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© Amy Walters / Fotolia
Moscow/Munich, September 2014
Russian automotive market update: what would be the real cost of sanctions?
2
Management summary > With 12% decline in the first eight months of 2014, Russia is in the middle of our pessimistic market
scenario, which we developed in May 2014 – Quick return to growth path is not expected > Potential sanctions against the automotive industry create additional pressure and uncertainty > Roland Berger analyzed three scenarios for potential sanctions, ranging from an increase in duties for
vehicle imports from EU/US to a full import embargo on vehicles from EU/US > Conclusions of this analysis:
– Market volume would decline in each scenario due to higher prices and lower variety of vehicles – An import duty increase is the only sanction that is advantageous for Russia – though the overall
impact is limited – Import embargos on EU/US vehicles – for part of the fleet or in full – damage the Russian state 3x
more than affected OEMs and result in up to EUR 1.4 bn lower state budget income – The only winners of such import embargos would be Asian OEMs – Impact on Russian OEMs limited
> Instead of sanctions, we recommend the Russian state should rather address two main issues: – Long-term stable and attractively high market volume – Cost-competitive local vehicle production
> Nonetheless, the potentially affected OEMs should consider sanctions as a possible scenario in their strategic plans and be prepared with proper mitigation strategies
3
Change vs. Jan-Aug 2013
The Russian automotive market continues to be in crisis mode, further decline expected Light vehicle1) sales development in Russia, 2008-2014
1.9
2010 2012 2014F
2.4
2013
2.8 2.9
2009 2011
2.7
1.5
2008
3.0
1.6
0.8 1.0
1.8
Source: AEB, Autostat
Sales 2008-2014 [m cars] Sales Jun-Aug 2014 ['000 cars]
1) Light vehicles include passenger vehicles and light commercial vehicles
-6% -12% -17% -23% -2% 0% -8% -26%
172
Jul
201
May Feb Jan
153
199 206
Jun Aug
227
Apr Mar
181
243
-12%
-20%
January- August
September- December
4
Almost every OEM in Russia is facing dropping sales volumes
Premium Volume EU/US Volume Asian Russian
103 247 42 46 31 29 26 32 43 40 123 23 85 56 103 24 124 82
Sales of major brands in Russia, Jan-Aug 2014 vs. Jan-Aug 2013 [%]
Source: AEB
16%
-20% -18% -20% -20%
15%
-7%
1%
18%
-5%
-43%
-19%
-2%
-27%
-18%
-10%
-3% -5%
Jan-Aug 2014 vs. Jan-Aug 2013 XX Sales in Jan-Aug 2014 ['000 vehicles]
5
Russia is on the path of our pessimistic scenario – Quick return to growth track is not expected Roland Berger sales scenarios, 2012-2020 [m units]
Source: IHS; Roland Berger estimates and analysis
> Until recently, positive development of automotive market in Russia expected
> Sales forecasts exceeded 4 m vehicles by 2020
> In May 2014, Roland Berger published a study "Russia at the crossroads" and developed updated market scenarios, taking into account: – Weakening macroeconomics – Implications of Russia's WTO
accession – Emerging Crimea crisis
> Since then, the situation has worsened > Russia is currently following our
pessimistic case > Quick return to growth track is not
foreseeable
1) Light vehicles include passenger vehicles and light commercial vehicles
2012 2013 2014 2015 2016 2017 2018 2019 2020
1.5
1.2
3.6
2.4
3.3
3.0
2.7
2.1
1.8
2.5
2.9
2.8
2.2
2.7
2.5
2.4 2.5
3.2
2.8
3.4
3.1
2.7
2.8 2.8
3.6
2.8
2.8 2.9
3.2
3.0
2.6
3.1
2.9 2.5
Light vehicle sales1) [m units]
Optimistic case Pessimistic case
Base case
FORECAST FORECAST
6
The ongoing conflict and exchange of sanctions between EU/US and Russia put additional pressure on the automotive market Key events of Russia-Ukraine crisis and resulting sanctions
Referendum, held in Crimea in March 2014, resulted in the accession of Crimea to Russia in April 2014
Start of military conflict in Donetsk and Lugansk regions of Ukraine
