Luxury cars regain ground in Russia

Issue Number: 
152
Author: 
Christopher Kenneth
Published: 
2002-03-15


With the Russian economy once more gathering steam, and local business moguls and their foreign partners amassing greater wealth, luxury cars, which dwindled significantly on Russian streets following the financial meltdown of 1998, are regaining popularity once again around Moscow and other Russian cities.

ZAO DaimlerChrysler Automobile RUS, the official dealer of Chrysler and Mercedes Benz S-class vehicles in Russia, has attributed this positive trend in the elite market category to the improving economic situation in Russia.

The launch of its new models – equipped with the latest innovative technological gadgets in the auto industry – also helped fuel demand.

Other luxury car sellers have already cashed in on this positive market situation by showcasing more and more sophisticated cars in Russia.

BMW Russland Trading premiered its new BMW 7-Series at a gala ceremony in Moscow in November 2001 with the 745i series, its best-selling model, on sale for 115,000 euros ($101,000).

"Our clients are successful businesspeople who occupy top- and middle-management positions, both in Russian and foreign companies, including embassies and government organizations," said Wolfgang Schlimme, BMW’s general director for Russian operations.


The new BMW 7-series is setting a new benchmark in modern top-of-the-line motoring, he said, adding that with its progressive exterior and interior-design, this series has established a new standard of performance, luxury and exclusivity for its owners.

The Audi A8-series, with a price tag starting at $85,000 including extras, is Audi’s flagship in this sector for top Russian businessmen, corporate and government fleet clients, said Nick Rees, retail director at Audi Rolf Center Sever.

"There are no problems at all in marketing these top-of-the-market cars, as Russians not only love to own the most expensive cars, but also order lots of additional individualized options to go with them," he said, adding: "This is what differentiates Russians from other Europeans, who usually save and buy the simplest version of a top-of-the-line model."

The state of near-frenzy in this elite segment is being consciously fueled by automakers, who are constantly designing new models.

The innovations constantly stimulate the insatiable demand for these expensive cars among the rich, said Nikolai Kachurin, a luxury-cars expert with Autopilot Magazine, which specializes mostly on the automobile industry.

Last year’s winners

According to local dealers, of the 10,000 units of expensive cars sold in Russia in 2001, about 15 percent were exclusive luxury models, with price tags starting at $100,000.

Of the 230,000 top luxury cars sold worldwide in 2001, Mercedes Benz, Audi and BMW accounted for 105,000, of which about 1,500 were sold in Russia alone, according to Audi Rolf’s data.


RUSSIA’S AUTO IMPORTS
AT A GLANCE

• In 2001 Russia imported 475,000 motor vehicles (up 109 percent from 2000) for personal transportation.

• Of these imports, 445,000 were cars worth $2.65 billion, of which 93,500 cars were new, accounting for $1.084 billion.

• Out of the total, 114,900 cars worth $950.4 million, were imported by companies, while individuals brought 360,100 cars worth $1.7 billion to Russia.

• In 2000, companies imported 71,200 cars valued at $443.4 million, including 47,700 new cars, worth $394.1 million.

Individuals imported 156,300 cars, worth $792.4 million last year, of which 131,900 were used cars, worth $580.1 million.

• In 2001, Russia's car production exceeded one million vehicles.


Mercedes Benz’s S-series cars dominate Russia’s elite automobile market, with their sales figures standing at 1,102 vehicles, up by 49 percent from 2000, and about 75 percent of the gross market turnover, according to dealers.

"The launching of the fifth generation of the Mercedes Benz SL series, which combines style with the latest technical innovations in the industry, has also boosted DaimlerChrysler’s position in this sector," said Yelena Machurina, Daimler-Chrysler’s corporate communications manager.

Some of these innovations include a distronic system, which allows the driver to maintain a safe distance from the car in front, and which automatically notifies the driver whenever this distance is shorter the safety limit in its memory, she said.

"The Mercedes Benz S-series is the absolute leader in the luxury-car segment in Russia. Historically, it was the first car to win the hearts of rich Russians, and consequently, it has become a landmark of wealth among the nouveaux riches," Kachurin said.

Audi’s A-8 and S-8 series have also become a sign of prosperity: Audi is the second-most-popular brand among the Russian business and political elite, who usually go for the S-8 series because they are more expensive than the A-8 series, which are more comfortable to use, he added.

Audi’s growing popularity is evident from its sales figures, which increased from 144 units in 2000 to 223 in 2001.

