Whither St. Petersburg, the "Russian Detroit"?

I have been to Detroit and it's not a particularly scenic place. In part, its run-down condition reflects the waning fortunes of America's automotive industry. Not only are automotive sales in America down overall, but those of GM, Ford, and Chrysler more so. However, it may surprise some of you that high gas prices have not dented car sales the world over. Russia, of all places, is a booming automotive market. Aside from the ranks of the nouveau riche who owe their fortunes to Russia's burgeoning exports during a time of rising commodity prices, decades of repression has made Russians clamor for the joys of the open road--although the traffic from Russia to St. Petersburg is often quite bad.

From about zilch in 1991, Russia has become Europe's largest car market, surpassing Germany in the first half of 2008. How times change! Russia is expected to be the world's third largest market by 2012, surpassed only by the US and China. Interestingly, Russia's second city, the rather more scenic St. Petersburg (which I'd love to visit again), is angling to become the "Russian Detroit." Let me rephrase that--Detroit during its heyday. St. Petersburg offers inexpensive but skilled labor, healthy tax breaks, and nearness to major markets--it sounds like a page from the development state playbook. What may set this case apart, though, is a generally healthy level of domestic demand.

Which of the world's automakers have set up shop in St. Petersburg, you ask? So far, try GM, Ford, Toyota. (GM and Ford cars made in Europe are actually quite good compared to their US brethren, though that's another story.) Meanwhile, Nissan and Hyundai will soon open plants in St. Petersburg. Even better yet, with gas prices in Russia comparatively low, hulking monstrosities automakers have trouble selling elsewhere are much in demand in Russia:

For automakers like Ford, GM, Toyota and Nissan, which are struggling to boost sales in saturated home markets, emerging economies represent great opportunities at a challenging time. In Russia, many first-time buyers are strolling into dealerships. While there are 800 vehicles per 1,000 inhabitants in the United States, there are 190 vehicles for every 1,000 Russians.

Unlike customers in the other BRICs -- the acronym for the paramount emerging markets of Brazil, Russia, India and China -- Russians go for the kind of big vehicles that generate big profits for automakers. "It's a big country with long straight roads and big-sized people, so it has many of the preferences of the American market," said Shinichi Sasaki, a senior managing director at Toyota who has worked in Europe.

The only cloud I see on the horizon for St. Petersburg's burgeoning automotive industry--and it's a pretty big one--is foreign investor aversion to Russia given the country's increasing belligerence towards the West. However, it should not be so easy to expropriate facilities producing branded finished goods as opposed to unbranded commodities such as oil and gas, making carmaking a relatively safer endeavor. Though unsurprisingly biased towards the optimistic side, this Russian commentator owning a large auto dealer network suggests the auto boom is here to stay:

In our globalized economy, it's hard not to feel discouraged as we witness one crisis after another on Wall Street. But here in Russia, it's not all doom and gloom. Far from it -- at least as far as the booming Russian market for foreign cars is concerned.

Given the massive problems crippling Detroit, why does Russia's auto market continue to thrive? There are several reasons.

First, a declining stock market primarily affects only those Russians who actively invest in the stock market. Not only is this a very small group -- about 3 percent -- but it is a wealthy group. And its members typically work out of two pockets: one for investing and one for spending. Strong 2008 sales -- up 43 percent from last year -- suggest that this second pocket is still pretty full.

Second, the credit crunch has not had much effect on Russian consumers. Most buyers of foreign cars don't take out loans for their purchases, and the few who do aren't usually put off by occasional hikes in interest rates. Simply put, a 1 percent increase here or there in interest rates doesn't have the same effect in Russia as it does in other markets. In fact, as interest rates have consistently risen over recent years, the percentage of customers buying cars on credit has stayed roughly the same.

Third, the global economic downturn that has shrunk demand for cars in the United States and other developed markets has increased the number and styles of cars available to Russian consumers. Slower sales in developed markets have led to more cars being available for Russia as the number of cars in stock has increased significantly.

For automakers, 2008 is more likely to go down as the year Russia emerged as Europe's largest car market than as the year the world suffered a liquidity crisis.

While much has been made of the distinction between Russian and foreign cars, globalization is unquestionably blurring the lines between national brands. All over Russia, foreign companies are establishing factories and joint ventures, while Russian automakers are increasingly using technologies imported from abroad. Within a few years, consumers will almost certainly look more to the quality and class of a car than to its "nationality."

Whatever happens on Wall Street in the foreseeable future, the Russian auto market should continue to grow. The key to capitalizing on that growth, however, will consist of accurately gauging and effectively responding to another kind of growth -- the growth in the sophistication of Russian consumers.