THE RUSSIAN CAR MARKET

Consumer Preferences Development Forecast

CONTENTSINTRODUCTION

STEP 1: RUSSIAN CAR MARKET OVERVIEW

STEP 2: CONSUMER SEGMENTS

STEP 3: MARKET NICHES

STEP 4. NEW CAR SALES POTENTIAL EVALUATION

SUMMARY

AVTOVAZ LEADING RUSSIAN AUTOMOTIVE PRODUCER

LADA brand owner

Annual production – 900,000 cars, sales in Russia – 680,000 cars

LADA market share in Russia – 29% (new car sales)

LADA market share in B class – 30%, in C* class – 45%

Outside Russia assembly lines are established in CIS and Africa

AVTOVAZ share in Russian GDP – about 1%

*According to the Russian statistics all LADA models are included into C class, except LADA Kalina (B class) and Niva (SUV)

The aim – to develop the new car with the highest sales potential.

CONSUMER PREFERENCES STUDY GENERAL APPROACH

We have reached the target with 4 STEPS:

Market analysis. Distinguishing high potential classes and price segments.

Exploration of consumer preferences. Selecting the most promising consumer segments.

Revelation of market niches. Developing the most prospective car concept.

Estimation new car sales potential.

STEP 1

RUSSIAN CAR MARKET OVERVIEW

0%

10%

20%

1996 2000 2004 2008 2012%

%

%

%

1996 2001 2006 2011 2016

RUSSIAN CAR MARKET OVERVIEW MARKET FORECAST

BASIC ASSUMPTIONS

Driving factors – consumers’ income rise and credit purchase availability:

The disposable annual income growth rates decrease from 10 to 5%.

Portion of credit purchases in the total volume of new cars sales grows – from 35 to 60%.

Share of credit purchase, %

20%

10%

0%2000 2007 2016

Disposable income growth rates, %

60%

30%

0%

1996 20162007Source: RF Ministry for Economic Development and TradeSource: www.rbc.ru ,

Forecast: Marketing and Investment Projects (MIP)

Market boom: > 80% increase in sales by 2012:

10-25% from 2008-2012

5-9% from 2013-2017

Maximum growth in middle price segment ($10-15 ths).

14%17%29%

36%35%

29%

30%

24%

16%

14%

13%

13%

13%

10%

6%

RUSSIAN CAR MARKET OVERVIEW NEW CAR SALES FORECAST

2002 2007 2012 2017

>$30 ths

$20-30 ths

$15-20

ths

$10-15 ths

<$10

ths

0.9 MIO

2,4

MIO

4,3

MIO

5,4

MIO

2%3%5%4%3% 6%

12%13%

15%

10%8%

7%

56%

57%

53%

11%

14%

16%

3%

2%

2%

RUSSIAN CAR MARKET OVERVIEW NEW CAR SALES FORECAST

2002 2007 2012 2017

0.9 MIO

2,4

MIO

4,3

MIO

5,4

MIOThe consumer demand is concentrated on C* class models.

The demand expands into B and D classes.

OTHER

АB

С

DSUVMPV

*According to the Russian statistics all LADA models are included into C class, except LADA Kalina (B class) and Niva (SUV)

RUSSIAUK

SPAIN

GERMANY

FRANCE

INDIA

BRAZIL

ITALY

JAPANCHINAUSA

161519002065

44004700

2400

1075

24052490

3150

7565NEW CAR SALES 2007, THOUSAND CARS

RUSSIAN CAR MARKET OVERVIEW RUSSIAN MARKET IN A GLOBAL CONTEXT

RU

SSIA

CH

INA

IND

IA

ITA

LY

BR

AZI

L

FRA

NC

E

UK

SP

AIN

US

A

JAP

AN

GE

RM

AN

YBRIC-countries demonstrate the highest growth rates. NEW CAR SALES GROWTH RATE, 2007/2006-9%

27%

35%

26%

22%

7%

3%3%

-1%-2%

-5%

RUSSIAN CAR MARKET OVERVIEW RISK ASSESSMENT

Car sales growth might decrease as a result of roads capacity

limitations

Transportation Development Program involves substantial

investments in road construction

Economy growth might decrease in case of

oil and gas price reduction

According to the experts forecasts energy resources

prices will stay at a high level

IMPACT

PROBABILITY Low Low

High Middle

Low LowTOTAL RISK

INFRASTRUCTURE RISKSECONOMIC RISKS

Though the level of economic risks’ impact on the market is high, probability of their occurrence is minor

RUSSIAN CAR MARKET OVERVIEW ALTERNATIVE FORECASTS

MIP uses estimations for car population in use

and excludes

out-of-use vehicles (30%).

