Evolving Russian vehicle market will reshape aftermarket sales

Aug. 28, 2017
The most important distribution segment in Russia is an amalgam of the wholesale distributor channel with the e-tailing channel. These distributors, both independent and members of European buying groups, rely on e-tailing to cover the great variety of vehicles in Russia.

It was June 1992 and barely six months had passed since the fall of the Soviet Union. A professor of engineering at a well-regarded Moscow university was struggling to make ends meet. A teacher’s government-paid wages couldn’t possibly keep up with the rampant inflation Russia was experiencing.

A neighbor asked the professor, Yevgeny, to help diagnose a problem with his car. As an engineer, Yevgeny often helped his neighbors find “workarounds” because parts were always scarce. In his neighbor’s case, there was no workaround. He needed a new fuel pump. Since there were none to be found in or around Moscow, Yevgeny offered to find one on an upcoming trip to Istanbul.

The fuel pump was found, and Yevgeny returned a hero, at least to his neighbor. But this gave Yevgeny an idea. He knew of many people who needed parts desperately to repair their vehicles, but they had no logistical means to acquire them. Soon after, Yevgeny began monthly trips back to Istanbul, where he would fill his two oversized suitcases with auto parts and return to Moscow. On each trip, he netted more profit than his annual university salary.

His success inspired others to try this, and it became known as the “luggage trade” in Istanbul, where vendors made small fortunes throughout the 1990s. No one knows Yevgeny’s fate exactly, but many lament that those days are in the past. As one would expect, the Russia that grew out of the former Soviet Union has matured, and it has established more traditional supply chains.

The Russian Federation, as it’s formally known, is geographically the largest country in the world. Its 17 million square kilometers of area is nearly double the size of the next biggest country, Canada. Yet for its size, Russia remains sparsely populated. Given Russia’s population of 143 million people, the country ranks as the tenth most populous in the world.

Russia faces significant demographic challenges as it has an aging population, and a smaller replacement work force to fill jobs as older workers retire. The stagnation is likely to continue as only 25 percent of the population is less than 25 years old versus 32 percent for the U.S., 39 percent for Brazil and 42 percent for Indonesia. China, which faces similar demographic issues, has 30 percent of its youth under 25 years old.

Economically, Russia has been under pressure from a multi-national sanctions regime stemming from Russia’s annexation of Crimea in 2014. Just prior to those events, the Russian economy had reached a peak in 2013, with a $2.2 trillion gross domestic product (GDP), which ranked them as the world’s eighth largest economy. By 2016, their GDP had fallen 46 percent to $1.2 trillion and their economy was ranked twelfth in the world. To put that in perspective, that would be slightly less than the combined GDP of Pennsylvania and Ohio. Total aggregate trade between the U.S. and Russia was approximately $20 billion in 2016, well off the $38 billion peak reached in 2013.

Many Russia scholars believe that 2017 will be a turn-around year for the Russian economy. According to a 2017 Ernst & Young CIS Region Transportation & Infrastructure Group (E&Y) market report on Russia, “The main drivers of growth will be the ruble exchange rate, oil prices, auto loans interest rates, the effectiveness of government support measures and the potential to reduce vehicle ownership costs.”

Sanctions hurt Russia's vehicle market

To understand where the Russian automotive market is today, it’s helpful to understand where it’s come from. While most countries generally follow a long-term growth trend, Russian vehicle sales have been lethargic during the last 30 years. Total new vehicle sales in the former Soviet Union pinnacled in 1985, reaching 2.2 million cars and trucks. More recently, Russian new vehicle sales peaked at 2.78 million units in 2013.

But since international sanctions were imposed in early 2014, the market has fallen precipitously, dropping 49 percent to just over 1.4 million units sold in 2016. Contrast this to the U.S. new vehicle sales data, over 17.6 million units were sold in 2016. According to E&Y, total vehicle sales in Russia may top 2 million units by 2020. The same E&Y report points out that with still very limited amounts of vehicle ownership, there is immense potential for future sales growth.

What the Russian market lacks in volume today, it makes up for in diversity. Whereas in the 1970s and 1980s, choices were limited to brands like VAZ, GAZ, ZAZ and LUAZ, modern Russia offers brands from across the globe. In 2016, 57 globally recognized brands sold more than 328 distinct models inside Russia.

