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Russia’s passenger and commercial vehicle market: results for the first eight months of 2016 and outlook

October 2016 Table of contents

1. Overview of ’s passenger car market 2. Overview of Russia’s commercial vehicle market 3. Conclusions

PwC 2 Overview of Russia’s passenger car market

PwC Although the pace of decline in Russia’s economy has begun to slow in 2016, the Consumer Confidence Index remains at low levels

GDP growth rates and Consumer Price Index (CPI) Average nominal USD/RUB exchange rate 1Q 2013 – 2Q 2016 1Q 2013 – 2Q 2016

20% 80

70 15% 60 10% 50 +25% 5% 40 2.1% 2Q’15 - 2Q’16 1.1% 1.2% 1.1% 0.6% 0.6% 0.9% 0.2% 30 0% 20 -1.2% -0.6% -2.8% -4.5% -3.7% -3.8% -5% 10 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q '16 0 -10% GDP compared to the same quarter of the previous year, % 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q CPI compared to the same quarter of the previous year, % '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 Source: Russian Ministry of Economic Development, Rosstat Source: Central Bank of Russia (CBR)

Consumer Confidence Index (CCI) Brent oil price trend (USD) 1Q 2013 – 2Q 2016 1Q 2013 – 2Q 2016 120

100 2Q’15 - 2Q’16 -7% -6% -7% -6% -7% 80 -11%-11% -25%

60 -18% 40 -23%-24% -26% -26% 20 -30% -32% 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 Source: Rosstat Source: Bloomberg PwC 4 Based on the 8M 2016 results, new passenger car sales1 in Russia fell by 16% in quantitative terms

• In the first eight months of 2016 (8M 2016), the new imported car segment saw a 29% plunge in sales, while sales of domestic brands and locally assembled foreign declined by 10% and 12%, respectively. • Meanwhile, the average weighted car price in Russia’s auto market increased in all of the segments listed above. Thus, the average weighted price of a domestic make passenger car rose 17% in 8M 2016 compared to the same period last year, whereas this date point for foreign cars (both locally assembled and imported) went up 19%. Overall, the average weighted price of a new passenger car in Russian roubles (RUB) rose 18% in 8M 2016. • The increases seen in the average weighted car price across all the segments enumerated above was largely driven by further weakening of the RUB against major world currencies. • In RUB terms, the car market shrunk by only 1% in 8M 2016, but in USD terms it contracted by fully 16%, which also resulted from the year-on-year shift in average FX rates from USD 1.00/RUB 58.10 in 8M 2015 to USD 1.00/RUB 68.70 in 8M 2016.

Sales, '000 units Sales, RUB bn Sales, USD bn Type of passenger cars Jan-Aug Jan-Aug Jan-Aug Jan-Aug Jan-Aug Jan-Aug Change Change Change 2016 2015 2016 2015 2016 2015

Domestic brands 178 197 -10% 103 98 6% 1.5 1.7 -10% Foreign brands assembled in 471 534 -12% 631 618 2% 9.2 10.6 -14% Russia Imported cars 179 253 -29% 344 372 -7% 5.0 6.4 -22%

Total 828 985 -16% 1,079 1,088 -1% 15.7 18.7 -16%

1 Data on shipments excluding light commercial vehicles

Source: Association of European Businesses (AEB), Russian Federal Customs Service, PwC analysis

PwC 5 Monthly sales of new passenger cars in January-August 2016 did not exceed 120,000 units

Sales trend for new passenger cars in Russia by month • In 2015, the number of cars shipped (2015 - 8M 2016) exceeded the number of auto registrations, whereas numerous cars shipped to Russia Government decides to renew state support programmes for the car were purchased in Russia by buyers from industry in 2016 other countries (primarily Kazakhstan and 160 50% About 200,000 cars - excess of the number of Belarus), who took advantage of the sharp shipments over the number of registrations in 2015 140 depreciation of the rouble in the period 30% before the national currencies of their 120 countries depreciated. • In 2016, the opportunities for such FX 100 10% arbitrage shrunk, however, due to

