LONG READ: The first thing the emerging middle classes of New Europe do is buy a better car

LONG READ: The first thing the emerging middle classes of New Europe do is buy a better car
Nothing says middle class more than a nice car, and middle classes are emerging in New Europe. But looking at car ownership in the region highlights the differences between each country.
By bne IntelliNews May 14, 2021

A middle class is emerging in New Europe but to get a handle on how far the process has gone and what the differences are between each country bne IntelliNews took a look at the icon of middle-class status: car ownership.  

Taking the EU as a benchmark, on average there is one car for every two people in the EU, or 500 cars per thousand people, according to data from the European Automobile Manufacturers Association (ACEA).  

The fleet is young too, with the newest cars found in Luxembourg (6.5 years old) and Austria (8.3 years), against an average life of 11.5 years in the EU as a whole.  

Unsurprisingly, despite the progress made in the last three decades there is still a big gap between the new EU members that joined in 2003, and the countries of Eastern Europe are even further behind.  

The oldest cars in the EU can be found in the new member states of Lithuania, Estonia and Romania, which all have an average age of at least 16 years – double the age of those in Luxembourg.  

The very oldest cars are in Eastern Europe – almost twice as old as the average car age in the EU heartland – but the averages are deceptive, as they hide big differences as a class structure emerges in most of the countries of the region.  

In Russia the average age of a car was 12.5 years in 2020, according to Autostat data, but drilling into the ages of different brands and big differences emerge. Foreign brand vehicles in Russia have an average age of 9.9 years, with Chinese-made cars the youngest (5 years), Korean (6.4), American (8.3), while the traditional Lada has an average age of 15.1 years and the other domestic brands' average is 21.1 years.  

Clearly the growing Russian middle class is buying new fancy foreign cars, whereas the working masses are sticking to the Russian brands and hanging onto them twice as long. The same phenomenon can be seen in most of the other markets in Eastern Europe and Eurasia, although the differences are probably the most extreme in Russia, which remains by far the most prosperous market in the Commonwealth of Independent States (CIS) with the biggest middle class.  

 

Car ownership per thousand Emerging Europe

Central Europe behind but catching up  

The surprise in Central Europe is some countries such as Estonia and Poland have more cars per thousand people than even the biggest markets like Germany and France. The reason is simply that citizens of those countries buy new cars less often.  

In general the new members of the EU that joined in 2003 have an average of 480 cars per thousand people, which is very close to the EU average. However, including the accession states into the EU-wide average drags down that EU number. The average number of cars owned by just the “old Europe” portion of the EU is 550.  

And the richer the country, the more cars they have. The very densest car ownership is in Luxembourg with 694 cars per thousand, or two cars for every three people.  

What should surprise is that Estonia has one of the best levels of car ownership in the whole of the EU with 600 cars per 1,000 people. Poland (642) is also better than almost all the old Europe member states on this score too. Both outperform the likes of Germany (575), France (570) and almost Italy (655). But the cars in Estonia and Poland are a lot older than those found in their richer neighbours 16.7 and 14.1 years old respectively, compared to the EU-wide average of 11.2 and the Old Europe average of just under 10 years.  

Germany has slightly fewer cars per thousand than Estonia, but with an average age of just 9.6 years the German fleet is one of the youngest on the Continent, and France with 10.2 years is not far behind.  

Italy is a curiosity, as it beats Germany in terms of the per capita car count but with an average age of 11.4 years the fleet is noticeably older that those in the core of Europe, as it seems the Italians hang on to their old bangers for longer.  

But looking over the numbers and the real stand-out success is Slovenia, which has both ownership and age numbers on a par with, or better, than most of the Old European countries.  

As bne IntelliNews reported, Slovenia is Emerging Europe’s secret success story. Per capita income has grown consistently as it has closed the gap with its EU big brothers over the last three decades and begun to overtake many of them more recently. With an average of 598 cars per thousand on the road it is better than both Germany and France. And with an average age of 11.7 years it is close to the EU mean and on a par with Italy, but ahead of the likes of Finland, Portugal and Spain, and way ahead of Greece. (Everyone in the EU is way ahead of Greece, where there are 489 cars per thousand that are an average of 16 years old.)

