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Russian passenger car and commercial vehicle market 2016 results and outlook

February 2017 Table of contents

1 Overview of the Russian passenger car market 3

2 Overview of the Russian commercial vehicle market 11

3 Export potential of Russian vehicle manufacturers 15

4 Conclusions 19

5 About PwC 21

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 2 Overview of the Russian passenger car market

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 3 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC By the end of 2016, the Russian economy began to stabilise

GDP growth rates and consumer price index (CPI) Average nominal exchange rate of the rouble to US dollar 1Q 2014 – 4Q 2016 1Q 2014 – 4Q 2016

74.9 16.2% 15.8% 15.7% 14.5% 66.1 65.9 63.2 63.0 64.6 63.0 9.6% 8.4% 7.6% 7.7% 7.4% 52.8 6.4% 6.8% 5.8% 47.6

0.6% 0.7% 0.9% 0.4% 35.1 35.0 36.2 -1.2% -0.6% -0.4% -4.6% -4.3% -2.2% -3.6% 1Q ’14 2Q ’14 3Q ’14 4Q ’14 1Q ’15 2Q ’15 3Q ’15 4Q ’15 1Q ’16 2Q ’16 3Q ’16 4Q ’16 GDP as compared to the same quarter of the previous year, % 1Q ’14 2Q ’14 3Q ’14 4Q ’14 1Q ’15 2Q ’15 3Q ’15 4Q ’15 1Q ’16 2Q ’16 3Q ’16 4Q ’16 CPI as compared to the same quarter of the previous year, % Source: Ministry of Economic Development of the Russian Federation, Rosstat Source: Central Bank of the Russian Federation

Consumer confidence index Brent oil price, USD 1Q 2014 – 4Q 2016 1Q 2014 – 4Q 2016

107.7 109.9 101.3

-6.0% -7.0% 71.1 -11.0% 65.3 56.9 51.6 49.2 51.9 -18.0% -18.0% 43.8 46.2 -19.0% 36.8 -23.0% -24.0% -26.0% -26.0% -30.0% -32.0%

1Q ’14 2Q ’14 3Q ’14 4Q ’14 1Q ’15 2Q ’15 3Q ’15 4Q ’15 1Q ’16 2Q ’16 3Q ’16 4Q ’16 1Q ’14 2Q ’14 3Q ’14 4Q ’14 1Q ’15 2Q ’15 3Q ’15 4Q ’15 1Q ’16 2Q ’16 3Q ’16 4Q ’16

Source: Rosstat Source: Bloomberg

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 4 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Following the results of 2016, the sales of new passenger cars1 in quantitative terms dropped by 12%

2016 became the fourth year in succession for the Russian market to demonstrate a drop in sales; however, as compared to the previous year, the drop rates decreased (12% reduction in quantitative terms in 2016 compared to 36% in 2015). In spite of the fact that many car manufacturers faced a decrease in sales compared to the previous year, some of them showed a growth in sales month-over- month, which was particularly notable in 4Q 2016. Among the sales volume leaders, LADA, Hyundai and Renault showed the best positive dynamics with an increase in their December sales by 18%, 12% and 17% respectively, as compared to December 2015. Government incentive programmes substantially supported the market. One of the most popular programmes is a subsidised car loans programme. According to the Ministry of Industry and Trade, in 2016, under the programme, 324,000 passenger cars were sold, while 270,000 were planned. Thus the plan was exceeded by 20%. In monetary terms, in 2016 the passenger car market remained almost on the same level as in 2015, despite the drop in sales in quantitative terms. Against the background of low sales of new cars, there is an ongoing growth of demand for used cars. Presently, dealers are actively developing this line. According to the Autostat agency, following the results of 2016, the volume of the Russian market of used cars is 5.19 million cars, which is 6% higher than the previous year.

