Seat fails to enter the Russian Market
Group Project – International Business Strategy
Danil Antonov, Denis Gorbachev, Sabine Etzlstorfer, Vadim Rotar, Eliza Furman

Contents
Introduction 3
SEAT History 4
2000 – 2009 6
Problem 10
Theory-1 13
Methodology 16
Data & Analysis 17
PEST-analysis 17
Porter’s competitive forces 20
SWOT-analysis 23
Recommendations 28
Results 30
References 31

Introduction
SEAT, S.A., is a Spanish car manufacturer and a wholly-owned subsidiary of the German Volkswagen Group. The headquarters of the company is located in Martorell near Barcelona, Spain. SEAT presents a range of cars delivering the combination of superior engineering and young design. It makes sustainability principles its priority: reduction of CO2 emission, energy efficiency, and recycling. By 2006, the firm has already produced 16 million cars in total. 75 per cent of the manufactured cars are exported to all over the world. SEAT launches it products in almost 40 countries across Europe, 11 countries in Asia and 16 countries in North and South America. It even sells cars in Africa. However, for some reasons, SEAT struggled a lot to enter the Russian market. But why did they struggle? How can they be successful in so many countries and on the other hand have problems to enter the Russian market? In this paper we are trying to identify the mistakes and explain what has happened. First, we give some background information about the company SEAT and describe the events that made it so hard for the Spanish firm to enter the market. Then, we will present some theories and analyse the Russian car market and the company itself. We are going to use the PEST-analysis, Porter's Five Forces and the SWOT-Analysis. Finally, we will showcase our results and recommendations. SEAT History
1950 – 1979
The Sociedad Española de Automóviles de Turismo, S.A. (SEAT) was founded with the help of Fiat on May 9th 1950 with a capital of 600 million Pesetas – the equivalent of roughly € 3,606,000. Initially, SEAT manufactured rebadged Fiat models which differed very little visually from the products of the Italian parent. The first plant was established in the Zona France District of Barcelona in June 1953 with an initial workforce of 925 employees. In November 1953 the first SEAT car, a 1400 model, was manufactured. This elegant and spacious car was aimed at the luxury market and also suitable for use as a taxi. The daily output of 5 cars and the high demand soon led to delays in delivery. By 1956 the daily production output was 42 cars.
In 1957, SEAT started to produce the SEAT 600 model due to the growing demand for a more economic vehicle accessible to the middle class in Spain. The company opened a new headquarters in Madrid in 1964 . In 1966 SEAT launched the 850 model, which is the first car to offer a wide range of versions - including a four-door, sports and convertible version. The 124 model was introduced in 1968. In the same year the overall production reached the one million mark and the construction of the R&D facilities, the SEAT Technical Centre in Martorell, began. SEAT's aim was to create, develop and manufacture cars - all done in-house. In the 70's, SEAT's rapid growth was interrupted by a period of major change. The energy crises of 1973 and 1977 caused global disruption and the death of General Franco in 1975 led to political changes in Spain. Furthermore SEAT was faced with more and more competition from multinational car manufacturers entering the Spanish automobile market. Despite the deep crisis SEAT went ahead with its expansion plans. In 1974, the 2,000,000th SEAT car was produced and the company sales ranked SEAT among the top ten European car manufacturers. The Martorell Technical Centre started its activities in 1975. One year later, the 3,000,000th SEAT car was produced and the 128 model was launched - a car marketed as "Three Times SEAT" to emphasis triple characteristics of sportiness, versatility and design. In 1979, the company reinforced its manufacturing capacity by installing a specialized plant for the production of gearboxes, gear mechanisms and differentials near Barcelona.
1980 – 1989 In 1980, SEAT launched the SEAT Panda, which quickly became the most fashionable utilitarian vehicle in Spain. Its range is diversified with specific variations and limited editions and appeals to the juvenile market segment. In the early 1980s, SEAT's major shareholder, the Spanish government, and Fiat discussed a lot about funding and control in the company. SEAT needed major capital investment, which Fiat was not prepared to contribute. The outcome, in 1981, Fiat withdrew from the operations and the relationship ended. Industrial and commercial cooperation agreements with Volkswagen were signed in September 1982. In 1983, the firm introduced the SEAT Ronda - the first model equipped with a computer-controlled unit, designed to reduce fuel consumption and patented under the name "Econotronic". This model was the first car to be officially exported with the help of a newly created international dealer network. The first SEAT Ibiza model, which was collaboration between SEAT and the Italian designer Giugiaro, the German engineering company Karmann and the German sports-car manufacturer Porsche, was launched in April 1984. The following year, the SEAT Malaga, a family-friendly car, was launched and the motorsport branch SEAT Sport was founded. The SEAT Malaga model became the top of the SEAT range during the second half of the 1980s. Furthermore, SEAT cars started gaining certain recognition in the European market based on the combination of its Mediterranean design with German Technology.
