During these early months of 2019, the car industry is experiencing an ambiguous situation. On the one hand, for the second consecutive year, the market has been recovering after a lengthy stagnation. On the other hand, the 20% VAT may slow down its development pace.
The market’s continuing growth indicates that the consumer demand is steadily recovering. Anticipated increase in the prices of new cars and weakening ruble coupled with the VAT increase to 20% stimulated the sales in the late 2018. However, in the early 2019, the market slowed down and the prospects are not so optimistic anymore.
According to the Association of European Businesses forecast, in 2019 the Russian car market will grow by 3.6% to 1.87 mio vehicles. The maximum growth, provided that the conditions are favorable, may reach 5%. However, there is a chance of no positive dynamic at all.
The main factors that may adversely affect the automotive market in 2019 include unstable exchange rates and shrinking government support for the automotive industry, as well as a heavier tax burden on car dealers and motorists arising from the higher vehicle owners’ tax, compulsory civil liability insurance, fines and parking costs.
This year, the government plans to start implementing its new strategy for support of the national automotive industry: state funding will no longer be distributed selectively, but will be allocated using a single principle. To become entitled to a subsidy, the manufacturer needs to double exports to achieve a value equivalent to the target set by the government. At the same time, the existing regulatory framework for state subsidies in a number of industries will be cancelled, including mechanical engineering, the machine-tool and automotive industries. So automakers can only count on government support after concluding a special investment contract, which implies exporting their products to foreign markets.
In 2018, car prices went up by 5%-22% depending on the brand and model. The luxury segment prices showed minimal growth, while prices in the mass segment grew up the most. In 2019, car prices might rise by 5%-15% depending on the brand. The biggest increase will be in the luxury segment. In addition, more advanced and as a result more expensive versions of popular models will appear on the market. At the same time, there will be no steep rise in prices: they will increase gradually during the year and will depend on the country’s economic situation and the car makers’ price policy. The first increase related to the 20% VAT and the fiscal and working year change has already happened with most brands and another price increase will happen in the second quarter.
According to the ASC car dealership, the average price of a car was RUR 1.7 mio ($26K) in 2018; in 2019 it is expected to reach RUR 1.8-1.85 mio ($27K). It is unlikely that customers would prefer the used vehicle market. The used vehicle market showed a slowdown and grew by just 2.4% in 2018. Many trends specific to the new car market are also true for the used car market, for instance a price increase and the extended period of possession. At the moment, corporate car sales in Russia are significantly lower than those in the developed countries. However, corporate clients bring same profits to car dealers as individuals. In 2018, the share of new car sales to legal entities in Russia was 10% and the share of cars registered to legal entities was 5.6% of the entire fleet. Thus, taking in account the insufficient development of the market, corporate sales can become a new trend in the Russian car market and might reach 15%-20% of sales in the mass segment. The share of corporate sales in Moscow and St. Petersburg in 2018 was 17%-25%, and 10%-15% in the regions. The dealers’ interest in corporate clients is justified because they usually purchase several cars at once. The maintenance of corporate cars is also profitable for dealers because legal entities do a regular check-up of all purchased transport and can later replace their fleet by trading it in.
To sum up, emphasis should be put on a positive scenario of market development in 2019, which will see a 5% increase as compared to the last year. Russian car owners are now accustomed to a dynamic pricing on the car market, the situation in the country has stabilized, and the pent-up demand will remind of itself.
By Konstantin Avakyan, Business Project Manager, AvtoSpetsTsentr (ASC) car dealership