The top 10 brands in Russia make up 75 percent of new vehicle sales. Not surprisingly, VAZ (popularly known as Lada) leads the market with an 18.7 percent share. Kia and Hyundai come in at 10.5 percent and 10.2 percent, respectively. Renault (8.2 percent), Toyota (6.6 percent), Volkswagen (5.2 percent), Nissan (4.9 percent), top out the top seven. GAZ and Skoda each claim 3.9 percent for eighth and ninth place, while UAZ claims the tenth spot with 3.4 percent market share.

Amongst the many changes taking place in Russia since the early 1990s, consumer choice has been the biggest beneficiary. AutoVAZ joint ventured with Fiat in 1966 to create the Lada. The Lada is a small, popular car that dominated Russian sales for 45 years until 2016.

Though the Lada nameplate still held the highest market share, the bestselling individual model of 2016 was the Hyundai Solaris. This was big news for Russian consumers. After decades of near total domination, Russian domestic brands represented only 26 percent of sales in 2016, which is their lowest market share total to date.

Russian-manufactured vehicles represent more than half the vehicles currently operating in Russia. But since the end of the 2009 recession, foreign nameplates, like Hyundai and Kia, have made significant in-roads. By 2020, it is estimated the Russian brands will only make up 40 percent of the total vehicles in operation, and will continue to decline in market share until they reach their sales share, which is currently 26 percent.

There is no reliable estimate for the average age of vehicles in Russia. Strong demand coupled with a strong economy in the 2000s put many new vehicles on the road. The post-recession boom in 2010 and 2011 means those vehicles should now be entering prime repair years.

The Russian government also has an interest in getting older vehicles off the road. A scarcity of vehicles in the early post-Soviet era meant many older cars seldom got scrapped. Instead they remained operational, often with massive safety and maintenance issues. In 2010, the government ran a very successful scrappage program, which resulted in 180,000 vehicles being scrapped in exchange for a new vehicle. Almost 80 percent of those sales were made by Lada.

Russian aftermarket difficult to measure

The size of an aftermarket often is difficult to evaluate and that is particularly true in Russia. The reasons for this include the fact that there are no official statistics and the market is divided into several different reporting areas. For example, data may exist depending on the age of the car, the sales channel it was sold through, illegal or private importation, or some other such methodology.

There are several local firms that have attempted to do an evaluation of the size and the development of the aftermarket. Estimates from the Russian automotive statistics company Autostat indicate that there has been a steady increase in the aftermarket since the 2008-09 global recession. The reasons for this are attributed to a continuous growth in total vehicles in operation (VIO), which currently stands at 48 million units.

Messe Frankfurt, a trade show organizer that is responsible for several aftermarket exhibition events in Russia, including the MIMS Automechanika Moscow that was held in August 2017, estimates that the Russian aftermarket consumes about 2 billion units annually. They calculate that the market is valued at approximately US$65 billion.

Based on their figures, the Russian aftermarket outsells the OEM market by three to one. One of the key growth drivers in the aftermarket is the continuing deterioration of highway infrastructure. As such, tire sales account for nearly 12 percent of all aftermarket sales, followed closely by steering and suspension components which is estimated to be about 10 percent of the market (US$6.5 billion).

Servicing a car in Russia can be accomplished several ways, often depending on the age and origin of the vehicle. Newer vehicles are more often serviced at a certified branded garage or new car dealership, especially while under warranty. When the car is older, it is more often the uncertified/unofficial garages that take over both service and repairs.

Additionally, there are even more local unofficial garages and a growing DIY segment. Locals have devised an unofficial color coded system for designating the segments. White is the official, certified repairs and service with original spare parts, about 40 percent. The Grey market is mostly repairs by uncertified garages, which may use known brands, or more likely, with value brand or counterfeit spare parts, 35 percent. The Black market, which is mostly the worst of the uncertified garages and DIY, often use value parts or counterfeit spare parts, 25 percent.

Russian car dealers believe the strongest market opportunities are shared between the White and Grey markets. Dealers don’t consider the DIY segment as a competitive threat. In the context of their thinking, it is important to underline that the DIY segment is relegated to the cars produced within Russia, as they traditionally have been much simpler in their manufacturing, and thus easier to maintain on a personal basis.

Distribution segment

Distribution in the Russian aftermarket has its own unique peculiarities due to the massive landmass that is Russia. National level players tend to be few and far in between. Among the largest is Automag. While they claim a national footprint, they are essentially franchised locations spread around the country, but mostly clustered around Moscow and other major cities.

AGA is a large retailer of auto chemicals, appearance products and accessories. Koreana, as its name suggests, specializes in Korean vehicle parts and has more than 200 locations around the country. They also operate 65 repair facilities in the northwest, more European part of Russia. Rounding out the national level players is Avto49 and Bi-Bi (pronounced buy-buy), a single company with two sides to its operation. Avto49 operates stores and about 70 repair facilities, while Bi-Bi specializes in internet order fulfillment.