In June 1986, Volkswagen purchased 51% of the SEAT shares and by the end of the year, increased this to 75%. The German Company's medium-term goal was to establish a new modern factory next to the Technical Centre in Martorell. The construction of that plan started in 1989.

1990 – 1999 In 1990, Volkswagen acquired up to 99.99% of SEAT shares and the name Sociedad Española de Automóviles de Turismo, S.A. was changed to SEAT, S.A. SEAT was the first non-German subsidiary of the Volkswagen Group. The SEAT Toledo was the first SEAT model developed within the Volkswagen Group. It was presented at the Barcelona Motor show in 1991. After the opening of the Martorell plant in 1993 the production of the second generation of the SEAT Ibiza began and the SEAT Cordoba was introduced. In 1995, the 10,000,000th SEAT, a Toledo, was produced. The SEAT Alhambra MPV was presented at the Geneva Motor Show. It was a co-operation between Volkswagen and Ford, and it marked SEAT's entry into a high growth segment. In 1996, 1997 and 1998, the SEAT Ibiza Kit Car won the FIA World Rally Championship in the 2 liter category. In 1999, SEAT presented a new corporate identity and the new SEAT Leon. Blue and white were replaced by red and silver. The new SEAT Leon was the first SEAT car with a 180 hp engine, a six-speed gearbox and four-wheel drive. With this model SEAT marked its entry into the largest car segment in Europe and stepped into top quality and technology territory.
2000 – 2009 In 2000, the SEAT Salsa concept car and the new brand claim "SEAT auto emoción" are presented. In 2001 the new SEAT Ibiza, the SEAT Tango and the new high-performance SEAT Leon CUPRA R prototype are revealed. The year 2002 brought some changes. SEAT joined Audi and Lamborghini in the Audi Brand Group and under the umbrella of the newly organized Volkswagen Group. Dr. Andreas Schleef became President of SEAT. Additionally, a family model was added to the current vehicle range - the new SEAT Cordoba. In 2003 the prototype of a new key player in the SEAT range, the SEAT Altea, was revealed. 582 million Euros were allocated to its R&D and the adaption of its production process. The new era of SEAT finally began with the premiere of the SEAT Altea at the Geneva Motor Show.
In 2006, a new head office was opened centralizing all activity in Martorell near Barcelona. Erich Schmitt became the new President of SEAT. Furthermore, the new SEAT Leon FR, the SEAT Leon CUPRA and the SEAT Altea XL were presented. SEAT Service was launched in 2007 to ensure globally standardized vehicle maintenance and repairs. Also, the Prototype Centre of Development (PCD) was established - a specialized department merging the virtual and physical stages of prototype development. The SEAT Design Centre (SDC), one of the most modern and functional design centers in the world, was opened in 2007, as well. In September 2007, the first SEAT Ibiza Ecomotive, one of the most environmentally friendly cars on the market, was presented at Frankfurt's IAA Motor Show. After reporting immense losses in the past years, SEAT had improved substantially its operating result by 54 million Euros in the first half of 2007. In 2008, the SEAT brand reported an operating result of €-78 million (2007: €+8 million). In 2009, SEAT presented the Leon Twin Drive Ecomotive project, the first prototype of a hybrid vehicle, and a car that set a new standard in eco-friendly performance.
Besides launching a few other models, SEAT also laid the foundation of the bodywork workshop for the new Audi Q3 - the foundation for the future of SEAT innovation.
In the same year James Muir, who has long experience working in the auto industry, was appointed Chairman of the Board of Management of SEAT.
Since 2010 In 2010, SEAT presented the revolutionary SEAT IBE concept, a zero-emissions sports coupé for the electric age. The company also introduced the development of greener engine technologies through its innovative new E-Ecomotive range. In 2011, SEAT participated as usual in different Motor Shows to display its latest innovations and designs. It also presented the new Altea XL Electric Ecomotive and plug-in hybrid Leon Twin Drive Ecomotive. In Addition, the company could improve its results thanks to exports. The operating result improved almost by 100 million Euros because of increased revenues and optimized costs.
With its home country struggling and consumer confidence falling to an all-time low, SEAT wanted to offset its losses by expanding into China. It opened a headquarter in Beijing’s financial district and right now has eight showrooms in major cities in China and plans to have 15 outlets by the end of the year. Paul Sevin, SEAT Vice-president for Sales and Marketing, said “China, together with other countries like Russia and Mexico, will contribute to increasing exports and the growth of our sales over the next few years”. This shows how important the Russian Market for SEAT is. Today SEAT exports about 75% of its products to 72 countries worldwide and holds the leading position in the Spanish Market. It exports more than 40% of its production by sea, and 95% of those vehicles reach the Port of Barcelona via rail. The company has 13,000 employees at three production bases in Barcelona. The Spanish carmaker has its own Service Center where more than 900 engineers work hard to achieve its goals — to create innovative technologies. SEAT makes sustainability principles its priority: reduction of CO2 emission, energy efficiency, and recycling.
