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№6 (239) 25 March - 7 April 2009

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Main theme: Carmakers. Looking into the future     More realistic approach
The demand for cars is steadily falling and prospects for carmakers and car dealers look bleak. They have to rethink and change strategies. In commercials official dealers put special emphasis on services and availability of spare parts. They revise their already pessimistic forecasts. Analysts also report a drop in orders for premium and business class models. Official dealers switch to more budget car brands. Dealers operating in the shadow sectors also tend to buy smaller number of jeeps and sedans and make their choice in favor of cheap second hand brands. Car dealers criticize the state for its decision to impose higher tariffs on imports of vehicles

Alexey Ikonnikov
Almaty

"It is not just a shock it is a blow"

The markets are not just falling, they are in the steep decline. According to data issued by the marketing department of Astana Motors in 2008 the cars markets contracted by 31.2% . The sales plummeted from 34385 in 2007 to 23573 units. Between January - February 2009 sales decreased by 54% if compared to those for the same period of 2008. Renowned car brand producers (Japanese four) reported the same figures. Sales of Russian cars have fallen by 60%. " Orders are being cancelled. The markets haven't recovered from the biggest shock namely of drop in sales by 1/3 in 2008. The decrease in sales this winter is not just a shock it is a blow" said Marchell Rudik, the director of sales and marketing department of Toyota Motors Kazakhstan. We will do our best to retain at least the existent market segments and keep sales at the present level. ", added the expert.

Analysts conducted a marketing research. No wonder it turned out that the sales of cars newly produced and old ones went down if compared to 2007. According to the report published in 2007 by business analysis center Business Resource Central Asia (BRCA) the price of all contracts concluded between Kazakh dealers and importers were roughly estimated at $3.7 billion. In 2008 the research center using the data of customs reported that imports fell. Dealers paid only $2.1 billion for all imported cars. They also placed big orders on the market for two brands of cars Nissan and Subaru because there was a substantial growth in their sales in 2007. Unfortunately overly optimistic prediction of Astana Motors experts for two brands of Nissan and Subaru has never come to its fulfillment. Sales and arguments of analysts that carried out market research misled dealers. That is why as the president of Astana Group Nurlan Smagulov put it car dealers built large stocks of unpopular brands, that is why they have to sell at a discount. In January the car sale firms offered 5-10% discount for Japanese and European vehicles. Today they grant 25% discount for Japanese brands and 40% and even more for Russian ones. To be fair some car brands are purchased willingly due to the sound marketing strategy of car makers and optimal price- quality ratio. For example until now brands of Southern Korean concern Hyindai have been popular with customers and there was no any drop sales of these vehicles. The explanation for this phenomenon is very simple: due to the liquidity shortage customers had to tighten their belts and switch from the prestigious luxury brands to high- end technology but more practical ones such as Hyindai which fits second description. Astana Motors managed to get a boost from the sales of Hyindai and compensate its losses from Nissan and Subaru that stay in warehouses unsold. The demand for off- road is steadily declining while cheap but still quality vehicles gain popularity among potential buyers. "We stake at Hyindai during crisis and we really think that future belongs to Toyota" says the General Director of Astana Motors Nurali Ahmetov.

Every cloud has a silver lining but even Hyindai can't change an overall bleak picture. Car dealers don't see any reasons for optimism. Pessimists such as Suleimen Tastemirov, the owner of Auto cargo company believe that there will be another fall in demand. Usually distributors and car dealers business requires considerable investments to boost sales and create demand for their produce and services. Country is short of liquidity now the middle and small sized businesses are deep in trouble. Demand is sluggish. Autocargo owns 10 turcks, 8 of them stay parked idle in the parking lot: demand for transportation services has evaporated. Dealers operating in shadow market face similar problems: they have wide variety of vehicles available for sale , staying idle in garages . All the cars were delivered between 2007 - 2008 and there are not in demand. Many businesses just have to go bust. It is just a talk of the towns. The owners of warehouses designated for temporary storage (WTS) located in the suburbs of Almaty confirm that dystopian prognosis.

