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Latvian Auto Market Takes a Dive

  • 2009-08-13
  • By Olga James

GRIDLOCK: With car sales plunging, shoppers have their choice to pick from in crowded lots.

RIGA - Auto industry analysts all around the world are worried that carmakers, as well as car dealers, will be facing a massive sales drop in the fourth quarter of 2009 - some expect global car sales to plunge by as much as 12 percent, year-on-year. Against this backdrop, Latvian car salesmen are bracing themselves for the challenging operational environment of intensifying competition for a dwindling customer base amid decreasing profit margins.

When the experts at Business Monitor International, the international agency providing analysis, ratings and forecasts to 130 countries worldwide, set their eyes on  the Latvian car industry, the picture they saw was not a pretty one. According to the Latvia Automotive Report that came out in 2009, the car market in the country remains gloomy, clearly indicating that inaccessibility of financing and economic hardships are keeping buyers away from the purchase of big ticket items such as cars.

In 2005, Latvians were the third most active car buyers in the European Union. The industry experienced double-digit growth, both in 2006 and 2007, when the robustly developing economy was sustaining customer confidence and spurring the sales. Towards the beginning of 2008 much tighter credit conditions as well as negative effects of the global economic crisis considerably dampened consumer sentiment. Consistent with the overall macroeconomic environment in the country in the first two quarters of 2009, the situation in the Latvian car market deteriorated even further, causing it to shrink by a record margin after the years of rapid growth.

Gross domestic product in the Baltic republic contracted by 18 percent in the first quarter of this year, with second quarter output down by 19.6 percent. Luxury items such as cars are said to have high income elasticity of demand, which means that as people become poorer, they will spend less and less for the goods that are not absolutely essential for functioning of the household. The real estate bubble that exploded with a bang and left many families in jeopardy of losing their house, the government budget cuts that slashed the salaries of the public sector employees, and the massive redundancies in the private sector have clearly discouraged a fair share of Latvians from experiencing that 'new car smell' of a freshly purchased auto.

Car sales in Latvia have dropped precipitously so far in 2009, as the market outlook remains equally dim for family vehicles as well as high-end cars. Business news daily Dienas Bizness reports that only 1,636 new cars have been registered this year, which is a staggering 80 percent decrease compared to the same period in 2008. From January to April of 2009, Toyota sold 81.5 percent fewer new cars, year-on-year Skoda's sales dropped by 88.6 percent, Renault's sales fell by 83.3 percent and Hyundai's sales declined by 82.7 percent. Dodge tops the unlucky list with a massive 97.1 percent drop in sales, closely followed by Chrysler with a 95.9 percent decrease year-on-year. I

n the high-end auto category, Ferrari posted a drop of 100 percent, year-on-year, Mercedes Benz's sales decreased by 66.9 percent and Bentley sales plummeted by 66.7 percent, year on year.  Ironically, Hummer, the leader in the category, sold 1 vehicle in 2008, and 19 in 2009, thus managing to achieve a 1,800 percent growth rate, while the runner-up, Alfa Romeo, sold 1 car in 2008, and 2 cars in 2009, posting a 100 percent increase in sales.
Clearly, the car sellers' profit margins are just not there, currently. Owners of the car dealerships have switched to 'survival mode' and are forced to come up with more and more creative ways to attract the customers' attention.

Citroen is offering clients to bring their old cars to the dealership in exchange for considerable rebates for the brand-new Citroens; BMW is advertising a 0 percent first installment for eligible clients, while Toyota is selling spare parts at a considerable discount and is lowering car maintenance fees. There is an increasing number of car dealers that focus on developing auto-body repairs, parts, and service as alternative profit centers that help to push the profit margin further up.       

The focus has shifted from 'make as much as you can' to 'survive for as long as you can.'  Prior to the crisis, auto sales points in Latvia were often short of cars to satisfy customer demand. This year the supply is exceeding demand by far. The need to increase liquidity is putting car salesmen under pressure to dispose of current inventory in the near-immobile market conditions and straining their relationship with car manufacturers. In this economic environment, Business Monitor International believes that the dealerships will further focus on maintaining competitive pricing and limiting costs to meet their annual financial targets.

Dealerships specializing in selling used cars are also experiencing extremely difficult times. With car values in Latvia falling at an incredible pace and fleets of discounted brand-new models available at the dealerships, it is difficult for the used cars salesmen to convince the customer that their asking price is consistent with the ongoing market situation. As Ugis Vitols, the president of the Latvian Used Car Salesmen association commented, "The market for used cars in Latvia has been frozen for some time. We are barely able to sell in a month what we used to sell in a day during the good times." Dealerships reached for this story say that with overall car sales down they are being extremely client-sensitive in regards to their product portfolio. The supply is being driven by the customers' needs as never before, and the dealers that report decent customer traffic are also saying that one of their core priorities is keeping a competitive inventory of vehicles on their lots.

Overall, it is important to mention the significant shift that is taking place in customer behavior in Latvia. In the current market environment buyers are increasingly making long-term decisions. Customers no longer perceive a car as something they bought for short-term use, but rather as an investment that they make and which should retain value for many years to come. Thus, such criteria as average fuel economy, predicted reliability and cargo capacity become as important as purchase price and design. The consumers feel empowered by the variety of choices available to them and will be as demanding to the used vehicle as to the new one.

In the adjoining market segment, leasing companies are also finding themselves in hot water. In the past, the majority of cars in Latvia have been purchased through leasing. According to the president of Latvian Authorized Car Dealer Association Aksels Rubulis, a large proportion of those cars are under operating leasing agreements, where after a four year period car dealers have to buy back the vehicle, at 40 percent of its initial value. "In the current market development, the value of these cars is not higher than 20 percent of the sum, but the money still has to be paid on the basis of these agreements. Such contracts had been signed by dealers in serious need of increasing sales, but the loss-making leases might now be the last straw which will sink struggling businesses," says Rubulis in the asset finance-oriented journal Leasing Life.

However, as often happens in life, one man's loss is another man's gain. Even though the sector is facing the prospects of flat sales in 2010, there are businesses that are able to change their operational models in order to adapt to the challenging market environment. An increasing number of dealers are turning to the banks with an offer to take over the vehicles of certain models that have been returned to the financial institutions in default of the leasing agreements. Such vehicles are often in excellent condition and can be resold at a very attractive price. This motivates dealerships to work on establishing direct cooperation with banks and leasing companies that, in turn, are more willing to sit down at the negotiation table and discuss a relationship reshape.