SEAT in Russia You can’t call the story of SEAT in Russia a success. SEAT tried three times to enter the Russian market. The first attempt was in 1997, but with the financial crisis the following year, the operations were stopped again. The second attempt was in 2003 with the help of the holding company Volkswagen Group. However, after a year Volkswagen decided that three brands in Russia – Volkswagen, Audi and Skoda – were already enough. The latest try started in the middle of 2007 and was actually successful. In 2007, SEAT sold 300 cars in Russia, in 2008, already 2,500. Seat is planning to reach the 20,000 mark in 2015. In 2012, SEAT reinforced its presence in Russia and strengthened its international expansion plans. It participated in the Moscow Motor show. The company also has doubled its network in 2012 and has now 22 dealerships in Russia - located in Moscow, St Petersburg and other major cities such as Yekaterinburg and Nizhny Novgorod. SEAT plans to bring the total number up to 25 by the end of the year. It also plans to introduce a new model, the SEAT Alhambra, in addition to the three models currently marketed in Russia. The Russian Market is obviously a priority market for SEAT both short- and long-term. SEAT’s main task for the coming year in Russia will be to present a design and technology oriented, young at heart brand to the Russian consumer, and to develop an excellent sales and service network. Problem
And now we should cut to the chase. SEAT has a continuing problem of entering our market but there were several types of problems. During the first attempt obviously it was a problem of bad timing. Spanish brand came into the market in 1997 through one of the dealers but a year later crisis has started and brands without production sites in Russia suffered a lot. It is said that even in 2000 the ratio between imported and domestically produced cars were 20/80 . Only the biggest and most powerful brands did the import and it is obviously that only one dealer without financial support from car-manufacturers could not resist the monetary problems and in 1998 the program of SEAT import was stopped. Below you may see the chart of imported cars . In 2003, Volkswagen, the SEAT parent firm, has decided to introduce the Spanish brand into Russia themselves. But the year later they stopped trying. The reason differs a lot from the first time. VW obviously has the money to promote a new brand but it turned out that the 3 brands were already penetrating the market under the brand or ownership of Volkswagen – Audi, Volkswagen themselves and Skoda and the fourth one was too much at that time. VW didn’t want to raise competition among these brands.
The third try was no success either. The holding from Poland Iberia Motor Capital Group through its Russian subsidiary Iberia Motor Rus has tried to enter the market with SEAT once again in 2007 but it was again the case of badly chosen timing. The sales were seemed to be as a success (2500 cars in one year) but crisis of 2008 has destroyed all the hopes. Even production of cars in Russia was dropped from 1.5 million cars in 2008 to nearly 600 thousand in 2009. So, in the end of 2008 Iberia Motor Rus have stopped trying to promote SEAT and left the market. Below you may see the table, showing the losses of the manufacturers in Russia.
At this point you may see a bit of a tendency. First attempt was made by a dealer and failed because of a crisis, second – was made by VW but lacks concernment, third was made again by a single dealer and failed again because of a crisis. And in 2012 VW announced that they are bringing SEAT into the market.
BY KIND OF ECONOMIC ACTIVITY
"MANUFACTURE OF TRANSPORT MEANS AND EQUIPMENT" 1992 1995 2000 2004 2005 2006 2007 2008 2009
Number of organizations (end of the year) ... ... ... ... 4663 4956 5106 5445 ...
