While others withdraw from the race, China steps up the pace. Investment potential in the automotive industry in Russia and Belarus
Just when other Western car manufactures such as Volkswagen, Ford and Hyundai announce temporary suspensions of work in Russia, the China-based manufacturer Geely has decided to build another factory in Belarus.
The new Belarusian-Chinese factory must be completed by the beginning of 2017. It will have an annual production capacity of 60,000 cars with a focus on the market of the Customs Union of Russia, Belarus, and Kazakhstan. The present production capacity is 30,000 cars. The company’s actual and expected production levels in comparison to plans for 2017 are, respectively, 8.3% in 2013 and 33.3% in 2014. Taking into consideration the previously mentioned facts, Chinese producers must be very confident they will be able to sell almost 100,000 cars on the market of the three countries. The main factors possibly behind this confidence: good price competitiveness, the complicated economic and political situation currently seen in Russia, and the relative stability in Belarus.
Chinese investors are generally welcomed in Belarus as far as they are usually less biased against current government than the European investors. In addition to this stability, often guaranteed by the president himself, Chinese investors also get access to the Russian market, where around 2.78 million new cars and LCV’s were sold in 2013.
Relatively lower labour costs (in comparison with Russia) together with tolerable transportation costs allow Geely to position itself as a future Octavia segment killer, e.g., in Belarus model SC7. The producer declares that the latter is from the same segment as the Skoda Octavia, the Toyota Corolla and the Volkswagen Jetta. In Moscow, it costs up to 70% less than these models. Hence, even though they have their production facilities in Russia, some of these companies will not be able to compete with Chinese manufacture in terms of price.
Due to the complicated political and economic situation, the market is expected to shrink. In just the first two quarters of 2014, sales of cars and LCV’s in Russia have dropped 9.9%, according to AEB statistics. This means that in medium terms, we may observe a strong shift towards cheaper budget cars, which may make Geely cars extremely attractive for consumers.
One should also take into consideration the fact that some previously budget models, such as Ford, which have recently become middle class cars, will be totally out of range of the average household budget, thus creating a gap in supply.