China is capturing the Russian car market: it already accounts for more than half of passenger car sales, and import growth continues — it has increased by a third since the beginning of the year. In total, Chinese concerns expect to sell 10 times more cars in Russia than in 2021. At the same time, they are in no hurry to invest in factories and revive the Russian car industry, limiting themselves to large-unit assembly. As a result, the dependence of the Russian auto industry on China is worsening, and cars, contrary to logic, are only getting more expensive. This is not what the government was counting on, and now it is trying to fix everything with strict regulation. But even coercive measures are unlikely to force companies from China to seriously invest in the country — the leader in the number of sanctions.

The decision of Western automakers to leave Russia after the start of a full-scale war in Ukraine came as a surprise to the Russian authorities. The government moved to confrontation with foreign business, and a three-step salvation path was developed for the domestic auto industry. At the first stage, it was decided to buy out foreign assets, which went to state structures or Russian companies for next to nothing. At the second stage, it was decided to find partners in “friendly” China who would help resume production based on their brands in exchange for broad opportunities for Chinese business in the Russian market. At the third stage, it was decided to switch to a full cycle of car production with deep localization of key components and substitution of Chinese imports with Russian production.

All this was supposed to lead to “technological sovereignty” and increase the share of Russian cars from 40% in 2022 to 83% in 2035. Two years later, it became obvious that it was possible to restart and stabilize the industry, but only at the cost of total Sinicization. This dooms the auto industry to slow and comprehensive degradation.

Pre-war successes and the 2012 record

For two decades until February 2022, the auto industry in Russia developed according to a scenario typical for industrial countries. The Russian government set localization requirements and allocated billions of rubles in subsidies for the purchase of local cars, compensating for the low interest rate on car loans and leasing. State support was given primarily to the largest Russian enterprises, but was also available to many Western concerns - customs benefits for the import of components for participants in "industrial assembly", cash compensation for part of the costs of business development. As a result, in the 2010s, the share of imported cars on the Russian market decreased fourfold, domestic production increased, world-class factories and large industrial clusters appeared.

In 2012, the Russian car market reached a record size, exceeding 2.92 million cars sold. At that time, manufacturers were confident that this was long-term and sustainable growth.

But the record was not broken, the car market began a protracted decline, aggravated by the Crimean sanctions, the pandemic and the war.

Nevertheless, the decline in sales did not directly affect production. The concerns continued to work and invest money. Almost all of them took on new obligations, concluding ten-year special investment contracts (SPIC) with the Russian government. In total, 14 SPICs were signed in the auto industry, including five fairly large ones.

But before the war, the companies managed to fulfill only part of their obligations. Thus, Daimler opened a full-cycle automobile plant in the Moscow region and, together with KAMAZ, launched the production of truck cabins in Naberezhnye Chelny. Mazda localized engine production in Vladivostok.

Nothing similar was done in Russia by Chinese automakers at that time, with the exception of the Great Wall concern (Haval brand), which built a car plant in the Tula region and signed a SPIC in 2020 to localize key auto components.

China is quickly capturing the market without obligations, while cars have not become more affordable for Russians

The departure of Western concerns after February 2022 stopped factories, and sanctions caused difficulties with the supply of components. The largest decline in the auto industry in post-Soviet history followed.

That year, only 450 thousand passenger cars were produced in Russia - a collapse of almost 70% compared to the previous year. Sales of new passenger cars fell by almost 60%.

Chinese companies began to be actively invited to replace Western companies. They became partners of the new Russian owners, gaining access to production sites, dealerships and other assets.

Over the past two years, it has become clear that the Chinese have their own views on the Russian market, which diverge from the objectives of the Russian government.

Firstly, mass export of their cars and rapid capture of the Russian market. The results are tangible:

There was a rapid increase in the share of Chinese cars in sales from 9% in 2021 to 61% in 2023. In the first half of 2024, Chinese passenger cars accounted for 59% in the mass segment and 80% in the premium segment in terms of the number of units sold. China is also the leader in terms of the share of sales revenue: Chinese brands accounted for more than 80% in 2023, while two Chinese concerns (Chery and Haval) overtook AvtoVAZ in this indicator. Six Chinese brands entered the top 10 companies in terms of sales, while in 2021, not a single company from China was represented on this list. Russian dealers complain about such a massive import of "Chinese": the market in its current state cannot digest so much.

Chery and Haval overtook AvtoVAZ in revenue in Russia

High profit. Seven major Chinese automakers received a record 79 billion rubles in profit by the end of 2022, which is comparable to the total profit of the "Germans" and "Koreans" for 2021. High sales rates of Chinese cars in 2023 allowed them to earn more than 63 billion rubles in total profit.

Export record. Thanks to the Russian market, China has become the largest car exporter in the world and for the first time surpassed the United States in the number of cars sold. In 2024, the Chinese intend to sell almost 1.2 million cars to Russians, with optimistic forecasts for market volumes by the end of the year - 1.4 million cars. About 430 thousand cars were sold in six months with total sales on the Russian market - 713 thousand cars.

Thanks to the Russian market, China has overtaken the United States and become the world's largest car exporter

Secondly, business development in Russia is taking place with minimal investment. Chinese automakers act as partners, but help restart production only based on a simple technology for large-unit assembly of their cars and under a different brand. As a result:

At the former Renault car plant in Moscow, they started assembling Chinese JAC cars under the Moskvich brand and planned to produce more than 50 thousand cars in 2023 and more than 100 thousand cars in 2024. In fact, the plant produced only 31 thousand cars last year and reduced the production plan for the current year by 70% (to 27 thousand cars), and set prices for them twice as high as the Chinese original. Subsequently, at the end of 2023, Moskvich reported a net loss of 8.6 billion rubles and a total debt that increased to 42.6 billion rubles.