Eastern Europe’s ageing fleet

Travel a little further east to Russia, Belarus and Ukraine and the slower pace of reforms is easily visible in the car ownership statistics. The gap widens further – with some surprises.  

All three countries rank near the bottom of the ACEA table on the cars per thousand, with Belarus having the most (320), then Russia (303) and finally Ukraine (215), which is second from bottom in the surveyed region, with only Turkey (152) having fewer cars per 1,000.  

Russia does much better on the age of vehicles score. While Russians have fewer cars than their European peers per capita, with an average age of 12.5 years the fleet is surprisingly young and only one year older than the EU average.  

Part of the explanation is that Russia has, and has always had, a large and well-developed automotive sector, producing models that are priced for the local market. During the boom years of the noughties the first big-ticket item Russians bought (after a new telly of course) was a new car.  

The number of passenger cars on the road in Russia has risen from 26mn ten years ago to 54mn today. In 2005, there were just 180 cars per 1,000 people in Russia, but that figure has almost doubled to 303 today. The explosion of new cars meant Moscow’s traffic jams became legendary, where a previous a 20-minute trip down the road could take hours.  

Five of the world’s biggest car markets have set up plants in Russia to cater to the local market; it used to be six but Ford withdrew two years ago for global strategic reasons.  

Between 2000 and 2008 the car market was driven by 10% per annum pay rises as the Kremlin was following a policy of closing the gap between public and private sector pay. The increasingly sophisticated banking sector and the appearance of captive banks owned by the carmakers to finance purchases catalysed its growth. The result was the Ford Focus quickly becoming the best selling model, followed by Korea’s Daewoo car, which is assembled in a factory in Uzbekistan.

In the wake of the global financial crisis, the government stepped in to support the carmakers with a “cash-for-clunkers” scheme, which drove new car sales up to around 2.6mn sales a year in 2010-2014.  

The economic recession in 2015 led to a drop in car sales to around 1.6mn and just 1.2mn new cars were sold in 2016, but by 2018 and 2019 sales were back to around 1.7mn a year before falling again to 1.5mn in 2020 – another crisis year.  

The global financial crisis changed the make-up of the market as would-be car owners traded down. The Ford Focus fell out of fashion and the Lada once again became the most popular purchase. The maker Avtovaz had upgraded the traditional “Zhiguli” model to the Kalina, which was good enough for the masses to buy. Today Avtovaz continues to be the biggest seller of cars and holds a 25% market share.  

Ukraine again scores at the very bottom of the list with only 215 cars per thousand with an average age of 19.5, making the fleet by far the oldest in Europe.  

With a population of 43mn people Ukraine should be a very big car market indeed, but thanks to it having amongst the lowest incomes per capita the number of new car sales remains tiny. Registrations of new passenger cars in Ukraine in January-March this year increased by 4% to a little more than 9,000 units, according to Ukrautoprom, whereas the monthly sales in Russia with five times the population is fifteen times higher at around 150,000 units sold a month. In total, Ukrainians bought and registered 85,500 new passenger cars in 2020, which is 3% less than in 2019.  

Ukraine does have a car plant called Eurocar in the west of the country that was set up by German investors, but the entire country's output is under 20,000 cars a year. The major source of cars is imports of second-hand cars from Western Europe.  

In contrast to the sale of 9,000 new cars in the first two months of this year Ukrainians imported 53,000 used cars, which was 4.4 times more than in the first two months a year ago.  

A theme that will come up again and again amongst the poorer countries is there is currently a boom in second-hand German diesel engine cars flowing from the German markets as a total ban on the “dirty diesel engine” looms. The Eastern European markets are still years away from even considering such a measure. In 2020, used car imports into Ukraine totalled 353,400 against the new car imports of 85,500, with the largest part coming from Germany.  

 

There are no statistics on the average age of a car in Belarus but at 320 cars per thousand, car ownership is the highest of all three Eastern European states.  