We visited two large WTS built along the Ily road on the Northern fringes of the city. We attempted to assess future prospects of the market and weigh market potential. It seems that there are grounds for concern. Seven hundred vehicles produced between 2000-2006 were parked in the WTS area. All vehicles have passed the customs and were equipped with full package of required documentation. What brands were represented there? The area was full of business class and rather expensive cars such as Mercedez, Toyota, BMW, Mazda mini-vans , jeeps Mitsubushi Montero, Subaru Legacy Toyota and Suzuki. There were also not so widely spread in Kazakhstan brands recently delivered from the US Kraisler, Chevrolet. The demand for all vehicles is scarce. Even in 2007 and in early December of 2008 the car dealers set $15 thousand for 4-6 years old Montero. Now they are ready to get rid of it and sell it for $11 thousands, but nobody wants to buy any car. Alexey Chesnokov, an indivual entrepreneur said that he imported 5-7 cars monthly. He managed to turn $500 -1000 profits from the sale of each car. In 2007 all cars were purchased in a month. In summer 2008 he felt satisfied when he sold cars within 3-4 months. Recently recession nearly paralyzed the market: Alexey Chesnokov's colleagues are ready to sell all cars at the original price that set by the manufacturer just to return money invested in the project. After tenge devaluation prices plummeted and car dealers advertise their goods on the hope to return at least two thirds from the initial price.

Some so called grey dealers, who saved some money, pin their investment hope on the promise of V Shkolnik the Minister of Industry to raise import tariffs on cars. These dealers are eager to strike good deals. This promise matters somehow. In recent months Vehicle prices have been up a little by $500-700. Defensive import tariffs can't be regarded as determining factor in the sales issue. They are to fuel demand but in vain. Warehouses are full of cars. There are hundreds of them but demand is sluggish. People don't rush to acquire a new vehicle. If any potential buyer emerges in the warehouse and it seems that he is really serious about buying a car the sellers grant him nice discount The buyer may notice some small defects and the price may be $2000- 3000 lower. You can be offered to buy the automobile by installment.

Knock down for the market?

Leading car sellers assume that the period of substantial discounts for all will be over soon. The cars subject for discount will be acquired by new owners The markets will be on the verge of fatal collapse. Sales are likely to fall again. Nurlan Smagulov suggests that 2008 marked the beginning of the crisis, and expectations were far more optimistic reality turned to be worse, the market shrank by one third instead of 10-20% predicted by dealers. In 2009 another drop of sales will follow. The market is likely to contract by 30-32%. Sellers are expected to sell only 16 000 automobiles. Some opine that forecasts should be even scaled back. Official retailers threaten to raise prices by 15-20% following introduction of 15-20 % defensive import tariff. After this drastic measure the market will be struck by the recession and it will be hard to recover., reads the official press release of Astana Motors published on February 25 th. Another spike in newly imported cars price will entail the uncontrolled wave of defaults and bankruptcies. Thousands of Kazaks will lose jobs.", note the authors of communiqu?. The market of the used cars will be on the verge of collapse as well.

"Raise of tariffs and excises , will lead the market in disaster. Any attempt to adjust the market of Kazakhstan to the customs code of Russian Federation will cause havoc. Car prices will soar. Car dealers and automobile importers will feel very uncomfortable with the idea of the new spike in prices. New rise in prices will render cars a sheer luxury. People can't afford a car, even now. Some potential buyers will be scared away by high price set in the future due to export tariffs".

The Ministry of Industry won't get any additional revenues by imposing heavy defensive import tariffs, claim the representative of Astana Motors. " With the fixed markup of 6-8% set by car manufacturer for the official dealers, the car sellers won't be able to raise excess profits", reads the official report of KMK . So it is unlikely that extra money will fill the government's coffers due to the revision of import tariffs ' Opine car dealers.