Sales*, thousand units Sales*, RUB bn Sales*, USD bn Passenger car groups (exclusive Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec of LCV) Change Change Change 2016 2015 2016 2015 2016 2015 Domestic brands 284 288 -1% 108 143 17.8% 2.5 2.3 8% Foreign brands 754 842 -11% 1,058 974 8.7% 15.8 15.9 -1% assembled in Russia New imported 273 361 -24% 555 663 -16.3% 8.3 10.8 -24% cars TOTAL 1,311 1,491 -12% 1,781 1,779 0.1% 26.5 29.0 -9%

* Shipment data exclusive of light commercial vehicles. Source: AEB, RF Federal Customs Service, PwC analysis

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 5 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Among the leaders of the growth in sales in 2016 there are brands offering new or updated models

In 2016, some of the top 20 brands in the volume of sales of The volume and growth of passenger car sales of some brands in 2016 passenger cars in the Russian market showed a positive growth in sales including Lexus, Lifan, Ford, Skoda and BMW. 300

units 275 The leader of the growth in sales among the top-20, Lexus, was 250 Lada

successful in 2016 due to a renovation of its product line and 225 %)

downturn

12 - development of the dealer network. 200 ( 175 KIA A positive growth in sales of Chinese manufacturer Lifan was due 150 Market to the implementation of financial programmes and promotional 125 Hyundai Renault programmes enabling the purchase of cars with maximum 100 Toyota 75 Nissan VW Skoda benefit, as well as a popular product range including crossovers. Chevrolet Mercedes-Benz Ford 50 Mitsubishi Mazda 25 Datsun Land Rover Audi UAZ BMW Lifan Lexus In 2016, Ford finished a complete renovation of its product line 0 for the Russian market, which, along with a well-balanced price -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% policy, helped it strengthen its positions. thousand 2016, in volume Sales Change in sales in 2016 vs 2015 The attractiveness of Skoda for consumers was also mainly due to Source: AEB, PwC analysis the attractive product line. In addition, the company is anticipating an even greater growth in sales in 2017, as this year a Change in the passenger car market share of some brands new crossover Skoda Kodiaq will be launched, as well as the Brand Market share, 2015 Market share, 2016 Change in market share updated Skoda Octavia. Lada 17.6% 19.7%  KIA 11.0% 11.4%  The sales volume of BMW remained practically the same as in Hyundai 10.8% 11.0%  2015 with a slight growth in sales. Measures for the reduction of a Renault 8.0% 8.9%  financial load on dealer centres taken in 2016, investments in the Toyota 6.6% 7.1%  enhancement of the quality of all processes, and attractive credit VW 5.3% 5.7%  Nissan 6.1% 5.4%  programmes offered by BMW Bank contributed to the stable Skoda 3.7% 4.2%  development of the company in the Russian market. Ford 2.3% 2.8%  Mercedes-Benz 2.7% 2.7% = Chevrolet 3.3% 2.3%  BMW 1.8% 2.1%  UAZ 1.8% 2.0%  Lexus 1.4% 1.8%  Mazda 1.8% 1.6%  Audi 1.7% 1.6%  Datsun 2.1% 1.4%  Lifan 1.0% 1.3% 

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 6 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC In 2017, the extention of the traditional state support programmes and introduction of new more target-oriented measures is planned

Anticipated Russian car industry support programmes in 2017

Programme Financing Expected outcome

Subsidies to Russian organisations for partial compensation of expenses RUB 17.5bn Providing for the additional manufacture of connected with the manufacturing of wheeled vehicles 250,000 vehicles and the preservation of jobs in car manufacturing companies and related sectors

Programmes including First Car, Family Car, Russian Tractor, Russian RUB 17.4bn Sales of 90,720 cars in 2017 Farmer, Private Business, the support of sales of natural gas-engine vehicles and public city electric transport, the purchase of school buses and ambulance cars

Subsidising wheeled vehicles leasing RUB 10bn Sales of 41,500 cars in 2017

Compensation for some expenses for interest payments on the credits RUB 7.4bn Compensation for some expenses for the servicing of received for the implementation of investment projects, and payment of investment credits of more than coupon profit of bonds issued for the same purposes 32 car manufacturers and car part manufacturers due to a degradation of crediting terms

