CONFESSIONS OF VLADIVOSTOK USED CAR SALESMEN

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SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON RS
SUBJECT: CONFESSIONS OF VLADIVOSTOK USED CAR SALESMEN

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1. Summary. The famous Vladivostok marketplace for used
foreign cars called Zelyoniy Ugol ("Green Corner") has been
experiencing a serious downturn in recent months. New customs
tariffs, banks' reluctance to provide consumer credit for car
purchases, and the slumping value of the ruble have conspired to
slow business at the market to a near standstill. The market's
downturn is an example of how the economic slowdown has taken
its toll on the regional economy. The auto dealers Econ Officer
and FSN spoke to are pessimistic about their future and stated
they would pack up shop if they could only get rid of their
inventory.

One-Bustling Market Now Dormant
--------------


2. With its 10,000-car lot, Zelyoniy Ugol is still the largest
open-air used car market in Russia, and has provided steady
income for thousands of entrepreneurs. It has been in existence
since 1993, and has evolved from a wild and chaotic market in
early 1990s into a well-organized car-dealer community with
paved roads, fenced sales lots, ancillary auto-related
businesses, and its own website. The market has been popular
and well-known throughout Russia, and has served as the main
source of automobiles for the Russian Far East and Siberia for
over a decade.


3. Dealers there were very talkative to Consulate staff,
voicing complaints about the precipitous decline in business
since December. One dealer mentioned that in the best times he
was selling at least 10 cars per month, mainly to car dealers
from Siberia who would then ship them or arrange for drivers to
take them back. Nowadays, there are no purchasers from the
interior, and local visitors are few and few between. In fact,
by noon the Consulate staff members were the only visitors the
dealer had seen that day. One dealer complained that he and his
partners have not sold a single car since December. Another
mentioned that only 900 cars have been delivered to Vladivostok
during the first four months of the year, though previously
thousands cars arrived every month.


4. Many of the businesses to support the trade of cars to
Siberia -- shipping companies, drivers, and even roadside
eateries on the way to Baikal and points further away, have gone
out of business. All of the dealers Econ Officer talked to
waxed nostalgic for the prosperous years, when Siberian car
dealers arrived in Vladivostok, mostly via the two daily flights
from Novosibirsk. Shoppers arrived from as far as western
Russia and the Caucasus republics, making such long trips to
purchase used Japanese car at one third the price of cars
assembled in Russia.

Three Main Reasons for Slow-Down
--------------


5. The main reason for the lack of customers is that banks are
now unwilling to lend money to consumers for automobile
purchases. Secondly, car importers buy most of their stock in
Japan and pay in yen. The weakening ruble coupled with the
continued strength of the yen have made the purchase of the cars
much more expensive for the dealers. Japanese-brand, U.S.-made
cars are the second most popular at the market, but the weak
ruble has made not only their purchase, but also shipping more
expensive.


6. The recent import duty increase has also made foreign
vehicles more expensive. Though this issue has taken center
stage and has proved a catalyst for recent anti-government
demonstrations in the Russian Far East, the dealers at Zelyoniy
Ugol did not place it at the top of their complaint list. Most
of the unsold cars on their lots were imported before the
increase. Even so, all dealers spoke critically about Putin's
protection measures for Russian auto producers and the Kremlin's
indifference to the needs of RFE residents, and were convinced
that the measures will not spur consumption of domestic
vehicles. Only better quality at lower prices will help, they
said.


7. All of the dealers were skeptical that the 'temporary'
tariff increase will be phased out in October as officially
stated. A Consulate contact, however, said the tariff likely
will be discontinued, since the resultant drop in imports has
cost the federal budget USD one billion in lost revenue.

Ban on Right-Hand Drive to Mean More US Cars?
--------------


8. Some car dealers voiced concern about a move away from
increased tariffs on Japanese cars to an outright ban on
right-hand drive vehicles, though others are in a better
position for such a change. Some have already turned to the
U.S. market, purchasing used, U.S.-produced Japanese models.
One dealer stated that he purchases high end cars on eBay and

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ships them to Vladivostok via Los Angeles in 40-foot containers.
Each container costs USD 6,000 to ship, and can hold four
sedans or three SUVs. Though the shipping cost is considerably
higher than the USD 300 cost per car from Japan, the dealer
explained that left-hand drive vehicles are unusual in
Vladivostok and fetch a premium. This dealer used the example
of Lexus SUVs to illustrate how the increased customs fees have
hurt his business. The first Lexus imported in December just
before the increase required a 12,000 USD customs payment, while
a similar vehicle shipped a mere month later incurred a USD
24,000 customs fee.

Around Tariffs -- Subsidies and 'Konstruktors'
-------------- -


9. To offset the increased cost of Japanese imports, the
federal government has introduced two programs. One is to
subsidize consumer loans for Russian-built automobiles, and the
other is to subsidize the shipping of such cars from their
factories in western Russia to the Far East. Potential buyers,
however, refuse to buy Russian-made cars -- even those of
foreign brands -- because of their perceived lack of quality and
higher price. In fact, according to the Rossiskaya Gazeta, no
one in Primorye has yet applied for the privileged car loan, and
very few cars have been shipped by railroad under the subsidy.
The paper reports that the few people who bought Russian Ladas
recently did so with the intention to use them for hunting in
forests or for fishing in remote areas, not as their everyday
vehicle.


10. One way around the tariffs was to assemble 'konstruktors.'
Dealers purchased used cars in Japan, cut the bodies in two, and
import them as 'spare parts' with a much lower tariff. The car
would then be welded together in Russia and resold. This
business had been popular until authorities slapped a 5,000 Euro
charge on car bodies, whole or in pieces.

Comment
--------------


11. Though the increase in tariffs on imported autos has had a
dramatic effect on the used car market in the Russian Far East,
the difficultly for consumers to get financing has been an even
larger blow. It is too early to tell if the measures will
increase sales for Russian-produced cars, since the economic
crisis has likely taken a toll on sales on all cars, domestic or
foreign. In any case, the current tariffs will be in effect
until at least October. By that time, according to many of the
dealers at the market, most of the sellers will likely have left
the business.
ARMBRUSTER