‘We owe such price growth to dealers’: what’s really happening in Russia’s car market

A deficit in the car market amid record-high demand from buyers led to an explosive growth of prices for new and old cars in Russia

‘We owe such price growth to dealers’: what’s really happening in Russia’s car market
Photo: realnoevremya.ru

We have seen a sudden rise in prices for cars for the second year of the pandemic now. Many Russian manufacturers’ prices have grown in February — by 50,000-200,000 rubles. Dealers, in turn, will raise the prices more because their infrastructure maintenance costs and sales are rising. Some experts assume that the difference between the recommended and real price can reach 1-3 million depending on the brand and demand. a deficit of supply — car markers physically cannot expand production capacities. As a consequence, prices are growing for second-hand cars too because those clients who either cannot afford new cars or don’t want to wait for supply, which can take nobody knows how much time paid attention to them. Realnoe Vremya’s columnist, economist with long-term banking experience Artur Saifulin offers to find out what’s the problem and for how long we will be living with the shortage.

Prices in the car market

Prices for certain car brands were raised seven times last year. The average price of a new car in Russia in 2021 rose by 20%. Such a price is made of average figures of prices and sales volumes in every model considering modifications recommended by distributors — the engine capacity, drive, transmission and so on. Last year, this indicator was 2 million rubles or 300,000 rubles more than a year earlier. Such a sudden rise was registered in 2015 amid the ruble’s collapse because of the events in Ukraine. After that, the indicator has always been below 10%.

Earlier, car factories fixed prices several months in advance, and dealers can work calmly. In the current conditions, prices are raised once in two weeks. Dealers say they simply fail to adapt to the new car price.

We see the Russian car market transform because of the pandemic — first, with total lockdowns around the world and the impossibility of selling cars in stock, dealers registered losses at least during the first quarters of 2020. The situation improved a bit by the middle of the summer because dealers resumed their work and the pent-up demand from the population started to be met.

Photo: realnoevremya.ru

Prices stayed at pre-pandemic level after the resumption of operation, dealers made discounts and other incentives as usual. Then we started to see how the market worked in a situation when demand seriously outstripped supply. Global logistic disruptions in processes led to a deficit of supply, dealers’ commodities in stock rapidly depreciated. The population’s inflation expectations and the ruble’s devaluation brought to a high demand for cars. It seemed to people that buying a car was a good investment to keep their savings. This is very doubtful in fact.

As a consequence, manufacturers started reconsidering and raising prices. Dealers, in turn, took advantage of the moment and hurried to recover the losses from the downtime at the beginning of the pandemic. Besides receiving awards from manufacturers, dealers started to massively impose different additional equipment. Frankly speaking, we own such price growth precisely to the dealers, they took advantage of the situation very smartly. Not producing anything, they behaved like representatives of the speculative business.

In numbers, the Russian market of new cars grew by 4% in 2021, but experts think that the growth was conditioned by the collapse in 2020 because of lockdowns. In fact, the sales stayed at the previous level and even decreased. The situation with the fall in sales in Europe is more interesting, by 25-30% on average depending on the country.

With the existing growth of prices for new cars, many Russians have to focus on the market of second-hand cars. In 2021, the sales of such cars increased by 4,6% compared to the previous year. The average old car price rose by 52% over the year, to 1,049 million rubles.

Photo: realnoevremya.ru

Causes of shortage

A shortage of electronic components for a finished car’s complete setup and disrupted supply chains remain the main causes of the lack of cars to meet the demand. As we already wrote in earlier articles, the problem of the absence of containers because of their accumulation at ports severely hit the automotive industry, for instance, the spare parts made in China, which went out of the lockdown the fastest, went to Europe and the USA but didn’t return, since they were considered COVID-19 affected.

As for the deficit of electronic components (semiconductors), it is necessary to stress the fact that less started to be produced in expectation of a fall in demand from consumers, car markers. In fact, it turned out to be a double effect. For reference: a deficit of microchips led to a 9,1% decrease in sales of new cars in Russia in 2020.

Apart from the above mentioned two factors, the appreciation of all key materials used for car production played a role too. For instance, a sudden rise in prices for metals and rolled steel, up to 50-80% a year both in Russia and globally.

As a result, we have a significant reduction in the amount of cars that left the conveyor belt and a deficit. For instance, Toyota recently officially confirmed that the expectation of a new Land Cruiser 300 can be four years. The portfolio of orders of this model is 20,000, while the car maker managed to make just 5,000 in 2021.

Outlooks for the situation

Experts of the sector believe that such a situation with components and materials will stay for another year, at best, it will return to normalcy by late 2022. In general despite the lack of car components and a rapid growth of prices in car, the Ministry of Industry and Trade forecasts the Russian car market will grow by 5-6% in 2022.

At the same time, the share of imports in the car market grows too. In 2022, the growth was 22% compared to the pre-pandemic 2019. It is a consequence of the shortage of supply with active demand in our market. In the long term, imports will decrease because Russian factories can meet the demand in the mass segment.

Photo: realnoevremya.ru

However, it is necessary to single out Chinese brands that their ramp up their supplies even if the supplies of other traditional car brands for our market such as Lada, Kia, Hyundai, Renault, Toyota, Volkswagen, Skoda go back to normal. In a few years, they can occupy the first positions in the sales rating in Russia. Chinese manufacturers didn’t have such problems with components as others did, they benefited from the situation, reached new sales levels raising the quality of products. It will be interesting to see the further transformation of our car market.

Artur Safiulin

The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.