80 exchange rate alignment. Thus, there were -10% no specific differences between the -17% 60 -11%-10% number of shipments and the number of -14% -14%-14% -19% -19% registrations. 40 -24% -30% -28% • In early 2016, the Russian Government -30% -29% -30% approved a state support programme for 20 -38% -38% -39% -42% the auto industry for 2016, with total -43% -43% -50% 0 -52% financing of RUB 137 billion. These funds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug were allocated to stimulate demand and -20 -70% support automakers. 2015 2016 • In January-April 2016, the decline in Shipments of new passenger cars during 8M 2016. ‘000 units monthly car sales began to slow down, Excess of the number of shipments over the number of registrations of new passenger cars in 2015, '000 units reaching a minimum of -10% in April. Over Registrations of new passenger cars in Russia in 2015, '000 units the next four months, the sales decline rate Shipments growth rate (versus the same months in the prior year), % accelerated again slightly. Source: AEB, Avtostat Info, PwC analysis

PwC 6 The market leaders in terms of sales growth in 8M 2016 were car makes with new and updated models in the crossover and SUV segments

• Twelve makes from among the top 20 outstripped the average market results for 8M 2016 in terms of passenger car sales to strengthen their market positions, with four makes (Lifan, Ford, Lexus and UAZ) demonstrating sales increases. • Those car makes that introduced new or updated models in the crossover and SUV segments, which are still the most attractive for Russian motorists, were more successful in relative terms. In line with market trends, many automakers in Russia announced the launch of serial car production in these segments, including of such makes and models as the Qashqai, XRay, Renault Kaptur, Hyundai Creta, and Toyota RAV4, among others.

Passenger car sales volume and increase for specific Change in passenger car market share by makes in 8M 2016 leading makes in 8M 2016

180 Market share, Market share, Change in Brand 8M 2015 8M 2016 market share 160 Lada Lada 18.0% 19.6% ↑ KIA 10.5% 11.3% ↑ Hyundai 10.5% 10.4% ↓

140 16%) -

( Renault 7.7% 8.5% ↑

Toyota 6.6% 7.2% ↑ units

120 decline Market VW 5.0% 5.6% ↑

Nissan 6.3% 5.5% ↓ ‘000 ‘000 100 Skoda 3.7% 4.4% ↑ KIA Mercedes-Benz 2.9% 2.9% = Hyundai Ford 2.0% 2.9% ↑ 80 Renault Chevrolet 3.6% 2.4% ↓ BMW 1.9% 2.2% ↑ 60 Toyota UAZ 1.6% 1.9% ↑ Lexus 1.4% 1.8% ↑

Sales in 8M 2016, Sales 2016, 8Min Nissan VW Audi 1.7% 1.7% = 40 Skoda 1.8% 1.6% ↓ Mercedes-Benz Datsun 2.4% 1.4% ↓ Chevrolet Ford 20 Mitsubishi Mitsubishi 2.5% 1.4% ↓ Mazda BMW Lexus Lifan Lifan 0.8% 1.3% ↑ Datsun Daewoo Audi UAZ Daewoo 1.4% 1.0% ↓ 0 -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Year-on-year change in sales in 8M 2016 (versus 8M 2015) Source: AEB, PwC analysis PwC 7 Total production of passenger cars in Russia fell 13.5% in 8M 2016 even as some automakers succeeded in boosting production volumes

• Due to reduced demand in the car market, automakers in Russia have had to reduce their production of new cars. Thus, in 8M 2016 the production of new passenger cars fell 13.5% year on year. Production of domestic passenger car makes and models saw a greater decline (21%) than the drop-off in production of foreign makes (11%). • The share of foreign cars in the total production of passenger cars in 8M 2016 was 73% (versus 71% in 8M 2015). • In spite of the negative trend for total passenger car production in Russia, the Ford plants in Vsevolzhsk, Leningrad Region, and Naberezhnye Chelny, Tatarstan, saw a significant increase in production, as did the Izhevsk Car Plant, which announced plans to increase output in 2016 by one-third compared to 2015. The upturn in production volumes seen at these plants was mainly the result of strong demand for the specific makes and models they produce, in particular the Ford Fiestа and Lada Vesta.

