Russia’s prime minister Vladimir Putin said on Monday that the government would further raise import tariffs on foreign-produced vehicles over the next few years up from the 25% duty it currently imposes on vehicles coming into the country. Exact figures were not given but carmakers and ro-ro providers are bracing themselves for the shift from the dominant import of foreign vehicles into Russia to greater domestic production of them by the end of 2010.
In an interview on the Vesti 24 television channel Putin appealed to foreign vehicle makers: “We want you to gradually transfer technology skills, increase productivity and the level of technical training for our specialists. And for our part we will do our best to ensure a successful launch of businesses.”
While an increasing number of carmakers are becoming involved in domestic production through joint ventures on Russian soil (exactly what the high import duties are designed to achieve), a number are still importing significant amounts from abroad and are likely to feel the sting of the proposed increase.
Kia Motors, for instance, became the best-selling foreign automotive brand in Russia for the first time last month selling over 10,000 imported vehicles in July, up 105% from the same month last year. The company recognised the impact of the further rise.
“In terms of the announced import tariff increase in Russia and its impact on our recent success in the local market, obviously it will pose challenges,” Kia spokesman Michael Choo told Automotive Logistics News. “However, we feel that we can mitigate the potential negative impact on our sales growth as we plan to start production in late 2011 at Hyundai's plant in St. Petersburg of a totally new Kia C1-segment city car especially designed for Russian consumers. Although sales forecasts of this vehicle have not been announced, it will take up a large portion of our local sales portfolio as this segment is one of the fastest expanding segments in Russia.”
According to Choo, Kia’s new generation of products designed for export to Russia will keep it competitive there despite the increase in duty.
But for logistics providers the situation could be more problematic. Dominik Buszta, research analyst at Frost & Sullivan said that “although increased tariffs aim to support domestic OEMs and to catalyze development of the Russian component industry, inevitably, they will negatively hit foreign, as well as domestic, LSPs. Higher tariffs will result in higher import vehicles prices and which will result in weaker demand for new cars.”
This was something picked up by Höegh Autoliners spokesman Tomasz Lis who admitted that if imported cars became more expensive than alternative cars produced locally, then demand for imported models was bound to drop in the short term and that it would hit ro-ro.
“Such a drop in demand for higher priced models due to increased import tariffs will definitely hit ro-ro operators like Höegh as lower demand for cars mean lower requirement for transportation,” he said.
“Over a longer period of time the manufacturers need to evaluate if shifting of their production from the place were imported models are being produced now to Russia is profitable or not,” he continued. “Such decisions are usually quite complex as they are based on customer behaviour and influence on manufacturer's logistic set up worldwide.”
Höegh’s major customers have decided to produce certain high-selling models locally but there are still models being produced abroad that are delivered to Russia by the company.
“I am sure that if a decision to significantly increase import tariffs to Russia takes place it will have a negative impact on volumes moved by Höegh,” continued Lis.
It may also lead to further transport problems within Russia as increased production there puts a strain on the country’s underdeveloped infrastructure, meaning delays and a lack of the necessary resources.
According to federal data for 2009 there were more than 680,000 foreign-made vehicles imported against 306,000 foreign cars made in Russia at the end of 2009. But this is expected to change once results are in for 2010 with more foreign cars produced in the country (590,000) than imported (570,000) and this tendency is expected to continue.
“Russian LSPs hit by the economic crisis will most likely not be able to quickly respond to new market conditions due to relatively poor financial condition,” said Frost & Sullivan’s Buszta. “Cross-border LSPs that closely cooperate with importers will find themselves under even higher cost pressure, as importers will most likely try to transfer higher import costs onto LSPs, which are already under great cost pressure,” he said.
Peter Menzel, director and general manager of K-Line Europe’s Car Carrier Group, agreed that the impact was more likely to be felt by smaller brands with lower volumes, and was probably more of a problem for trucking companies rather than ocean carriers such as K-Line, which he maintained had a positive outlook.
“Whether a further rise in duties will put a damper on this is unclear. It is indeed a possibility but most volume OEMs also have domestic production anyway or are in the process of setting it up,” he said.
The announcement of a further increase in import duties has been reported as a risk to Russia’s bid to joint the World Trade Organisation. Under terms currently agreed Russia must reduce import tariffs on cars from the current rate to 15% over seven years from the time it joins. A commitment to raise duties on vehicle imports could reverse years of progress.