An Analysis Of The Russian Automotive Industry: Patterns And Influences

1. First, assess the extent to which the chosen industry can be characterised as: (a) ‘globalised’ or ‘regionalised’ (as per Rugman) or (b) ‘core Triad’-dominated or ‘multi-polar’. Then, explore and analyse the underlying factors and forces behind the observed patterns.

2. For the chosen industry, evaluate the extent to which current global patterns of production, trade, FDI and consumption are influenced by nation-states. You are encouraged to draw on Dicken’s “roles of the state” and other relevant concepts.

3. For the chosen industry, select and investigate one prominent geographical industry cluster, account for the cluster’s international prominence (drawing on relevant theories) and explain the role it plays within wider global production networks.

Success of a particular industry highly depends on its present scenario, its rate of production, trade values as well as the flow of Foreign Investment in the particular sector at a considerable rate (Ajupov Kurilova and Ivanov 2015). Consumption rate of the manufactured (finished) products of the particular industry among the people of the country as well as among the people of foreign countries derives the amount of revenue generated by the industry as a whole and its overall contribution in the GDP and economic development of the country(Amighini and Franco 2013).

This particular assignment will cover up a brief discussion on the chosen country and a particular industry of the country along with highlighting the impact of the industry on the country’s economy. A brief industry analysis of the industry will highlight the present situation of the industry and future prospects in the upcoming days. Discussion about the production pattern, trade pattern and Foreign Direct Investment will highlight the capacity of the industry and financial assistance received from foreign investors. Consumption pattern of the industry products will highlight the revenue generation of the industry. Applicability of Dickens’s role of the state and other relevant theories will focus on the Global Shift and its extent on the chosen industry.  

For this particular assignment, the country chosen is Russia and the industry chosen is the Russian Manufacturing Industry. This particular industry comprises of several industries such as Ferrous Metallurgy, Non- Ferrous Metallurgy, Machine Building, Automotive Industry, Chemical Industry and Light Industry (Berger 2014). Therefore, it can be stated that the entire Russian Manufacturing industry depends on the performance of all these respective industries throughout the particular financial year. Economic development of Russia is highly dependent on the performance and growth prospects of these industries in the upcoming years (Ajupov Kurilova and Ivanov 2015). The assignment will basically highlight on the Russian Automotive industry, a part of the Russian Manufacturing industry.

2.0 Chosen country and Industry

The Soviet Government’s priority in modernization of the Russian industry in the beginning of the 1920 reached its full peak under the systematic central planning undertaken by Stalin. During this particular period, resource of investment was directed more towards heavy manufacturing industries as compared to the light industries (Balcet Wang and Richet 2012). The productivity of this industry started to decline during the phase of the Cold War and the industry reached its point of revival during the beginning of 90’s. 

After reviewing the last quarter of 2015, it has been observed that the total production of the Russian industrial sector declined at the rate of 3.5 % on yearly basis (). Russia is considered as one of the high income generating country with a mixed economy with majority of state ownership in the strategic areas. The Russian Automotive industry has been playing a significant part in the development of the economy and employs nearly 6, 00, 000 people of the country and produced nearly 19 lakh cars in the financial year 2015 (Berger 2014). Some of the largest automobile companies of Russia are GAZ, Avto-VAZ, the producer of lightweight automobiles and KamAZ the leading producer of heavy vehicle in the country.

During the 90’s, this particular industry was considered to be one of the most slow producing industries in the country. Majority of the Automotive companies operated far below their present operation capability, hence under performance was the main highlighting factor of this particular industry (Rocha Arkader and de Goes, 2015). The commercial vehicles both light weight and heavy weight vehicles were manufactured and sold to the small business corporations. Whereas the diesel - operated trucks manufactured by GAZ had limited service life, hence the industry was termed as unreliable and failed considerably to capture trust and fulfill demand of people both in terms of quality and quantity of the vehicle produced.

During the last 20 years, demand of passenger automobile kept on increasing, with no such positive response from the automobile manufacturing companies of the country. Generally, the incapability of self - financing among the Russian automobile makers delayed the production capability and created incapability of further expansion of business. Increasing rate of import from companies like Mercedes, Audi and BMW created further danger for the industry and handful of industries relied on Joint venture or partnership projects with western automobile makers (Ajupov Kurilova and Ivanov 2015).