Boeing 777 passenger plane shot down. Further escalation of the situation in Eastern Ukraine
1st ROUND OF SANCTIONS > Sanctions against Russian
individuals (first Russian and Crimean officials) by the EU and US
> Sanctions against Russian entities (banks owned or controlled by government) by the US
2nd ROUND OF SANCTIONS > Sanctions against Russian
individuals (state officials, businessmen incl. Rotenberg, Timchenko) by the US and EU
> Sanctions against companies (largest banks, oil, defense companies) by the US
3rd ROUND OF SANCTIONS > Sanctions against Russian
companies (oil, infrastructure and defense, dual-use technology, Crimean companies, banks incl. Bank Moskvy, VTB, Rosselkhozbank) by the US and EU
> Extension of the list of banned individuals by the EU
March August May September
Claims of presence of Russian troops in Ukraine. No significant de-escalation despite truce. Gazprom's gas threats
> Sanctions against selected US and EU citizens (lists are not disclosed) at the end of March
> Restrictions on the operations of global payment systems in Russia
> Extension of the list of people who are banned from entering Russian territory
> Embargo on selected agricultural products from the countries that imposed sanctions on Russia
RETALIATION BY THE RUSSIAN FEDERATION ? ES
CALA
TION
OF
CONF
LICT
- ?
Source: EUR-Lex, US Department of Treasury, press
4th ROUND OF SANCTIONS (from September, 12) > Restriction of access to the capital markets for oil &
gas companies (Gazprom, Rosneft, Transneft) and defense firms (UAC, UVZ, Oboronprom)
> Tightening of access to long-term funding for Russia's largest banks
> Broadening the ban on sales of dual-use technologies
> Asset freezes and ban on visa issuing for Russian officials
7
> Restrictions on imports of industrial goods (especially cars, ships, aircraft)
> Prohibition of transit flights and flights within Russian airspace
> Embargo on household chemical goods imports
> Embargo on fashion and textile products imports
Sanctions directly against the automotive industry are potentially the next countermeasures in response to new sanctions from the EU/US
"
We are potentially ready to introduce protective measures in aircraft, shipbuilding, automotive and other industries
Dmitry Medvedev, Russian Prime Minister
" "
" It is not inconceivable that in the nearest future the government will consider measures restricting the import of light vehicles costing less than 800,000 rubles (~EUR 17 k)
Vladimir Gutenev, 1st deputy chairman of State Duma
industrial committee
"
One of the potential sanctions is the complete or almost complete restriction of car imports from unfriendly states
Federal official "
Selected quotes of Russian officials
" "
There are a number of consumer goods where our European partners are more dependent on Russia… for example, car imports…
Andrei Belousov, Russian Presidential Aide
Possible areas of future sanction policy
Source: Press
8
We analyzed three basic scenarios for possible sanctions against vehicle imports from Western countries (EU/US)
High
ECON
OMIC
IMPA
CT
Low
Basic scenarios – further evaluated > Damage to Western producers/governments > Stimulation of domestic production > These or similar measures are therefore possible
Extreme scenarios – not considered further > Significant negative impact on domestic
automotive industry > Likely to be avoided by the Russian
government
Increase of CBU import duties (+10%) 2)
Embargo on CBU imports (<EUR 30 k) 3)4)
Embargo on all CBU imports3)
Subsidies elimination
Import embargo on components
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
"… if sanctions are taken, then only to provide better conditions for ourselves"
Vladimir Putin Russian President
1) Sanctions only evaluated for light vehicles. Similar sanctions may be introduced for commercial vehicles, additional further sanctions with minor impact possible 2) Assumption: 10 percentage point increase for CBU imports from EU/US 3) Imports from EU/US 4) 30 k – retail price in EUR, including VAT