Subsidies to Russian credit organisations for the compensation of a shortfall RUB 7.0bn Sales of 270,000 cars in income from credits granted by Russian credit organisations in 2015– 2016 to individuals for the purchase of cars

Subsidies to Russian credit organisations for the compensation of a shortfall RUB 3.0bn Sales of 350,000 cars in 2017 in income from credits granted by Russian credit organisations in 2015– 2017 to individuals for the purchase of cars (2017 liabilities)

Source: List of measures aimed at providing the stable social and economic development of the Russia in 2017, dated 19 January 2017, PwC analysis

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 7 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC New car market is expected to see growth in 2017

In 2017, sales of new passenger cars in Russia New car market forecast, thousand cars (exclusive of LCV) could grow 7% and reach 1.4 million cars. Passenger car groups 2016 2017 Change One of the main factors to be considered when (exclusive of LCV) (actual shipment) (forecast) forecasting the volume of car sales in Russia in 2017 is the forecasted crude oil price. Domestic brands 284 300 6% According to GI, the average Brent crude oil Foreign brands assembled in price amounted to USD 43.3 per barrel 754 810 7% Russia following the results of 2016, while in 2017, according to a consensus forecast by Imported cars 273 290 6% Bloomberg, the price could grow to USD 55 per The market as a whole 1,311 1,400 7% barrel, which is to promote the sales of new cars. Source: PwC analysis The consumer confidence level will also influence the market development. Following the results of 2016, the consumer confidence index is still quite low (-18% in 4Q 2016); however, there is a positive dynamic to be observed. The implementation of the state-demanded promotion measures in the volume stated will also give material support to the Russian car market.

(*) Dealer sales data, excluding light commercial vehicles (LCV). Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 8 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Long-term development of the Russian car market will depend on the economic situation in Russia and on measures to support supply and demand in the car market

According to the current forecast, in 2017, the new passenger car market is expected to grow by about 7%. The average annual market growth rate in 2016-2021 will be about 11%.

Forecast for the new passenger car market in Russia, 2017-2021, million units

Forecast period 2.74 2.76 2.61 2.48 2.37 2.34 2.18 11% 2.07 1.94 1.80 1.78 1.74 55 1.49 1.40 1.41 1.37 1.31

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Crude oil price forecast, USD/barrel (the crude oil price forecast is based on a consensus forecast by Bloomberg).

Source: PwC analysis

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 9 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Considering the car manufacturers’ plans for increasing the production capacities in Russia and the current market forecast, the capacity utilisation is expected to reach 57% by 2021

Following the results of 2016, the production of new passenger cars New passenger car production volume in Russia, 2017–2021 in Russia reduced by 7.4% and amounted to 1.1 million cars. 57% 54% 50% Considering that the current production capacities of Russian and 45% 39% localised car manufacturers amount to about 3.1 million cars per 36% 39% year, following the results of the year, the production capacities were utilised by 36%. Forecast period Presently, several foreign car manufacturers are preparing to start manufacturing their cars in the territory of Russia. 3.3 3.3 3.3 3.3 3.1 3.1 3.1 Particularly, within the next five years, the production capacities are scheduled to be increased by 0.2 million cars to 3.3 million cars. This 1.5 1.4 1.8 1.6 is due to the anticipated opening of three car plants: 1.9 2.0 1.9 – Great Wall in Tula region (150 thousand cars/year); – Lifan in Lipetsk region (60 thousand cars/year); 1.8 1.8 1.5 1.6 – Mercedes-Benz in Moscow region (25 thousand cars/year). 1.2 1.1 1.2 According to the forecast based on the forecasts of sales, export and import of passenger cars in Russia, in 2017 the production of 2015 2016 2017 2018 2019 2020 2021 passenger cars in Russia is to grow by 7%, reaching 1.2 million cars. Unutilised production capacities, million units In the next few years, the production volumes are expected to New passenger car production volume in Russia, million units recover, reaching 1.8 million cars by 2021, providing there are no Utilisation of production capacities external shocks. Source: PwC analysis