2.1 Impact of the chosen industry on the economy

Despite of being hit by the global economic recession in 2008, the automobile industry is considered an industry having political importance. Tolyatti, the mono town Russian city that is entirely dependent on the functioning of the company AvtoVAZ, employing more than 1, 00, 000 people from the city itself (Domanski et al. 2013). The Russian government is also focused on development of this particular industry through technological development and innovation. Presently, after looking deeply into this industry, it can be opined that the Russian Automotive industry is the perfect combination of International and National car manufacturers with the immense capability of fulfilling the desire of cars and commercial vehicles at the highest level.  

From the beginning, this particular industry has been hit with high and lows of production, either affected by Cold War or by Global economic slowdown. After shedding light on the phase of 2000 to 2005, it has been revealed that income generation among the people of the country was quite higher that created strong demand of family cars and private vehicles creating boom in the automobile industry. During this phase, nearly 16 lakh cars were sold out of which nearly 8.5 lakh cars were of Russian make (Gonchar and Marek 2013). Increased sales of cars attracted the foreign car manufacturers that facilitated flow of foreign investment in this particular industry. There has been an increased rate of foreign car production in Russia from 1, 60, 000 cars in 2005 to nearly 5, 00, 000 cars in 2007. During this phase, the valuation of the Russian Automotive industry was valued at 14 %, 36% and 67 % respectively during the year 2005, 2006 and 2007 respectively, assisting the industry to be known as the fastest growing automotive market of the world in 2008 (Davies 2014).  

The Russian government enacted specialized legislation in 2005 regarding establishment of Specialized Economic Zones to attract increased rate of foreign investment from the foreign automotive companies. These companies received adequate benefits from exemption from assets and land tax, tax allowances, protecting the investing companies while having changes in tax slabs. With this particular effort, general Motors, Toyota and Nissan enhanced the Russian automotive industry through investment (Hannola Myller and Kortelainen, 2014). After the economic recession in 2009, The Russian Automotive market lost its previous position with a massive drop in the production figures by nearly 9, 00, 000 units among which production of heavy vehicles like trucks fell to 90, 000 units in 2009 as compared to 2, 60, 000 in 2008. Financial assistance of $ 2 billion was provided to the weak companies along with credit up to $ 3 million to the customers opting to purchase Russian cars (Heinz and Tomenendal 2012). Government subsequently increased the tariff (from 50 to 100%) for importing foreign cars aligning with size and cubic capacity of the engines. The government even provided subsidized pricing strategies, where the new car buyers could receive subsidy up to 6, 00, 000 rubles to keep the flow of car sales within the economy. Still, amidst economic slowdown, Marussia B2 became the first supercar (sports car) to be manufactured and launched in Russia in 2008 and officially started to sell from 2010 from Marussia showrooms from Moscow (Kurilov 2012).  

2.2 Brief Industry Analysis

The scenario changed in 2010, Russian car manufacturers retained their profit position by selling nearly 85 to 90% of the total cars sold in the country. AvtoVAZ topped the list of the highest car selling companies of Russia during the particular financial year. The major products manufactured and sold by the Russian automotive companies are Cars, Heavy vehicles, and Sports cars from Russian and foreign companies (Lee et al. 2013).  However, in 2014, this industry showed signs of collapse when sales of new car plummeted nearly by 14.5%, especially affecting the production of budget cars. Even production of commercial vehicles shrank up to a great extent. Till the last quarter of 2015, the car manufacturing companies in Russia gained a meagre portion of their lost market share, except Toyota that continued its run in the negative figures.

The Russian car industry has been hardly hit during the entire financial year 2014-15 with sales figure and production going down significantly. Devaluation of the Russian currency is considered as a major reason behind the drastic situation of this industry. Reducing demand of cars and rise of Russia’s inflation level of 13% (approx) during 2015 reduced the purchasing power of Russian people (Montemayor and Pirvulescu 2015). At the same time, following the rule of theoretical economics, inflation increased the selling price of the cars hence production of cars slowed down largely.

