Jeeps to Traverse Russian Terrain
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One can tune-in to any 1980s or early 1990s program with a Cold War-era Russia setting (I recommend anything MacGyver) to catch a quick glimpse of the output of the nation’s uninspired automotive industry. Following a sub-utilitarianism approach – striving for overall adequacy as opposed to maximizing the happiness of the population – Russian autos were poorly designed, inefficient, and built solely to reach production goals. Russian native Lada – “Lada” translates to “boat” in Old Russian, and its badge is also an old Viking boat – probably offers the best example of what the industry has long represented.
The turn-of-the-century Russian auto industry has made a rapid evolution, however, and shed most of its former skin prior to the 2009 downturn. Sales in the market increased 14%, 36%, and 67% in 2005, 2006, and 2007, respectively, making it one of the fastest growing auto markets by 2008, and despite the 49% sales slump in 2009, the market is expected to once again reach 2008 volume levels by the end of 2012.
In essence, there is a very firm reason why Russia is in the BRIC club-- it is the third fastest growing economy in the world with GDP growth of 4.2% in 2011, and with nearly a quarter of the population now being considered "middle class" (as opposed to only 15% in 2000) a huge surge of people are gnawing at the ability to purchase a brand new auto. At current rates, the nation will easily oust Germany as the largest auto market in the European region, and this being said, there has been no lack of foreign investment in the nation as high volume automakers have sought to further penetrate the market and grab a meaningful piece of the rapidly growing pie.
Chrysler, as has the Russian auto industry, has made a huge rebound from its recessionary trough levels. With a much needed cash infusion from Italian-based Fiat (NASDAQOTH: FIATY.PK), the automaker has revamped its lineup with smaller, more fuel efficient vehicles (that actually sell), and following the strongest sales rebound of Detroit’s Big Three between 2010 and 2011, Chrysler is now ready to catapult that success into the international zone.
Chrysler has long been one of the highest volume worldwide automakers, yet the majority of its sales have recently been isolated to the United States and Canadian markets (86% in of its 2011 sales). Utilizing the help of Fiat’s worldwide footprint – the automaker has made progress in over 120 countries – Chrysler hopes to close in on the ranks of its larger Detroit counterparts in General Motors (NYSE: GM) and Ford (NYSE: F).
Russia is primary on the list, and management is banking on the Jeep brand (Chrysler, Dodge, and Jeep are under the Chrysler umbrella) to be the largest international hit. A $1.1 billion joint venture established with state-controlled Sberbank will eventually give way to over 120,000 Jeeps being produced in St. Petersberg, and perhaps an addendum that will add production to another plant in Moscow.
The Jeep brand has long been sold in international regions – around 15% of the near 2.5 million sold worldwide over the past five years – although the tariff-plagued economics behind Jeep purchases in certain nations have made it an increasingly unattractive option for most foreigners. High tariffs on foreign produced autos in Russia and China, for instance, can easily double the selling price of a particular import. Even with the ever-increasing middle class populations in these regions, such elevated prices have only depressed sales and raised the aspirational status of such vehicles.
The Fiat/Chrysler team has hopes that the initiative will boost Jeep sales to 800,000 units per year by 2014, which would be a considerable jump from the near 600,000 sold in 2011.
Blazing its Own Path
The ambitious Jeep plan is a stark contrast from the smaller, internationally marketable vehicle approach being used by competing automakers. From one research and development initiative, for example, GM’s international focus with its popular Chevy Cruze compact sedan has given it access to the growing demand for fuel-efficient autos in the United States and BRIC nations.
Additional Chevy entries into the compact vehicle segment, including the Spark, and Lacetti, have made GM’s flagship brand the number one foreign-based brand in Russia. With 244,000 units sold in 2011 (up 53% from 2010), Chevrolet has boosted its market share up two percentage points to 10%.
But what does the growing Chevy popularity say about the Russian consumer? In examining the recently best selling autos in the Russian market, consumer shopping habits are not much different than their American counterparts – quality, value, and fuel efficiency are of utmost importance, and models including the Ford Focus, the Volkswagen (NASDAQOTH: VLKAY) Polo, the Chevy Cruze, and the Hyundai Solaris are among the most popular. The highest volume units are hardly characteristic of the rugged, relatively inefficient, and “do-anything” image of the Jeep brand.
Fiat and Chrysler have new plans for the Jeep badge, however, and are betting that the vehicle’s versatility (not only in terms of its dual on-road/off-road capabilities, but in terms of its sizing and styling) can make it acceptable in any international market. Among the six upcoming remodeled Jeep entries, the automaker plans to hit every consumer segment with a Mini Cooper (NASDAQOTH: BAMXY) –sized subcompact Jeep to a larger 7-passenger Wagoneer remake. The new entries on the smaller end of the size continuum may make sense in the Russian market, as if one looks at the second set of most popular vehicles (#11 - #20) they will find similarly sized small SUV competitors in the Kia Sportage, Toyota Rav-4, and the Volkswagen Tiguan.
Much like GM’s and Ford’s Cruze and Focus ventures, respectively, Fiat has hopes that these new Jeep entries will allow for enough diversification to be able to capture meaningful demand in different markets around the world using relatively universal vehicle platforms and sharable component parts. Considering its relatively smaller volume output, the new international growth plans for the Chrysler brand should allow the automaker to enjoy more robust growth rates than GM and Ford over the next several years, despite their already impressive resurgences from mid-recession trough levels.
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