PwC Overview of the Russian commercial vehicle market

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 11 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC The gradual recovery of the economy and state support have a positive influence on the category of light commercial vehicles

The category of light commercial vehicles comprises vehicles with a Forecast of LCV sales, thousand units gross vehicle weight of up to 3.5 tonnes. 174 166 165 Forecast period Among the 2016 leaders, the following brands showed a growth in 141 65 sales: Volkswagen (51%), Hyundai (30%), Ford (17%), Lada (11%), GAZ +0.3% 62 63 65 (9%), and IVECO (9%). 122 56 104 105 109 109 91 92 93 97 In 2017, the total LCV sales volume is expected to grow by 5%, reaching 97,000 vehicles.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

The main factors influencing the market of light Crude oil price forecast, USD/barrel (the crude oil price forecast is based on a consensus forecast by Bloomberg. commercial vehicles: Source: Autostat, PwC analysis During 2016, some of the important indices grew, including oil price, which increased from USD 34.7/barrel in the Brand Market share, 2015 Market share, 2016 Change in market share beginning of the year to USD 56.82/barrel at the year end, GAZ 41.5% 45.1%  the consumer confidence index, which improved from –30 to 18%, and the national currency exchange rate, UAZ 21.9% 20.3%  which grew from 72.9 RUB/USD to 60 RUB/USD. Lada 7.6% 8.4%  Various state support measures, i.e. fleet renewal, Mercedes-Benz 9.6% 7.1%  concessional lending, industrial subsidies, continued Ford 4.6% 5.4%  subsidising of the purchase of ambulances and emergency care cars. Volkswagen 3.3% 5.0%  Fiat 4.0% 2.2%  Hyundai 1.3% 1.7%  Peugeot 1.5% 1.3%  IVECO 1.1% 1.2%  Other 3.5% 2.3% 

Source: Autostat, PwC analysis Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 12 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC In 2016, the growth of sales in the truck segment was largely driven by deferred demand and government support

The truck market includes medium (from 3.5 up to 16 tonnes) and Truck sales forecast, thousand units large (more than 16 tonnes) commercial vehicles. 129 Among the top ten brands of trucks, the following showed a growth 111 111 Forecast period in sales compared to the results from the previous year: KAMAZ 88 91 82 (15%), GAZ (3%), Ural (2%), MAN (20%), ISUZU (0.2%) Mercedes- +4% Benz (4%), NEFAZ (29%) and Volvo (60%). 72 60 63 51 53 56 In 2017, the total truck sales volume is expected to grow by 5%, 41 reaching 56,000 vehicles.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 The main factors influencing the truck market: Source: Autostat, PwC analysis There has been a decrease in sales since 2012, and companies will have to renew their fleets realising the so-called deferred demand accumulated during the previous years. Brand Market share, 2015 Market share, 2016 Change in market share The state support measures including fleet renewal KAMAZ 34.3% 37.9%  programmes, concessional lending, industrial subsidies, etc. GAZ 13.8% 13.6%  The growth of crude oil prices from USD 34.7/barrel in the MAZ 7.1% 6.2%  beginning of the year to USD 56.82/barrel at the year end Ural 5.1% 5.0%  coupled with the improvement of the consumer confidence index from –30 to –18%. SCANIA 5.0% 4.7%  ISUZU 4.9% 4.7%  The increase of transport service costs including credit rates, increased rates of fully comprehensive motor insurance MAN 3.6% 4.2%  (KASKO) and compulsory third-party insurance (OSAGO), the Mercedes-Benz 3.9% 3.9% = necessity to install tachographs and ERA-GLONASS sensors, NEFAZ* 2.9% 3.6%  and the increase of Platon system rates. Volvo 2.1% 3.2%  Other 17.3% 13.1%  Source: Autostat, PwC analysis * NEFAZ produces trucks based on the KAMAZ chassis. Reference of the car depends on designation in VIN-code. If designation is absent, the car is referenced according to the name to KAMAZ. Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 13 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Fleet renewal, preparation for big sports events and state purchase of buses provide for stable demand in the category

The bus segment includes all transport vehicles designed for the Bus sales forecast, thousand units transportation of passengers and baggage that are equipped with 17.1 more than eight seats exclusive of the driver’s seat, except when the 16.4 15.2 transport vehicles fall within the category of light commercial +15% Forecast period 13.6 vehicles. 12.4 12.4 11.7 11.2 11.2 11.6 Of all the category leaders, only Marcopolo showed a drop in sales in 10.3 10.4 9.0 absolute terms (–29%) and IVECO (–18%); other brands increased the volume of sales compared to 2015.