Overview of potential scenarios relating to sanctions in the automotive industry1)
9
The case study of Iran suggests that production-related sanctions are likely to be avoided
SANCTIONS
Prohibition of the sale, supply or transfer to Iran of goods or services relating to the automotive industry supported by the EU (since March 24, 2012), US, Japan and South Korea (since July 1, 2013)
794
-52%
2013 2011
1,649
COST INCREASE > Due to restricted supply from South Korea (supplied >60% of all components),
OEMs' production costs increased by 40%
PRODUCTION DECLINE > Foreign OEMs (PSA, Renault,
Fiat, GM, Hyundai, Toyota) decided to adjust capacity/ production volumes due to cost increase and lack of specific components
> 20% of 860 component suppliers in Iran halted production
DEMAND DECLINE > The market dropped by 35-40% due to the price increase and limited supply
Production of LV in Iran ['000 vehicles]
Source: US Department of Treasury, OICA, press
Example: Impact of sanctions on the Iranian automotive industry
10
Key assumptions for assessing the impact on the market, OEM profits as well as the Russian economy developed Overview of key assumptions
1) For calculation purposes split into two price categories: <EUR 15 k and EUR 15-30 k
Reduction of EU/US imports
…of which replaced…
Additional assumptions
> Profit contribution per vehicle: – < EUR 30 k:
EUR 1,000-2,000 – > EUR 30 k:
EUR 5,000 > Avg. vehicle price:
– < EUR 30 k: EUR 12,500-22,500
– > EUR 30 k: EUR 50,000
> VAT 18% > Scrappage fee:
EUR 500 per vehicle
Split of replacements: EU/ US brands
Asian brands
Russian brands
Scenario 1: Increase of import duties
<301) 40-80% 80-100% 50-70% 10-40% 0-10%
>30 10% 20% 50% 50% 0%
Scenario 2: Embargo on CBU imports (<EUR 30 k)
<301) 100% 60-80% 50-70% 10-60% 0-10%
>30 0%
Scenario 3: Embargo on all CBU imports
<301) 100% 60-80% 50-70% 10-60% 0-10%
>30 100% 40% 50% 50% 0%
Retail price [EUR '000]
Retail price [EUR '000]
Retail price [EUR '000]
Source: Expert interviews
11
Significantly lower variety of supply
Delayed purchases, especially in > EUR 30 k segment
Repl
acem
ent b
y In the event of a full import embargo, there is a risk that there will be no substitution for up to 50% of affected vehicles Overview of sanction effects on the market [m units]
Scenario 1: Increase of import duties
Scenario 2: Embargo on CBU imports (< EUR 30 k)
Scenario 3: Embargo on all CBU imports
Price increase and shift in market shares
Majority of affected volume substituted
Lower variety of supply Delayed purchases and
partial switch to Asian brands
30
70
230
Total market after sanctions 2,226
Asian brands 25
Total market, 2015 (pessimistic case)
Russian brands 1
Import reductions from EU/US
2,240
Local EU/US production
40
40
230
1
2,186
135
2,240
60
60
2,240
1
230
230
2,131 109 k 54 k 14 k
Affected volume Affected volume Affected volume
12
-250-200-150
-100-50
050
100150200
600 400 200 0 -200 -400 -600 -800
Russian brands EU/US brands
Asian brands
-200
-150
-100
-50
0
50
100
150
200
600 400 200 0 -200 -400 -600 -800
Change in global profits [EUR m]
Asian brands
Russian brands
EU/US brands -250-200-150
-100-50
050
100150200
600 400 200 0 -200 -400 -600 -800
Asian brands
Russian brands
EU/US brands
EU/US OEMs could lose about EUR 550 m, while Asian OEMs emerge as key winners; limited impact on Russian brands Impact on OEM groups – Sales in Russia and global profits Scenario 1: Increase of import duties
Scenario 2: Embargo on CBU imports (< EUR 30 k)
Scenario 3: Embargo on all CBU imports
Change in sales ['000 units]
No impact Only
winner
Loss of EUR 550 m
Only winner
13
The biggest loser would be the Russian state: up to EUR 1.4 bn lower budget income under full embargo scenario Impact on Russian budget income [EUR m]
