Road to Russia

China and Russia, two vast countries sharing a long border, have closed great distances in the past decade as bilateral business links continued to strengthen and trade revenues increased at an annual rate of 28.6 percent in the eight years since 1999.

The nations' partnership crossed a new milestone last year when for the first time Russia surpassed the Middle East to become the top destination for China's auto exports.

Statistics from the Ministry of Commerce show that in 2006 China exported 38,000 vehicles valued at $350 million, as well as $110 million worth of auto parts, to Russia. The total value of $460 million, a 360 percent increase, far exceeds the figure of 2005, when vehicle exports totaled about $100 million.

The main driver came from a year-on-year increase of 332 percent in the number of vehicles exported to China's largest neighboring nation.

"There is huge potential for cooperation between China and Russia in the automotive trade," says Zhi Luxun, of the Department of Mechanics, Electronics and Hi-tech Industry with the Ministry of Commerce.

He bases his statement on the realities that China has become a major motor vehicle producer and consumer, while Russia has a growing demand for cars and rising ability to pay for them.

Attractive market

"Beginning in 2002, Russia's auto market was reborn and soon entered a period of rapid growth," says Zhang Xiaoyu, vice-president of the China Machinery Industry Federation.

Auto sales reached 2.1 million vehicles in Russia in 2005, a 17 percent increase over the previous year. In 2006, the figure reached 2.4 million, a 15 percent increase. It is projected that sales will rise to 3 million units in 2010.

"In Russia, motor vehicles in use exceed 20 million, one vehicle per seven persons on average. But almost half of them have been in use for more than 10 years," says Kang Ping, vice general manager of Harbin-based Hafei Automobile Group. "That means they should be replaced in the near future. So we see the potential of the market demand."

Hafei has sold 2,500 of its mini cars since entering the market last June and signed orders with Russian businesses for 8,000 vehicles for this entire year.

With an eye on Moscow, where more than 3 million motor vehicles are on the road, Hafei has authorized about 60 local dealerships in the city.

"At present, auto production in Russia is between 1 million and 1.5 million units a year, far behind the market demand. Last year, of the 2.06 million passenger cars sold in Russia, only 760,000 were its home brands. Around 1.3 million units were imported, manufactured in joint ventures or purchased second-hand, accounting for 63 percent of the total," says Xu Haiguang, general manager of FAW Import and Export Co.

"It's predicted that because of Russia's limited production capability, by 2010 the market will need more than 2 million imported and locally manufactured vehicles with overseas brands," Xu adds.

In 2003, Chinese enterprises realized the potential of Russian market and began to export their products to the largest country in the world. A fleet of Chinese brands, including Great Wall Motor Co Ltd, Hafei, Beijing Automobile Works and South-East (Fujian) Automobile Industry Co Ltd made forays into the nation.

By 2004, made-in-China vehicles were showing strong sales, increasing nearly 10-fold over the year previous.

The Russian government adopted policies in 2005 to encourage overseas auto manufacturers to invest in assembly plants, with favorable auto parts import tariffs of zero to 3 percent, compared to duties of 25 percent for complete passenger cars and 10 to 15 percent for commercial vehicles.

"It provides an opportunity for Chinese automakers to set up manufacturing facilities in the country," says Xu.

In 2006, Great Wall Motor invested $70 million in an assembly plant in Russia that has an annual capacity of 50,000 units, including its self-developed SUVs (sports utility vehicles), pick-ups, MPVs (multi-purpose vehicles) and sedans, all of which meet European Union standards.

Great Wall is now the top maker of Chinese auto brands in Russia.

"As the biggest auto export destination for China, accounting for 10 percent of China's total auto exports, Russia is predicted to set another record this year, importing over 60,000 vehicles from China," says Zhang of China Machinery Industry Federation.

Although the Russian auto market is relatively attractive, there are some difficulties, says Hu Jiangyun, a researcher for the Development Research Center of the State Council.

"The major challenge is strict admittance standards," says Hu. "For example, the Russian government has decreased the maximum age for imported second-hand vehicles from seven years to five years. It also plans policies for favorable taxation to encourage R&D and investment by its home automakers."

Xu of FAW notes another factor. "In Russia, the authentication period of a vehicle model is always over 180 days, which increases the cost and the length of time it takes in the export process."

"So we chose the way of exporting complete vehicles and parts at the same time. This year, our complete and knocked-down vehicle exports will hit 10,000 units and by 2010, we plan to sell 40,000 units of complete vehicles. Our sales target is to hit $700 million by 2011," says Xu.

Suggestions

"I think Chinese enterprises, such as leading domestic makers Chery Automobile and Geely Holding Group, should further develop their processes and overseas investment to find new ways of auto trading," says Hu.

He believes the improvement and innovation of Chinese auto manufacturing and technology will "definitely accelerate Sino-Russian auto trade".

"Most Russian consumers consider Chinese-made auto products to have low prices. Yet to make a strong foothold in the market, Chinese vehicle makers should guarantee high-quality," says Kang of Hafei.

The Russian government recently refused to approve four agreements on assembling Chinese vehicles in Russia, so "enterprises should focus on auto trading first, then go to overseas manufacturing", Zhang says. "And service is the key to winning the market and enhancing brand image."

He also notes that "Chinese enterprises should pay more attention to researching regulations".

"In the Russian market, when they meet a regulatory conflict, Chinese companies should solve problems through negotiation, not complain about changeable official regulations in the country."

(China Daily 08/27/2007 page6)