Therefore, we expect later market saturation and a higher potential.

619575520

505425

410

300270245

350

145LA

TVIA

BU

LGA

RIA

PO

LAN

D

GR

EE

CE

UK

SP

AIN

GE

RM

AN

Y

FRA

NC

E

PO

RTU

GA

L

AU

STR

ALI

A

RU

SSIA

CAR DENSITY, cars per 1000 ppl

20142010

400

200

145

290

100

200

300

400

2007

NEW CAR SALES, MIO cars

FOREIGN EXPERTS

MIP2.8

5.5

4.0

2.4

4.6

5.5

1.0

2.0

3.0

4.0

5.0

6.0

202020142007

STEP 2

CONSUMER SEGMENTS

CONSUMER SEGMENTS APPROACH TO SEGMENTATION

27 variables describe consumer perception (activities, interests, and opinions) – driving habits, usage conditions, etc.

Principal component analysis

– 4 factors.

Cluster analysis

– 4 consumer segments.

Research key features:

– new car consumers– car price range: $6,000 - $25,000– classes: A, B, C, D, SUV, MPV– face-to-face interview– 41 cities all over the Russia– 3,200 respondents in 2003 and 6,000 in 2007

Image-conscious,Importance of car appearance

High involvement,Good knowledge of car

Pragmatism, Work or family car

Low involvement,Poor knowledge of car, Fear of car

CONSUMER SEGMENTS OUTLINE

SERVICE -oriented27%

share

SECURITY–oriented24%

share

PERSONALITY - oriented

27%

share

PRICE -oriented22%

share

CONSUMER SEGMENTS OUTLINE

SERVICEOriented

• Fear of servicing• Prefer compact

economy car• Low income,

mostly women

SECURITYOriented

• Appreciate active / passive car safety

• Modest car appearance

• The highest income

PRICEOriented

• Long distance, rough road drive

• Carry passengers, luggage

• Car as a source of income

• Entrepreneurs, workers, drivers

PERSONALITY Oriented

• Appreciate car appearance

• Drive fast• Mostly young

people, high income

LOW MIDDLE HIGH

Customer loyalty potential for LADA brand

CONSUMER SEGMENTS FORECAST

Due to the dramatic income growth price-oriented segment is shrinking while personal-oriented is increasing. As the Russian market gets mature this tendency will change.

Growth of security- and service-oriented segments takes place due to consumer preferences development.

25%

22% 31%

27% 27%

30%

24%27% 16%

21% 24% 26%

PRICE - ORIENTED

PERSONALITY - ORIENTED

SECURITY - ORIENTED

SERVICE - ORIENTED

Russia 2003

Russia 2007

The Netherlands Source: Focus on Cars, part of Life & Living, 2005

by Trendbox Strategic Market Research

CONSUMER SEGMENTS EVALUATING CONSUMER SEGMENTS APPEAL

SERVICE- ORIENTED

SECURITY- ORIENTED

PERSONALITY- ORIENTEDPRICE-

ORIENTED

Size 27% 24% 27% 22%

Growth potential High High Middle Low

Company’s share in segment 27% 24% 26% 37%

Company’s competence Low Low Low High

Loyalty Middle Low Low High

OVERALL ASSESSMENT LOW PRIORITY

MIDDLE PRIORITY

MIDDLE PRIORITY

HIGH PRIORITY

Price-oriented is the most lucrative consumer segment for LADA. It determines the major company’s share due to the high company’s competence and customer loyalty.

STEP 3

MARKET NICHES

40 variables describe car features: riding comfort, speed limit, safety level, etc.

Computation of “relative importance variables”

– purchased car estimation minus

the nearest alternative estimation.

Hierarchical cluster analysis.

“Relative importance variables” were grouped into 10 niches.

Respondents distribution among niches. Each respondent was assigned to the niche

which he or she evaluated uppermost (first- choice model).

