My New Moskvitch has Chinese Settings
My New Moskvitch has Chinese Settings
Thirty Years of Industrial Revival | Great Western Exodus | Hello China. Inc.
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“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed RUSXIT, a BWR term to describe Russia’s exit from the global Western-dominated economy and its bifurcation by Russia. Last week’s publication ties together several BWR publications related to Western and Russian exits from the Russian and Western markets, respectively, and Russia’s enablers.
In this week’s BWR, I will discuss the Russian automobile sector and the impact of Putin’s war on it. Exit left, Western automakers; enter right, China, Inc., and others. Can the Russian automakers survive? Dealerships? The ecosystem as a whole?
Takeaways:
INDUSTRIAL RESILIENCE—The Russian auto industry is experiencing changes not seen since the collapse of the Soviet Union. After three decades of establishing Western-Russian state-of-the-art manufacturing supply chains, Western automakers have exited the Russian market overnight, paralyzing the ecosystem and resulting in write-offs of billions EUR. However, Russian automakers are better prepared for this crisis and are slowly recovering. Nevertheless, they still face severe challenges in access to emerging technology, particularly in electric vehicles (EV) and new partnership arrangements with China, Inc.
NEW PARTNERSHIPS—The Russian auto sector’s new partners are China, Inc. and, to a lesser extent, Iran. China brings manufacturing capacity, markets, and technology. Besides low-end market vehicles, Iran brings institutional and current knowledge about best practices in import substitution and sanctions evasion.
Given the limited partnership options, in contrast to multiple options with Western automakers over the past 30 years, the partnership terms with China, Inc. will likely be less favorable.
My New Moskvitch has Chinese Settings
Thirty Years of Industrial Revival | Great Western Exodus | Hello China. Inc.
Thirty Years of Russian Auto Industry Success
Western automobile manufacturers have a long history in Russia. GAZ (Gorky Automobile Plant), located in Nizhny Novgorod, was established in 1929 with the assistance of the Ford Motor Company (Ford).
GAZ manufactured the Volga sedan, the standard-issue car for Soviet apparatchiks and later Russian government officials. Ford was also instrumental in establishing the Moscow Car Assembly Plant. This plant assembled knock-down Ford kits and later mass-produced the Moskvitch car, based on German Opel models, for the everyday Soviet man. AvtoVAZ (Volga Automobile Plant), one of the Soviet Union's largest automobile manufacturers, was established in 1966 in cooperation with Fiat. Located in Togliatti—named after Palmiro Togliatti, the Italian Communist Party leader—AvtoVAZ manufactured the Zhiguli, the ‘people’s car’ based on the Fiat-124 (and exported under the Lada brand). It is also where the late Russian oligarch Boris Berezovsky made a fortune through his control over the distribution of Lada cars in the 90s. Berezovsky had a monopoly on the distribution of vehicles from the plant.
The collapse of the Soviet Union left the Russian automobile manufacturing sector (like many Russian manufacturing sectors) vulnerable to high-quality import competition, forcing the government to take protective action. Over 30 years of negotiations, this protective action resulted in a robust, vertically integrated local manufacturing value chain comprised of Western and domestic manufacturers—Ford, Renault, Volkswagen, BMW, and Nissan—providing well-paid local jobs, a reliable tax base, a competitive automobile market, and technology transfers to support global advancements in the industry.
Russian automakers like AvtoVAZ entered joint-production ventures with Renault, Nissan, and General Motors. GAZ established production agreements with Volkswagen, Skoda, and Mercedes-Benz. Domestic-foreign manufacturing arrangements and supply chain agreements took root across the country.
Several wholesale and retail automobile dealers emerged from the decades-long resurgent Russian automobile sector, with the Rolf Group being one of the most successful dealership networks. The dealerships are where the relationship between the auto consumer, manufacturer, and banks came together to create the fastest-growing automobile market in Europe for nearly a decade, with new sales peaking in 2008, when 2.9M autos were sold in Russia.
The resurgence of the Russian automobile market ended in 2014 when Putin launched his first invasion of Ukraine, sanctions were imposed, and the ruble's value collapsed: new car sales dropped over 40%. Putin’s second invasion of Ukraine in 2022 decimated the Russian automobile sector in terms of sales and the value chain. While native brands such as Lada, Volga, and Gazelle held strong market positions, Western automobile manufacturers had dominated the Russian auto market for nearly three decades. Sales fell to just 0.6M in 2022, less than half the average from 2014 to 2021, and two-thirds below the 2008 peak.
Western automobile manufacturers dominated the Russian auto market for nearly three decades, along with native brands such as Volga, Gazelle, and Lada.
The resurgence of the Russian automobile market came to an end in 2014 when Putin launched his first invasion of Ukraine. Putin’s second invasion of Ukraine in 2022 decimated the Russian automobile sector in terms of sales and the value chain.