In 2017, the total bus sales volume is expected to grow by 8%, reaching 11,200 vehicles.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 The main factors influencing the market of buses: Source: Autostat, PwC analysis 900 million roubles are to be allocated, in addition to the school bus update programme amounting to 3 billion roubles. The Brand Market share, 2015 Market share, 2016 Change in market share natural gas-engine transport support programme is extended PAZ 60,7% 57,4%  and the bus fleet still needs to be updated. LIAZ 11,8% 18,1%  As part of the preparation for the 2017 Confederations Cup and MAZ 6,0% 8,0%  2018 World Cup, the programme for expanding the bus fleets in the World Cup host cities continues. About 3,000 new buses are NEFAZ 6,8% 5,8%  to be purchased under the programme. KAVZ 3,4% 3,6%  The development will be restricted by the growth in the number Volgabus 3,1% 2,7%  of private cars and the growth in competition with other types of Marcopolo 1,3% 0,8%  public transport. IVECO 0,8% 0,6%  YUTONG 0,1% 0,5%  King Long 0,3% 0,5%  Other 5,8% 2,1% 

Source: Autostat, PwC analysis Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 14 Export potential of Russian vehicle manufacturers

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 15 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Adapting to local conditions and a proper investment policy will determine the export potential of Russian car manufacturers

In Russia, there is under-utilisation of production capacities; thus exporting cars to foreign markets can become one of the sources for partial utilisation of free capacities. The realisation of an export strategy will enable car manufacturers not only to provide for the additional utilisation of their capacities but also to improve brand recognition and develop their client base.

Presently, the products of Russian car manufacturers are likely to be popular in the developing markets, in which there are high car market growth rates, a demand for medium and low price cars, and comparatively favourable market access conditions.

The main competitors of Russian car manufacturers in the developing markets are Asian manufacturers, primarily, Chinese, which have a considerable price advantage over other market participants. Offering products with expressed technological advantages as compared to the products of Chinese brands while preserving an optimal price–quality ratio can help improve the potential of Russian manufacturers in export markets.

Choosing a strategy to enter the developing markets depends on the capabilities of a manufacturer, its ultimate goals and the particular features of the export market. When entering a new market, companies can choose indirect export when products are sold through independent intermediaries, or direct export when a company performs export operations independently, i.e. establishes a trade representative office or engages foreign distributors. An important component of success in foreign markets is the availability of appropriate partners and contractors. Irrespective of the strategy selected, the solution to the task generally requires investment and a good assessment of the potential outcome.

It is not only necessary to build a sales network but also to provide for the availability of spare parts and maintenance services. A substantial share of many developing markets belongs to unofficial dealers and service centres, with which it is also necessary to compete.

Tariff and non-tariff foreign trade regulation methods used in different countries can hinder export development; however, they can be partially removed if the state and car manufacturers join together in their efforts (see more details below).

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 16 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC When entering export markets, Russian car manufacturers face a number of tariff and non-tariff foreign trade regulation methods

Tariff regulation methods Non-tariff regulation methods • Tariff regulation methods imply the necessity of paying customs • Non-tariff regulation methods imply the application of foreign trade duties when importing cars into a country's territory. regulation tools different from customs duties. • In many developing countries including BRIC* and ASEAN* member- • The most popular regulation methods are licensing and quantitative states there are high import duties limiting export from other countries, restrictions of products (i.e. in Algeria and Ecuador), compulsory which is mainly aimed at protecting local car manufacturers and certification of products to confirm the compliance with technical and promoting the localisation of production. Thus, import duty on a ecological standards applicable in a country (i.e. Euro-6 in the EU), and passenger car in India and Thailand is 60% and 80%, respectively. providing export subsidies.

