What else might be done? We see two ways to overcome the industry’s current challenges: through exports and through innovation.
Exports. The first solution is for manufacturers to make an aggressive push into exporting. Some countries in the Middle East, such as Iran (which buys about 1 million automobiles a year) and Saudi Arabia (600,000 autos), have vehicle markets that are still relatively open and growing. Collectively, the African countries of Egypt, Algeria, Nigeria, and Mozambique account for roughly 800,000 cars a year. Moreover, European countries could be export targets for some car models produced in Russia. For example, the Kia Rio, a budget model built in Russia, could be sold in European markets such as the UK, Italy, Spain, and France (all of which are close enough to offer low delivery costs from Russia).
Hyundai/Kia is a good model for how to expand into exports. The Korean OEM has increased its annual sales from 2.3 million vehicles in 2000 to more than 8 million in 2015 (a compound annual growth rate of 9% during that period, which is an industry record). Hyundai Motor Company started with a strong position in its home country: a market share in Korea of 70% to 75% (due in large part to protectionist trade barriers), very high profitability, and a highly efficient network of suppliers. From that base, the company launched a strategic expansion into foreign markets.
Hyundai began with strong measures to improve quality. In the early 1990s, the company’s quality ranking was among the worst for any major manufacturer, but now it consistently ranks among the best worldwide. Hyundai also sought to develop new designs quickly, introducing seven entirely new models in just two years. It put forward the right value proposition for high-growth markets—entering the US market aggressively in the late 1980s as a low-cost brand, and entering fast-growing markets such as Brazil, Russia, India, and China in the 2000s. And it established a highly efficient network of suppliers and invested in its brand.
Innovation. The second approach to boosting the Russian auto industry is for the government to develop R&D centers in promising new technologies. Certain areas, such as electric powertrains (which would likely require an investment of billions of dollars and 15-plus years to get caught up), might be challenging because of their complexity and risk. But other areas, including advanced driver-assistance systems (ADAS) and digital connected-car technologies, are more attractive options.
Russia already has a foundation in place, with about 200 patents and seven startups focusing specifically on connected-car technology. One company, Remoto, designs apps that enable drivers to control features of the car remotely through their smartphones. Another, Movizor, is working on a system to track the location of vehicles. A third, Kot, offers automobile locator and safety systems. Russian companies are even more active in the mobility services marketplace, where 15 startups have collectively attracted more than $100 million in venture funding.