Volume of own production, works, services shipped, bln. RUR ... ... ... ... 833 1024 1284 1513 1102
Production index, percentage to previous year 85.3 89.5 110.7 111.5 107.1 103.9 115.3 109.5 62.0
Average annual number of employees, thou. persons ... 1664 1408 1207 1201 1144 1148 1156 1049
Balance, financial (profit less loss)1 mln. RUR ... ... ... 23981 15433 38300 63995 -40690 -88836
Profitability of goods (works, services) shipped1), percentage ... ... ... 7.8 6.9 6.1 6.1 4.1 1.1
Production:
trolleybuses, units 1685 340 498 369 812 530 651 778 770 lorries, thou. units 583 142 184 200 205 245 285 256 91 passenger motor cars, thou. units 963 835 969 1110 1069 1178 1294 1470 597 buses, thou. units 48.2 39.8 54.0 75.7 78.2 88.7 88.9 66.5 35.5 freight rail cars, main railway lines, thou. units 16.9 7.1 4.0 35.3 35.2 33.7 38.6 42.7 23.6 passenger rail cars, main rail line, units 961 489 802 1211 1221 1557 1823 2143 1384 motor bicycles and motor scooters, thou. units 604 70.3 29.1 16.9 10.2 5.8 3.8 1.9 0.4 bicycles (without children's bikes), thou. units 2402 563 639 341 236 1048 1512 1434 371 including folding bikes 698 192 331 86.0 12.7 503 513 427 102
1) 2004 - 2008 - according to book-keeping data. Symbol (-) means loss. VW now has a plant in Kaluga and its growing in terms of production capacity. Also, Russia nowadays is one of the fastest growing markets out there. Car manufacturers were suffering heavily because of crisis which urged them now to seek the financial and production stability and ways of growth. Many of them surged into the Russian market in attempt to regain market share. So, we may conclude, that Volkswagen is introducing SEAT in response to positive market dynamics. The main problem of SEAT brand, however, lies beneath of what was described earlier. SEAT is a well-known brand in Europe and has from 1% to 2.5% of an overall market share there. SEAT cars are seen as flamboyant, interesting and sporty but still with built with German technology . They are also competitive in terms of price tags comparing with VW Golf and Opel Astra. In Russia, though, the situation is completely different. Due to previous failed attempts, Russian consumers simply are unaware of the Spanish brand and its features (which are shown through weak sales). Further in our work, we will analyze the current market situation as well as the SEAT brand to decide on the best possible strategies to enter the market and not to fail at this time. Theory-1 Firstly, we should discuss different market entry modes using which car makers can penetrate the market. Nowadays, Russian market is among the most promising in the world (second biggest car market in Europe), and it is logical that no car manufacturer want to miss this opportunity. However, there are challenges that must be addressed before you start selling your products. There are several types of entering the market for the company but not all of them suites for car manufacturers. Further we will mention the most popular types of entries related to the increment of control and level of needed of investment and commitment.
Export
The simplest way of entering the market is to export the products directly from factory into the needed market. In terms of car manufacturers it is done through dealers who then sell cars inside the country. That way does not require big investments thus it is flexible. If the market hasn’t welcomed the new brand the company could simply shutdown the program. But there is a problem of limited control. Also, decision not to build a factory could be explained because of the tradition (Mini’s traditionally are built in England despite their German owner), level of luxury or limited production plan (at some point, there is no need to produce a lot of cars to meet needs of target market because the costs of overproduction can be higher than revenue of sales).
Joint ventures In a joint venture, a foreign firm has an agreement with an incumbent on how to share activities in the target market. This collaboration can for instance take place through a subsidiary owned equally by both parties. Such an agreement would in most cases involve a substantial investment from the foreign firm although not as much as an acquisition or green field venture.
At the same time, a joint venture can benefit from knowledge and technology of both parties. There is also a benefit from localization. In Russia for instance to get tax indulgence car manufacturer should meet the level of localization (at a ratio of 70%) and Ford company has joint venture with a company Sollers to meet the needs of this percentage.
Wholly owned subsidiary
A wholly owned subsidiary can either be obtained in a foreign market by acquiring an entire firm or part of a firm in the target market or it can be started as a green field venture; that is building production and/or distribution facilities from scratch in the target market. Since all costs associated with this sort of entry mode lies upon the entrant, this is naturally the one which requires the largest upfront investment. In case of a green field investment, the entrant cannot rely on an incumbent’s knowledge on the foreign market. A major advantage to a wholly owned subsidiary is that the entrant will retain full control of the venture. This way is the most expensive of them all and decision of building the factory is usually made relatively to the market size and existent market share. Also, governmental barriers (like taxes) could force car makers to enter the market in order to reduce costs. The company is entering the new market in pursuit of several goals. Talking in terms of car makers they tend to:
• Search for new markets (to increase sales and turnover);
• Search for resources (nowadays nearly every car maker on the market has its factory in China to reduce costs because of a cheaper labor)
• Search for efficiency (where comes the demand there comes the production to make the sales more efficient. Also, at some point for most interesting markets car companies tend to modify their models according to the market requirements. For example, Audi produces special versions of their cars which are a bit longer than usual, Subaru, Fiat and VW have recently introduced modernized for Russia models or even specially built models like VW Polo Sedan ).
• Countering the competition (in response to competitors entrance companies tend to enter the market as well).
Problem of brand awareness
In the oligopoly market (car market is an oligopoly) the company and its brand definitely needs to be notable. There are four main levels of brand awareness:
1. When the consumer is unaware of the brand (unawareness)
This is typically for the new, foreign brands. We have already mentioned about the biggest problem of SEAT and to our mind, despite three attempts to enter the market, Russian consumers are still unaware of the Spanish brand. At this point, the flash marketing campaign is vital. This situation occurs on the first stage of expansion – export.
2. When consumer does recognize the brand barely with a hint (recognition)
Usually that type of awareness accompanies the prolonged marketing campaign. The results of export will show to the management their perspectives in that market which then leads to a decision of how to penetrate the market (or to leave this market at all).