• Among the measures able to ease the regulatory mode and have a • Non-tariff regulation methods often result in the need to adapt the positive impact on the volume of export by Russian manufacturers there products of car manufacturers to local specifics, which, in turn, requires are execution of free-trade agreements and special intergovernmental substantial investment and optimisation of operation costs. agreements. • Therefore, it is very important for car manufacturers to track global car • Thus, for instance, to extend the economic relations, a free-trade production trends to consider all present and future requirements of car agreement between the Eurasian Economic Union (EEU) and Vietnam products. was concluded on 5 October 2016. One of the main provisions of the • Thus, Russian car manufacturers have the potential to expand their agreement deals with a gradual reduction of import duties for passenger presence in export markets; however, to preserve and strengthen their cars manufactured in Russia and other EEU countries from 50–70% to competitive ability, it is necessary to introduce technologies and 0% and from 17% to 0% for trucks within ten years. innovations and maintain quality standards. • Also, in October 2016, a Russian-Vietnamese intergovernmental protocol on the support of motor vehicles in the territory of Vietnam came into force, providing authorised companies (Groups GAZ, KAMAZ and Sollers) with the right to import motor vehicles and vehicle sets to the country within the quota limits.

(*) BRIC – Brazil, Russia, India, China; ASEAN (Association of South-East Asian Nations) – Brunei, Vietnam, Indonesia, Cambodia, Laos, Malaysia, Myanmar, Singapore, Thailand, Philippines. Source: PwC analysis

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 17 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC The main development lines with export potential of Russian car manufacturers are aimed at developing financial and non-financial support tools

In November 2016, a passport of the priority project International Cooperation and Export in Industry was approved, including a set of the industrial sector’s state support measures. Particularly, the support measures will be focused on four sectors, i.e. car production, agricultural machinery industry, railway machinery industry and aircraft industry. The project is aimed at creating conditions for the sustainable growth of the export of Russian industrial non-resource products. It is expected that the amount of funds in the federal budget earmarked for priority sectors (including the manufacturing of automobiles, agricultural machinery, railway machinery, and aircraft) could reach RUB 70bn over the period of 2017-2019.

The main car production support programmes for 2017-2019

Non-financial export support measures Financial export support measures

• Compensation of expenses for the transportation of exported products, • Crediting foreign buyers of the products with a subsidised certification of products in foreign markets and export R&D activities interest rate through Vnesheconombank and Roseximbank. (homologation of products, design and development of new export products); • Compensation of expenses for the registration of intellectual property objects in foreign markets; • Assistance in the conduction of exhibitions and trade fair activities; • Subsidising the creation of an aftersales service system; • Compensation for some expenses for participating in the activities of international organisations in order to protect the interests of the national car industry.

Source: passport of the priority project International Cooperation and Export in Industry, protocol dated 30 November 2016.

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 18 Conclusions

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 19 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC Conclusions

 In 2016, falling rates in the Russian economy slowed, but the consumer confidence index still remains at a low level.

In 2016, the sales of new passenger cars in quantitative terms dropped by 12%. In rouble terms, the market remained practically unchanged while in  dollar terms it dropped by 9%.

 Among the market leaders in the growth of sales in 2016 there are brands offering new or updated models.

 In 2017, the extention of the traditional state support programmes and introduction of new more target-oriented measures is planned.

In 2017, growth of the new passenger car market is anticipated in quantitative terms up to 1.4 million cars. According to the forecast, by 2021,  the new passenger car sales volume will reach 2.18 cars per year, providing there are no external shocks.

The total new car production volume in Russia dropped by 7.4% in 2016. Considering the car manufacturers’ plans for increasing the production  capacities in Russia and the current market forecast, the capacity utilisation is expected to reach 57% by 2021, reaching a production volume of 1.8 million cars.

