Tough Competition with Chinese Imports Troubles the Russian Coatings Industry

Over the past year, Russian coating companies heavily invested in new technologies and capacity expansion targeting to make up for the lack of Western products. Now, at least in some segments, they are outbid by Chinese competitors who are showing an expanding interest in the Russian market.

Problems faced by the leading Russian carmaker Avtovaz seemed one of the most striking examples of how painfully Western sanctions bite. During the past year, the company saw its production repeatedly disrupted by a lack of imported components. On top of that, Avtovaz narrowed its offer to three colors: white, black and deep green.

Russian coatings manufacturers stepped forward, offering their help, but local publication Rupec recently reported that the carmaker opted for Chinese coatings. In previous years, Avtovaz primarily relied on conveyor coatings delivered by PPG, but the US company pulled out from Russia in 2022.

Valery Abramov, general director of the major Russian coatings manufacturer Russian Paints, told Rupec that it would be wrong to say that the Russian automotive coatings market was in short supply. He explained that Russian Paints could manufacture conveyor coatings in all colours, but it was never reached out to by Avtovaz.

Status Quo

Since the departure of Western supplies, the automotive coatings niche was occupied primarily by a manufacturer from a friendly country, Abramov said, not providing additional details. In fact, the demand in the segment is believed to plummet by nearly 50% last year, as the domestic finished vehicle production plunged to 620,000 units, the lowest level since the Soviet times.

In the previous years, Russian finished vehicle production reached 2 million units, while the Russian think tank Avtostat estimated that established capacities allowed the country to manufacture 3 million finished vehicles per year, almost as much as Germany, the largest European automotive producer. As estimated by Abramov, sales of automotive coatings in Russia stood at around 20,000 tonnes per year, with products under foreign brands meeting 60% to 70% of the domestic demand.

In fact, Russian coatings producers used to occupy a substantial share in the car repair segment, while almost all conveyor coatings came from plants operated by Western companies. Russian Paints was the only local company whose products were used to paint new passenger cars in the country. It had signed contracts not only with Russian carmakers GAZ and Kamaz but also with some European firms, like Volkswagen and Renault.

Abramov recalled that Russian Paints accounted for roughly 20% of sales in the conveyor coatings segment in the previous years. These figures are in line with the calculations of Gennady Averyanov, director of the Russian coatings manufacturers association Soyuzkraska.

“Up to 80% of coatings for conveyor application – hot drying – were supplied by import or by localized foreign enterprises. Russian manufacturers at first knocked on the door in order to somehow ramp up the share of Russian coatings, but not hearing answers, they stopped knocking and reoriented their capacities and resources to the production of other coatings,” Averyanov told Rupec, adding that such state of play basically suited the Russian Industry and Trade Ministry, which has been orchestrating the import replacement initiatives in the country during the past few years.

Tver Coatings Plant has also launched production of automotive coatings, but those were primarily destined for the light commercial vehicles and truck segments. The company, however, keeps the information about its production performance and order book private. 

Trial and error

Despite the turmoil in the Russian automotive industry, Russian companies put a lot of effort into spurring import replacements in this segment last year. Valery Abramov explained: “Some products had to be created from scratch, and this took time. We did not stop production, even though we experienced difficulties with raw materials”.

Even on the contrary, Russian Paints has developed new products, for example, water-based paints for one of the car factories, Abramov said, not going down into details. However, he admitted the obtained product didn’t suit everyone in the Russian automotive industry.

“The customer wants to source replacements for foreign products from Russian manufacturers. But this is not how the coatings industry works. Development and technological homologation take from one to two years on average.

Therefore, something is already out there today, something else is not,” Averyanov said, also stressing that the required range and prescription composition of each automotive company differs.

Diana Kudryashova, research director at the Russian institute NIITEKHIM, also told the publication that Avtovaz refrained from using coatings of Russian origin due to a long homologation, as well as dumping from China. Long story short, she added, Avtovaz may not want to take a chance and rely on new, albeit domestic, but untested products.

Uneven struggle

Olga Andrutskaya, editor in chief of the Russian publication Coatings and Their Application, emphasized that the Avtovaz case exposed a long-standing problem of the Russian coatings industry that some share of local customers prefers imported coatings over domestic even when Russian companies have a competitive offer. Over the past few years, quite a few Russian companies complained about this phenomenon, which is seen not only in the coating industry.

On the other hand, Andrutskaya claimed that the Russian coatings industry’s operations performance in the first quarter of 2023 appeared to be encouraging. In fact, the country could even be moving into an oversupply as imports from friendly countries that are called to replace Western brands perk up. The problem, however, is that some Western firms pulled out from Russia only on paper, Andrutskaya disclosed, adding that “it is still delivered to the through various schemes”.

Indeed, some coatings under Western brands still can be found on the shelves in Russia. They are believed to be imported to the country via parallel import from some countries in the Middle East and Central Asia.

In light of the logistics challenges and soaring raw materials prices, the upcoming season is not going to be easy for Russian coatings manufacturers, Andrutskaya forecasted, adding that Russian business “despite the uneven fight doesn’t give up and keep launching new factories and developing new products.”

Secondary risks

There are signs that Chinese coatings manufacturers show a growing interest in the Russian market. At the recent Interlakokraska 2023 exhibition in Moscow, out of six automotive coatings manufacturers, three were from Shanghai.

“In 2023, they [Chinese manufacturers] will have a larger share of our market, as they successfully offer the Russian consumer a full range of coatings, which includes cataphoresis, secondary primer, base enamels and topcoat. This allows them to win the favor of finished vehicle manufacturers. At the same time, local coating companies do not yet offer the entire range,” Abramov said.

In general, Russia-China trade turnover is on the rise as the countries forge stronger political ties. In 2022, the turnover between Russia and China jumped by nearly a third, reaching a record-breaking $190 billion. There are no doubts that this trend will continue in 2023.

However, Russian coatings manufacturers might not be entirely happy because Chinese companies are known to put pressure on prices. In the wake of supply chain issues, it is harder for their Russian competitors to keep prices low. Rupec estimated, citing market players, that last year, Russian coatings manufacturers saw their production costs rise by 20%.

So far, there are no reports that the growing presence of Chinese coatings is seen in any other segment of the Russian coatings market. In the previous years, foreign companies, primarily Tikkurila, AkzoNobel, Huntsman, Hempel and PPG, accounted for 30% to 35% of the sales on the local market. In addition to China, other countries reportedly expand export to Russia, including Turkey and India.

Russian coatings manufacturers warn that relying on Chinese coatings bears certain risks in the current geopolitical conditions.

“Chinese manufacturers often produce coatings under license agreements with European and American companies. Such cooperation has great risks in the long run and does not solve the issue of the country’s technological security, which the government and the president are talking about”, Averyanov stated.