How KZ automotive is going through the crisis

To this and other questions responses Farrukh Makhmudov, Chairman of the Board of Directors of “Autodom” Group of Companies

Photo by PwC Kazakhstan
Farrukh Makhmudov.

- How would you assess the current condition of the Kazakhstani automotive industry?

- I would say – quite difficult. Devaluation of the Russian ruble led to massive disparities in retail prices which in turn resulted in a huge inflow of cars from Russia, and in the end, it adversely affected the activities of official importers and their chains in Kazakhstan. Devaluation in our country resulted in the decrease of purchasing power and accordingly the market froze. I think that some companies can even stop their activities and leave the market, for instance, Suzuki (The interviewee talks about distributor, who left the Kazakhstani market. Suzuki dealers continue their work in Kazakhstan. - F).

- What is the impact of the situation with Russian ruble on your business?

- Open borders and free movement of goods with Russia are actually good, but devaluation of the ruble and unwillingness of our Russian colleagues to adjust retail prices has had a dramatic impact on our business. The situation is favorable for Russian companies’ sales in Kazakhstan and detrimental for local firms’ sales. Thus, the share of official sales has substantially fallen. It is clear, that the situation is temporary, but we have had a lot to learn from it. The main lesson was – how to survive.

Our dealer centers are ready for the crisis situations. Based on our experience, customer loyalty does not only depend on prices, but also on the quality of services, and we started an intensive work in this field. It should be noted that the quality of our service can be differentiated from our competitors. The evidence is that the growth of income from post-sales services fully covers our operational expenses, despite the crisis. The right structure, policy, motivation, team, risk assessment and a clear understanding of business play a significant role in our ability to achieve this goal.

- How did your buyers react to the price disparity with Russia?

- Their reaction was drastic – stronger in some regions than in others. Our dealer centers situated closer to Russian borders affected the most. It was hard to explain to our customers, that significant price differences were not due to our margins but were caused by USD/KZT and USD/RUB exchange rates disparity. Moreover, in order to keep market share gained throughout the years, Russian dealers fixed the retail prices in rubles, despite their currency devaluation.

- What are the prospects for Toyota distributors to equate the retail prices for Russian and Kazakhstani dealerships?

- At this moment, the car acquisition price for us is higher, compared to Russia. First of all, it is explained by the fact that the volume of our market is much lower, which makes us less attractive for them.  However, it is important for every distributor to understand that from now on Kazakhstan and Russia (as well as Belarus, Armenia and Kyrgyzstan) shall be considered as a single territory. The difference in VAT between our countries should have had positive effect for Kazakhstan, but due to significant disparity between the car acquisition prices for Kazakhstan and Russia it negates the entire effect.

We regularly negotiate the price issue with Toyota Motor Kazakhstan (TMKZ) – the official distributor of Toyota in Kazakhstan. The President of TMKZ, Etsuo Hashino, is currently going through difficult negotiations with Toyota Motor Europe on the provision of additional funds for Kazakhstani dealers in order to equate prices with Russian ones.

I hope that the situation will stabilize in the nearest future and the prices in the Eurasian area will become more similar.

- How has the crisis affected your future regional development plans?

- Before starting something, we conduct a forecast. Initially our business plan was for 5 years horizon, now it is for 7-10 years. We understand that these are two difficult years ahead of us and it is during this period that we will have to engage in these projects. At the end of the day, we are more of an investment company and building showrooms is our investment project.

- How would you assess the development prospects of commercial vehicles in Kazakhstan?

- Our vision of the future prospects of this segment is positive. Currently we are involved in Hino project (subdivision of Toyota), which is to be launched in the nearest future, despite crisis.

There is a term of “total cost of ownership” in the automotive business which shows how much total car related expenses will be incurred in the coming 3-5 years. It appears that those who purchase a low-quality commercial vehicle, end up spending more money on the post-sale maintenance comparing to those who initially invest in a good vehicle. We are confident in our commercial vehicles project, as well as we are confident in the quality of Toyota commercial vehicles. 

- What do you think about licensing all dealerships?

- As one of the official dealer, I should support the licensing of dealerships, which protects my personal interests. However, I have never seen such practice anywhere in the world, hence I do not really understand this topic. Since we have free economic relations, this basically becomes a problem of manufacturers and their distributors.

Licensing is a temporary measure. I do not understand why will we need this additional bureaucracy with licensing when the situation in the market stabilizes and prices will be aligned? Just for the small volume of cars that is imported by grey dealers? Even after this regulation takes place, they will find new ways to import cars. Grey dealers can easily diversify. They are very flexible and can quickly respond to the market changes compared to the official dealers, because it is a temporary business for them.

- How would the WTO accession affect your business?

- Kazakhstan has not yet become a full member of WTO, so it is difficult to assess how it has affected our business. In general, WTO accession  is beneficial for our business, while it is opposite for the automotive industry overall, as the customs duties are going to decrease. Although, I think that our government will find other protective measures, such as utilization fees. What is more important WTO accession is better for our customers.

- In your opinion, why is trade-in not developed in Kazakhstan?

- We have just started to develop this business. Given that unofficial markets such as bazaars are quite developed in our country it was hard to develop used car platforms.  People were afraid to buy used cars from a dealer center even if it was actually cheaper than in a bazaar.

Now the situation is changing, and peoples’ trust in purchasing used cars from official dealers has increased. Here they can buy a certified car with a guarantee, which is not available in a bazaar.

- How do you assess operational leasing market for passenger cars?

- There is a dynamic upward trend in the market and we are also trying to capture it.

We are planning to roll out the program on a full scale in around 2017-2018. One of these retail products includes services like insurance, towing, GPS monitoring and road assistance in the monthly fee. For instance, for a monthly fee of USD 300, the client can lease the car without worrying about car maintenance, taxation, insurance, etc. In three years, the client can come to us and exchange his current vehicle for a newer one. This product makes the client’s life easier as he doesn’t need to worry about the funding method: loans or payment in full by cash, as well as servicing, insurance, and, lastly the sale of a car to buy a new one, i.e. the client does not need any additional investments.

Regarding the leasing of commercial vehicles and passenger cars, the main issue with leasing companies is that they do not know how to sell the vehicle at the end of the leasing contract.

- What is your opinion on that?

- We are ready to buy these vehicles, if it suits the structure of our enterprises. It is the same with trade-in – we arrange the contracts with large customers for buying out their fleet, which, for instance, consists of 50-100 vehicles, at the end of the leasing contract. Later, we sell them through the trade-in program.

We already have such agreements with our clients. Why are they doing it? They want to make sure that they will not be left with any unsold vehicles at the end. The buy-out is guaranteed by the contract and valuation is based on the market value.

- What are the important parameters for the client, when it comes to choosing the car model in a current situation?

- The main factor is the available budget. You can notice that Lada is ranked #1 in car sales. The first factor defining demand is price. However, we do not rely on prices, because our clients value reliability. The clients that get used to reliability will always come back.

Liquidity is also an important factor. For instance, if you buy a Toyota Camry for USD 26 000, you would sell it for USD 20 000 in a year, compared to other brands whose price depreciates by 50-60%. This factor has a strong influence on customer’s decision. Sales leaders amongst the Toyota brand are Camry, Corolla, Prado and Land Cruiser.

- Thank you for the interview!

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Advisory Director, PricewaterhouseCoopers Tax & Advisory LLP

 

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