Scrappage scheme slows decline in Russian light-vehicle market to 10% y/y in October

The Russian light-vehicle market's recent rate of decline slowed partially in October to 9.9% year-on-year (y/y), with 211,365 units sold, according to the latest data released by the Association of European Businesses (AEB). This was at least some relief from the highly accelerated declines of more than 20% recorded in the previous three months. The Russian government's new vehicle scrappage and trade-in scheme was the principal reason for the improved result, as explained by the chairman of the AEB's vehicle manufacturers' committee, Jörg Schreiber: "Market performance in October was anything but great, however a step forward compared to the very weak results in recent months. The reason behind the relative improvement is the combined effect of the scrappage incentive supporting the sales of domestic models, and the sharp decline of the Ruble raising the short-term demand for imported models. The stimulating impact of these two factors will be only temporary, but for now appears to be carrying sufficient momentum [to] deliver a further improvement in the market sales statistics for November."

As indicated above, local OEM AvtoVAZ was one of the biggest winners from the introduction of the scrappage scheme, which completed its first full month in October. However, the term "winner" in the context of the Russian market is somewhat relative and for AvtoVAZ's Lada brand translated into a 1% y/y improvement to 37,788 units. This was probably not the result that was expected or desired by both AvtoVAZ's management and the Russian government in terms of the scrappage scheme's ability to move the dial on sales. This was despite the company's and the country's best-selling model, the Granta, posting an improvement during the month of 3,450 units to 16,807 units. As the cheapest passenger car on sale in the Russian market, the Granta was always going to be the biggest potential beneficiary of the scrappage scheme. The October figure mildly arrested the year-to-date (YTD) decline for the brand, which stood at 16% y/y for the first 10 months of the year to 321,590 units. The second best-selling brand, Kia, recorded a 1% decline during October, which still translated into significant outperformance in relation to the overall market, with sales of 17,392 units during the month. This was despite the brand's best-seller, the Rio, posting a decline of more than 1,000 units to 7,100 units. Kia's YTD sales stand at 154,813 units, which equates to a fall of 6% y/y. Renault almost exactly tracked the overall market decline in October with a fall of 9% y/y to 16,664 units, with its YTD sales falling by almost exactly the same rate to 173,494 units. The rise in Logan sales of more than 2,000 units during the month was matched by a near identical decline in sales of the Duster, albeit against a very high y/y base of comparison. The Volkswagen (VW) and Chevrolet brands in seventh and eighth place, respectively, on the best-sellers list in October posted the most alarming declines during the month of 26% y/y to 9,322 units and 37% y/y to 9,181 units, with the companies' best-sellers – the VW Polo and Chevrtolet Cruze – both continuing to record accelerated falls.

Outlook and implications

The Russian government only announced the scrappage scheme at the end of August, and October was the first full month of operation (see Russia: 29 August 2014: Russian government will allocate RUB10 bil. to second scrappage scheme, according to minister). At the time of its launch, Industry Minister Denis Manturov said the scheme would run between September and December and would provide RUB10 billion (USD273 million) in order to help subsidise the purchases of up to 170,000 new passenger cars, light commercial vehicles, trucks, and buses. Buyers of new passenger cars are eligible for a discount that starts at RUB40,000 when scrapping a car. Given the latest results, the effect of the stimulus measure can only be described as disappointing, and it reinforces the view that the wider macroeconomic conditions are simply not in place to support a sustained recovery in the market. As a result, a somewhat downbeat assessment of the scheme's impact and the short-term implications for the market appears apt. Although Lada's Granta showed a big improvement in sales last month, this only translated into a 1% improvement for the brand, and given that the Granta is the cheapest passenger car on sale in Russia it was always going to be the biggest winner of the scrappage scheme since the biggest proportion of its overall purchase price is covered. However, as the previous scrappage scheme was such a success, this has removed much of the pent-up demand at this end of the market.

As IHS stated earlier this week, the Russian economy is currently facing the double negative impact of sanctions and tumbling oil prices, while the rouble has dropped 25% against the US dollar this year, making imports significantly more expensive. "It's not just the slow burn nature of sanctions that are beginning to bite, but the sagging oil price is providing a double whammy for Russia's finances and growth prospects," says director of sovereign risk at IHS and author of the global insight provider's third-quarter 2014 Sovereign Risk Review, Jan Randolph. Oil prices have fallen close to USD80 per barrel in recent months amid weak global demand and excess supply, narrowing Russia's current-account surplus and placing further pressure on its ailing economy. According to the report, further ratings downgrades are expected, as Russian companies must increasingly rely on the domestic banking market for credit, given an inability to roll over existing facilities and service debts on pre-existing US dollar-denominated liabilities because of sanctions. The report outlines the likely scenario of additional downward pressure on Russia's foreign-exchange reserves and more capital flight. None of this is particularly positive for the Russian light-vehicle market's short-term prospects and rather gives the impression that the government's scrappage scheme is a sticking plaster to treat a severed artery. The bottom line is that there is simply not the macroeconomic platform or pent-up demand needed to move the needle significantly on Russian vehicle sales. For the full year 2014, IHS Automotive currently forecasts the Russian light-vehicle market to decline by 16.7% y/y to 2.39 million units, before falling further in 2015 to 2.24 million units.