3. When consumer knows the brand and does not need hints (recall)
After the marketing campaign usually consumers are aware of the brand and remember the key facts about the brand. At this point, company should seek for further expansion in the market, for example build a factory within its borders.
4. When something associates with the particular brand (for example, the word Jeep in Russia actually means more of an off-road vehicle than the brand itself) . Methodology
In this case, we will use the range of analysis tools to better assess the current market situation.
Firstly, a general description of the market and its trends is needed and for this purpose we are using PEST-analysis, the ideal form of report in terms of general market knowledge. PEST stands for four groups of factors influencing vendors:
P – Political factors: It is obvious that government is influencing any market activity;
E – stands for economic factors and describes how well the current economic situation suites the target market;
S - social factors: Usually, this factor describes how well the labor market is developed;
T – stands for technological factors and describes R&D and how technology meets current needs on the target market.
Next, we will analyze the Porter’s five competitive forces to understand the height of the market barriers and to evaluate the main difficulties faced by the newly entering into the market company.
Finally, we will make the SWOT-analysis of the SEAT-company, using the obtained from the previous analyses information. SWOT is the perfect analytical tool to look at all the companies’ opportunities, threats, strengths and weaknesses. Based on this information we will propose the best strategies in the Strengths-Opportunities and Weaknesses-Threats sectors of the SWOT-table which will help the company to avoid the problems of the previous entries.

Data & Analysis
PEST-analysis
Political factors
The role of the government in the Russian automotive industry considered to be quite high. Over the last decade, the government has taken a noticeable part in the regulation of imports of foreign cars. Policy setting high barriers (high duties on import cars particularly) was created in attempt to protect domestic manufacturers against threats from abroad.
But still, Russian government for all the recent years has been implementing the policy of attracting new foreign investors, especially the biggest car manufacturers. Only due to the reduction of the import taxes on some spare parts and creating Special Economic Zone agreements, we can see the substantial growth of the car industry in Russia. These factors have a positive effect on the company’s positions in the industry.
It should be noted that the government holds active policy targeted at increase of localization of manufacturing of foreign car companies. The early agreement between the foreign manufacturers and the Russian government meant that the localization level is about 30%. Even though, a year ago this level was about 60%. The old agreement will expire in 2016 year (but can be prolonged to 2018), so the car manufacturers have 5 more years for solving this problem. The problem is quite serious because Russian manufacturers are unable to produce and supply parts for production of cars of necessary quality in necessary quantity and in set time. Today, the maximum level of localization in Russia on average is about 35%. This means that all the biggest car manufacturers will probably have to produce parts in Russia.
The position of manufacturers is also jeopardized by the fact, that recently Russian Federation has become the member of WTO. Before the foreign car manufacturers on the territory of Russia were protected from imported cars by high taxes, but because of the fact that Russia is in WTO now, the country will have to gradually reduce the import taxes. On practice it means, that the decrease of taxes from 25% to 15% will intensify the competition between the foreign cars produced in Russia and imported cars.
Economic factors
As it was mentioned earlier, the welfare of Russian people has positive dynamics. The levels of real and nominal average salary are increasing. The growth of GDP in 2012 has slowed down sufficiently. According to experts the speed of growth of Russian economics has decreased in 2012 from 4.2% in 2011 to 3.3 in 2012. The predicted inflation on present and next year will increase to 6.5%. The reason of decreasing growth of GDP in 2012 and growth of inflation is the oil industry. Among the main reason the experts especially point out:
• The decrease in prices
• The decrease of manufacturing
• Decrease in investment demand
• The outflow of foreign investments
• The shrink of export of energy products due to the decrease in demand in Europe
• The decrease in the growth of consumer lending; кредитования

Social factors
Due to the general improvement in welfare of Russian citizens, the preferences have changed too. A few years ago the big parts of all sold new cars in Russia were the cars of economy class, particularly the cars from Russian producers. During the period of crisis there was a growth of demand for cheap cars. This demand was stimulated not only by lower people buying power, but also it was the government initiative. The main driver of selling the cars of economy class was the program of utilization of cars. However, with the growth of income of people the preferences moved towards more expensive cars. The statistics show that the number of economy class cars in Russia in declining rapidly.
The issue of ecology has become especially urgent during the recent years. People think about the environment more and more. The fact that one of the most important characteristic of the cat is its CO2 emission, is very illustrative. The car manufacturers try to reduce these emissions with new safe technologies. But it is important to remember, that the worst damage is caused by production plants. The production of a car is connected with a lot of chemical waste, and this has quite negative effect on the ecology of the region. In Russia there exists progressive system of taxes on production waste.
Technological factors
The priority course of economic development of Russia is innovations. All over the country the modernization is planned and process of gradual implementing new, efficient technologies. The car industry is one of the examples of constant improving and modernization. At the car market of Russia there is an intense competition among the leaders of the world car industry. The technical characteristics are those of the first importance for the consumer when choosing a car. In order to conquer and retain the competitive advantage, the companies have to research and implement new modern technologies of car production. These innovations have different directions on modernizing the technical characteristics of the car and on decreasing the costs of production.