At the former Nissan car plant in St. Petersburg, which came into the possession of AvtoVAZ, they first launched the assembly of the Lada X-Cross 5 model, the main difference between which and the car of the Chinese company FAW (the Bestune T77 model) was the logo. However, after AvtoVAZ was included in the US sanctions list, FAW suspended the partnership and stopped assembling this model. Later, the plant was transferred to state ownership. Now a new attempt has been made to organize assembly, but in partnership with the Chinese concern Chery and under a different brand - Xcite. At the former Volkswagen car plant in Kaluga, which had been idle for more than two years, car production was resumed in the summer of 2024. However, there is still no official information about the industrial partner of the new owner, the models produced and the level of their localization, the planned production volumes and the project parameters. The industry is rumouring the assembly of test batches of Chinese Chery Tiggo 7 Pro Max crossovers at the plant, as well as a potential partnership with China's GAC Motor.

GAZ Group's facilities in Nizhny Novgorod, where Skoda cars were produced before the war, are preparing to launch the assembly of Volga cars, the prototypes of which were cars from the Chinese auto concern Changan. The line was recently presented to the Russian Prime Minister, who was surprised that "even the steering wheel is Chinese".

A similar picture is at other plants of former Western auto concerns. Chinese auto concerns do not become the owners of these assets, do not enter into SPICs and do not undertake investment obligations to the Russian government.

China has discovered a capacious market for the sale of car kits (components in the form of large units, assemblies and parts produced in China and ready for car assembly) under promises to help with their localization, which no one is in a hurry to implement. As a result, car production in the country is recovering, but largely due to assembled rather than localized cars, with low levels of added value and unclear prospects.

Automobile production in Russia is being restored using assembled, not localized, cars

Such a restoration is one of the manifestations of "growth without improvement" that does not affect the real well-being of Russians. Cars have not become more affordable for the population. The average price of a new car exceeded 3 million rubles in 2024, and during the entire war, new and used cars have become 1.5 times more expensive.

Friendship with an eye on sanctions

Chinese businesses are acting very cautiously, carefully looking at the risks of falling under sanctions. They became significantly higher after almost all major Russian automakers (AvtoVAZ, Moskvich, Sollers, KAMAZ, GAZ Group) were included in the list of the most severe type of American sanctions (SDN list). Companies from third countries cooperating with them may fall under secondary sanctions, which are already in effect.

There are three types of industrial strategies of Chinese business in Russia:

Participation in production localization projects and exit from them when sanctions risks arise. This strategy is followed, for example, by the already mentioned FAW or the Weichai engine-building corporation, which stopped supplying gas engines to KAMAZ plants in Naberezhnye Chelny and Neftekamsk after KAMAZ was included in the SDN list.

Participation in production localization projects in partnership only with persons not included in the sanctions lists. This is how Chery behaves, which is a partner of the new owners of the Hyundai plants in St. Petersburg, Volkswagen in Kaluga and Daimler in the Moscow region, which are not subject to sanctions, or a number of Chinese brands (Kaiyi, BAIC, SWM, Dongfeng, etc.), which assemble their cars at the facilities of the unsanctioned Avtotor in Kaliningrad. This is convenient: when a partner is included in the sanctions lists, the Chinese side can suspend the supply of assembly kits, as well as the partnership in general, without any significant losses for itself.

Participation in localization projects with the assumption of sanctions risks. This is followed by JAC, which is a partner of three Russian automakers included in the SDN list: Moskvich, KAMAZ and Sollers, and Haval, which is negotiating with the sanctioned AvtoVAZ on the supply of engines for Lada cars. But depending on the seriousness of the US Treasury Department's intentions to introduce secondary sanctions, the determination of these automakers may diminish.

Added to this are difficulties with payments for the supply of cars, components and spare parts, which puts Russia in the category of an important sales market, but not an object for investment and long-term business development. After all, the Chinese have something to lose in global markets: Chery, for example, annually sells about 500 thousand cars outside of China (in 2023, the company's exports reached 937 thousand), FAW - at least 400 thousand, Dongfeng - about 250 thousand.

Chinese manufacturers are deeply integrated into global supply chains, provided by financial transactions worth billions of dollars, which may become impossible if these companies fall under secondary sanctions.

How the Kremlin responds

Chinese expansion has become so large-scale that the Kremlin is ready to take radical measures to protect the market. For example, the government is preparing for an unprecedented annual indexation of the recycling fee paid in Russia for each car, but partially or fully compensated for locally produced cars (the level of compensation depends on the level of their localization). According to the draft document, this fee will grow to 6.3 million rubles for some models by 2030. The government expects that this effectively prohibitive duty will encourage Chinese businesses to develop production in Russia.

Such hopes would not be in vain if Russia were not involved in the war, were not the world leader in the number of sanctions imposed, and did not deal with one large player, trade dependence on which has reached dangerous proportions.

And since these conditions will remain in force for a long time, the authorities should prepare for the Russian auto industry to get used to simple assembly operations, the dominance of imported Chinese cars on the market, an investment famine in factories, and rising car prices.