By Hyunjoo Jin and Samuel Shen
SEOUL/SHANGHAI (Reuters) - Asian carmakers who bet big on expanding in Russia face a test of their commitment to a market they once hoped was set to surpass Germany's by size as the rouble plunges and auto sales skid.
Manufacturers including Japan's Nissan Motor Co (T:7201), China's Great Wall Motor Co (HK:2333) (SS:601633) and South Korea's Hyundai Motor (KS:005380) and its Kia Motors (KS:000270) affiliate have been stepping up investment in Russia in recent years and are gaining market share there at the expense of European and U.S. rivals.
But the rouble's sharp fall this week on tumbling oil prices, which brought its losses against the dollar this year to about 50 percent, leaves their near-term prospects there looking decidedly bleak.
Late on Tuesday, China's Geely Automobile Holdings Ltd (HK:0175), whose parent Zhejiang Geely Holding Group [GEELY.UL] owns Swedish brand Volvo, warned that its profit this year would roughly be halved, partly as a result of foreign exchange losses in Russia.
Geely, whose Russian sales have slumped 49 percent in the first 11 months of 2014, said it was raising prices in the country and had begun "to restructure its Russian operations with an aim to reduce its financial risks".
Even before the rouble's recent slide, Russian car sales were forecast to drop 15 percent this year and a further 4 percent next year, according to Hyundai and Kia's in-house think tank, which expects overall Russian sales this year of 2.37 million, compared with 3.25 million in Germany.
SCALING UP
That slowdown comes just as some producers are scaling up.
In August, Great Wall Motor Co, China's biggest SUV maker, broke ground on a 3.2 billion yuan (329 million pounds) car factory in Russia, its first, which will have annual capacity of 150,000 cars.
The company said Tuesday that those plans remain intact despite the market turmoil.
Last week, Japan's Nissan Motor Co (T:7201) began producing its X-Trail model at its plant in St. Petersburg, where it is doubling capacity to 100,000 vehicles per year in a bid to increase the share of locally made cars it sells in Russia to 90 percent by 2016, from 70 percent now.
While they can take comfort from the fact the rouble's fall gives comparative advantage to carmakers with higher levels of localised production and content, a tottering Russian economy hurts the entire industry.
France's Renault (PA:RENA), which is the biggest player in the market through its control of top local carmaker Autovaz (MM:AVAZ), benefits from having the highest share of rouble-denominated costs for the cars it produces there, at 90 percent, followed by the Hyundai/Kia pairing, at 68 percent, according to a Nomura report.
Japanese manufacturers generally import a bigger share of their cars into Russia, the report said, although the weaker yen has helped Nissan and Toyota Motor Corp (T:7203) post sales gains this year in Russia.
Kia, which along with Hyundai holds a combined 15 percent of the Russian car market, good for second place, has been diverting some of the cars it usually imports to Russia from plants in Slovakia and South Korea to other markets to avoid selling them at a loss, a company official said.
"We are trying to minimise losses by redirecting vehicles to other European countries," the Kia official said, declining to be identified or give further details.
To offset the pain of a tumbling rouble, Kia also raised prices on key models in both the second and third quarters, according to a company official.
Kia declined to comment.
Hyundai invested $500 million to build a plant near St. Petersburg in 2010 that it shares with Kia and is running at full speed. It said Tuesday it has no plans to expand capacity in the country for now.
Hyundai and Kia's Russia sales fell 2 percent and 4 percent, respectively from January through November, compared with the market's 12 percent decline.
"The more we sell in Russia, the more we lose money there," another Kia official told Reuters recently on condition of anonymity because he was not authorised to speak to the media.
(Additional reporting by Mari Saito in TOKYO and Joonhee Yu in SEOUL; Editing by Tony Munroe and Rachel Armstrong)