Unfortunately, the technical and technological condition of the Russian plants leaves much to be desired, what doesn’t let foreign producers localize their production. Instead, they have to set going the production of parts in Russia, which causes substantial costs.
One of the main trends of the recent years is the development of hybrid technologies. The car producers all over the world in order to reduce fuel consumption and emissions of CO2, start installing the hybrid engines. The companies spend huge amounts of money on research in this field. Never the less, if should be pointed out, that this trend is actual more in Europe, USA and Asia that in Russia. The cars with hybrid engine are usually of high price and not very efficient in Russia with its climate peculiarities. That is why they are not so popular in Russia.

Conclusion table
Factor Probability Influence Reaction
Politics
High import taxes low Substitution of import by internal production The reason to place production plants in Russia
Economic discounts and government subsidies to foreign producers High Stimulation of production inside Russian Federation Good opportunity to expand production
The increase in level of localization High Require substantial investments The search for potential suppliers or production of parts in Russia
Joining the WTO High The intensification of competition Negative effects
Introduction of utilization tax high Protection of producers on the territory of Russia. The expansion of production in Russia
Economics
The growth of wealth of Russian citizens Medium The growth of demand for foreign cars Good opportunity to increase sales
Inflation growth, decline in GDP growth high Out-flow of investments The diversification of risks
Socio-cultural factors
Change of consumer preferences high Higher concerns about the quality Good opportunity
Higher importance of ecology low The growth of taxes Search for new technologies
Technological
Russian technologies depreciation High The lack of suppliers in the Russian market The building of Russian own production plant
Introduction of new standards low The improvement of technical characteristics Good opportunity to conquer market's share Porter’s competitive forces
Threat of substitutes
The main substitute for new cars and the whole car market is the market of used cars. During the global economic crisis, the share of used cars has increased dramatically. Dealerships, sells not only new, but also used cars have benefited from rising demand. In addition to the Russian domestic market, the source of used cars for some time was the Japanese and American markets. There is a great demand for used Japanese cars in Russia especially in small towns because they are relatively cheaper and more reliable than Russian cars .
The market of used cars in Russia is quite similar to the European - the ratio of sales of "new / used" corresponds to the average European level (2.4 used cars per on new). However, there is a significant difference between the markets of used cars in Russia and Europe. In Europe nearly 60% of all used cars are sold by the official dealerships. In Russia situation is different – usually the seller of the used car is the owner of that car. Many dealerships will give you the service warranty for used car, or at least have a review of its technical condition; in case of private individual seller checking the quality of the car is often difficult. But nowadays, the point of quality is nearly essential due to the rise in living standards of Russian citizen and their urge to buy quality goods.
In recent years, the government actively encouraged "modernization" Russian car market. It supports the construction of car factories, subsidizing and lowering rates and import quotas on imported parts. In addition, the government has significantly increased the import tax on used cars older than 3 years, which seriously affected the sales of Japanese-imported used cars in the eastern part of Russia. We should also mention the stimulating recycling program, aimed to boost sales of new cars. Interesting fact is – people were utilizing their old AvtoVAZ cars and were buying new AvtoVAZ cars (same models as the old ones). Let’s not forget about the alternative means of transportation like public transport and bicycles which can be cheaper or friendlier to the environment. However, these means of transport considered to be less comfortable, less reliable or worse in terms of social status.
Threat of new competitors
During the last 10 years a lot of new automotive companies have come into Russian market. In Saint-Petersburg alone occurred «Volkswagen», «Chevrolet», «Toyota», «Renault», «Hyundai», «Kia» and «Nissan». New competition within this market is a complex question. The government is stimulating building of the new factories, but the overall barriers are quite high because of the overall expenditures are very high.
Besides the construction of the production site, the complex investment into the supply chains is needed due to their low quality in Russia. It should be also noted that the majority of SEAT competitors are already present in the Russian market and some of them have their own production sites.
Power of suppliers
It is not necessary to get full overview of the suppliers due to the fact that SEAT has no production sites in Russia and the cars are going directly from abroad.
Power of consumers
The Russian car market is amongst the fastest in terms of rate of growing in Europe and in the same time amongst the least “saturated”, so the power of consumers can be described as quite high.
There is a great range of competing models on the market, both in terms of price and technical characteristics, so the switching costs of price-sensitive consumer is low. Also, as we have already mentioned above, there is a great supply of used cars.
Level of competition
Nearly every car manufacturer on the worlds market is present on the Russian market. Also, some of the biggest car-makers have their production sites in Russia (including Nissan, Lada, Hyundai, Ford, Chevrolet, Skoda and Toyota). In the attachment below you may see the division of shares between the biggest players on the market today.

