Auto parts are in a hurry, and the Russian auto market may shrink by more than 10% this year

Under the sanctions of Western countries, the Russian auto industry has been hit hard.

At present, Volkswagen, Mercedes-Benz, Renault, Ford and Toyota have announced that they have stopped their business in the Russian automotive market. "The Russian automotive industry is now under tremendous pressure, with many car companies and products being hit." Sergey Burgazliev, a senior analyst in the Russian automotive industry, told the first financial reporter recently.

For many years, Russia's economy and exchange rate have largely determined the direction of the automotive market. Due to the Russian-Ukrainian conflict, the Russian automobile economy has been greatly affected, and the ruble has depreciated, which will restrain automobile consumption and will also have a certain impact on Chinese brands exporting to the Russian market.

Parts are in a hurry

At present, a number of car companies have suspended their business in Russia. Volkswagen, Audi, Mercedes-Benz, BMW, Renault, General Motors and Ford Motor Company have announced that they will stop exporting cars to Russia. In addition, Toyota has also closed its plant in Russia.

Renault, as a holding company of Russian automaker Avtovaz, said it would suspend some operations at its auto assembly plant in Russia due to shortages of parts and transportation difficulties. The disruption was mainly due to stricter border controls in transit countries, forcing some established logistics routes to change. Avtovaz also said that part of the assembly line at a factory in central Russia may be suspended due to continued shortages of electronic components around the world.

"Almost all European car companies have stopped exporting cars to Russia, and the car business in Russia is also in a state of suspension. At present, Chinese brands, Stellantis and local Russian brands UAZ (a brand of the Sollers Group) are still in operation. Sergey Burgazliev told first financial reporters.

Russian auto parts rely on imports, and the Russian-Ukrainian conflict has challenged the supply of auto parts. A report released by Shanghai Beidou Convention and Exhibition Co., Ltd. shows that about 35 to 37% of Russia's auto parts are produced by themselves, while the market share of imported auto parts is relatively high, fluctuating between 63% and 65%. Taking 2019 as an example, the main importers of Russian auto parts are Germany, Japan and China. Russia has a large demand for engines, body parts, lamps and other products, and in recent years, Parts made in China have become one of the most popular parts. In addition, it is worth noting that the Auto Parts market in Russia is divided into two parts: the primary market and the secondary market. Parts sold in the primary market (OEM) are used to produce cars in factories, while parts sold in the secondary market (automotive market) are sold in auto shops. In other countries, the primary market dominates, while in Russia, the secondary market is dominant, which is dominated by spare parts for Russian cars.

Alexandra Dubrovskaya, head of vehicle operations coordination at Chrysler Group Russia, said not long ago that the Russian-Ukrainian conflict has affected the cost of car logistics in Eastern Europe. In the past, a large part of the complete vehicles and auto parts were supplied to Russia from Western Europe via Ukraine, and now the situation is clearly going to change. In addition, some parts suppliers began to transfer production lines. Aptiv said the company had pulled a large number of auto parts production out of Ukraine before the Russian-Ukrainian conflict escalated. Finnish tire maker Nokian has also moved key production lines from Russia to Finland and the United States.

An executive in charge of Chinese brand business in the Russian market said in an interview with the first financial reporter that Russia did not give full support to its own automobile industry, missed the golden period of the development of the automobile industry, and the auto parts supporting system did not develop. Most of the Russian auto parts interiors, electronic components, etc. are made in China, and many other parts and components are also dependent on other countries. Due to the problem of supporting supply of the Russian automobile industry chain, the development of the automobile industry is also retreating.

Sergey Burgazliev told reporters that the level of Russian car localization is very low, almost all automakers rely heavily on imports of parts, and logistics outages have caused some European car companies to be unable to export to Russia in the form of SKD/CKD. "Russian auto parts are facing great difficulties. About 70 to 80% of the parts of passenger cars in Russia still rely on imports, and the supply of some parts may be interrupted due to exchange rates and logistics factors. At present, Russian auto parts suppliers still have some inventory, but only 3 to 4 weeks of inventory. Sergey Burgazliev told reporters.

The Russian-Ukrainian conflict has also affected the supply chain of European car companies, and not long ago, Volkswagen said that due to the delay in the arrival of parts produced in Ukraine, the two German factories will stop production for a few days. BMW also said it expects production at its plants in Germany and other European countries to be disrupted due to supply bottlenecks. Sergey Burgazliev believes that the Russian-Ukrainian conflict will have a certain impact on the automotive industry chain, which will push up the price of oil and natural gas, so the energy costs in Europe will increase, and the price of cars will also increase. In addition, Ukraine is the largest supplier of the industrial gas neon, which is used in microelectronics production, which may have some impact on the supply of chips.

The Russian car market has been hit again

The Russian-Ukrainian conflict will further adversely affect the Russian auto market.

Due to political factors, the Russian auto market has experienced a volatile decline in recent years. In 2014, Russian passenger car sales reached 2.276 million units, in 2015 there was a cliff-like decline in sales of 1.284 million units, in 2017, 2018 (1.607 million units) years recovered, followed by a slight decline in 2019, and in 2020, it fell further to 1.434 million units affected by the epidemic. Sales in the Russian auto market will rebound in 2021, but this year's Russian-Ukrainian conflict will make the Russian auto market suffer again.

At present, the Russian ruble has depreciated sharply, and the fluctuation of the exchange rate will also adversely affect the development of the automotive industry. To some extent, the growth of the car market depends on the exchange rate and economic stability. Since some of the cars in the Russian car market come from imports, and most of the parts and components of vehicles produced in Russia come from imports, the depreciation of the ruble may cause an increase in import costs, which in turn will make the price of cars denominated in rubles rise significantly, which will inhibit consumption in the automobile market. In addition, consumer credit interest rates have increased, which will also hit consumer confidence.

Sergey Burgazliev believes that the Russian auto market will fall, predicting an annual decline of 10 to 12 percent. He said that if the Russian-Ukrainian conflict lasts longer than expected, the Russian auto market may face a loss of about 20%. "Almost all the OEMs that have built factories here are interested in the Russian automotive market, but for political reasons, no one knows where they will go next, and OEMs are full of uncertainty about the future development in Russia." At present, Haval, Geely, Chery, Hyundai and Kia are doing well in Russia, but the situation facing European car companies such as Volkswagen, BMW, Porsche, mercedes-Benz and so on is complicated. Sergey Burgazliev told reporters.

At present, many Chinese brands such as Great Wall Motor, Geely, Chery and Changan have laid out related businesses in Russia. Among them, Great Wall Motors has invested the most in the Russian market and established a factory for local production. According to Autostat, a Russian automotive industry analyst agency, China exported a total of 123,000 vehicles to Russia in 2021, with a market share of nearly 7%. The value of exports has increased by nearly 400% in five years, rising from $500 million to about $2 billion.

In the view of Xu Haidong, deputy chief engineer of the China Association of Automobile Manufacturers, Russia is one of the main markets for independent brands to go to sea, and the overall impact of this conflict is relatively large. However, if the vehicle manufacturer can recycle in Russia, it will be less affected than the direct import and export trade of the whole vehicle. For example, Great Wall has built a factory in Russia, and its sales business has been carried out for many years, and its resistance to risks will be stronger.

Sergey Burgazliev told reporters that the change in exchange rate will have a great impact on Chinese brands, but from the current reaction, the attitude of Chinese car companies to the Russian market is still relatively positive.