Unlike Ukraine, Belarus has a well developed automotive industry, but it is heavily geared towards the production of the MAZ giant mining trucks, the legendary Minsk tractor and buses. But more recently Belarus has got into bed with its Chinese friends and set up the BelGee car plant near Borisov in the Minsk region to produce passenger saloons, and is now planning to make electric cars. The company was aiming to sell up to 7,000 cars in Belarus in 2019, up from 3,700 in 2018, but has not announced results during the pandemic. BelGee launched its new unit in 2017 with an annual output capacity of up to 60,000 Geely cars, but the plant must be running below capacity at the moment. Russia’s automotive sector was also running at just under 50% of capacity too in 2019, and is unlikely to have grown in the meantime.  

Southeast Europe old banger

Low spending power in Southeast Europe means carmakers in the region have mainly relied on exports, while local people overwhelmingly buy imported second-hand cars, though as incomes gradually increase purchases of new cars within the region are growing too.  

The region's largest economy of Romania in particular has seen an increase in new car registrations, albeit set back by the coronacrisis in 2020. However, its car fleet is one of the oldest in the EU with an average age of 16 years.  

Albania has been doing well in the last few years as its economy begins its catch-up growth. There has been a sudden explosion in car ownership during the transition years after four decades during which no one except high-ranking Communist Party officials were given vehicles.

Despite being one of the poorest countries in Europe, Albanians have a taste for luxury vehicles. The Mercedes-Benz brand accounts for a whopping 31% of all passenger cars in the country, according to a 2020 report from statistics office Instat. Other popular makes are Volkswagen (17% of the total), Ford (10%), Opel (6%) and Audi (5%), although almost all of these were bought second-hand in neighbouring countries and driven home.  

Over two thirds (64.4%) of Albania’s passenger car fleet was produced between 2000 and 2021, with 7.4% even older. Only 28.2% of the passenger cars on Albania’s roads were manufactured between 2011 and 2019.

The Instat survey doesn’t specify the share of cars bought second hand, but in line with the rest of Southeast Europe, a large share was imported from Germany and other mainly West European countries. Three quarters (73.3%) of passenger cars in Albania run on diesel, reflecting booming export of second-hand diesel cars to Central and Eastern Europe.  

Car ownership per thousand in Turkey has been growing steadily but still runs well below European levels: in the last decade the number of cars per thousand has increased from 102 to 157 in 2020, but that leaves Turkey right at the bottom of the rankings in European terms.  

Combined sales of passenger car sales grew nearly 58% year on year to 610,000 units in 2020 to 773,000 units, according to the trade group ODD, which predicts that sales will expand to 800,000 this year.  

Unlike its peers in Southeast Europe, Turkey has a healthy primary market for car sales thanks to the hirer incomes. In 2020 as a whole, Renault was the market leader in the passenger car segment at 98,900 units sold, followed by Fiat at 92,000 and Volkswagen at 53,000. Toyota and Peugeot were the fourth and fifth best-selling brands at 39,000 and 37,000 units respectively. Together these five brands account for 40% of the whole market.  

All in all, imports still account for two thirds of cars sold in the country, accounting for 427,028 sales out of the total 610,109 total passenger car sales in 2020.  

The Turkish car market has actually been helped by the recent currency crisis as the population buy cars as store of wealth to protect their savings from the deep devaluation that the currency has suffered from this year, a phenomenon also widely seen in Eastern Europe, where currencies are just as unstable.  

But currency volatility has been particular bad in Turkey over the last year and vehicle sales jumped this March, since another bout of depreciation was clearly on the cards that would add to the prices the following month. Since the begin of the pandemic there has been a sharp rise in car sales, but 2020 sales are still running behind the record level set in 2017 during the previous currency crisis.  

Using cars as a form of savings helps propel the second-hand market, which is in event bigger than the primary market and is dominated by sales of VWs, which are considered to hold their value very well on the secondary market. In 2020, 304,780 VW cars changed hands online, according for 15% of all second-hand sales, followed by Renault at 266,000 and Ford at 208,000.

