The Russian auto market will overcome its current slump and overtake Germany to become the largest in Europe – and the fifth biggest globally – by 2020 as car ownership increases, a Boston Consulting Group study said.

Western carmakers including General Motors, Volkswagen, Ford Motor and Renault have invested heavily in Russia on expectations that the market will grow as a rising middle class buy cars for the first time or upgrade aging models.

The study predicts that Russia can follow Brazil and China in transforming itself from a market targeted by foreign exporters, to one with a dominant share of locally-produced vehicles.

Boston Consulting forecasts that Russia’s auto market will grow by an average annual rate of 6 percent through 2020, when it will reach annual sales volume of 4.4 million, up from 2.9 million in 2012.

That would make it the fifth largest in the world by sales, after China, the United States, India and Brazil. Last year, Russia ranked seventh in the world after China, the U.S, Japan, Brazil, Germany and India. In 2009 it was tenth largest.

However, Boston Consulting warned that that Russia still needs to overcome serious hurdles, including volatility in demand, a weak supplier base and high logistics.

Study co-author Nikolaus Lang, said annual vehicle sales in Russia will grow if the government creates a stable market environment and “if the industry professionalizes along the whole value chain, from developing cars to producing components to manufacturing the cars and selling them.”

Russia was on course to become Europe’s biggest market before the 2008 financial crisis hit demand and the availability of credit.

Market slowdown

Boston Consulting’s forecast for Russia is a bullish prognosis compared with recent figures from the Association of European Business (AEB), which tracks the Russian car market. Data from the AEB showed car sales have fallen for four straight months as Russia’s $2.1 trillion economy falters.

The AEB recently cut its full-year sales forecast to 2.8 million units, which would be a fall of 5 percent, but said it expects government plans to subsidize credit-backed vehicle purchases will boost sales for the remainder of the year.

Boston Consulting said its prediction takes into account the current weakening of the market. Lang said Russia’s underlying strengths remain, including strong demand stemming from low car-ownership, good access to car finance and a willingness of local entrepreneurs to open car dealerships.

The study said both local and international carmakers were expanding, calculating total production capacity would rise to about 3.3 million vehicles per year by 2016, up from 2.3 million in 2012.

But, in a sign that many of Russia’s less technologically advanced producers are struggling to compete, last year for the first time more cars made by localized international producers were sold in Russia than either imports or domestic brands.

Supplier weakness

Weak local suppliers remain a big issue compared with other developing markets such as China, Brazil and India, Lang told Automotive News Europe.

Automakers said they are able to work with just 10 percent of Russian suppliers immediately, compared with 80 percent in Brazil and 40 percent to 50 percent in China, Lang said.

Russian suppliers are typically small scale and have inadequate quality levels for latest-generation vehicles. Only 20 percent of domestic parts manufacturers were likely to survive by 2016, the study said.

While Russia will remain a net importer of vehicles in 2020, exports will also increase, Boston Consulting forecast, as during downswings companies are likely to tap exports from Russia to send to other markets, mainly former Soviet bloc countries.

There are only 290 cars per 1,000 Russians versus 560 in western Europe and many of those vehicles are old, while a decade of strong growth driven by Russia’s mineral wealth is slowly empowering a greater chunk of its population.

“Fundamentally it is an attractive market in terms of cars per thousand inhabitants and therefore we are bullish long-term – but that doesn’t mean that every year will be a good year,” said Ewald Kreid, a study co-author.

The study projects that emerging markets overall will account for 65 percent of global car sales in 2020, more than double the 28 percent for which they accounted in 2000.