The Great Western Automakers Exodus:
Outside Russian aviation, the auto sector has experienced the most profound and immediate impact from Putin’s war and Western sanctions. Since 2022, nearly all Western auto manufacturers have exited Russia, writing off billions of dollars in investments and leaving several vertically integrated state-of-the-art supply chains and manufacturing plants paralyzed. Auto sales dropped more than 60% within a few months, including domestic brands, and foreign-made auto parts are now being sourced through third-country intermediaries, significantly increasing consumer maintenance costs.
Two Western auto exits of particular interest are Renault and Volkswagen. Renault sold its 68% stake in AvtoVaz for 1RUB, resulting in a €2B write-off. Volkswagen sold its Russia operations to Art-Finance, supported by auto dealer group Avilon, for €135.
In 2021, AvtoVAZ sold 350,000 vehicles, representing 12% of the cars sold by the Renault group. Today, the former Renault plant in Moscow plans to sell 27K Moskvich-branded cars, of which 7K were sold in the first four months of 2024. The Moskvich-branded vehicles are knock-down assembly kits imported from China by JAC Motors. The stamping machines, paint cubes, and other manufacturing equipment remain idle. For now, the manufacturing process remains primarily assembly.
Art-Finance, the new Russian owner of Volkswagen’s (VW) Russian operations, entered into an agreement with the Chinese automaker Chery International to assemble imported vehicle kits in the former VW plant in Kulga. The GAZ plant in Nizhny Novgorod now produces Volga-branded cars based on imported Changan assembly kits.
While Chinese automakers have taken a dominant position in the vacuum left by Western automakers, Iranian manufacturers are also entering the market. Iranian automaker IKCO has introduced the Tara sedan, which is positioned to compete with the Lada. It should be noted that Tara is a modified copy of the Peugeot 301. Iran has been under sanctions for more than 30 years and has adapted through import substitution and reverse engineering of Western technology. This knowledge transfer will be valuable and relevant to Russian automakers as they reconfigure the Western equipment left by their former Western partners.
Ironically, the Rolf Group, once a multi-billion-dollar auto wholesaler and retailer in Russia, is the dealer network introducing the Tara to the Russian Market.
The Kremlin seized the Rolf Group from its exiled founder, Sergei Petrov, in 2019 and recently transferred it to Umar Kremlev, president of the International Boxing Association (IBA) and a Putin loyalist.
While Lada continues to hold the largest market share in Russia today, Chinese and Iranian brands have replaced all Western brands in the top 10 most popular selling brands in Russia since 2022.
Chinese automaker Chery International is now the largest foreign company in Russia. Chery’s 2023 revenues in Russia quadrupled over 2022 to $6.6B on sales of 220K cars.
As the Chinese automakers fill the vacuum left by the departing Western automakers, the Western value chain must now be reconfigured to accommodate Chinese standards—for example, auto parts and service centers. Russian owners of new Chinese cars complain that mechanics are unfamiliar with Chinese standards, and replacement parts are expensive and hard to find.
Internal Combustion Engine (ICE) vs Electric Vehicles (EV)
The accelerating global migration from ICE to EV is also taking place in Russia, albeit slower. From May 2023 to April 2024, more than 21K EVs were sold in Russia, a jump of about 350% over the previous 12 months, with Chinese brands accounting for over half of sales. As illustrated in the chart below, Chinese EV dominance continued in the first half 2024.
Zeekr, a subsidiary of Chinese automaker Geely, sold 8K EVs in Russia in the 12 months from June 2023-24. This is quite an accomplishment, given that Zeekr does not have official representation in Russia.
Motorinvest, the Russian automaker of EV Evolute and Zeekr’s closest competitor, plans to produce and sell more than 3,000 Evolute electric vehicles in 2024, as reported by TASS, Andrei Reznikov, Managing Partner of Motorinvest, stated,
"This year, we plan to produce more than 3,000 electric vehicles under the Evolute brand and sell them all […] the Evolute model range is already quite wide. I do not think we will expand it. Rather, we will consider the possibility of installing hybrid units on the Evolute electric vehicle line.”
Other EVs on the market include the AvtoVAZ Lada e-Largus and licensed Chinese copies branded as the iconic Moskvitch.
China, Inc.
China is now the world's largest vehicle exporter, surpassing Japan in the first half of 2024. It is a leader in ICE and EV exports and is beginning to establish in-country manufacturing worldwide.
Russia is the leading importer of Chinese cars, and domestic automakers have taken note. They have begun lobbying the Russian government for tariffs on Chinese vehicle imports and assembly kits.
Sergei Chemezov, the CEO Rostec Corporation, a powerful Russian weapons and automotive player with an equity stake in AvtoVAZ said,
"After the departure of Western brands, there was a shortage of cars on the market, and it had to be covered somehow. By the way, we should say thank you to the Chinese […] when the Germans, the Japanese, and the Koreans showed the Russia 'the finger', the Chinese auto industry supported us […] the state would find a solution […] the import of assembled cars can be regulated with protective measures."
The Russian government and domestic automakers have only begun their partnership negotiations with China, Inc.
Watch this space.