The sales of light commercial vehicles in 2016 actually remained at the level of the previous year, amounting to 93,000 vehicles. In 2017, the total LCV sales  volume is expected to grow by 5% to reach 97,000 vehicles. The gradual recovery of the economy and the state support have a positive influence on the category of light commercial vehicles.

Following the results of 2016, the truck market grew by 4% compared to the same period of the previous year amounting to 53,300 vehicles. In 2017, the total  truck sales volume is expected to grow by 5% amounting to 56,000 vehicles. Among the main factors of growth in the next few years are the growing deferred demand and state-supported measures, while a constraining factor is the increasing vehicle maintenance cost.

Following the results of 2016, the bus market grew by 15.4% compared to 2015 and amounted to 10,400 buses. In 2017, the growth is expected to be 8% with the  sales reaching 11,200 buses. Fleet renewal, preparation for big sports events and the state purchase of buses provide for a stable demand in the category.

Russian car manufacturers have the potential to expand their presence in export markets; however, to preserve and strengthen their  competitive ability, it is necessary to introduce technologies and innovations and maintain quality standards.

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 20 About PwC

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 21 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC PwC international experience of services to car industry companies

We are proud that experts recognise us Facts about PwC: as leaders in our field. • The PwC network of firms is the world’s largest network rendering professional services. • In 2016, PwC was named the strongest • PwC network was recognised as the world brand in the Business for Business category leader in the field of business consulting • PwC network includes over by Brand Finance and was ranked among the according to IDC. 223,000 employees in 157 world’s top ten most influential global • According to Kennedy Information, PwC countries. brands in the annual rating. network was recognised as the world • For more than 25 years, PwC • PwC global network holds the first place in leader in the field of M&A transactions has been rendering services in the international rating by a reputable consulting. Russia and over 2,500 professional publication, International • In 2015, PwC was ranked No.2 among professionals help us reach Accounting Bulletin, as the world’s major audit and consulting groups in success. largest international network. Russia by the Expert RA ratings agency. • PwC consists of specialised • According to Vault, PwC network holds: • In 2015, PwC was named for the sixth time as sectoral subdivisions, which Russian Tax Consulting Firm of the Year enables us to render services of among auditing organisations in an annual competition held by in forensic; maximum quality fitting each 1 International Tax Review magazine. particular client. in the rating of top 50 consulting firms • PwC Legal was among the top ten legal • In Russia, more than 3,000 in the field of financial consulting firms in Russia according to the Pravo.Ru- companies are our clients, 270 300 rating. 2 for 2016; of which are included in the Expert-600 rating of top in the rating of top 50 consulting firms Russian companies. for 2016. 5 • In Russia, PwC is a member of many professional organisations, business unions and business associations.

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 22 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC PwC experience of rendering services to car industry companies

A non-exhaustive list of PwC clients in Russia representing The market share of PwC in all types of services rendered to the car industry car industry companies in Russia Avilon Automobile Group Peugeot Citroen Rus (by the number of clients) 49 companies included in the rating Asia Auto Ust-Kamenogorsk* Pirelli Tyre Russia Automotive Glass Alliance Rus* Porsche Russland* BMW Renault Bosch Rexroth* ROLF* PwC Brembo Russia Scania-Rus* Bridgestone CIS SKF* Brose Togliatti Automotive* SOLLERS* 65% Volvo Vostok* Sollers-Bussan* PwC Goodyear Russia* SP BUSINESS CAR* DAIMLER KAMAZ RUS Tenneco Automotive Volga* Daf Trucks Rus Toyo Tires Rus JCB Russia Toyota Boshoku* Johnson Controls* Toyota Tsusho Technics* The market share of audit services rendered to car Inchcape Holding* Volkswagen Group Rus* industry companies in Russia Caterpillar Eurasia* Ford Motor Company* (by the number of clients) Ford Sollers Automotive 49 companies included in the rating Caterpillar Tosno* Components* KIA Motors Rus Ford Sollers Elabuga* Cominvest-AKMT Ford Sollers Holding* PwC Cordiant* Faurecia Group* Magna Automotive Holding Fuyao Glass Rus* % Mazda Motor Rus Hyundai Motor Manufacturing 27 MAHLE RUS* Hyundai Motor CIS PwC MAN Trucks and Bus Rus* Hyundai Steel Rus* Mercedes-Benz RUS Hyva Russia* Mitsubishi Corporation Honda Motor MMC Rus Zeppelin Russland* NVH RUS Schmitz Cargobull Russland* Nissan Manufacturing Rus Unipress Rus Source: PwC; rating Expert-600, October 2015 Norauto Rus* Jaguar Land Rover * - auditing clients. Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 23 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC We offer a wide range of services to automotive companies