Regional distributers are situated in the major metropolitan areas of Moscow, St. Petersburg and Kaliningrad. The largest in this group or regional players would be Avtopasker. It specializes in Russian-made vehicle parts and its locations are clustered within 400 miles of Moscow.

What is fast becoming the most important distribution segment in Russia is really an amalgam of the wholesale distributor channel with the e-tailing channel. These distributors, both independent and members of European buying groups, rely on e-tailing to cover the great variety of vehicles in Russia, though many are in low volumes. However, their physical locations are serving installer shops as a two-step distribution system.

Among the larger players in this segment are Exist.Ru, primarily a web-oriented distributor, but one with more than 350 locations from St. Petersburg in the west to Vladivostok in the east. Also of note is AD Russia, which is part of Belgium’s AutoDistribution International. AD-Russia operates seven distinct business entities in 37 separate cities around the country, each carrying the “AD” banner.

France-based Groupauto partnered with Rossko to cover the Russian market. They stock around 70,000 unique SKUs and distribute to more than 7,000 installer shops, retailers and company stores. One major player in the Russian aftermarket is a Minsk-based company. Shate-Em takes advantage of a customs-free border between Russia and Belarus and has become a major supplier into the Russian market.

Challenging economic conditions may currently be having an adverse impact on the Russian aftermarket, but that shouldn’t be the only caveat to take into consideration when exploring market opportunities there. The Russian Federation has been fighting intellectual property abuses for more than two decades. Automotive parts and accessories are notorious for being counterfeited in Russia. For those taking their vehicles to authorized dealers or service networks, this is less of a concern, but still a concern.

At the DIY level, it’s often hard to tell what you’re buying. But many manufacturers are finding innovative ways to make sure consumers can identify the authentic products. These methods include educating installers about the parts, social media campaigns and traditional advertising methods.

Efforts to establish a sales channel may also be fraught with peril. One U.S.-based manufacturer, who asked to remain anonymous, had a harrowing experience a few years ago. After working with several small importers in the Russian market, one customer informed the company that they had registered their trademarks and copied their website. Their demand was exclusivity as the manufacturer’s partner in Russia. Fortunately, the manufacturer hired attorneys to successfully secure their trademarks, and the customer soon lost interest. Today, this company does about $5 million to $10 million in sales inside of Russia, but they are always careful to understand who they're dealing with.

Manufacturers looking to develop their brands in Russia should be mindful of the usual caveats of export sales. First and foremost, know your customers. Referrals are usually best, but when developing an account that arrived out of the blue, it’s best to double check their credentials.

Secondly, it’s important to secure payments when dealing with Russia. While most sales are conducted using secure banking methods, there are suppliers who grant credit terms. This should be done warily, and only with customers with whom there is experience.

Another complication when dealing with Russia is the fact that they are under U.S. sanctions. This prohibition would apply only “dual use” materials that could conceivably be used on energy exploration equipment. However, it should be noted that almost anything destined for Crimea, would require a U.S. export license.

Russia is no longer a vast, untamed wilderness for auto parts suppliers. There are definite market opportunities that can be taken advantage of today. For those who take the longer-term view, the market has enormous potential as vehicle ownership becomes more ubiquitous and affordable to the masses. Social and political risk factors can be anticipated, but the largest restraint to growth will be economic growth. Once growth rebounds to 2013-2014 levels, both new vehicle sales and aftermarket sales should increase commensurately.

Partnering in Russia also can be tricky, but it’s not impossible. Access to the market through European buying groups is possible, and there also are many well-established distributors in the market to work with. By employing due diligence and common sense, you can avoid the fate of a Solzhenitsyn character and have a pleasant experience in Russia.

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About the Author

Richard Mezadurian | Contributor

Richard Mezadurian is president of Aftermarket Strategies LLC, an aftermarket sales and marketing consulting firm dedicated to helping companies explore aftermarket opportunities in the global market, including North America. Richard has spent nearly 30 years developing strategies for brand development, marketing and aftermarket distribution management.

Prior to forming Aftermarket Strategies, Richard was president and CEO of Falcon Steering Systems, a pioneering supplier of undercar products for private brands and retailers. He has served the industry through various activities, including past-chairman of the Overseas Automotive Council, where he continues to serve on the board. Richard also has been on the boards of the Auto Care Association and the Automotive Aftermarket Suppliers Association.

You may contact him at [email protected].

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