Strife prompting uncertainty over Russian, Ukrainian markets

Ukraine was teetering on the brink of civil war with a Russian invasion force amassed along the eastern border at press time in May. Prior newsreels of Russians commandeering Ukrainian tanks and spinning donuts in the town square had escalated into sustained gunfire and a mounting death toll.

The impact on the respective nations’ automotive sectors and their American vendors remained uncertain amid diplomatic efforts to ease the conflict. An accelerated prospect of heightened U.S. economic sanctions against Russia was equally up in the air as the American public retains an isolationist posture.

Europe’s leaders have 460 billion reasons to balk at pressing the issue – Russia’s annual trade with the European Union amounts to $460 billion compared to the $40 billion in U.S.-Russian trade relations. In addition, Europe is heavily dependent on Russia’s fuel output and other natural resources.

“I am not able to make a prediction as to what will happen with regards to sanctions; the situation changes daily at the moment,” says Kenneth C. Duckworth, principal commercial officer with the U.S. Commercial Service in Russia.

“I think, however, you should keep two things in mind,” Duckworth explains in an exclusive interview with Aftermarket Business World. “One, the U.S. sanctions and the sanctions imposed by our European partners are very limited to a small group of people and are targeted at their personal assets, and two, we are not discouraging companies to do business in Russia,” he reports.

“That being said, we encourage caution in their due diligence,” Duckworth says in addressing U.S.-based firms pondering business interests in the region. “They should be familiar with the executive orders and seek out guidance and updates from the Treasury Department’s Office of Foreign Assets Control (OFAC).” (Emailed updates are available here.

“If necessary, seek out a determination from OFAC,” Duckworth advises. “The lists containing all sanctioned individuals on this executive order, and any government order, are described on the Bureau of Industry and Security website.” It is a best practice to check all international contacts and clients against these lists before engagement and/or shipment,” he says.

“I would also note,” Duckworth continues, “that the Specialty Equipment Manufacturers Association (SEMA) will be going forward with its Russia Business Development Conference in Moscow on May 22.”

Set for May 21-24 and taking place at the Moscow Marriott Grand Hotel, “SEMA Week in Russia” was indeed gearing up to proceed as scheduled, according to Linda Spencer, SEMA’s director of international and government relations.

“We have been in close and ongoing contact with U.S. government officials both in the U.S. and in our embassy,” she says. “At this point (in early May) the U.S. government sees no reason to cancel or postpone our event. The sanctions imposed by the U.S. government in reaction to Russian actions in Crimea and Eastern Ukraine have been very limited in scope and there are no safety or other concerns currently in Moscow in terms of U.S. businesses seeking to sell into the market,” says Spencer, adding that organizers were receiving ongoing briefings on the latest developments.

A passion for customizing

An enthusiastic delegation is eager to explore Russia’s aftermarket opportunities.

“There is great demand for U.S. products in the region, and the reaction among buyers to the first-ever delegation of leading American brands coming to the region has been extremely positive,” Spencer says.

“This first trip will include the opportunity to meet with resellers both in one-on-one meetings and more informally. The U.S. manufacturers will also have the opportunity to visit specialty shops in the area – to those shops catering to the off-road enthusiasts as well as speed shops,” she says.

“Rounding out the schedule is the opportunity to participate in a roundtable with local retailers, wholesalers and installers to learn more about the developing distribution system for specialty products and learn about the latest trends and interests in the marketplace.”

SEMA has designated Russia and the NIS region – the 29 countries that comprise the former Soviet Union’s “Newly Independent States” – as an important and potentially productive overseas marketing initiative.

“The selection of the Middle East, China and now Russia is based on an evaluation of a couple of key indicators,” Spencer says. Russian drivers display “a passion for customizing,” and the expansive nation of 143.4 million people is soon to be the largest automotive market in Europe. “Off-roading is extremely popular in Russia, and drifting and other racing events are drawing an ever-increasing number of enthusiasts,” she adds.

“Also,” says Spencer, “Russians are increasingly looking to personalize their vehicles, and car dealers as well as more typical specialty shops are providing aftermarket products for the array of vehicles on Russian roads.”

Another benefit cited is the population’s growing disposable income for purchasing auto accessories. Russia has the highest gross domestic product per capita among the members of the BRIC nations (Brazil, Russia, India, China and South Africa). “Experts expect Russia to be one of the biggest world consumer markets within the next decade,” according to Spencer.

“Lastly, we seek to focus our attention on countries where the rules for specialty products are just being established. That is the case in Russia,” she points out.

“As the local specialty equipment industry grows,” Spencer elaborates, “authorities have the opportunity to draw upon systems such as in the U.S. which allow maximum freedom to create products as long as the products and their use are safe and do not take vehicles out of compliance. This legislative framework, which has developed in the 50 years since the development of the specialty market in the U.S., has aided in the growth of a market worth $32 billion annually in the U.S.”

“Given the current dynamics in this automotive sector, the U.S. Commercial Service strongly believes that significant opportunities for growth and expansion exist in Russia for U.S. manufacturers of automotive parts and components,” says Duckworth. “Russians are prepared to pay for quality vehicles, while at the same time the Russian automotive manufacturers and the Russian government are seeking technology and business partnerships to meet this demand.”

“Russia’s auto industry is back from the brink,” according to a Boston Consulting Group report released in 2013. “It recovered to pre-crisis sales levels in 2012 and – more importantly – is currently benefiting from an unprecedented amount of investment into new and modernized production facilities. With more than $10 billion committed to upgrading facilities and expanding capacity through 2020, the auto industry is the one industrial sector in Russia that is attracting serious levels of direct foreign investment.”

The Boston Consulting Group’s analysis goes on to note “it remains to be seen whether this wave of investment and modernization will be sufficient to transform the Russian auto industry. The question is whether the upgrades and expansion will elevate the sector’s products, customer service, productivity and cost efficiency to be globally competitive in the face of a more uncertain macroeconomic outlook, slower growth in demand and continued pressure from imports.”

Dicey outlook

Numerous American and overseas automakers are already up and running in Russia, of course, and the same holds true for Ukraine’s $1.8-billion car parc as well – although the nation’s sputtering economy and the civil strife is certainly creating a dicey outlook in the near-term.

Ukraine’s largest automotive producer is the Ukrainian Motor Corp., commonly known as UkrAVTO and also AvtoZAZ.

Founded in 1863 by Mennonite colonist Abraham Koop of The Netherlands to produce farm equipment, UkrAVTO has grown to encompass 400 car dealerships and an extensive network of service centers throughout Ukraine. It is the exclusive importer and authorized dealer for more than 20 overseas OEMs, including Mercedes-Benz, Jeep, Chrysler, Dodge, Kia, Opel, General Motors, Nissan, Renault, Toyota, Chery, Lada and Tata.

UkrAVTO’s ZAZ Sens model, with a 14 percent market share, is the embattled nation’s top-selling car, followed by the ZAZ VIDA.

“ZAZ vehicles represent the quality of domestic automotive industry proven over the years, which is chosen by the compatriots without any hesitation,” says company general director Andriy Zalutskiy in a March press release.

Although the website retains a cheerful attitude regarding sales success and quality production with no mention of the erupting unrest, company executives did not respond to an interview request. It is difficult to discount a sense of foreboding as UkrAVTO’s state-of-the-art Zaporizhia Automobile Building Plant is located northeast of Crimea in close proximity to the hotly disputed – and heavily fortified – border with Russia.

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