MARKET NICHES REVELATION OF MARKET NICHES

Reasonable price, inexpensive maintenance, No need to be concerned about auto theft, …Low price

High price

MARKET NICHES OUTLINE

Drivers Car•Ergonomic•Directional stability•Soft suspension, …

4%Comfort•Comfortable•Cosy seats•Modest design, …

7% Crossover•Off-road capability•Storage capacity•Forward visibility, …

11%

Sport Style•High-speed•Maneuverable•Dynamic design, …

5%

Compact•Fuel efficient•Easy to park•Convenient in city, …

16%

Easy drive•Good steering•Sensitive brakes•Air conditioning, …

7%

Mainstream•Popular•In demand•Second-hand value, …

13%

Large car•Spacious•Sufficient cargo space•Imposing looks, …

7%

Family car•Fair visibility•Easy to board•Convenient family use, …

5%

25%

Low price

Compact Large size

% - consumers, example for class B

MARKET NICHES STRUCTURE, 2007

Niches’ size in cars is estimated by multiplying the share of each group by the annual sales volume of class B.

Drivers Car

10Comfort

17Crossover

29Sport Style

12

Compact

43

Easy drive

19

Mainstream

35

Large car

17

Family car

13Low price

65

Class B……….. 260 ths

cars

Large

RENAULT Symbol

MARKET NICHES MAIN REPRESENTATIVES, CLASS B

Existing car models fit into market niches. The more niches you capture, and the bigger they are, the more sales you get.

Comfort

FORD Fusion

Sport

PEUGEOT 206

Low price

CHEVROLET Aveo

Mainstream

HYUNDAI Getz

Compact

HYUNDAI Getz

Easy

FORD Fiesta

Family

FORD Fiesta

Drivers Car

NISSAN Micra

Crossover

FORD Fusion

MARKET NICHES BRAND POSITION, CLASS B

78.630%

+50%

Market share

Sales 2007, ths cars

Growth rate, 2007/2006

LADA Kalina$9,800

FORD Fusion$15,500

43.418%

+162%

Market share

Sales 2007, ths

Growth rate, 2007/2006

27.010%

+104%

Market share

Sales 2007, ths

Growth rate, 2007/2006

Cro

ssov

erC

omfo

rtE

asy

Share in niches

0%

61%

…

Larg

eFa

mily

Pric

e

Share in niches

22%

54%

…

Spo

rtM

ains

.D

river

Share in niches

3%

32%

…

HYUNDAI Getz,$14,500

STEP 4

NEW MODEL SALES POTENTIAL

Correspondence between market niches and consumer segments

Assessing niches compatibility

Selection of targeted niches

Calculating share of potential consumers in the selected niches

Estimations of new car sales potential

NEW MODEL SALES POTENTIAL CONSECUTION OF ANALYSIS

NEW MODEL SALES POTENTIAL JOINT ANALYSIS

SERVICE -oriented

27%

SECURITY -oriented

24%

PERSONALITY -oriented

27%

PRICE -Oriented

22%

Sport Style•High-speed•Maneuverable•Dynamic design, …

Mainstream•Popular•In demand•Second-hand value, …

Large car•Spacious•Sufficient cargo space•Imposing looks, …

Family car•Fair visibility•Easy to board•Convenient family use, …

Low priceReasonable price, Inexpensive maintenance…

Comfort•Comfortable•Cosy seats•Modest design

Drivers Car•Ergonomic•Directional stability•Soft suspension, …

Crossover•Off-road capability•Storage capacity•Forward visibility

Compact•Fuel efficient•Easy to park•Convenient in city

Comfort•Comfortable•Cosy seats•Modest design

Easy drive•Good steering•Sensitive brakes•Air conditioning, …

Each consumer segment corresponds to specific set of market niches.

NEW MODEL SALES POTENTIAL NICHES COMPATABILITY, CLASS B

Combination of niches allows to enlarge sales potential of a new car.

Drivers Car

10 Comfort

17

Easy drive

19

Mainstream

35

Crossover

29

Compact

43

Sport Style

12Large car

17

Compatible niches, sales volume 2007, ths cars

Family car

13

Low price

65

NEW MODEL SALES POTENTIAL CALCULATIONS

Target consumer segment: Price-oriented.

Selected market niches: Low price, Crossover, Large car.

Will you buy new brand “X” model, if it suits your specific demands? Proportion of answer “Yes” determines Brand “X” maximum sales in the niche.

Yes...58%

* 111,000 = 64,000 carsNo…42%

PRICE -Oriented

Large car17

Low price65

Crossover29

TOTAL

111

SALES POTENTIAL

64

+ + =

SUMMARY

Rapid growth in Russian car market: more than 80% by 2012 with the highest potential in class BPrice-oriented consumer segment

is

identified as the targeted audience for generating sales for LADA new model

3 niches compatibility (low price, large car, crossover) is used as an approach to boost LADA new model market share in class B

LADA new model annual sales potential

is estimated at 64,000 cars applied to 2007 total sales volume

Thank you!