Russian Auto Output to Increase Risking Overcapacity

Analysts believe that Russian auto industry is close to reach the same overcapacity problem with which the rest of Europe confronts.

The warning comes after Avtotor Holding formed a partnership in November with supplier Magna International, being the latest company to announce a major investment in Russia’s auto production. The two companies aim at establishing a complex of 15 parts plants and 6 assembly plants in Russia’s Kaliningrad province, which will manufacture 250,000 vehicles annually by 2018. The companies will invest $3.2 billion in this project.

Automakers are focusing more and more on Russia after strong growth made auto sales reach 2.9 million units last year, making the country Europe’s second-largest auto market, Germany being the largest market. Still, analysts are not sure whether the Russian market will continue to grow as industry sales were flat two months ago.

“We do not expect a quick return to growth in the coming months,” said Joerg Schreiber, chairman of the Association of European Businesses’ Automobile Manufacturers Committee.

This doesn’t seem to affect automakers’ future plans, a good example being VW which in December laid the foundations for a new engine plant next to an existing one in Kaluga. The German automaker said it plans to sell 500,000 vehicles annually in Russia by 2018. AvtoVAZ automaker refurbished part of the Togliatti facility to manufacture 350,000 vehicles annually together with its partner Renault-Nissan.

Ford and its partner Sollers have three assembly plants in Russia, and the two companies plan to open the fourth one. Due to all these investments in the country, 66% of new cars Sold in Russia are manufactured locally and LMC Automotive research group predicts this number will continue to increase.

“If everybody puts in capacity they say they might, there could be overcapacity,” said Carol Thomas, central and eastern European analyst at LMC Automotive.

Taking into consideration the prospect of overcapacity, Avtotor’s JV with Magna might seem a risky one. The two companies not only plan to boost production, but they also do this with one big advantage compared with other automaker: locally produced components. Even if production capacity becomes too high for Russia, automaker may at any moment begin exporting more vehicles to the other European markets.

“To be competitive you have to have local component production,” said Oleg Deripaska, owner of GAZ Group.