Positive, but very low impact
-160
-90
Total +55
Employment tax +10
Profit tax +15
Scrappage fee -20
Import duty, higher rate effect +300
Import duty, volume effect
VAT
-50
-170
-465
-280
+15
+20
0
-130
-750
-600
+20
-1,420
+40
0
Significant loss in tax/duties income Only limited positive impact from higher local production
Scenario 1: Increase of import duties
Scenario 2: Embargo on CBU imports (< EUR 30 k)
Scenario 3: Embargo on all CBU imports
14
Key take-away: Import embargos are harmful to all sides and should not be introduced Summary of impacts and conclusions [EUR m]
Scenario 1: Increase of import duties
Scenario 2: Embargo on CBU imports (< EUR 30 k)
Scenario 3: Embargo on all CBU imports
Budget impact for Russia Profit loss for EU/US OEMs
+55
-100 -175
-465
-550
-1,420
Conclusions
> Limited impact of an increase in duties for EU/US OEMs only – most likely not worth the effort > Greater short-term and long-term self-damage to Russia though import embargos:
– Short-term: budget revenue shortages higher than "punishment" effect – Long-term: strengthening of Chinese/Asian brands as direct competitors to Russian brands
15
Instead, the Russian state should address two main issues – Long-term market stimulation and cost-competitive domestic production Possible measures to support the Russian automotive industry Measures by the state Current status Further steps
Long-term market stimulation
Cost-competitive domestic production
> New program introduced in September, including recycling and trade-in compensa-tion (limited impact expected overall)
> Age limitation of vehicles in use under consideration
> Implementation of age limitation measures > Streamlining of vehicle check-up process
to increase quality on the road > In addition: improvement of road
infrastructure
Lifecycle regulation/ other
> Loan rate subsidy program stopped in 2013 > Introduction of sales support mechanisms (especially in rural regions)
> Simplification of legal framework for private car leasing/sharing
Sales support
> Review of import duties for select articles under consideration
> Long-term increase of import duties on CBUs (for all OEMs)
> Support for localization of key raw materials (e.g. automotive-grade steel)
> Introduction of a special agency for component clusters development
> Reduction in import duties for sub-components
Support for localization
> Provision of state guarantees to Kamaz
> Subsidy of loan rate for AvtoVAZ's modernization projects
> Provision of subsidies for exports > Controlled ruble devaluation Financing/
hedging
16
In any case, we recommend that EU/US OEMs should adjust their risk profile and prepare for possible sanctions Recommendations for EU/US OEMs
Our recommendations What to expect?
Adjust local cost base to new market scenarios
Keep production in Russia and increase local content (at low investments)
Maintain relations with Russian counterparts/authorities
Investigate supply alternatives for imported goods (e.g. from Asia)
Examine opportunities for support programs
Market recovery is not expected in the near future, rather a further decline is anticipated
Crisis likely to last another 1-1.5 years, further escalation is possible
Automotive sanctions – even if not economically reasonable – are possible
17
Recommended further readings
Impact of economic sanctions
BRIC study for suppliers
Russia at the crossroads
> Derivation of three market development scenarios
> Assessment of regulations and cost competitiveness of local production
> Implications and action need for key stakeholders
> Overview of economic sanctions related to Russia
> Scenarios for further crisis development
> Impact on Germany and selected industries
> Assessment of market and business environment in BRIC
> Implications for supplier growth strategies and funding allocation
© Amy Walters / Fotolia
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