Russian sizzle belies sluggish European car market

Carmakers love people like Nina Shabalkina, whose decision to buy a new car helps make her native Russia one of the few bright spots in what promises to be a rather dreary 2007 European automotive market.

"I bought a Suzuki made in Hungary because of its convenience and reliability compared to Russian cars," said Ms Shabalkina, 40, who works for a tour company.

Brisk economic growth, an expanding middle class and a taste for foreign brands have sent car sales rocketing in Russia and attracted a stable of foreign carmakers eager to fill demand with locally-made products as well as imports.

With car sales in saturated western European markets expected to stagnate or fall this year, manufacturers are counting on Russia to take up the slack.

"The prospects for growth in East European car demand in 2007 look strong. However, the growth will come almost single-handedly from Russia, where consumer demand is running hot," said Global Insight automotive market analyst Ewa Root.

"Indeed, with sales of foreign-brand cars in that market up by more than 50 per cent, Russia will close the year at practically two million units, making it larger than the Spanish market and therefore the fifth-largest market in... Europe."

Ukrainian demand is also booming, with sales set to surpass 400,000 units in 2007, but Poland and the Czech Republic remain swamped with used-car imports and demand in Turkey is weak after a currency devaluation in early 2006.

An influx of used cars to Romania and Bulgaria after they joined the European Union in 2007 will cap demand for new cars there as well, analysts say.

Carol Thomas, who tracks eastern Europe for consultants J.D. Power-LMC, said the Russian car market would grow seven per cent in 2007 and expand by five per cent to six per cent a year into the next decade.

That marks a deceleration from unsustainable double-digit growth rates since 2004, she said, but should keep the resource-rich nation of 140 million a bulwark of demand.

US-based Ford Motor Co. France's Renault and South Korea's Kia Motors are already making cars in Russia, while Toyota Motor Corp. Volkswagen PSA, General Motors Corp. and Nissan Motor Co. are building up capacity there.

For US carmakers watching their domestic market share crumble, Russia has been a sales boon.

Ford sold 13,700 units there in November, more than double the year-earlier figure. That gave Ford an import market share for the month of 19.7 per cent versus 12.4 per cent in 2005, making it the best-selling import brand in Russia, it said.

Helped by its entry-level Chevrolet brand of vehicles made in South Korea, GM sold a record 117,745 vehicles in the first 11 months of the year in Russia, a gain of 72 per cent.

Russia is a smaller niche market for the Chrysler Group, whose sales there doubled in the first 11 months of 2006 to slightly more than 4,000 cars.

One potential hurdle to Russian sales growth, Ms Thomas said, is tougher emissions standards that are forcing the phase-out of older, cheaper products affordable for many families. About 45 per cent of new cars sold in Russian currently cost less than €6,000. Earlier this decade, more than half of new cars cost less than €6,000.

"The starting price of cars is shifting up," she said, which tends to foster sales of used cars instead of new ones.

Eastern Europe needs to become a sales locomotive if all of Europe is not to turn lower this year.

New car registrations in Germany, Europe's largest car market, should be stable around 3.4 million units in 2007 despite a three-point hike in VAT rates that pulled demand forward into 2006, German auto industry association VDA says.

Spanish industry group ANFAC sees 2007 car sales falling two per cent after a 1.8 per cent drop in 2006. Spain is Europe's No. 3 car-making country after Germany and France.

Italian auto research body Centro Studi Promotor forecast 2007 car sales in Italy could rise by 12 per cent to a record after the government broadened tax incentives to scrap old cars.

Britain's SMMT car industry group expects the market to edge down 1.3 per cent year on year to 2.315 million units this year.

J.D. Power Automotive Forecasting sees western Europe car sales down 0.6 per cent this year at 14.71 million units.