A sudden raise of tariffs produces sometimes adverse effect. It did more damage to the market than Russian officials care to admit. The demand for imported cars fell dramatically. The official dealers and importers were nearly driven into the corner. In January 2009 the imports were down nearly fourfold from 110 000 to 30 000 automobiles. Not all car dealers will be able to weather this storm. Meanwhile, Russian carmakers didn't get any additional benefits. Russian concerns have to shut down production. According to recent reports, Autovaz had to halt another conveyor because suppliers rejected to receive the payment in the form of bills of credits that cover 70% of each order. The management of Autovaz had to cut 3 500 jobs in the canteens. This is a clear indication that top management of the company reneges on its own word , as Autovaz promised the employees to ensure good work conditions ,deliver stability and provide steady jobs. In addition it would be difficult to resolve ambiguity of the ruling party Edinaya Rossia(United Russia) which encouraged Russians to buy Zhiguli cars within a framework of the advertising campaign for the support of the national Russian businesses. The thing is that Autovaz increased the price for its produce by 14- 15% right after the introduction of 15% import tariff, thus annulling PR campaign of United Russia, which urged Russians not to spent too much on foreign brands and buy cheaper local cars.

Moscow attempt to apply higher import tariffs to create a demand for the national car makers ran aground. Astana Motors and many other Kazakh dealers claim that it would be ridiculous to involve Kazakh in the ambiguous project. The crisis may compound already grave problem as many expert opine. Nurlan Smagulov says that there will be a jump in car prices by 15 -20%, after introduction of higher import tariffs. This spike in prices will affect all the markets including that of used cars. Even old automobiles will become too expenisve for the majority of Kazakh customers. The president of Astana Motors reckons that Kazakhstan should care about the market in whole not about carmakers that cooperate with Russians assembling Russian cars, which fall short of all international standards.

In is interesting to note that the precedent has been created on the Kazakh market: official dealers that were involved in ever lasting battle with grey comptitors, formed the union with them to vote down the unpopular decision of the government to "protect national car makers". They don't want to aggravate crisis by exerting addition pressure on the market. Nobody can answer whether middle sized businesses will be able to stand the crisis and remain solvent. It is really important as many self employed people often sell cars.

Eastern optimism

Judging by facts and statistics issued in the period of economic prosperity, the outcome for the economy in case of car market crumbling can be really bad. According to BRCA data as it was mentioned in this text the price of all contracts concluded between Kazakh dealers and importers were roughly estimated at $3.7 billion. Car imports accounted for 7.3% of the total. 40 official dealers, several hundred of middle sized companies and thousands of self employed individuals are operating on the market. Contraction of the market by one third led to mass job cuts.(5000 people lost jobs in the official dealer centers alone). The pessimism may be overdone. If the state will treat the car dealers with due respect, the market will retain its great potential. The industry car making and sells may take heart from different sources. This is how the problem is seen by the representatives BIPEK Autoasia, official dealer of General Motors and Toyota. The report made by the groups assess all weaknesses and strengths of the national market, on the basis of the recently published data compared to statistics of 2007, which turned to be a golden age for the national car industry. Sales of new cars jumped by 68%. In 2007 310.7 000 of used cars reached domestic market. So 547.9 000 of automobiles were sold. In 2007 the car market grew in leaps and bounds faster than somewhere else. In 2007 Kazakhstan figured as the top automobile importer in the region in all world rating charts.(Second place belonged to Ukraine). So it appears that national car dealers haven's suffered that much if we take into consideration only facts. Crisis fall in sales - 32% if compared to 2007 factor heavily for the industry but it is not a compete collapse. The car market shrank and returned to the indices of 2005. Automobile markets of the US and the EU are in trouble as they came back to indices and figures of the 90s. They are clearly lagging behind.

