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Russia’s Weakening Automotive Market

Being in the car business is tough.  All the noise we heard about the Big Three bailout in the United States was just the tip of the iceberg for a troubled global market, as fewer and larger manufacturers scramble to place their bets on the best growth markets – namely Russia and Asia.  However, in these shifting economic winds, are we going to see a strategic revision with regard to foreign investment in Russia’s car market?

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Over the past number of years, most major automotive-related companieshave thrown a lot of money into Russian manufacturing, some even partnering locally such as Canada’s Magna (though their arrangement with Basic Element seems to have fallen through).  The Ford Motor Company was once proud to be one of the largest foreign automotive investors in Russia, but back in December they also halted productionat one of their major plants.  Competitors in Europe have been pushinghard to establish a presence in Russia as well, with Peugeot expectinga 20-25% growth in sales in 2009, while Volkswagen got into the gamea little later with a €370 million investment in a huge productionplant in 2007.  During the first half of 2008, Pricewaterhousecoopers reported that car sales in Russia jumped 41% to 1.65m cars and spending grew by 64% to a record$33.8bn.

But with the economic downturn, the crash in the price of oil, and the hemmorhaging of the ruble, is the party over for Russia’s automotive market?  That’s the story that the Wall Street Journalis carrying today, quoting a report from that same PWC market analystwhich predicted that Russia would be Europe’s largest car market in2008 (it wasn’t).  Now they are expecting that the number of new carssold will shrink by about 2.3 million from 3.2 million in 2008.  Theweakening of Russia’s auto market will naturally have a huge collateralimpact on other industries, such as steel – which will further put the pinch on some of the country’s formerly most powerful and wealthy business owners (the line for corporate handouts from the state might start to get rowdy).

Nevertheless, even if the market shrinks by half, the WSJ reports, it will be at the size it was only two years ago.