Production of passenger cars in Russia by month for 2015 - 8M 2016

135 126 123 45% 108 108 108 104 101 101 99 96 91 86 88 89 88 81 75 61 4% 48 -4% -15% -18% -20% -22% -19% -20% -21% -27% -23% -27% -31% -27% -37% -42% -39% -39% -40%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

2015 2016 Passenger car production of domestic makes in 2015, ‘000 units Passenger car production of domestic makes in 8M 2016, ‘000 units Year-on-year change in passenger car production Passenger car production of foreign makes in 2015, ‘000 units Passenger car production of foreign makes in 8M 2016, ‘000 units Source: ASM-Holding, PwC analysis

PwC 8 Given automakers’ current plans to boost production capacities in Russia and current market projections, capacity utilisation is expected to reach 52% by 2020

Projected production of passenger cars in • The production projections were based on projections for sales, Russia, 2016-2020 and exports and imports of passenger cars from/to Russia. 52% 49% • The forecast projects a reduction of passenger car production 45% in Russia by 10% in 2016, reaching 1.1 million units. In 39% 41% 35% subsequent years, it is expected that there will be a gradual restoration of production volumes, which may reach 1.7 million units by 2020, barring any external shocks. Forecast period • Open source information shows that the current production 3.3 3.3 3.3 3.1 3.1 3.1 capacities of domestic Russian and localised foreign automakers are about 3.1 million units per year. In the next five years, production capacities are expected to increase by 0.2 1.6 million units due to the expected commissioning of two 1.8 1.7 Chinese auto plants: 1.9 2.0 1.8 - the Great Wall Plant in the Tula Region (150,000 cars per year); and - the Lifan Plant in the Lipetsk Region (60,000 cars per 1.7 1.5 1.6 year). 1.2 1.1 1.3 • In this regard, starting from 2018 and up to the end of the forecast period, maximum production capacities were fixed at 2015 2016 2017 2018 2019 2020 the level of 3.3 million units.

Idle production capacities, million units Passenger car production in Russia, million units Capacity utilisation

Source: PwC analysis

PwC 9 It is expected that based on the results of 2016 the new passenger car market will reach 1.27 million units

Forecast for the new passenger car market, ‘000 units (net of LCV) The oil price forecast has become a key factor for projecting passenger car sales in Russia in 2016. According to the Bloomberg consensus forecast, as at the date of this presentation’s publication, the average Brent oil price is expected to be at the level of USD 48 per barrel in 2016. Government measures for stimulating demand are still providing significant support for Russia’s auto market. Categories of passenger 2015 2016 Change For reference only: cars (excluding LCVs) (actual (forecast) 2015 (actual registrations) registrations)

Domestic brands 296 265 -10% 259

Foreign brands assembled in 821 735 -10% 709 Russia Imported cars 361 272 -25% 313

Total 1,477 1,272 -14% 1,280

Source: PwC analysis

PwC 10 Recovery in Russia’s new passenger car market is expected to begin in 2017

• The forecast for the new passenger car market was prepared based on the financial factor model, which took into account a combination of short-term and long-term factors. • A major short-term factor (up to end-2017) is the oil price trend, which will largely determine the fluctuations in the population’s disposable income and consumer expectations (both key passenger car demand factors). • For the purposes of the long-term market forecast covering 2018-2020, PwC has selected an approach based on projections of the level of car ownership, a fundamental indicator for the car market overall. • According to the current forecast, Russia’s new passenger car market is expected to begin recovering starting in 2017.

