A car crash you can’t look away from: Russian car production industry plummets after Ukraine war

A year of the Ukraine war has practically changed the entire top ten ranking of the most sold car brands in Russia. The Q1 of 2023 saw only South Korea’s KIA and Russia’s Lada holding on to their positions on the list.

The Russian brand continues to top the ranking.

Compared to 2022, its share of sales went up from 34% to 41%, while the number of the cars sold increased by 22% according to the calculations by the Association of European Businesses (AEB).

The US and EU did not impose direct sanctions on car exports to Russia or manufacturing in the country. They only banned deliveries of “luxury” models to Russia (the EU set this car value threshold at €50,000 and over). Nevertheless, Western brands fled the country en masse after the war began, pointing to supply chain issues as the reason.

As a result, the share of European, US, Japanese, and Korean cars sold in Q1 of 2023 compared to 2022 nosedived from 66.8% to 5.7%. KIAs were bought the most (4,000 cars) but the overall drop for this manufacturer stands at 87%. The other brands that pulled out of Russia only sold cars in triple digits or disappeared from the official statistics altogether.

Chinese companies sensed this opportunity to sell 64,000 cars in the first three months of 2023 in Russia. Their sales share went up from 8.9% to 42%. At the same time, Russian makes are still ahead with 51%.

However, China could not fully fill this gap: the Russian market contracted by 153,000 cars sold in 2023 Q1 compared to last year (-44.7%).

What Chinese cars lack

The Chinese car production industry has achieved significant progress in the last few years but still trails behind Western, Japanese, and Korean producers, automotive journalist Vyacheslav Subbotin tells Novaya-Europe.

“The quality of Chinese cars is below average. They look nice but once you look inside, you see rubbish that breaks due to poor engineering decisions. Even if individual Western-made car parts are used — rear differential, engine, gearbox — they just can’t put it all together well. The car frame is the weakest spot. It will immediately rust in Russia’s climate. They are not treated in any way and painted rather poorly,” he says.

These weaknesses lead to breakdowns, the reporter notes. However, Russia’s Lada is even worse still, Subbotin believes.

Chinese brands are expanding not only into Russia but globally as well, particularly in Europe, Vakhtang Partsvania (PhD in Economics) notes. For Instance, China’s Geely bought Sweden’s Volvo more than ten years ago, while China’s electric cars are on par with most Western counterparts, he adds.

However, maintenance and repair of Chinese cars causes more issues than that of the brands that left Russia, the experts stress. For example, spare parts for these models are sometimes very hard to find.

Subbotin believes that Russians will not fully ditch the self-exiled brands in favour of Chinese manufacturers.

“Therefore, they are oriented towards the European market,” he says. Subbotin thinks that Russians will turn to buying cars abroad through middlemen.

Prices for which models went up the fastest

According to Russia’s official statistics office, Rosstat, prices for brand new Russian cars on average rose by 29.6% in 2022, while Western makes became 39.1% more expensive.

Chinese cars increased in price the fastest. Lada Granta, the most popular Russian vehicle, managed to keep the price hike at 13% thanks to a new simplified version, Avtostat notes.

Prior to the full-blown Ukraine war, the majority of Western models sold in Russia were assembled in Russia. At the same time, only China’s Haval had its own factory in the country. Therefore, the increase in Chinese car sales is mostly attributed to bigger imports.

The cars imported into Russia are liable for several taxes, the customs duty is the costliest of them. Taxes, extra charges, and transportation can push the car price up by up to two times. For instance, the latest Volkswagen Polo worth around 1.8 million rubles (€21,450) has an extra charge of almost 900,000 rubles (€10,725) in taxes to buy in Russia.

At the same time, the parallel import resulted in the bigger share of cars brought in by individuals rather than legal entities: from 2% to 28%. This trend continues in early 2023: there were three times more used cars wheeled into Russia in Q1 than in the same period last year (106,000).

Official agencies warn that switching from new models to used right-hand drive cars will potentially increase danger levels on the roads.

What’s left of Russia’s car manufacturing

The car manufacturing is suffering the worst decline among all Russian spheres of industry, President Vladimir Putin conceded in April. “Precisely because of the actions of our so-called partners. Former ones now, let’s be direct about it. They acted highly improperly,” he said. The car production in Russia in Q1 of 2023 contracted by 65.6% compared to 2022 and 76% compared to 2021.

In 2022 (pre-war), 18 car and van assembling factories operated in Russia. Of those, nine were run by foreign brands. The others were partially owned by overseas companies or manufactured their models under licensing agreements.

A year of war has dealt its blow: only six of the 18 factories continue working in Russia. In the pre-war times, 45% of all cars in Russia were assembled on the currently shut-down plants.

