A few years ago, there was an ebullient mood among automakers regarding China and its status as the next big market just waiting to be exploited. To be certain, the China market is still very large, and it’s still growing. However, a marked slowdown in the country’s GDP growth rate has put a big damper on all the cheer.
The statistics for July confirm that tapped-down enthusiasm, as total vehicle sales for the month increased 8% to 1.4 million, according to the China Association of Automobile Manufacturers. That’s not bad, but it represents a decided slowing from the June sales gain of 10%.
In the U.S., July sales also were sluggish, with Ford (NYSE:F) and General Motors (NYSE:GM) posting declines in sales for the month. Then there’s Europe, which saw new car registrations in Western European nations sink 7.7%, collectively, in July to just over 900,000 vehicles, as reported by research firm IHS Global Insight.
So, what do carmakers do when three of their biggest markets are struggling? Simple: Go to Russia.
The latest company to make an increased commitment in the former Soviet nation is none other than U.S. taxpayer-funded GM. The auto giant recently announced plans to invest about $1 billion over the next five years to expand its production in Russia. Tim Lee, GM’s head of international operations, made the announcement on the eve of this year’s annual auto show, also known as the Moscow International Automobile Salon.
The increased production plans in Russia come on top of the company’s existing production in Kaliningrad, St. Petersburg and Togliatti. The push to boost Russian production may indeed be a smart move, especially when you consider that the total number of cars sold in Russia was up 40% year-over-year in 2011 to over 2.6 million units. That’s not very big by U.S. standards, but growth in the nation is there, and the market is expected to continue growing at a robust pace in the years to come.
As for GM, it made its initial venture into the Russian market by partnering with the country’s AvtoVAZ carmaker to build the Chevrolet Niva sport utility vehicle. The GM/AvtoVAZ vehicle is designed to withstand the relatively bumpy, often ice-covered roads that connect major cities to the each other, and to its miles of remote rural areas.
GM’s next goal, according to Lee, is to double production to 230,000 vehicles per year of its Chevrolet Cruze midsize sedans, Opel Astra hatchbacks and Astra sedans at its St. Petersburg plant. The company also plans to increase Niva production to 120,000 per year from the existing output of 70,000 units.
And if you think GM’s move to expand in Russia is an isolated case, think again. Europe’s largest automaker, Volkswagen AG (PINK:VLKAY), also has its sights set on the Russian consumer. The company, which recently acquired complete ownership of legendary sports car maker Porsche, is in the process of building out its production facility in the Kaluga region just south of Moscow. The company plans to double its existing investment in Russia to €2 billion by 2018.
Not to be left out of the mix, France’s Renault (PINK:RNSDF) and Japan’s Nissan (PINK:NSANY), also have entered the Russian market by teaming up with AvtoVaz to make cars under the Soviet-era Lada brand. Even Fiat (PINK:FIATY) is getting in on the Russian auto rally. The Italian company plans a big marketing splash at the Moscow auto show featuring its sleek, seven-seat Freemont vehicle.
In an interview with Reuters, John Stech, head of Fiat’s Chrysler unit in Russia, succinctly explained why automakers are rushing into the country: “It’s a dynamic market and one of the few showing growth.”
Based on that bullish sentiment, look for Russia to be an increasing player in the auto market, and potentially a big source of revenue in the years to come for carmakers savvy enough to provide Russians with the drive they want.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.