A worker on the Ford plant, which is located in Vsevolozhsk near St. Petersburg. Source: TASS

Foreign auto companies are shifting gears in Russia as the country’s economic crisis throws a once-accelerating car market into reverse. Ford is revving up, while GM backs out.

There was a time, not long ago, when Russia was poised to overtake Germany as Europe’s biggest auto market. But those days are increasingly in the rear view mirror.

Car sales in Russia fell 10 percent last year in terms of units as the country teetered on the bring of its first recession since the 2009 financial crisis, according to consultancy PricewaterhouseCoopers, and the downturn may accelerate to 35 percent this year overall. In the month of April alone, car sales were down 41.5 percent year-on-year, according to lobby group the Association of European Businesses (AEB).

Still, while the crash has forced some players to abandon the market, others are digging in and betting on a recovery. Two of the biggest U.S. players, Ford and General Motors, are on different tracks in Russia, with GM cutting its losses and pulling up stakes while Ford hunkers down to chase market share.

“We still hold the view that when the market stabilizes and ultimately recovers… this could be one of the biggest, if not the biggest market in Europe,” Ford CEO Mark Fields told investors during a phone conference on quarterly earnings in late April.

Of course, it’s also a matter Ford not wanting to lose a market it’s already bet big on.

“Unlike GM, Ford has more investment [in Russia], including in launching new models and in the localization of production here … [Ford] is ready to take a part of the losses that are unavoidable given the fact that the market is currently very bad”said Vladimir Bespalov, an industry analyst at investment group VTB Capital.

It’s an open question how long Ford’s gamble will take to pay off. While Russia’s domestic car market is showing some early signs of a recovery, analysts say that Russia's longterm economic maladies — including an over-dependence on oil exports and double-digit inflation — may prove tough to beat.

Market Crash

Almost all car producers had to drastically raise prices in Russia to compensate for the devaluation of Russia’s currency, the ruble. Even Ford, one of the more thoroughly localized market players, still only gets only about 40 percent of its parts domestically.

The ruble has fallen around 30 percent to the U.S. dollar since the start of last year as low oil prices and Western sanctions over the Ukraine crisis choke off investment.

And even as prices go up, many Russians are feeling stretched. With many experts anticipating that Russia’s economy may shrink by around 3 percent this year, and with real wages down 13.2 percent in April year-on-year, few have the spare cash for a new car.

The crunch has already seen a number of companies announce production cutbacks or market exits. U.S. auto giant General Motors, or GM, announced in March it would wind down its Opel and Chevrolet lines after suffering a more-than-70% dip in sales in the first two months of the year.

“We do not have the appropriate localization level … and the market environment does not justify a major investment to further localize,” Opel Group CEO Karl-Thomas Neumann said in a press release issued in March.

GM will still keep a hand in the market though — the company in May launched an Opel production line in neighboring Belarus in the hope of keeping consumer appetite alive through export sales, according to Russian newspaper RBK.

Ford Bets On Russia

But as companies with relatively fewer production assets in Russia, such as GM and Korea’s Ssangyong, exit the Russian market, Ford is doubling down.

In April, Ford took a majority share of its joint venture with local partner Sollers in move CEO Fields said would help streamline operations, and in early June appointed ex-Russia hand Mark Ovenden to head up the Ford-Sollers partnership.

In May, Ford also moved to permanently cut prices on cars by 4-5 percent in a long-term bet on ruble stability that other companies have so far balked at, according to Russian daily Vedomosti.

Lower prices will be more sustainable, however, under the company’s ambitious drive to raise localization to 85 percent by 2019.

“Ford is currently negotiating with all its suppliers, with first tier and second tier suppliers in order … to lower as much as possible the cost of components,” said Andrei Toptun, chief analyst at car market research agency Autostat.

In early June Ford spent $150 million on launching production of its budget Fiesta brand at one of its three plants in Russia, and is set to spend $274 million by 2016 on building a factory to produce the Fiesta’s engines domestically.

Pay Off

Ford's strategy may already be seeing some early signs of paying off. Russian economic data from the first quarter proved better than expected as oil prices and a period of relative calm in war-torn neighboring Ukraine boosted the ruble.

Car loans, which accounted for 40.5 percent of the car sales last year, rose to 35 percent of the all sales in April from just 20.1 percent in the first quarter of the year, market researcher Avtostat reported in May.

The loan market was aided by the Central Bank’s steady rate cut down from its December hike to 17.5 percent, as well as a government program that offers loans at cut rate prices for cars under 1 million rubles ($19,000).

Russia’s economic downturn may also not prove as painful as previously forecast. In June the World Bank revised its forecast of a 3.8 percent economic contraction in Russia this year to 2.7 percent decline, citing firmer oil prices, a strengthening ruble, and cooling inflation.

“In 2016 I think that there will be some stabilization, maybe even a little growth,” said VTB’s Bespalov. “As long as the economic situation stabilizes and long as no new political risks pop up.”

Still, even if Russia’s economy is on the road to the recovery, it’s unlikely to return to boom times unless the government addresses key issues to growth. Critics, including ex-Finance Minister Alexei Kudrin, say drastic reforms are needed, given that Russia was growing anemically even before oil prices fell.

The appetite for that reform — which would include unpopular pension changes — is questionable, however, at a moment of intense political confrontation with the West over the Ukraine crisis. Ford’s bet on the market may bear fruit, but so far it remains a roll of the dice.

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