We should not forget the fact that the automotive market and the economy are far from being fully recovered from the global economic crisis. The crisis hit the car market particularly hard and almost all manufacturers have suffered from huge losses. Nowadays the market is growing and the companies are trying to win back their positions and improve financial performance by increasing their market shares which leads to intensification of competition.
SWOT-analysis
SWOT-analysis is a powerful and helpful strategic tool which helps to determine on a set of achievable goals. The information obtained from this analysis will help to match the company’s resources and capabilities to the competitive environment in which it operates. It is vital to perform SWOT-analysis in order to make strategically right managerial decisions.

Strengths Weaknesses
Strong parent firm (Volkswagen, Audi);
Slight increase in market share
High quality products Unknown to the Russian consumer;
High cost manufacturing;
Relatively high prices

Opportunities Threats
New brand to the market;
Penetration of diesel vehicles;
Strong market growth potential Rising taxes (salvage fee, demanded localization level);
Very intense competition
Strengths
Strong parent firm It is known that SEAT is wholly owned by the largest car-maker of Europe – Volkswagen. It has a good reputation and also provides SEAT with a strong financial backing, technology and widespread presence.
Besides, Volkswagen has an established car manufacturing factory in Kaluga, Russian Federation, which means that it has an established supply chain and a net of dealerships which can be capitalized on by SEAT. Russian customers perceive the VW brand as a by-word for quality.
High quality product
It is a fact that SEAT products share some of the components with Audi and VW cars. SEAT cars share engines with some of the Audi models which means that the engines are of high quality and performance.
SEAT cars stand out of the crowd due to their “liveliness”. Cars produced be SEAT have sporty spirit that is the engine performance and agile handling which gives the product unique traits that attract energetic people.
Slight increase in market share In its previous attempt (2007), SEAT sold maximum 300 cars a year in Russia, but in year 2011 they’ve already been selling more than 3000 cars. Still, the market share of this brand is somewhere near 0,1% which is one twentieth of what is demanded by the management.
Weaknesses
Unknown to the Russian consumer
Being unknown is the major problem of SEAT-brand in Russia. Russians simply are unaware of this car-manufacturer so they don’t understand its strong points or any points at all.
High cost manufacturing
All SEAT vehicles are produced in the Martorell factory in Spain, with the exception of the SEAT Alhambra, which is manufactured at the plant in Palmela (Portugal). The company’s Ibiza model which was partially manufactured at a plant in Bratislava, Slovakia would be produced at the Martorell factory from June 2005. The company’s manufacturing units are located in a high cost region whereas most manufacturers are increasingly shifting their manufacturing base to low cost regions such as Asia. This high cost manufacturing proves to be a disadvantage to the company as it leads to lower profits and uncompetitive pricing.
Relatively high prices In Russia SEAT cars are relatively more expensive than their competitors. For example, model SEAT Leon starts at a price more than 500 rubles which is higher than starting prices for Ford Focus III or Opel Astra.
Opportunities
New brand to the market
It can be a plus though. Some consumers tend to be tired of well-known brands and trying to find something new and unexpected. With economic growth and the overall welfare growth people tend to spend more money on unusual things. Great design, high quality, outstanding engineering and innovative technology bring something new and fresh to the dynamic Russian automotive market.
Increasing penetration of diesel vehicles
The size of the Western Europe diesel market and the rate of diesel penetration continues to grow with record diesel sales in almost all of the major European markets. The upper limits of specific power output in the diesel car are expected to increase further over the next few years (presently with 60kW/litre in production, they are expected to increase to 70kW/litre and later to 80-100kW/litre). This would lead to a rapid growth in the sports diesel market. There were record diesel car sales in most of the major Western European markets in 2003 (sales of 6.3 million, up 6.5%, nearly double the market of 5 years ago). This growth has been achieved by a continual increase in diesel penetration (presently at 44%, up 3.2% in 2003). The company has introduced a new TDI powered Ibiza Cupra, a diesel vehicle manufactured by SEAT Sport. The growth trends in this segment would drive sales of the company’s diesel cars.
New and updated models
The company is planning to launch several updated SEAT models, the Ibiza ST, Leon and Toledo Compact in 2012-2013 at the International Automobile Salon in Paris. SEAT expects to launch this model in the markets before the end of 2013. The new model would help drive sales in the next financial year
Strong market growth potential
Russia is a country with strong growth potential, and which aspires to make itself the largest car market in Europe over the next few years. In 2011 more than 2.6 million cars were sold – a figure beaten only by Germany (almost 3.2 million units) - and sales have grown 14.3% during the first half of 2012, exceeding 1.4 million vehicles.
Threats
Rising taxes (salvage fee, demanded localization level) In 2012 Russia was accepted to WTO which appeared to be a good thing for car manufacturers from abroad because of a lower tax. But then on the 1st of September the government introduced a new salvage fee which even increased the tax.
