Producers Will Lean On State As Demand Fades

BMI View : The government's recent loan guarantee to KamAZ is a precursor to further handouts and bailouts for struggling autos manufacturers in Russia. We believe issues of overcapacity in Russian automobile production, spurred by past government incentives, will place manufacturers under considerable pressure in the near future as sales of commercial and passenger vehicles continue their decline.

Following Russia's recent loan guarantees to truck maker KamAZ, BMI expects to see a series of similar government handouts and bailouts to other domestic vehicle manufacturers in H214, H115 and H215 as further sales declines worsen Russia's overcapacity problems. The deal approves a state guarantee to KamAZ of up to RUB35bn (USD968mn) for up to 15 years and comes as the truck sector continues to battle weak demand for heavy trucks (KamAZ's chief executive, Sergei Kogogin, estimates that heavy truck sales have fallen by 18-20% recently).

BMI maintains that the state guarantee highlights the dangers of a structural imbalance in the Russian autos market. We believe that recent increases in productive capacity will continue to be met with declining domestic demand in both the commercial (CV) and passenger vehicle (PV) segments. This will lead to greater demands from domestic and international manufacturers for government bailouts and subsidies respectively.

Producers Will Lean On State As Demand Fades

Sales Continue to Dive
Total New Passenger Cars and Light Commercial Vehicle Sales (Thsd Units Per Month), 2012-2014

BMI View : The government's recent loan guarantee to KamAZ is a precursor to further handouts and bailouts for struggling autos manufacturers in Russia. We believe issues of overcapacity in Russian automobile production, spurred by past government incentives, will place manufacturers under considerable pressure in the near future as sales of commercial and passenger vehicles continue their decline.

Following Russia's recent loan guarantees to truck maker KamAZ, BMI expects to see a series of similar government handouts and bailouts to other domestic vehicle manufacturers in H214, H115 and H215 as further sales declines worsen Russia's overcapacity problems. The deal approves a state guarantee to KamAZ of up to RUB35bn (USD968mn) for up to 15 years and comes as the truck sector continues to battle weak demand for heavy trucks (KamAZ's chief executive, Sergei Kogogin, estimates that heavy truck sales have fallen by 18-20% recently).

BMI maintains that the state guarantee highlights the dangers of a structural imbalance in the Russian autos market. We believe that recent increases in productive capacity will continue to be met with declining domestic demand in both the commercial (CV) and passenger vehicle (PV) segments. This will lead to greater demands from domestic and international manufacturers for government bailouts and subsidies respectively.

In line with BMI's forecast of a 9% decline in PV sales and an 8% contraction in CV sales for 2014, the market continues to disappoint, with the latest sales figures for passenger cars and light commercial vehicles showing a decline of 22% y-o-y in July 2014 and 9.9% y-o-y for the January to July period. Private consumption, especially for big ticket items, continues to be dampened by a weakening Rouble, persistent inflation, western economic sanctions and ongoing political uncertainties in Ukraine.

This decline in consumer demand is only serving to worsen the issues of overcapacity created since 2011 by the government's incentive policies under the Auto Investment Programme. The scheme provides preferential access and tariff exemptions for producers meeting local content requirements and initially encouraged large flows of investment into domestic production. Since sales declines began in 2013, producers have repeatedly cut their production targets for 2014.

According to recent production data released by the Association of Russian Automakers, total motor vehicle production in units in H114 declined 4.7% y-o-y, with passenger car output down 2.4%, truck output down 21%, and bus output down 27.4%. As a sign of the deteriorating situation, leading domestic player AvtoVAZ announced in January 2014 that it was to cut 7,500 jobs, some 11% of its workforce, due to declining sales volumes and operating weakness in its domestic market. This was followed in May by Ford Sollers announcing 700 job cuts at its St. Petersburg facility and by General Motors Company in August which announced production at its St. Petersburg plant will be cut back to four days a month each in August and September extending to eight days in October.

Taking into account this falling production, BMI believes that overcapacity problems will remain throughout our forecast period. Overcapacity will only decrease marginally from 2016 to 2018 when weak positive sales growth in PV (averaging 1.6% for the forecast period) and in CV (averaging 1.2%) will be met with steady marginal declines in PV production (averaging 0.8%) and modest increases in CV production (averaging 1.0%). BMI stresses that although sales growth will return in 2016, both sales and production will remain below their 2012 levels for the entire forecast period.

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