AT A SHARP TURN

One of the consequences of the devastating earthquake that shook Japan in March this year was that many automobile companies and related industries ground to a standstill. Japanese automobile giants traditionally occupied leading positions globally in car production and supplied nearly one hundred foreign factories with spare parts and accessories. The failure of this well-established chain cut sales and pushed up prices for Japanese carmakers' products, and this negative trend has also affected our country.

Sharp decline

The top three Japanese automakers cut their production of cars worldwide in March after the most devastating earthquake in Japanese history. According to Bloomberg, the sharpest decline in production was recorded by the largest, Toyota, Motor Corp. Its production fell by 30 per cent in March - to 542,470 cars, while production in Japan itself slumped by 62.7 per cent. Exports fell by a third - to 107,750 - last month. It seems that Toyota will not recover before December this year. It is not surprising that the company which, until recently, led the world in production and sales has now fallen to third place - behind General Motors and Volkswagen.

Production has fallen at other automakers, too. For example, in March production at the second largest company, the Honda Motor Co, fell by 19 per cent - to 282,250 vehicles worldwide, while the assembly of Honda cars in Japan itself plummeted by 62.9 per cent, which is its lowest level since November 1997. The third most important concern, the Nissan Motor Co., also cut production at its Japanese plants: by 52 per cent - to 47,590 cars.

The problems of the Japanese automobile industry have affected producers around the world. For example, General Motors was forced to suspend work at its Louisiana plant, because it did not have enough spare parts from Japan. In turn, Nissan plans to suspend car assembly in St. Petersburg from 30 May because of the shortage of spare parts.

While Japanese automakers are making every effort to restore the trading chain broken by the disaster, the main trend in global car markets is to replace Japanese products with cars from neighbouring countries, primarily from China and South Korea. "Hyundai and Kia will benefit most from the problems of the Japanese automotive industry. Hyundai will focus on the higher end of the market, while Kia has every opportunity to increase sales in the budget sector - together they could catch up with Japanese competitors in terms of production and sales," says Suh Sung-moon, an analyst with Korea Investment & Securities. However, the Koreans and the Chinese will need time to increase production volumes, adjust supply logistics and slot into the vacant niches in markets. In the meantime, the world experiences a shortage of Japanese cars and a trend of rising prices for the most popular models.

Negative impact

Unfortunately, these negative processes have partly affected Azerbaijan as well. According to the Baku Toyota Centre, all the cars in their showrooms have been sold. Centre managers say that in the best case scenario new Toyota cars will arrive in four months' time, and at higher prices. According to preliminary estimates, the cost of a Toyota Prado will rise from 33,000 to 37,000 manats. Other models will be available on request, but Camry and Avalon prices are not yet known. We should note that the rising prices of Toyota cars have also affected the second-hand market.

Mitsubishi cars are also more expensive. At the Diamond Motors-Mitsubishi Motors Centre, the price of the four-wheel drive Mitsubishi Pajero has increased from 33,000 to 35,500, while the popular Mitsubishi Lancer has gone up from 21,500 to 23,500 manats.

At the same time, no significant changes in price have been observed at the Subaru and Nissan centres, which is due to the large number of cars previously imported. This reserve allows distributors to hold prices and maintain stable sales.

In the light of the changes that have occurred, one wonders whether the problems of the Japanese car industry can affect the structure and price parameters of the Azerbaijani car market as a whole. The car market here has actually been in decline for three years, since the beginning of the global economic crisis. The slump in demand reduced the import of new cars into Azerbaijan somewhat, while the second-hand market is also at a standstill. Some experts see market saturation as another reason for the reduced demand.

This is also evident when comparing statistical data from the last pre-crisis years, characterized by rapid motorization in the country. For example, in 2006 the country imported 70,031 cars, and as many - 70,963 - the following year. 2008 holds the twenty-year record - 89,044 cars were imported. Even in 2009, a very difficult time for the country's economy, imports only fell to 63,427 vehicles, that is, a third down on the previous, pre-crisis, year. Alas, last year's demand for cars dropped by almost half of the level of two years ago.

The situation is most clearly reflected in State Customs Committee (SCC) statistics, according to which, during the past year our country imported 51,816 cars, worth more than $451 million. That is to say, compared with 2009, last year's imports declined by more than 11,600 cars, although monetary parity was retained - the value of cars imported in 2009 was $455 million.

Like demand, like supply...

The decline in sales of luxury cars has pushed car dealers to increase supplies in the budget sector.

However, despite the slight fall in the average value of imported new vehicles, retail prices in most of the country's leading dealers remained virtually unchanged throughout the year.

There are many reasons why the cost of a new car in the showroom is not coming down, and the primary reason is reduced demand. When there is significant demand, dealers import more cars, getting bonuses from producers - this leaves scope for price discounts. Further, when sales fall, the cost of maintaining showrooms, service centres and staff increases, and this needs to be compensated somehow.

Apart from the general reasons, the decline in the import of cars into Azerbaijan is due to the government's decision to impose the Euro-2 ecological standard from 1 July 2010; this regulates fuel quality and the content of harmful substances in the exhaust gases of imported cars. These changes significantly affected the balance of power in the second-hand market. "As early as February, the market experienced a tangible decline in prices due to increased sales of old cars, triggered by an excessive increase in supply in anticipation of new environmental regulations," commented Ramil Osmanov, expert from the NGO Property Market Participants. Following the adoption of the new standards, the supply of old cars increased dramatically in relation to demand and, moreover, by November there was a clear decline in market activity.

Liquidity in used vehicles also reached its lowest level in three years. This led to reduced interest in used cars as a form of property, increasing the degree of investment risk. The trend continued in the first quarter of this year; according to the NGO Property Market Participants; supply on Baku's car market fell by 4.1 per cent in March.

However, some experts believe that this year may see a revival of the car market, citing a number of reasons. In particular, according to the SCC, imports of automobiles and spare parts rose considerably between January and March this year. 4,880 new cars worth $42.36 million were imported, which is 97.03 per cent higher than the figure for the same period last year. This testifies to a pick-up in consumer demand. One more positive factor is the work of the SCC to fight corruption and ensure transparency in customs procedures. "All customs payments for imported cars are made through POS terminals and plastic cards. By May of this year, work on the introduction of the 'single window' principle for the registration of vehicles will also be completed and, as a result, car documents and registration numbers will be issued at the same place. A new complex for the motor customs department of the SCC is being built for this purpose," said Aydin Aliyev, head of the State Customs Committee.

Thus, the introduction of the 'single window' principle will significantly simplify the process of registering vehicles; this will increase imports and, accordingly, lower average market prices.