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Getting up to speed - Dealership networks, automotive logistics and CIS automotive markets - EY - Global

Getting up to speed

Dealership networks, automotive logistics and CIS automotive markets

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Light vehicle sales in selected CIS countries, units

  2008 2009 E2010 2009/10 2008/09
Belarus 36,220 20,754 12,626 -39.2% -42.7%
Kazakhstan 44,500 20,734 22,814 10.0% -53.4%
Ukraine 662,419 175,111 160,977 -8.1% -73.6%
Uzbekistan 56,496 59,004 56,526 -4.2% 4.4%
Total 799,635 275,603 252,943 -8.2% -65.5%

Source: J.D. Power

Light vehicle production in selected CIS countries, units

  2008 2009 E2010 2009/10 2008/09
Belarus 240 191 227 18.8% -20.4%
Kazakhstan 3,271 1,245 3,034 143.7% -61.9%
Ukraine 411,101 64,311 75,331 17.1% -84.4%
Uzbekistan 195,038 205,011 213,244 4.0% 5.1%
Total 609,650 270,758 291,836 7.8% -55.6%

Source: J.D. Power, ASM Holding

Uzbekistan’s low-cost advantage helped the country expand production during the recession.

Summary: The recession reshaped the way dealership networks and automobile logistics do business. Among CIS countries, Uzbekistan emerged ahead of the game and expanded production during the recession.

Dealership networks

The Russian automotive industry’s recovery has had a positive impact on the development of the broader automotive retail segment. A majority of the large Russian dealers survived during the financial crisis and managed to not only restructure their debts successfully, but also increased sales compared to 2009 figures.

A number of smaller automotive dealers left the market, which opened additional opportunities for stronger companies to capture market share from their ailing competitors and to capitalize on the medium term growth opportunities.

Currently, market players are looking for opportunities to expand the geographic coverage of their network, which we believe will drive further mergers and acquisitions activity in the sector.

Recession’s reshaping of dealership networks

The downturn of 2009-10 reshaped the dealership industry landscape both in terms of competition and also operational structure. Most of the dealers are shifting away from the old profitability model - which relied primarily on new car sales - and are moving to a more "mature" state by focusing on other profit centers.

In particular, they are attracted to the model whereby dealers in the developed markets secure higher profits from used cars sales and aftersale services (dealing with used cars is typically twice as profitable as new cars). Margins on spare parts and provision of repair services normally contribute to about 50% of overall dealer profitability in developed markets.

The above-mentioned trends will determine the future market development and will trigger further industry revitalization and the market growth potential will lead to further foreign capital inflow.

Automotive logistics

There are three main modes for transporting vehicles in Russia:

  • Road
  • Railroad
  • Shipping

Four times more cars are transported by road than by rail, and this relation has remained rather stable in the last few years, based on market participants’ estimations.

However, these statistics are opaque because these modes of transportation are often used sequentially. For example, an imported vehicle might be first shipped to a seaport, then transported by rail, before finally being delivered to a dealer center by road.

Recession’s effects on Russian automotive logistics

The global economic crisis triggered the rapid downturn in the automotive industry. It essentially brought automotive logistics to a standstill.

Before the recession, booming car sales encouraged logistics providers to continuously increase their capacities. Expecting the continuation of growth, many of them had engaged in burdensome leasing schemes in foreign currencies, which set off several debt restructuring processes in 2009-10.

The consequences of this lending were mixed. Like in other sectors, indebted companies, regardless of their size, were hit the hardest by the slowdown. Naturally, diversified groups appeared more stable than monoline logistics companies.

Ultimately, the market situation not only led to lower transportation volume, but the overcapacity also resulted in lower prices; in some cases, tariffs fell by around 30%-50%. Both factors deteriorate the financial position of automotive logistics providers, which puts excessive pressure on the reduction of transportation costs and process optimization, resulting in a vicious cycle from which only the fittest escape.

Right time to enter the market

What does this mean international logistics providers interested in the Russian market? The time may be right to enter the market through a strategic partnership or a merger and acquisition process.

This is true both for large companies focusing on inbound and outbound logistics, and also for smaller local companies concentrating on the automotive industry’s demands and leveraging their local experience, presence and flexibility.

Yet, some players left the market. This partly reduced the automotive logistics overcapacity, tariff pressure and market power of car producers, which benefitted the remaining logistics providers.

However, a quick return to the previous market situation and the transportation prices of 2008 is highly unlikely anytime in the near future.

Light vehicle sales in selected CIS
countries, units

CIS automotive market

Uzbekistan: Uzbekistan was the only CIS country that had a marginal increase in annual vehicle sales. Although most of the CIS countries are net importers, Uzbekistan is a net exporter of vehicles. Its low-cost advantage has enabled the country to expand production through the recession.

Ukraine: Ukraine, the largest among the four regional markets, witnessed the sharpest contraction in vehicle sales. Volumes shrank by an annual average of 35% between 2007 and 2010.

Despite the economic recovery in Ukraine and in Russia bearing well for the local auto industry, it is not likely to reach its 2008 peak volumes of over 662,000 vehicles anytime soon.

Light vehicle sales in selected CIS
countries, units

Vehicle assembly in Ukraine crashed by 84% in 2009. The majority of the decline was in the kits being imported and assembled in the country. Though the economic recovery has triggered a marginal rise in domestic production, the assembly of kits has grown by over 20% in 2010, and is expected to grow even further.

For Ukraine to be able to nurture its domestic auto industry, the country must have a more robust and comprehensive automotive policy.

Belarus and Kazakhstan: Belarus and Kazakhstan have been predominantly import markets, with domestic manufacturing limited to assembly of kits. With the economic recovery setting in, these countries are also likely to witness an increase in vehicle assembly, although a majority of the volumes are still likely to be CKDs or SKDs.

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