Forecast for the new passenger car market in Russia in 2016-2020, million units

2.74 2.76 Forecast period 2.61 2.48 2.37 2.34 2.02 56 1.90 1.80 1.78 1.48 48 1.74 1.40 1.28 1.49 1.37 1.27

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

Shipments of new passenger cars Registration of new passenger cars

Oil price forecast, USD per barrel1 1 The oil price forecast was based on the Bloomberg consensus forecast Source: PwC analysis PwC 11 Overview of Russia’s commercial vehicle market

PwC Government support programmes have partially compensated for the dampening effect that economic factors have had on the light commercial vehicle segment

Market share Share market Change in Forecast for light commercial vehicle sales, ‘000 units Make for 8M for 8M the market Forecast period 2015,% 2016,% share, % 174 GAZ 40.4% 44.4% 166 165 66 UAZ 22.6% 20.4% 141 62 63 LADA 8.2% 7.9% 122 -4% 56 112 112 119 Mercedes 9.2% 7.3% 102 91 92 Volkswagen 3.1% 5.0% 88 Ford 4.5% 4.9% Fiat 4.4% 2.8% 1.1% 1.8% Hyundai 1.5% 1.8% Peugeot 1.7% 1.3% Other 3.4% 2.5% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Avtostat, PwC analysis Oil price forecast, USD per barrel1 The light commercial vehicle segment includes 1 The oil price forecast was based on the Bloomberg consensus forecast. vehicles with a gross weight of up to 3.5 tonnes. Sales of light commercial vehicles for 8M 2016 Source: Avtostat, PwC analysis decreased year on year by 7% to 54,600 units. Key factors affecting the light commercial vehicle market The following vehicle makes showed sales increases: Volkswagen (48%), Iveco (43%), Economic factors, such as the downturn in business activity among small Hyundai (12%), GAZ (2%) and Ford (1%). and medium-sized enterprises (SMEs), the continuing low volumes of Total sales of light commercial vehicles are motor freight, and the decline in the population’s overall wealth, have had expected to decrease by 4% to 88,000 units in a negative impact on sales of light commercial vehicles. 2016. Various government support measures (cancelling duties on gas engine components, fleet upgrade programmes, etc.) are having a positive impact on the market.

PwC 13 Despite lower sales in 2016, pent-up demand should have a positive impact on the market in the near future

Market share Market share Change in Forecast for truck sales, ‘000 units Make for 8M for 8M the market 2015,% 2016,% share, % 129 Forecast period 32.6% 39.5% 111 111 GAZ 14.0% 15.1% MAZ 7.1% 6.5% 88 63 66 56 62 URAL 5.2% 5.3% -6% 61 64 ISUZU 4.7% 4.3% 60 54 60 51 48 NEFAZ 2.7% 3.9% 41 MAN 3.7% 3.8% Scania 5.1% 3.7% Mercedes 3.5% 2.9% Volvo 2.5% 2.5% Other 18.9% 12.4% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Avtostat, PwC analysis Oil price forecast, USD per barrel1

The truck market includes medium-capacity (3.5 to 1 The oil price forecast was based on the Bloomberg consensus forecast. 16 tonnes) and large-capacity (over 16 tonnes) . Source: Avtostat, PwC analysis Based on 8M 2016 results, the truck market Key factors affecting the truck market decreased by 3% year on year and amounted to 31,000 units. Pent-up demand from prior periods will stimulate the truck market. Out of 10 major truck makes, the following saw a year-on-year increase in sales: KAMAZ (17%), GAZ (4%), NEFAZ (39%) and MAN (0.3%). So far in 2016, the Russian Government has allocated RUB 3 billion to Total sales of trucks are expected to decrease by 6% subsidise purchases of vehicles running on natural-gas-based fuel. The to 48,000 units in 2016. number of car gas stations is expected to increase by 2018.