 The time span during 2010 to 2013 was the most favorable period for this particular industry where the local people preferred automobiles manufactured by Russian as well as International brands. Increased production, increasing profitability and introduction of new models were the core traits. Increasing demand of cars influenced international car manufacturers to invest and start their manufacturing units in Russia (Montemayor and Pirvulescu 2015). The unexpected slowdown of the economy and increasing rate of inflation forced many car manufacturers to reduce car manufacturing with Toyota and Nissan already shutting down their Russian units for temporary basis. As far as the foreign companies of the Russian automobile market are concerned, International brands like General Motors, Nissan, Hyundai etc has to import spare parts and other accessories that were quite costly as result of devaluation of Ruble.

Regulatory changes in the market in 2012, with the Russian government’s decision to reduce the import duties of vehicles, tax rates and operational surcharges have potential to attract new investment. Despite of the government’s effort and prediction in favor of huge market growth in the upcoming years, declining profitability and reduced demand of cars creates hindrances in trading of cars in the country (Morgenstern 2014). Localization of this industry, specifically on the norms of assembling the International branded cars with locally made engines and gearboxes, in exchange of duty - free import of car manufacturing components until mid 2018. Similarly, negotiation between the Russian government and WTO regarding availing higher duties on new cars and other vehicles to the extent of 5% until 2018 will ease the trade pattern of this industry with expected growth of the automobile component market of nearly 8% on annual basis. 

3.0 Extent of the Chosen Industry regarding Production pattern

(Source: Pavlínek 2012)

After favorable market growth of the Russian Automobile industry prior to the financial year 2010-11, renowned international car manufacturers from Japan, Germany and other European countries started investing in Russian automotive market on the basis of increasing demand of cars (Popov 2015). High sales figures and outright support from the Russian government through offering of Special Economic Zones to the car manufacturers witnessed investment of $ 1 billion from General Motors, Toyota and Fiat announcing to produce more than 2.5 lakh cars locally boosted the market.

With boost in manufacturing figures from the perspective of foreign car companies, supplier investment on various car spare parts/ components such as car batteries, tires, wheel rims, starter motor, sheet steel, rubber tubes, instrument clusters, seat covers, seats, exhaust systems and car music system were an additional advantage for the local and international car manufacturers of the country (Pavlinek 2012). The Russian automotive market successfully attracted foreign investment up to 2013 based on the government’s policy to provide localization support to the foreign brands. However, several protective measures regulated by the Western section (Banks) reduced the limit of FDI in recent times. Critical financial situation and underutilization of the production capacities by these companies have slowed down investment rates. Projected report regarding FDI on the Russian Automotive industry is stated as follows:

Production capacity is likely to stay low during the next couple of years with exception for the Chinese car manufacturers

Localized production rate will increase and have to be maintained by all the foreign car manufacturers presently operating in the Russian Automotive market

Financial support will be provided to every Russian foreign subsidiary companies

Sludge in rate of car production and decreased rate of inflow of F D I is the major backdrop of the Russian automotive market as most of the Original Equipment manufacturer of the Russian automotive market is affected by less adapted marketing strategies (Simachev et al. 2013)

Handful of companies are strategically bound to leave the Russian automotive market, hence creating outflow of Foreign Direct Investment

With availability of famous foreign automobile makers of the world accompanied by availability of variety of cars manufactured by the Russian companies, manufacturing hatchbacks, sedans and SUVs are reliable as well as economical to the people of the country. Nearly 70% of the cars manufactured in Russia are sold in the country, out of which the ratio of sales of Russian car brands and International brands changes frequently (Simonova et al. 2015). In general, price of cars sold in Russia is quite higher despite of availability of easy financing, provision of financial assistance from the government, Foreign Investment and operation of majority of the car companies in Specialized Economic Zones. Even demand of cars in Russia is at 250 car bookings on average of 1,000 people, which is far below from countries like United States of America and Germany with 750 and 400 car bookings on average of every 1, 000 people (Sorrentino Rizzo and Sorrentino 2014).

