By Megan Davies
MOSCOW (Reuters) - A year of disappointing auto sales in Russia has dealers and carmakers worried that a once-red hot market that was set to become Europe's largest may have slipped out of gear.
Stuttering economic growth, unhelpful demographic trends and a coming increase in car capacity could dampen one of the few bright spots in a global market that is under pressure.
In a Moscow showroom of dealership Premium Motors, packed with budget models such as Russian-made Ladas and Chevrolets, a dealer bemoaned the lack of customers. "In October and November - sales were bad ... there were few people," he said.
A few doors down, a dealership selling more expensive imported Volkswagens was finding it equally hard. "Maybe people ... need to save money instead of buying a car," said a manager. Asked about the outlook for next year, he said: "Nobody knows. We hope."
In a traffic-clogged city peppered with Porsches (GER:PAH3) and Maseratis (MIL:F) - trademarks of the super-rich who profited personally from Russia's resource wealth - it is the middle class who provide the bread-and-butter sales.
Yet after three years of double-digit growth as Russia recovered from the 2008-2009 economic crisis, sales so far this year are down around 6 percent according to the Association of European Businesses, a Moscow-based lobby group that counts major auto makers among its members.
Auto executives, resolutely bullish that Russia's rising middle class will support sales long-term, do not predict another crisis, but are worried about an extended contraction.
"We are certainly concerned in the short term," said Ted Cannis, chief executive of Ford Sollers, a joint venture between Ford (NYS:F) and Russian carmaker Sollers (MCX:SVAV), who sees the fall as a short-term trend. "It's not a crisis, but it's certainly not going in the right direction.
The stakes are high for automakers, which are investing billions into Russia and striking alliances with local players.
GM (NYS:GM) took a longer-than-normal summer shutdown at its St Petersburg plant partly due to lower sales, while Ford's plant there that produces the Ford Focus reduced output in August and September.
The models that have seen sales falls this year are compact cars such as Ford's Focus, GM's Chevrolet Cruze and Renault's (PAR:RNO) Logan. In contrast, sport-utility vehicles and premium models such as BMWs (BMWG.DE) and Daimler's (DAIGn.DE) Mercedes-Benz have seen sales hold up.
Russia's largest carmaker Avtovaz (MCX:AVAZ) has had mixed fortunes. Sales of its top-selling Lada Granta sedan, which starts at 279,000 roubles ($8,500), are up 43 percent this year, but its pricier Prioras and Kalinas have suffered sharp falls.
"What we see is not total depression, there is significant interest to the market," said Oleg Lobanov, acting CEO of Avtovaz, which is betting on new models for the firm's success. "If this continues the competitive advantage is to those who can react fastest, in a more proactive way."
An economic slowdown has been compounded by the effects of a slide in the birth rate that followed the disintegration of the Soviet Union in 1991. As a result, fewer people are reaching the age at which they would buy their first car.
A fall in 2009 car sales during the crisis means there are now fewer drivers eager to replace 3-4 year-old cars. And dealers overstocked in 2012, analysts said, leading buyers to hold off this year in the hope of snapping up a bargain.
Although the AEB lobby group expects sales to steady in 2014 it is concerned the slide may continue. Market analyst firm Autostat predicts a 5 percent fall in 2013 and sees a long-term stagnation ahead.
"What we project next year is more or less a stabilisation, we think the negative trend will lessen and stop," said John Stech, president and CEO of Volvo Cars in Russia, a Swedish firm owned by China's Zhejiang Geely (GEELY.UL). "I'd like to say there's a glimmer of hope towards the end of 2014."
Automakers have long been bullish about Russia, predicting that a low car density, an old fleet and a rising middle class will lift sales past Germany's this decade to make it Europe's biggest market.
"One of the critical factors in car buying is the health and state of the middle class and in Russia you have approximately 25 percent of the population which falls into the middle class," said Volvo's Stech.
The average age of a car in Russia is 11.8 years versus seven years in Europe, according to consultancy firm EY. Car ownership levels, at 260 cars per 1,000 Russians, are far below the 532 per 1,000 in Germany.
Yet VTB (MCX:VTBR) analyst Vladimir Bespalov reckons that Russia's car ownership ratio is in line with its economic development. Growth is unlikely to outperform in the years ahead and the population will be stable.
"All else being equal, this largely undermines the catch-up story," he said in a recent research note.
While the slowdown is less severe than the collapse caused by Russia's 2009 slump, a stagnant economy would leave Russia with excess production capacity, intensifying competition.
Bespalov estimates total auto production capacity will rise to 3.6-3.7 million by mid-decade "which significantly exceeds our projected market size". Surplus cars are unlikely to find a ready export market as Russia has a long way to go to establish itself as a competitive global production hub.
Sales of new cars in 2013 are expected to be around 2.75 million to 2.8 million according to the AEB.
CAP IN HAND
Russia launched a subsidy scheme for car purchases on credit in July, but it is due to end in December. More could be done, argue industry bosses.
"What would really accelerate (sales) is if a (cash for clunkers) scheme were introduced," said William King, CIS auto sector leader at EY. "That would bring the market right back."
President Vladimir Putin - previously prime minister - supported the industry after the 2008 financial crisis with a "cash-for-clunkers" scheme giving drivers of old cars rewards for trading them in.
Putin also promoted Russia's auto industry by driving a yellow Lada Kalina across Siberia in 2010. Putin, who uses an armoured Mercedes-Benz S Klasse Pullman on a daily basis, bought a Lada Niva in 2009.
Another problem for automakers and customers is the double-digit interest rates charged on car loans.
Only about 30 percent of retail car sales are financed by credit, said Natalya Alymova, head of retail loans at state-controlled lender Sberbank (SBER.MM), although she said average rates of 13-16 percent on the bank's auto loans were affordable.
Rates are higher than in countries such as the United States "because the funding cost is much higher," Alymova said. "The funding cost forms the major part of the interest rate."
The financing costs contribute to a high relative cost of owning a car in Russia - 304,779 roubles ($9,300) a year versus 223,445 roubles ($6,800) in the U.S. according to research from PWC. Insurance is costlier in Russia, although fuel is cheaper.
The double-digit interest rates on auto purchases are far higher than in the United States where the average rate is around 4 percent according to Bankrate.com.
"Who wants to pay these interest rates? Nobody," said Joerg Schreiber, chairman of AEB's Automobile Manufacturers Committee.
($1 = 32.8697 Russian roubles)
(Additional reporting by Alexei Anishchuk; Editing by Douglas Busvine and Peter Graff)