The unstable economic situation as well as non-tax levies still have a deterrent effect on the truck market.

PwC 14 Demand from public sector entities combined with government support measures will help ensure sales stability in the segment

The bus segment comprises transport vehicles Bus sales forecast, ‘000 units designated for the transportation of passengers and 17.1 Forecast period luggage, which have eight passenger seats, apart from 16.4 15.2 the driver’s seat, except for transport vehicles that fall into the category of light commercial vehicles. 12.4 -6% 63 66 11.2 62 10.3 56 PAZ, the segment leader, lost significant market 9.0 9.1 9.1 9.6 share in 8M 2016 but increased its sales in absolute 8.5 8.1 terms. Several of the other top 10 busmakers, including LIAZ, MAZ and Iveco, managed to increase both sales and market share, while NEFAZ and demonstrated negative sales and market share 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 trends.

According to the marketing agency Russian Oil price forecast, USD per barrel1 Automotive Market Research (NAPI), the shares of mid-size and super big-size increased by 15% 1 The oil price forecast was based on the Bloomberg consensus forecast. and 0.2%, respectively, versus the same period in Source: Avtostat, PwC analysis 2015. At the same time, the shares of small and big buses decreased by 12% and 4%, respectively. Key factors affecting the bus market Total sales of buses are expected to decrease by 6% to Allocation of RUB 3 billion for the federal school bus fleet renovation 8,500 units in 2016. programme in Russia’s regions.

In the run-up to the 2018 World Cup, Russian cities hosting football matches as part of the event will need to expand their bus fleets.

Cancelling import duties for components for vehicles with natural gas engines allows for reduce costs for production of buses with such components.

PwC 15 Conclusions

PwC Conclusions

• Although the pace of decline in Russia’s economy has begun to slow in 2016, the Consumer Confidence Index remains at low levels. • For 8M 2016, new passenger car sales in Russia declined by 16% in quantitative terms. In rouble terms, the market shrank by 1%, whereas in US dollar terms it shrank by 16% due to currency fluctuations. • Monthly sales of new passenger cars in January-August 2016 did not exceed 120,000 units. • Makes that launched new and updated models in the crossover and SUV segments, which are still most attractive for Russian consumers, became more successful in relative terms. • Total production of passenger cars in Russia fell 13.5% in 8M 2016 even as some automakers succeeded in boosting production volumes. Production of domestic passenger car makes fell more than the production of foreign makes (21% versus 11%). • Given automakers’ current plans to boost production capacities in Russia and current market projections, production is expected to reach 1.7 million units and capacity utilisation to grow to 52% by 2020. • It is expected that based on the results of 2016 the new passenger car market will reach 1.27 million units and starting from 2017, the market will experience a gradual recovery. According to the forecast, sales of new passenger cars may reach 2 million units by 2020, barring any external shocks. • Sales of light commercial vehicles for 8M 2016 decreased by 7% year on year to 54,600 units. Based on the results for 2016, total sales are expected to decrease by 4% to 88,000 units; however, starting from 2017 a market recovery is projected. Government support programmes have partially compensated for the dampening effect that economic factors have had on the light commercial vehicle segment • Based on 8M 2016 results, the truck market shrunk by 3% year on year and amounted to 31,000 units. Total sales are expected to decrease based on 2016 results by 6% to 48,000 units. Despite lower sales in 2016, pent-up demand should have a positive impact on the truck market in the near future. • Total sales in the bus segment are expected to decrease based on 2016 results by 6% to 8,500 units. Demand from public sector entities combined with government support measures will help ensure sales stability in the bus segment.

PwC 17 Contacts

Oleg Malyshev Partner Advisory Deals Leader

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

PwC Russia Press Service: Petr Yudin Tel.: +7 (495) 967 6000, ext. 5018 email: [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 presentation 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 presentation. Unless otherwise provided for by the Russian legislation, 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 presentation or for any decision based on it.

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