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Central & eastern EuropeSeptember 30 2007

Cars drive moves into Russian loan sector

Ben Aris reports from Moscow on the new trend of carmakers setting up shop with banking licences in Russia to take advantage of the accelerating growth in the auto loans market.
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Nothing epitomises the capitalist system more than cars. And nothing highlights the changes to the Russian economy more than Moscow’s appalling traffic. With more than 15,000 new cars being taken on the road every month, the capital city is gridlocked as Russians trade in their clapped out Ladas for brand new Ford Focuses paid for with credit.

Russia now boasts Europe’s fastest growing car market. The total volume of car sales doubled year on year in 2006 to reach a total of two million units as Russians spent more than $32bn on new cars; they have already spent $16bn in the first six months of this year.

Auto loans have become the new hot financial product among the domestic banks, overtaking express consumer credits as the fastest growing retail business. Unwilling to miss out on the financing bonanza, Toyota Financial Services was the first foreign carmaker to follow its main product into the Russian market when it finished setting up a bank in June and went operational in September to become the first foreign-owned bank dedicated to making car loans.

Accelerating growth

“The Russian auto-finance market is developing dynamically along with car sales growth. It is far from saturation for the moment and gives an opportunity to be successful for banks that have worked for a long time in the Russian market and those that have just entered the market,” says Olga Shestova, a spokeswoman for Toyota.

Russia’s Toyota Bank, a subsidiary of the German-based Toyota Kreditbank, has already started offering loans for its Toyota and Lexus brands. The loans are for between 12 to 60 months and are denominated in dollars, euros and roubles; hard currency loans carry 9% annual interest rates, while the rouble loans are charged at 11% a year.

Toyota Bank plans to increase the number of its outlets in Moscow to 18 by the beginning of 2008 from the current two, says Olaf Neitzsch, head of the Toyota Kreditbank representative office in Moscow. It also has plans for more outlets in St Petersburg, Russia’s second biggest city, and other big regional centres.

Toyota had the market to itself for only two weeks. Just as Toyota Bank opened its doors, US carmaker DaimlerChrysler received a licence for its carbank DaimlerChrysler Bank Rus. Renault-Nissan, BMW and General Motors are all close behind with similar plans.

“Toyota was the first to open a bank but our competitors will all follow suit very soon,” says Ms Shestova. “A substantial part of Toyota and Lexus cars worldwide are purchased on Toyota Financial Services loans, but of course it will take time to reach this level of the market. Our ultimate goal is to become the main supplier of financial services for Toyota and Lexus customers.”

Critical mass

Foreign car sales have reached a critical mass in Russia: sales of foreign-made cars (including both imports and locally assembled cars) overtook sales of the classic Lada and Volga saloons last year for the first time, after car sales doubled from 2005. In all, foreign-made car sales have more than tripled in the past five years and now command 78% of the market. At this rate, Russia will become the biggest car market in Europe shortly after 2010, according to PricewaterhouseCoopers.

This year is also going to be another bumper one for international automotive companies. The Ford Focus was Russia’s best selling car in 2006, when sales increased by 92% in a year to reach to 115,900 units. Toyota is a close second: sales rose 77% in the first six months of this year against the same period a year earlier to reach 72,331 vehicles. Its best-selling car is the Corolla, which made up a third of sales, but its luxury brand, the Lexus, also enjoyed a robust 62% increase of sales over the same period.

The growing middle class has been ploughing its newfound wealth into the ultimate status symbol: a car. Because spending power has almost doubled – thanks to consumer credit and falling prices as more and more foreign manufactures set up shop in Russia – most middle class people have chosen to forgo the classic Russians cars to spend an extra couple of thousand dollars on a foreign-made Ford Focus or Corolla.

“Nowhere is Russia’s return to health more easily seen as in the automotive sector,” says Eric Kraus, manager of the Nikitsky Russia/CIS Opportunities Fund.

“The car sector is a perfect example of the Kremlin’s plans for the economy in microcosm: foreign investment is flooding in to create a Russian Detroit in St Petersburg as every major carmaker sets up a factory; and at the same time the state is pouring resources in AvtoVAZ, the state-owned maker of the Lada, to create a national champion that will be a growth centre for the industry.”

Car loans market

Toyota’s sales are already thought to be worth $1bn a year, about half of which is financed by Russian domestic banks. The total market for car loans doubled last year to reach $10bn – 12% of total retail sales in 2006, according to RosBizconsulting.

The foreign carmakers’ lead over long-dominant Lada is likely to widen. In the past year, a score of foreign car companies have committed to building factories in Russia – mostly based in the investment-friendly environs of St Petersburg. Ford has an assembly plant in Vsevolozhsk in the Leningrad region that surrounds the city of St Petersburg. It is the company’s youngest plant and the only one to assemble Ford Focuses in all the four body modifications. Toyota is building an assembly plant in the northern capital that will come on line towards the end of this year.

Russia’s president Vladimir Putin said in February that no more was needed to entice foreign car markets to set up shop in Russia because almost all the major producers had already committed themselves. The attention has turned to attracting the second tier of automotive component producers and other supporting industries.

The Kremlin may be retaking the commanding heights of the oil industry, but it has more or less decided to let the automotive industry go. Analysts were cheered when deputy prime minister Sergei Ivanov suggested during the opening ceremony of a new Nissan plant in July that the Kremlin would abandon its effort to protect the state-owned “national champion” AvtoVAZ, the maker of the Lada: “I would support a domestic automobile if it were competitive, but talking about passenger cars, I do not see any.”

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