vehicle sales Not A Total Car Crash

Volatile market conditions in Russia are hitting carmakers hard, with each having to adapt to minimize losses. But profits have not completely crashed.
Ford Mustangs are a rare sight in Russia.

Western sanctions are biting, the conflict in Ukraine is rumbling on and the ruble continues to plummet, having lost about half of its value against the dollar in a year.

Against this backdrop, it’s hardly worth western manufacturers selling cars in Russia. They either have to jack up prices to an exorbitant level, meaning that most Russians can’t afford the vehicles anymore, or they lose money on every car sold.

The Association of European Businesses in Russia recently announced that its members expected a plunge of 24 percent in sales this year, having endured a 10 percent fall last year. That means that carmakers might sell only 1.89 million new vehicles in Russia in 2015. By comparison, annual car sales in Germany are normally around the three million mark.

It’s a cross almost all carmakers have to bear at the moment, but it weighs heavier on those who are very active in Russia.

Carmakers are taking very different approaches to dealing with the problem. Ford Europe, the continent's second biggest carmaker, is trying to power through, offsetting losses in the Russian market with growth in other parts of Europe. On the other hand, General Motors and its Opel subsidiary are suspending production to cut losses.

Carmakers are taking very different approaches to dealing with the problem.

Bob Shanks, Ford’s chief financial officer, admits that “Russia really is a problem for us in Europe.” The collapse of its market is hitting the company hard because the automaker had invested heavily in the region together with its Russian partner Sollers JSC.

According to Mr. Shanks, Ford lost a quarter of a billion dollars in Russia in 2014. “Things aren’t looking good in 2015 either,” he said.

Even though Ford Europe finished the year $1.06 billion in the red, that was quite an improvement on the previous year’s $1.44 billion. Without the weak Russian and Turkish markets, the carmaker would have improved its 2014 revenues in Europe “by almost three-quarters of a billion dollars” compared to the previous year, said Mr. Shanks.

 

 

Overall, Ford was able to gain market share in Europe in 2014, growing by 0.2 percent to 8 percent – the first increase since 2009.

One of its most successful markets was Germany. The firm sold 6 percent more cars there than in the year before, partly thanks to the popular Focus compact model and the Kuga, a small SUV. The overall car market grew by only about 3 percent.

It’s not the only way in which Ford is trying to counter the crisis. The U.S. automaker has already cut several hundred Russian workers and reduced production.

And Mr. Shanks may not stop there. He has announced that “all options are on the table” as part of efforts to tackle problems in the Russian market, but has excluded a possible market exit.

 

GM intends to shut its Opel plant in St. Petersburg for a few months from March.

 

The competition is not faring much better. GM is unlikely to fulfill its goal and oust Ford as Europe's second largest carmaker anytime soon. Last Friday, it announced plans to halt the assembly lines in its St. Petersburg plant from mid-March to mid-May. About 1,000 workers will be sent home for the two-month period. Car prices will rise as well.

The Russia crisis is weighing on Opel in particular. The GM subsidiary took charge of the company's Russian business, its great white hope, last year in an effort to accelerate its recovery from crisis.

Only the high-end market has so far been able to avoid the downward trend.

But last fall, staff levels were cut by half and production reduced by one shift. Sales of the Opel, Chevrolet and Cadillac GM brands plummeted by a quarter.

Other European carmakers are feeling the sting as well. VW halted production in Russia for several days in 2014 and last week Bernd Osterloh, Volkswagen's works council chairman, revealed that the poor market conditions in Russia had cost the Wolfsburg-based company many millions of euros in the past year.

Audi, a Volkswagen subsidiary, also suspended supply to dealers while prices were recalculated. Mr. Osterloh stressed, however, that VW hadn’t made a loss in Russia.

 

 

The great hope of carmakers is that time is working in their favor. They figure that if Russians are buying fewer cars than usual at the moment, it means that the current fleet is growing older and older. At some point, it will have to be renewed. Most manufacturers therefore hope for the crisis to calm down in the medium term – and for Russians to catch up on buying cars afterwards.

Only the high-end market has so far been able to avoid the downward trend. “We were the only brand to grow by 10 percent in Russia last year,” said Ola Källenius, who sits on the management board of Daimler, which makes Mercedes. Nevertheless, he added, Daimler is steering the market cautiously.

The reason why the premium segment is still booming is simple. Luxury cars are paid for in dollars and euros by wealthy customers. And because the country still counts a large number of super rich despite the fall of the ruble, they are still able to afford a Mercedes.

 

Thomas Jahn is a Handelsblatt correspondent in New York. Christian Schnell covers the automobile sector from Düsseldorf. To contact the authors: [email protected], [email protected]