Out of the foreign-run factories, only China’s Haval continues to run its operation in the Tula region. Foreign consortiums have either already pulled out from other ventures and joint factories or are actively looking for buyers.

Production only resumed on Renault’s former plant which was bought by Moscow’s government for a symbolic one ruble (€0.012): it is now engaged in SKD assembly of China’s JAC branded as Moskvitch, Soviet-era car make. Around 7,000 cars were produced by the factory between November and April, its technology partner Kamaz reported.

At the same time, only 375 Moskvitchs were sold in Russia in March, while the previous numbers are even lower: a handful of dozens per month.

The factories of Toyota, Nissan, Hyundai, Stellantis (Peugeot, Citroen), and Mercedes did not restart operations. Sources say that the new owner wants to assemble cars by Hongqi, a luxury car brand that drives Chinese leader Xi Jinping.

Media reports that talks are ongoing to launch production of Chinese vehicles on other idle factories, including the Volkswagen plant in Kaluga. Avilon, a car trader, is reportedly planning to buy it.

The GAZ Group is interfering with these plans, however. The group is suing the German manufacturer over termination of the contract to produce foreign models at its plant in Nizhny Novgorod. It believes that Volkswagen caused damages amounting to 15.6 billion rubles (€180.8 million) and managed to get the company’s assets in Russia arrested through a court order in March. Later, a higher court overturned the arrest because the net assets of the brand are worth more than the lawsuit amount.

Out of the seven foreign conglomerates that had their own plants and left Russia, only four managed to sell off their assets: Renault, Mercedes, Toyota, and Nissan. The deal amounts are symbolic or undisclosed. In total, the four brands reported losses of $5.1 billion (€4.7 billion). Renault has plunged the worst: $2.3 billion (€2.1 billion).

Hyundai, Volkswagen, and Stellantis are still struggling to sell their factories. If they get rid of them for symbolic payouts, their direct losses incurred through these deals can amount to 100 billion rubles (€1.16 billion). This number represents net assets of the legal entities that ran the plants.

AvtoVAZ, a Renault project that was nationalised by the state for one ruble, has partially revived production. The Tolyatti plant can no longer produce Lada XRay, a more modern make. At the same time, the Vesta model assembly has resumed after a year of suspension, it was previously manufactured at the AvtoVAZ plant in Izhevsk.

Meanwhile, the Izhevsk factory is still idle. Its employees pleaded with Putin to salvage the plant but 2,000 employees out of 3,300 were made redundant nonetheless. However, the management wants to start production of electric Lada Largus by the end of 2023.

Why China isn’t the solution

All the new models came to Russian factories from China.

Just a year ago, President Vladimir Putin had different plans for the industry. He told an official meeting that Russia needs to ensure its “technological sovereignty”. “Key and critically important things like engineering solutions, intellectual rights, and know-how should definitely be Russian,” he said.

Despite the fact that even old capacities of AvtoVAZ are not fully engaged, the Kremlin granted it the Nissan plant in St. Petersburg. The plan is to produce there Lada X-cross models, a copycat of China’s FAW Bestune T77.

In the past few years, a unique category of factories emerged in Russia. They were run by Russian owners and did not have any own brands but were licensed to assemble foreign cars. There were five such plants, only two of them resumed operations. Kaliningrad’s Avtotor now produces China’s Kaiyi instead of BMW and Hyundai. The Sollers factory in Yelabuga assembles JAC under its own brand instead of Ford. The new Russian brands based on Chinese cars only accounted for 0.6% of the market in Q1.

Despite the fact that competitors are out of the scene, Chinese manufacturers are not rushing to build their own plants in Russia.

Chinese companies currently lack motivation to invest in local assembly lines in Russia, Partsvania believes. “Sanctions are not targeting Chinese car manufacturers in Russia as of now. And what if measures get tougher and new risks emerge? Chinese companies feel rather secure on the international market but can suffer over their operations in Russia,” he says.

But even without any particular desire to develop its business in Russia, Chinese companies threaten local manufacturers, says Partsvania. According to him, Russia is opening its market to net imports: either finished cars or just assembly kits are supplied. Chinese companies work as invited partners at these operations but do not become owners of the assets.

At the same time, the self-exiled manufacturers invested their own money into the industry. They signed contracts with the state in order to increase the production of car parts inside the country in exchange for tax benefits. Under the nameplate exchange scheme, the Russian owners and the state are responsible for this.

“Chinese companies are a threat to local Russian brands as they occupy the gap not only of those that have left, but also of Russian companies,” says Partsvania. The Russian manufacturers’ setbacks will be exacerbated by the fact that they are under sanctions. “Gone are Western investments and technology. Have Chinese ones come in? We do not see that yet,” the expert concludes.