For the BMW 7-series, the market has been favorable as well, as the model almost doubled its sales volume from 86 units in 2000 to 159 in 2001, with the positive trend expected to continue through 2002.

BMW cars, which are well known for their high level of technical innovations in the automobile industry, are also specially adapted for the Russian market, Schlimme said.

Famous for their power, technical innovations and amenities, the BMW luxury series were once more popular among super-rich Russians with shady backgrounds, and this association has negatively impacted BMW’s image among ordinary Russians, pushing it to an overall third position in this segment, Autopilot’s Kachurin said.

"However, I must say this negative attitude has now changed," he added.

This change is evident from the series of awards won by BMW cars in 2001 in Russia, including the prestigious Russian "Golden Klaxon" auto prize as the Technical Breakthrough of the Year and a nomination as New Car of the Year.

In the sports-car segment, Porsches, especially the Turbo series, with price tags hovering around $140,000, are favored by rich Russian businessmen and sports-cars fans with a lot of cash to burn, car dealers said.

With a sales target for this series set at 120 per year, Anna Pankratova, Porsche’s sales director, said there is no problem marketing these cars, because they are all adapted to Eastern European markets, including Russia.

One of these adaptive mechanisms include a higher "clearance" index – the distance from the ground to the bottom of the car – in all Porsche cars sold in Russia, she added.

However, she declined to disclose their sales figures for 2001.

Maintenance services

Most dealers try to provide comprehensive post-sale services to their clients, since their expensive toys cannot be handed over for repair or maintenance services to just any roadside mechanic with little or no background knowledge of their sophisticated technological make-up.

For instance, BMW opened a Regional Distribution Center in Moscow in 2000, with more than 25,000 spare parts for BMW cars.

"Such a wide range of products guarantees no less than 95 percent availability of spare parts, which means that 95 out of every 100 client orders can be promptly and properly fulfilled as required, without waiting for overseas delivery," Schlimme said.

The BMW dealer network is constantly expanding, as are training centers for personnel in Russia aimed at improving the quality of service for BMW customers, he added.

The Audi Center Sever has more than a $1 million worth of spare parts in Russia, and also delivers ordered spare parts directly from Audi factories in Germany, with an exclusive discount offer of 10 percent on spare parts and 25 percent on maintenance services for certain models purchased six weeks earlier.

In 2001, DaimlerChrysler spent about 35.5 million euros ($32 million) in 2001 on spare parts, up by 42 percent.

It operates a warehouse for spare parts and other accessories, and also offers a two-year guarantee on spare parts and services rendered in its center.

Besides, it runs a special program dubbed "Privileged Service," which entitles those who bought cars from official dealers and followed set-out procedures for use to use such services as provision of technical support in case of breakdown or other problems associated with electronics or drivers’ errors, such as lost keys.

Entering the market

"It is not possible to get the actual size of this market segment. The figures from official dealers can only be roughly evaluated and this will just be the tip of the iceberg," Autopilot’s Kachurin said.

"But a lot goes through the so-called ‘gray’ sector – or semi-legal channels – and even more passes through the ‘black’ market – or purely illegal routes –and, consequently, these figures cannot be evaluated by any known means," he added.

Customs authorities refused to divulge any information on this issue.

The majority of the luxury cars enter the country legally, where they are subject to customs and excise taxes.

They are also subject to a 20 percent value-added tax, as well as 5 percent sales tax for private clients. These taxes and profit margins usually push these cars’ prices into the stratosphere, official dealers said.

Future prospects

Exclusive car dealers have already mapped out long-term strategies to continue to satisfy the almost insatiable lust of "New Russians" to drive some of the world’s best and most expensive cars.

There is a stable demand for these luxury cars on the Russian market, and this trend and the hegemony of the key players – with Mercedes Benz cars leading the pack – are not likely to change the market in the foreseeable future, Kachurin said.

"Our plans for 2002 are relatively modest, as everybody is waiting for the premiere of our new Audi A8-series, slated for the end of the year, several of which have already been preliminarily reserved," Audi Rolf’s Rees said.

BMW plans to capitalize on the positive tendency in this market segment in 2002 as well.

The company plans to showcase several models of new BMW 7-series, including the 760Li with a 12-cylinder engine, later this year, Schlimme said.

Likewise, Porsche plans to premiere its Cayenne series in 2003, with clients already voicing their intention to buy, Pankratova said.

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