Ford’s Russia Woes Could Affect European Operations Negatively

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According to the latest report by the Association of European Business, sales of new cars and light commercial vehicles(LCVs) in Russia dropped by nearly 26% in August on a year-over-year basis. [1] The one hurt most by this decline has been Ford, which saw its August sales collapse by as much as 57% year-over-year and January-through-August sales decline by 43%. These numbers are extraordinary and cannot be explained by an industry-wide slump. In contrast to Ford, sales of Hyundai was down by 6% and sales of Nissan was down by 5%. As a result of this poor performance, Ford’s market share for the January-August period was only 2.5% compared to the 3.9% market share last year and 4.5% market share two years ago.

Russian Car Market Fails To Deliver On Expectations

It seems like a long time ago, but it was only last year that Russia’s auto market was tipped to overtake Germany’s auto market as the largest car market in Europe and the fifth largest worldwide by 2020. [2] Many automakers made heavy investments in the country, expecting the country’s rising middle class to purchase new cars. Ford was one of the companies betting that the rising tide of the Russian economy would lift gains in the automotive sector. Ford signed a 50-50 joint venture with Prime Minister Vladimir Putin’s company Sollers, expecting the joint venture would treble Ford’s production capacity in the country as the Russian car market would grow to 4 million new car sales per year by 2014. [3]

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However, because of a weakening economy and currency trouble, car sales in the country have taken a major hit.  2.8 million units were sold in Russia in 2013 and the Association of European Business forecast a 17% drop in car sales in 2014 due to the weakening economy. [4] New car registrations in the month of July decreased to just under 181,000 from 199,000 in June. [5]  The company issued cautious guidance, saying that it would take some time for Ford to overcome the tough market environment in Russia.

Industry-wide Sales Slump

One reason for the company’s cautiousness is the fact that broader macroeconomic factors are exerting a significant influence on the auto market. Earlier this year, in order to curb inflation and raise the value of the rubble, the Russian central bank raised interest rates. [6] In a country where nearly as many as half of new car sales are made on credit, the tightening of interest rates will put significant pressure on overall car sales. Moreover, difficulty to buy a car on credit drives people towards used cars, another factor that puts downward pressure on new car sales.

Ford’s Strategy Backfires

As mentioned previously, the decline in Ford’s sales numbers is only partly attributable to the industry-wide slump, but the rest of the responsibility lies with the company itself. For example, the company mistook the popularity of Ford Focus 1 and Ford Focus 2 to mean that it had a loyal customer base in the country. Consequently, Ford raised the price of Ford Focus 3 in Russia, and the new price put the company outside the price range occupied by cheap hatchbacks and in the range of cheap SUVs. Needless to say, the strategy backfired. Moreover, the company has failed to make any dent in the country’s biggest car segment-SUVs. Seen as both status symbols and practical purchases, SUVs are highly popular in Russia. For the year 2014, none of Ford’s SUV models are placed in the top 25 selling cars in the country.

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Notes:
  1. Association of European Business, September 2014 []
  2. Russia’s car market to be Europe’s biggest by 2020 -report, Reuters, July 2013 []
  3. Ford ramps up Russia production, sees market doubling, Reuters, June 2011 []
  4. Russian New-Car Sales Tumble in June, Wall Street Journal, July 2014 []
  5. Russia Car Sales 2006-2014, Trading Economics) That figure was slightly lower than the 2006-2014 average of 181,200. Unsurprisingly then, Ford reported impairment charges of $481 million in its second quarter earnings report, to reflect the declining value of Ford’s investment in the joint venture with Sollers. ((Ford Posts Second Quarter 2014 Pre-Tax Profit of $2.6 Billion; North America, Asia Pacific, Middle East & Africa, Europe and Ford Credit Profitable; Net Income of $1.3 Billion+, Ford Motor Company, July 2014 []
  6. Russia Raises Rates to Lift Ruble As Conflict With Ukraine Sparks Selloff, Wall Street Journal, March 2014 []