Market analysis Solutions to tax and customs Solutions to legal issues Fundraising and strategy development; issues • analysis of market • finding ways to reduce the tax • legal assistance in the • audit of IFRS statements; potential, key players and burden; development of structure and • consulting services for bringing trends, analysis of a new the establishment of production • procedure for accounting of management statements into product market prospects and trade companies in Russia operations typical for dealers, compliance with the IFRS (feasibility study); and CIS including the distributors and manufacturers requirements; preparation of corporate • elaboration of a company’s of cars; documents; • improving internal control development strategy • regional tax breaks; systems in the domestic market; • legal support in the matters of • matters of international establishment and operation of • preparation for IPO; • development of a foreign taxation, matters connected joint ventures; markets access strategy; • financial modelling with intercompany transactions • support of investment • conducting financial and including financing; projects including the economical, tax and legal • support in tax disputes conclusion of investment examination (due diligence) of including in court; agreements with public partners and acquisition authorities; targets; • support of projects connected with industrial assembly • consulting and legal support • assistance with fundraising, regime; in the matters of the including the development of construction of plants and other a business plan, evaluation of • VAT consulting services real estate issues; a pledge object and assistance (VAT refund, tax remissions, in negotiations with partners import and export operations); • legal assistance in the and banks; creation of dealer networks and • assistance in the organisation of interactions with them, • M&A transactions support: a customs clearance process, including the development of search for buyers or acquisition assistance in the interaction standards in the field of the targets, business value with customs authorities and selection of potential dealers assessments and preparation of support in court. and introduction of dealer transaction documents. financing programmes.

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 24 Overview of the Russian passenger car market | Overview of the Russian commercial vehicle market | Export potential of Russian vehicle manufacturers | Conclusions | About PwC We conduct automotive market research and understand all its trends

The cost of car Reinventing the ownership wheel: car PwC strives to be at the centre of events in in Russia, 2016 industry potential the automotive industry and to offer the development most relevant information and analysis to scenarios our clients.

For this purpose, PwC: • Conducts detailed research devoted to the current state of the automotive Automotive M&A Global research industry and to development issues; deals insights – into information first half of 2016 security trends • Holds specialised seminars for our car for 2016: results of industry clients on industry and business car industry development matters; companies survey • Participates in key industry events and activities; • Sponsors key industry events and activities Driving value: Auto industry automotive M&A trends in 2016 insights

Russian passenger car and commercial vehicle market: 2016 results and outlook February 2017 PwC 25 Contacts

Oleg Malyshev Victoria Sinichkina Partner, Senior Manager, Corporate Finance, Deals Leader Advisory, Automotive

Tel.: +7 (495) 967-6000 Tel.: +7 (495) 967-6000 E-mail: [email protected] E-mail: [email protected]

PwC Press Service in Russia: Marieta Khamkhoeva

Tel.: +7 (495) 967-6000 (ext. 2405) E-mail: [email protected]

This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

PwC Russia provides industry-focused assurance, tax, legal and advisory services. Over 2,500 professionals working in PwC offices in Moscow, St Petersburg, Ekaterinburg, Kazan, Rostov-on-Don, Krasnodar, Voronezh, Novosibirsk, Vladikavkaz and Ufa share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Together, these firms form the PwC network, which includes over 223,000 employees in 157 countries.