Conclusion
Driven by Putin’s war on Ukraine and Western sanctions, the Russian automobile ecosystem, from manufacturing to raw materials, ground to a halt in 2022. A state-of-the-art vertically integrated Western-Russian value chain that delivered quality jobs, tax revenues, and technology transfers after thirty years of negotiations between Western automakers and Russian government officials came to a sudden end. The Russian economy and Western automakers experienced billions in financial losses due to lost revenues and asset write-offs. The Russian auto sector has not experienced such a dramatic change since the collapse of the Soviet Union.
However, Russian automakers are better prepared for these changes and the sector is slowly recovering. Auto sales are returning to near pre-war 2022 levels, but most new cars sold are Chinese and Iranian imports or assembled Chinese imported kits. The return of auto manufacturing will take several years, at best, because the value chain will need to be reconfigured according to Chinese manufacturers’ needs and standards for their models.
Western automakers have been replaced with Russian owners. The new owners have solicited and signed partnership agreements with Chinese and Iranian auto manufacturers that are now supplying the plants with imported automobile kits for assembly in the plants, and the finished vehicles are sold under iconic Russian brands such as Lada and Volga or sold under the Chinese or Iranian brand plants. Unlike the former Western automakers, the Chinese and Iranian automakers do not have an equity stake in the supply chain of the Russian auto businesses, although that may change over time.
In less than three years, China, Inc. has increased its share of the Russian market from less than 2% to over 60%.
Additional Reading(s)
A Bumpy Ride for Russia’s Car Industry, (Riddle, 30 May 2023)
Russia Makes Knock-Off Citroens at Stellantis Plant with Help from Chinese Partner (CarScoops, 15 Feb 2024)
Trend for Electric Cars Changes, (Realnoe Vremyna, 30 Jul 2024)
Chinese, Iranian Automakers woo Russians After Western Brands Leave (Christian Science Monitor, 23 Aug 2023)
Russia Weighing Protectionist Measures Against Chinese Auto Imports (Wards Auto, 13 Sep 2024)
Follow-ups & Quick Bites
Follow-ups
Iranian President to Attend BRICS Summit
In October 2024, Iranian President Masoud Pezeshkian will attend the BRICS summit in Kazan, the capital of the semi-autonomous Republic of Tatarstan.
The announcement comes as Russia and Iran strengthen their economic and military ties. Last week, Iran delivered ballistic missiles to Russia for use in the Ukrainian theater.
As discussed in last week’s BWR, “RUSXIT—Russia’s Exit from the Global Economy,” the Kremlin is leading the formation of a parallel global economy and serving as the bridge between BRICS and the coalition of Western-sanctioned countries.
Additional Reading(s)
Iranian President to Attend BRICS Summit in Russia (The Kyiv Independent, 16 Sep 2024)
RUSXIT —Russia’s Exit from the Global Economy (Barbershop Whispers…Russia, 15 Sep 2024)
The Kremlin Considers Raising Western Exit Tax to 40%
Russian authorities are discussing increasing exit ‘contribution’ that foreign companies from ‘unfriendly’ countries make when leaving the Russian market. As reported by RBK, the exit tax may increase from 15% to as high as 40% by the end of October 2024.
The Kremlin has steadily tightened exit requirements for foreign companies since Western sanctions were imposed after the second invasion of Ukraine in 2022. As discussed in BWR’s last publication, “RUSXIT – Russia’s Exit from the Global Economy”, the current government-approved formula for exiting the Russian market will result in a 42.5% discount of the appraised asset value, and this is a best-case scenario. Most exit valuations are settled at 26-35% of the appraised value.
Budget contributions from foreign company exits have generated $1.5B to date.
Additional Reading(s)
Russia Discussing Hefty Hike in Exit Tax (Reuters, 20 Sep 2024)
RUSXIT —Russia’s Exit from the Global Economy (Barbershop Whispers…Russia, 15 Sep 2024)
Western Companies Exiting the Russian Market… Not Easy (Barbershop Whispers…Russia, 17 Sep 2023)
Quick Bites
Ukraine Destroys Ammunition Depot Deep Inside Russia Proper
The Russian Army’s 107th arsenal, located 500KM from the Ukrainian border in Tver region, was struck by the Armed Forces of Ukraine (AFU). The explosions were powerful enough to trigger seismic monitoring systems and registered between 2 and 2.8 on the Richter scale.
The attack on the depot is reported to have involved more than 100 drones.
Russian Cities Cancel Pro-War Singer’s Shows
Yuroslav Dronov’s—AKA Shaman—100 city ‘Victory’ tour, designed to generate support for Putin’s war is tanking. The singer said he aims to “program” his audience to think about Russia’s victory over Ukraine. But low attendance and ticket sales suggest Russians are not interested in his message and concerts are being cancelled across the country.
Concert attendance and ticket sales may be a measure of Russian fatigue, particularly among young Russians, with Putin’s war. Even Shaman’s TV ratings are reportedly low, but then again, who watches Russian government TV other than Putin, Western security services, babushkas, and deduskas?
Additional Reading(s)
Shaman Pro-war Concerts Cancelled (The Moscow Times, 20 Sep 2024)
Vol 2, No 44 - BWR 22.09.2024
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.