Figure 1: Sale comparison in Car sale in Russia 2013-2014 (Brandwise)

(Source: Simachev et al. 2013)

Unfavorable weather conditions, lack of stability of the home currency and presence of inflation in the range of 12- 15% on yearly basis keep the car prices high considerably. The insurance values of cars are higher due to atmospheric instability and constant demand of cost efficient cars is the latest preference among people. Lightweight vehicles for family use have kept the hope alive for the declined condition of the industry (Thomsen 2015). On the contrary, demand of commercial vehicles in the lightweight category is expected to increase due to its wide range of usability. In order to influence the local residents of the country to purchase cars several lucrative schemes and have been initiated, such as:

Increased rate of financing through government and private undertaken companies

Encouraging the car manufacturers to develop low priced cars (with low maintenance cost) for benefits of the customers

Reduction in taxes and offering financial assistance to companies manufacturing heavy duty vehicles like buses and lorries as demand for public transport service will increase with rising population (Popov 2015)

Another important turnaround of the Russian automotive industry is expected to be possible with the production of Army vehicles and warfare transport vehicles, as Russia has already entered in to exchange contract of war vehicles with members of the BRIC nations, especially India during 2016-2018. Taking figure 1 in to consideration, it can be observed that the financial situation through sale of middleweight cars have highlighted signs of improvement at a slow pace. 

Welfens et al.(2012) opined that there are some significant factors such as recovery of Ruble’s valuation during the end phase of 2015, thinning effect of inflation in the Russian and world economy, and decreased price of fuel in the world market will definitely boost up the Russian automotive industry from the middle of 2016. It is already suggested that other significant factors like Net flow of capital, reduction in the level of inflation in the Russian economy will forecast a positive turn around for this industry. Significant supports from the government both financially and through development of technology are the two other factors to guide the industry towards its re- birth (Sorentino et al. 2014).

Similarly, Russian made cars will be the choice of maximum number of people as price of these cars will grow less or might remain stable in order to ease the sales figure and pay utmost care in development of the entire industry.

Graph 4: Price Hike percentage (expected) during 2016-2018

(Source: Pavlinek 2015)

It is expected that Russian and Japanese brand cars will occupy a significant position in the market due to its slack price growth. The market demographics of the Russian car market is expected to be divided based on the factors stated below:

Origin Country	Classification	Demographics	Preference rate	Price hike (%) avg.
USA	Sedan, SUV, Hatchbacks, Sports	High Income Group	High	50%
Russian	-          Do-	Middle Class (Income Wise)	High	9%
European	-          Do-	Age (19-40 years)	High	15%
Japanese	-          Do-	Age and Income	High	20%

Table 1: Expected Brand preference of Russian people based on Demographics

(Source: Morgenstern 2014)

            At the same time, it is also expected that the companies will also be able to recover the slashed down sales unit depending on the identified factors of the micro and macroeconomic scenario. (For graph, please refer to Appendix 1).

In order to highlight the Global Business Shift of the selected industry of Russia, Peter Dicken’s Global shift has been a significant example based on how development of a certain industry is possible taking into considerations the economic, political factors along with globalization of business scenario (Montemayor and Pirvulescu 2015).

As per this particular concept, globalization and technological innovation and advancement are the main source of development of business. Localization and entering in to joint ventures with foreign companies are another important factor towards development of the industry and eased employment opportunities for the residents of the country. Further importance on development of the industry is possible through understanding the economical issues and targeting the business sector based on geographical basis and demands of customers (Lee et al. 2013). Effective need of communication is another important factor of development of a weak industry to find its Midas touch. Dicken’s model emphasizes on factors like production, trade, investment and consumer preference behind re development or improvement of an industry.

The model also highlights the importance on location importance as well as technical and financial assistance of the host government through reduced tax structures, redeemed duty fees for receiving higher rate of investments (Kurilov 2012).

Conclusion

After conducting the detailed study on the Russian Automotive industry, it is observed that despite of adverse financial condition of the economy attempts from the car manufacturers and efforts from the end of the national government has been the maximum strength towards re-innovation of the industry. Foreign companies have stopped production for time being in order to save their capital loss, but are quite reluctant on providing importance on the identified growth factors to make the industry survive the crisis.

Macroeconomic as well as microeconomic factors are favorable towards the future development of the Russian automotive industry in the upcoming years. With thinning down of the economic crisis and improvement in the exchange rate of Ruble as compared to the other European currencies, purchasing power of Russian people will enhance once again along with increased demand of owning a personal car as per the identified demographic factors.

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