The large second-hand market means the car fleet is ageing slowly, with the average age increasing from 12.8 in 2019 to 13.2 last year.  

Eurasia on square one  

Iran does not log car sales, as the process of buying vehicles in the Islamic Republic is often convoluted and long waiting times are often the case due to the nature of the protected market. However, trends can be gleaned from the domestic industry’s production numbers.  

Iran has three main carmakers, Iran Khodro Company (IKCO), SAIPA Group and Pars Khodro, that manufactured 900,714 vehicles in 2020, according to the Ministry of Industry, Mining and Trade. High tariffs on imported cars, which can run to more than 100% for luxury models, help to defend the domestic industry.

French automakers Peugeot and Citroen, now Stelantis (previously Groupe PSA) have had a long presence in Iran dating back to before the 1979 revolution, with Citroen creating SAIPA as a joint venture. US sanctions on Iran, however, have hammered European car companies’ presence in Iran, with all foreign groups having pulled out in 2018 after US President Donald Trump levied new sanctions on the auto industry. US President Joe Biden has suggested that he is open to removing sanctions on the auto industry as part of the negotiations over restarting the stalled Joint Comprehensive Plan of Action (JCPOA) nuclear deal.  

IKCO produced 480,338 cars, enjoying a growth of 21.97% y/y. SAIPA assembled 317,321 cars, suffering a 12.67% y/y decline. Pars Khodro’s output fell to 103,055 cars, down 2.84% y/y.

Locally made Peugeot models traditionally dominate car assembly in Iran. Some 346,575 such cars were assembled in the Islamic Republic during 2020. IKCO, meanwhile, turned out 55,220 own-brand Samand sedans.

As in previous years, the two most popular models are the low-cost Tiba and old Pride produced by SAIPA, at 236,939 and 50,413 units respectively.

For the current Persian calendar year (that started on March 21, 2021), production is estimated to reach 1.2mn units, according to the CODAL.ir website, which releases data on behalf of the ministry.

There are no average age statics but the distribution of ages that is available show the fleet in Iran is relatively young, with two thirds of the fleet less than 10 years old, and 8.1% are more than 15 years old.  

The most popular brands in Iran are not popular out of choice but of necessity. The closed nature of the market means that the leading models are increasing out of date but the public has little choice. The Peugeot 206 and 405 models have been perpetually rehashed and increasingly indigenised, but more modern versions are simply not available.  

As elsewhere, Iranians are increasingly opting for crossover SUVs and foreign firms have mopped up this business, with the Chinese leading the way. South Korean brands Kia and Hyundai have entered the market with their luxury sedans and SUVs, while Japan’s Nissan and Toyota have also made inroads.  

Kazakhstan’s car market was hard hit by the coronacrisis after sales plunged 12.3% in 2020 due to the coronacrisis. But the market is growing on the back of an emerging middle class, up 19% in 2019 and 25% expansion in 2018.  

Most cars sold in Kazakhstan are used cars sold between Kazakh car owners as well as by car dealers, who buy cars abroad (mostly from Russia). The decline in car registrations in 2020 was likely driven by lockdowns put in place to curb the spread of the coronavirus (COVID-19).

Kazakhs tend to buy most of their cars from abroad usually from Russia but Kazakhstan’s domestic production has been growing robustly, up every year for the last four years. The number of domestically produced vehicles rose to 77,000 units in 2020, up from 50,000 units in 2019. The figure is set to rise further to over 100,000 units in the coming years. Among new cars (not used cars) sold on the Kazakh market in 2020, 73% were manufactured in Kazakhstan out of a total of 93,000 cars sold. Forecasts for 2021 show an increase of that figure to 80%.

With a nominal per capita income of $9,827 estimated for 2021 Kazakhs are more than five times better off than Uzbeks, with a nominal capital income of $1,832 in 2019, and hence the country is the most significant car market in Central Asia.  

The profile of the market is similar to Russia, with the Lada dominating with a 22% market share in 2019 followed by Toyota (20%) and Hyundai (20%).