This salvage fee is incurred from both new and used cars, of all the categories: passenger, commercial and auto-truck cars. Companies-importers and nationals should pay it.
Very intense competition At the moment SEAT exports Ibiza and Leon to Russian Federation. These models fall into B and C segments relatively. These segments are overwhelmed by a vast number of products from different kinds of car manufacturers. Segments B and C are among the most demanded in Russian Federation. Recommendations Having analyzed the macro environment of the SEAT company via PEST and Porter analysis tools we came up with a set of recommendations for SEAT. The essential part of the strategy development was the SWOT-analysis table. This table helped evaluate the risks and opportunities and address them.
According to the results of the macro factors and company’s strengths and weaknesses, there are not many possible options for the company to choose, so it was decided not to divide them into WT, WO, ST and SO categories but simply describe all of them in the sequence of importance.
Brand Awareness
The first and most crucial issue to address is the problem of low brand awareness. SEAT is rather new to the Russian customer. Since there were no obvious attempts to advertise or promote the brand therefore the Sear brand is almost completely unknown. According to our research the Russian consumer is unaware of the brand. This has been the major problem and the key failure factor during the previous attempts to penetrate the market.
In order to sell the product in desirable scale the company should address the issue of marketing. From this standpoint we would suggest that the company has to develop and promote a massive marketing strategy in accordance with the customer expectations and needs research.
At this point we would suggest that SEAT should stress out the following aspects in their marketing campaign:
• The target audience is 25-35 years old
• The cities with more than 1 million people should be targeted
• The sportiness and the style of the product (flamboyand)
• The quality of the product (the auto parts interconnection with VW and Audi)
Marketing campaign has been the major factor that SEAT lacked in its previous attempts. Good brand awareness will boost the sales and the profits of the company as a result.

Expansion of the dealership network Another key factor to the success is the established dispatch network. The current number of the dealerships is 25. It is not enough since it doesn’t cover the target regions – cities with over 1 million citizens. According to the PEST analysis the overall welfare of the Russian population has been growing for the past 5 years. This means that the priorities of the customers shift towards better and more expensive products. Nevertheless wealthiest population is concentrated in big cities, thus these cities have the highest potential and therefore need their own dealerships. The cost of the establishment of the dealership is relatively low. Currently there are only 3 models of cars on sale which means that approximately 300 m2 is required. This makes it rather cheap and easy to establish a dealership.
Cost reduction The macro analysis has shown that there is a high threat for the imported cars. The government of Russian Federation has recently entered the WTO. Under the agreement with WTO Russian Federation had to lower the taxes for the number of good including cars. This meant the increased competition between cars manufactured in Russia and imported cars. In order to protect car manufacturers, the government established a new taxation system which made imported cars even more expensive for the customers.
As has been already mentioned, Volkswagen is one of the biggest automotive companies in the world. It owns a production line in Kaluga and plans to produce 350 thousand cars a year in 2012. It does not actually mean that only Volkswagen-branded cars are made within this factory – it is also building Skoda Fabia, Skoda Octavia A5, Skoda Rapid (2013), Skoda Yeti, Volkswagen Jetta and Skoda Octavia A7. Since SEAT is a wholly owned subsidiary of Volkswagen and some of its cars are made on the same base as the VW cars (for example, SEAT Leon is basically the same as the VW Golf and one of new models of SEAT – Toledo is based on Skoda Rapid). It actually means that there is an opportunity to build SEAT Toledo within the factory in Kaluga without huge investments.
The production of cars on the territory of Russian Federation will help avoid high taxes. This is a good chance for SEAT to reduce the price for its cars and therefore make them more competitive and attractive for the customer.
Product line diversification There is a high demand for compact crossovers in Russia. They are being sold in vast numbers and the demand has been growing over the years. There is a good opportunity for SEAT to introduce such a model, since VW already has VW Tiguan and the Skoda Yeti – the platform can be shared. Also there is a niche in the D segment. But these are the long-term plans. Results Our research has shown that there are high barriers for new car-makers to enter the Russian market mostly because of the fierce competition and new taxes. However there are still huge opportunities because of market high growth potential.
During the years there were two major problems of SEAT – bad timing (first attempt in the market was held in 1997 just before crisis) and bad marketing (actually means, no marketing because of lack of interest from VW). Nowadays, sales are showing that consumers are interested in new, unusual cars and they even can forget about relatively high price-tag. The analysis of the previous SEAT failures to penetrate the Russian car market has shown that the key factor was very low brand awareness due to the absence of the solid marketing strategy.
The thorough macro environment analysis and the SWOT analysis helped to devise a set of recommendations based on the external environment factors and the strengths and weaknesses of the company:
• Brand awareness
• Expansion of the dealership network
• Cost reduction
• Product line diversification
Note that the company does not necessarily have to follow the recommendations.

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