- Canadian Supplier Likely to Develop New Vehicle for the Russian Market

    TORONTO, May 31 /CNW/ - Russia has started to appear on automakers' radar
screens, as a market with enormous growth potential that can no longer be
ignored, according to the latest Global Auto Report released today by Scotia
Economics.
    Russia is already one of the top ten global auto markets, with 2006 car
sales of 1.5 million units, surpassing Spain to become Europe's fifth-largest
car market. However, with only 31 million vehicles in operation in Russia, a
country with a population of 142 million, the vehicle penetration rate only
stands at 0.2 per capita, in line with Mexico, but still significantly lower
than other Eastern European markets, such as Poland and Hungary. Russia's
vehicle penetration is roughly one-third of the G7 average of 0.6 vehicles per
capita.
    "While many Russians still can't afford to purchase a new car, strong
economic growth is boosting household income at a double-digit pace, leading
to a rapidly expanding Russian middle class," says Carlos Gomes, Scotiabank's
auto industry specialist. "In fact, estimates suggest that personal disposable
income will more than double between 2005 and 2010, propelling Russia into
Europe's second-largest auto market by early next decade, surpassing France,
Italy and the United Kingdom."
    Many middle-class households are increasingly shifting to more expensive
foreign models, at the expense of domestic brands. Sales of imported cars
surged by nearly 70 per cent in 2006. Ford has become the best-selling brand
in Russia, largely due to the popularity of the Ford Focus, the best-selling
model in Russia, with 2006 sales of nearly 80,000 units. Purchases of foreign
cars have surged an additional 65 per cent year-over-year through April of
2007.
    In contrast, volumes at Russian automakers, such as AvtoVAZ, the
country's largest carmaker, fell by five per cent last year. Domestic vehicles
are considered inferior to foreign models. To change this perception, and to
fully participate in Russia's strong auto market, AvtoVAZ recently reached an
agreement with Magna International Inc., Canada's largest auto parts supplier,
to develop an US$8,000-US$10,000 compact car for the Russian market. The joint
venture calls for an investment of US$2 billion, including new assembly
facilities. A final decision on this plan is expected later this year.
    Other foreign automakers, such as Volkswagen, General Motors, Toyota,
Renault and Suzuki, also are rushing to set up new assembly facilities in
Russia. The Russian Industry Minister indicated late last year that foreign
automakers plan to invest US$1.8 billion in new assembly facilities, lifting
Russia's vehicle assembly capacity to three million units by the end of the
decade, up from the current 1.7 million. The addition of 1.3 million units of
assembly capacity through decade-end means that Russia will experience the
world's third-largest increase in new assembly capacity over the next several
years, only behind China and India.

    North American Vehicle Sales Weaken

    Turning to North America, vehicle sales slowed in the United States and
Mexico last month, but revved up in Canada. In April, U.S. purchases fell
eight per cent below a year ago to an annualized 16.3 million units, down from
the 16.5 million pace registered in the first quarter. The slowdown was
widespread and reflects weaker consumer purchases, partly linked to declining
house prices as well as the recent increase in mortgage delinquencies,
especially in sub-prime mortgages. Ford indicated that its retail sales fell
by 17 per cent year-over-year in April.
    "The increase in gasoline prices to more than US$3.00 per gallon, the
highest level since September 2005 in the aftermath of Hurricane Katrina, was
also a factor reducing U.S. purchases in April, and will dampen activity in
the key spring selling season," says Mr. Gomes.
    As a result, GM once again reduced its second-quarter North American
production schedule. The company now plans to assemble 1.145 million vehicles
in North America between April and June, 15,000 units less than last month's
guidance. This latest cutback lowers second-quarter North American production
schedules to an annualized 15.7 million units, down from 16.0 million in the
opening months of 2007, and in line with the weak output registered in late
2006.
    In contrast, Canadian passenger vehicle sales posted a nine per cent
year-over-year gain in April, climbing above an annualized 1.7 million units
for the first time since December, when automakers were offering year-end
clearances. In particular, sales at the traditional Big Three climbed
eight per cent year-over-year, reversing three consecutive months of decline.
    Crossover utility vehicles led the advance, with sales surging
35 per cent above a year earlier. Subcompact cars also outperformed, with
purchases of the Toyota Yaris buoyed by Ottawa's $1,000 rebate for
fuel-efficient cars.

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.