"This is a reason why we decided to open office in Kazakhstan. Tough times lie ahead but we believe in great future of Kazakhstan. We are on the right track. Kazakh markets look promising. The growth will be restored to the pre-crisis level It is just a matter of time", says Tadashi Arashima, the president of Toyota Motors department in Europe and one of the CEOs of Tokyo department at the press conference conducted to celebrate opening of new office. Toyota sold only 5665 cars in Kazakhstan in 2008, but car makers are attracted by prospects of future growth. " 70% of automobiles that run the roads of Kazakhstan are 7-13% years old. These are high end class models, imported during period of economic boom, says our interviewee, the representative of BIPEK Auto, which opened outlets in Almaty where Cadillas Hummer and Opel cars are available. "These cars sooner or later will be replaced. Their owners will unlikely change Opel by Zhiguli or Hummer by UAZ. Sooner or later people will put the worst behind them. Economy will pick up growth. We hope that we will have to change for the better and sell cars when a right moment comes.

Representative of Chinese factories, which are the main competitors of Russians in the cheap segment of Kazakh markets think the same. They are quite optimistic in their prognoses in Easterb style. Virazh(turn) auto center selling Cehry and Great Wall brands hasn't experienced big difficulties in recent months. It didn't't notice any considerable fall in sales. Managers think the demand for Chery cars remains steady because of the best quality price ratio. You get nice modern car for the Autovaz price equipped with weather control system, audio system Bluetooth cruise control and other high tech devices, says Dmitriy Somov, the dealer. "Add to all these advantages cheap services, engine that practically doesn't react to the quality of petroleum and availability of spare parts, and you will get an impression of the Chinese car", adds Dmitriy Somov. The consumers also give good recommendations to Chinese vehicles, heavy trucks included. One of them, representative of the construction company says that if his company faces any difficulties with the vehicle, maintenance and repair services cost considerably less than those for Russian Kamaz. Carrying capacity of Chinese dump truck is 30 tons. Russian truck is able to upload and transport 15 tons. Breaks down occur in Chinese vehicles as often as in Russian ones. The repair services are twofold cheaper. Chinese heavy vehicles do the same job as the Russian ones for moderate price.

Service center that was opened two years ago at Ryskulova Str. in Almaty, adhering to the principle that all brands are repaired in the one place, works at full capacity. The trucks sent by the companies queue up to be repaired. Local technicians that received training from Chinese specialists are highly skilled and qualified. Modern equipment is installed on the site such as robot controlled assembly lines and electronic tester kits. Mr Yui Lin, the senior manager of the service center believes that Kazakh market will be flooded by Chinese cars, because they meet all international quality standards and have no any suitable equivalents. Import tariffs that have to ward off foreign car producers will not hinder Chinese expansion. Russians raised tariffs on import of three years old vehicles by 20%. China supplies only brand new cars to Kazakh markets." Russians gave preference to Chinese vehicles before introduction of protective tariffs Our produce is good from the point of view of quality price ratio.", claims Mr Lin.

Crisis affected the market but it played into consumers' hands. Demand for expensive brands that helped to create the image of prosperous businessmen to their owners has practically evaporated , people switched to such brands as Huyindai. Car dealers revise their policies, paying attention to those sphere that have been neglected. Astana Motors puts high emphasis on quality maintenance and repair services. Overseas automobile dealers raise 95% of their profits from sales of spare parts. In the recent months local companies also have started to pay attention to sale of parts. Now this niche in business accounts for 60% of the total. In the pre- crisis years car dealers got only 20 -30% of revenues from distribution of spare parts and rendering services.", says Mr Smagulov, the head of Astana Motors Group. Quality services may add to the loyalty of the consumer to this or that brand. The representatives of Toyota Company share the same ideas."We are responsible for the brand that is why we manufacture top rate cars and provide quality maintenance services. We are responsible for what we are doing" , stresses the president of Totota Mr. Sahea Takei. "Kazakh office of the company constantly raises requirements to quality of services we render. Our technicians will be sent for training and attestation to Tokyo".

Steep decline in sales gave an impetus to competition among car dealers. It has been a useful lesson for all market players. That is why one shouldn't make clumsy moves to shatter unstable harmony.



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