Car ownership is a decent 250 per thousand and again, while there is no average figure, a third of the fleet is under 10 years old with 12.8% under three years, but the majority of Kazakh cars on the road are old bangers.

 

There are lots of new cars on the road in the Uzbek capital of Tashkent. They are all white. And they are all the same brand. Chevrolet.  

The cars are white because the locals believe it better reflects the summer heat. And they are all the same brand as the local car plant accounts for over 90% of the sales.  

As by far the most populous country in Central Asia with over 30mn young citizens and one of the few rapidly expanding populations in the Former Soviet Union (FSU), Uzbekistan should be a carmaker's wet dream. What is holding it back is the country's very low income levels, as despite the hype surrounding Uzbek President Shavkat Mirziyoyev’s relentless reform drive, the country is still only stepping off square one.  

Sales of passenger cars and LCVs rose by 24% to 167,600 vehicles in Uzbekistan in 2019 – double the amount in neighbouring Kazakhstan. The locally assembled Chevrolet cars are the most popular brand (94%) and Russia’s Lada sales grew for the second straight year (4% in 2019, up from 2% in 2018).

Uzbekistan had no automotive sector in Soviet times, but in 1996 former president Islam Karimov did a deal with Korea’s Daewoo to set up a plant in Andijan in a very rare success in attracting a major foreign investor.  

In addition to supplying cars for the domestic market the UzDaewoo became a major export product due to its western design and cheap prices, and became the second most popular car in Russia in the noughties. Uzbekistan increased the export of cars in monetary terms by 30.4% to $208.7mn in 2020, while imports were worth $475.1mn.

The plant has been through several changes since then. Daewoo went bust and was taken over by US carmaker GM in 2008 that changed production to Chevrolet. Due to high import tariffs and the extreme distances to other factories in other production centres the local Chevrolet monopolises the local market and consumes two thirds of the factory’s 225,000 annual capacity. The tie-up with GM came to an end in in July 2019 and the company is now called simply UzAuto Motors.  

 

But the penetration remains low. Uzbekistan has 80 cars per thousand, and while there are no statistics on the average age, walking about in Tashkent gives the impression that the domestically produced fleet appears to be young.  

After the two big markets of Uzbekistan and Kazakhstan the other three Stans all have small populations existing on even lower incomes.  

Turkmenistan has one of the smallest car markets in the world. Only 426 privately owned cars were sold in all of 2015, according to an independent foreign-based opposition-run news website Chronicles of Turkmenistan. And that was before the country started to slide into an economic crisis that has seen bread and flour supplies run short, starting in 2016. What car sales there were have likely declined even further since then.  

One notable example of bizarre car ownership troubles in Turkmenistan is the total absence of black cars in the capital Ashgabat. By order of the president, Gurbanguly Berdimuhamedov, all cars in the city must be white. Lately, this decreed colour scheme was extended to include vehicle detailings, such as grilles. Officials say white is required because it better reflects sunlight, reducing city heat, but it appears such strictures are more wrapped up in the autocrat's need to project his personality cult.

Tajikistan is also run like a Soviet state and also improvised. The last reported number on car ownership per capita was 38 cars per 1,000 in 2007. As of 2017, Tajikistan had 436,444 registered vehicles (including non-passenger vehicles), according to the official figures, and due to high petrol prices, more than half of Tajikistan’s motor vehicles have been converted to run on liquefied gas.

Kyrgyzstan is slightly better off, as prior to its decision to join the Russia-led Eurasia Economic Union (EEU) it acted as a second-hand market for the whole region, importing cars from abroad and reselling them in markets to traders from neighbouring countries, especially Kazakhstan. However, EEU membership has closed the border to imports from outside the economic union due to the high tariffs.  

Car registrations in Kyrgyzstan stood at 440,011 units in 2019, up from 344,550 in 2018, and the total number of registered vehicles in Kyrgyzstan amounted to 1.3mn in 2019. Over 93% of registered cars in Kyrgyzstan were over 15 years old as of December 2020, according to the official figures.

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