General Motors on the way to Russian Roads
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Automakers have been witnessing sluggish sales in their best markets, some of which are in fact eating away their bottom line. China was a ray of hope with high growth and increasing consumption, but things seem to have changed as the economy’s GDP growth rate softened. On the other hand, July car sales saw a decline in the domestic market with the top automakers General Motors (NYSE: GM) and Ford (NYSE: F) reporting lower sales figures as they lost ground to Toyota (NYSE: TM). Moreover, the European economy isn’t looking hopeful in the near term at least. Amidst all this, the Russian market happens to be a reason to smile for the auto sector.
GM plans to invest a billion dollars in Russia in the next five years with the vision to expand its footprint in this market. The Detroit based automaker desires to widen its car and component production to twice the current levels. Presently it has a production capacity of 98,000 vehicles and it aims to reach 230,000 vehicles by 2015.
But what’s so attractive in the Russian market? Let's dig deeper.
What’s tempting the automaker?
The Russian economy is showing great potential and growth for foreign automakers, particularly when other markets are disappointing. Vehicles sales in Russia went up 40 percent in the previous year; accounting for a sales figure of 2.6 million cars. Foreign brands particularly did well, experiencing growth of 70 percent and touching the 1 million mark for the first time. And now, experts estimate this year total sales would reach 3 million units—increasing from 2.6 million.
Conditions in the Russian market are pretty different from US and Europe because it has a huge amount of potential customers that have old cars. In addition, increasing income levels with improving disposable income are acting as catalysts. Nissan’s Head of Russia operations, Francois Goupil de Bouille, expects that the market would grow to 4 million vehicles in 2015. Growth has slowed down by 14 percent in the current year, but still the economy has a lot to offer as the government gives huge incentives to foreign manufacturers who set up production plants in Russia.
So how is GM planning to take advantage of the situation? What is its course of plan?
GM on Russian roads
The company appears to be driving to explore more of Russia given the huge potential in the economy. Of all the European markets, Russia comes in as a sign of relief and a must-grab for GM, whose domestic market share is at stake as its Japanese counterpart Toyota has been recovering strong from last year’s natural disasters. The company plans to double its production capacity and simultaneously increase market share to utilize its capacity to the maximum and grow inorganically. It produces cars at three locations across Russia in St. Petersburg, Togliatti and Kaliningrad, and proposes to work extensively on its St. Petersburg plant where it manufactures its Chevy Cruze midsize sedans, Opel Astra hatchbacks and Astra sedans.
But, is it only GM that has seen the potential of this economy?
What about the other automakers?
Russia is attracting a number of automakers. The German car manufacturer and Europe’s largest automaker, Volkswagen, has its eyes set on this market. The company plans to increase its investment to €2 billion by 2018 which is double the current investment and increase its operations at Kaluga. It is sensing the huge demand for luxury cars in Moscow and St Petersburg. Other than this, French automaker Renault and Japan’s Nissan have also made an entry into the Russian market. Even Fiat isn’t able to resist the temptation of this budding economy and is entering the auto rally. BMW enjoyed a 30 percent increase in its Russian sales in the first seven months of this year, and now also plans to ramp up its production in the region.
My takeaway
The auto industry looks extremely excited to venture the Russian market and be a part of its growth. The growth that is being sensed in this region is especially important as automakers are witnessing poor results from their major markets. GM’s profit was absorbed by the declining sales in the European market and things don’t seem to get better in the foreseeable future. Boosting production level in this economy is indeed a smart move of the company particularly as the region is expected to experience robust growth in the future.
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