Russian return: investment begins to flow back into the Russian auto industry

Automotive Industries, April, 2003 by Andrea Wielgat

In the mid-'90s automakers and suppliers were looking at Russia like they are now looking at China.

Virtually every automaker had some sort of production plan for the world's largest country and suppliers seemed willing to follow their customers to supply high quality, high-technology components.

The market was large and growing and while customers were craving the latest vehicles local automakers were supplying low-quality cars straight out of the '70s.

It seemed like the automotive promise land.

But economic crisis hit in 1998, the ruble fell and automakers had to deal with problems in their home markets. Russian plans fell to the side.

Five years later the spotlight is again starting to brighten on Russia. It's slower than before but automakers are more cautious than before.

During the last year the world's two largest automakers opened production facilities while others have reconfirmed their intentions to build vehicles in the market. Oil companies are setting up partnerships in Russia, while local automakers and suppliers find the money to invest in their aging operations. Most importantly, the government has detailed a plan for the industry, including curbing the import of used vehicles.

While experts agree the market is still volatile and at times dangerous, there are ways to succeed in Russia.

When you are in business you have to take a risk, says John Mylonas, managing director of the GM-AvtoVAZ JV plant.

"If you are timid in life for everything you will never get out of bed," he says. "You have to do a plan, evaluate a risk and go for it."

According to GM data, the new car market in Russia currently totals about 1.1 million units. By 2006, that number should touch 1.5 million cars.

Former head of GM Russian operations David Herman says Russia is one of the largest markets in the world and will grow faster than others.

"Russia will grow in importance," he says.

Ford estimates the market for new Russian car sales at almost 1.3 million units while new foreign vehicle sales will touch 108,000. Used foreign vehicles--a growing and very important segment--will equal 505,000 units.

More importantly, the market is turning into a global low-cost source for cars and components due to low labor, material and energy costs, which are 1/6 of those in Europe and will remain substantially lower, says Herman.

Ford and GM race to market

Seeing Russia as a local production location and export powerhouse, both Ford and GM opened new production facilities in Russia last year. But their strategies could not be further apart.

GM turned to Russia's largest automaker AvtoVAZ to build an existing Russian vehicle, while Ford essentially went it alone to build a European/American vehicle. Both plans seem to have been successful.

GM-AvtoVAZ was born after years of negotiations between GM and AvtoVAZ. The two, with help from the European Bank for Reconstruction and Development (EBRD), formed the joint venture to build the Chevy Niva. The Niva was already in small-scale production by VAZ, who sold the rights to the vehicle to the joint venture.

"We in GM did a good decision," say Mylonas. "It wasn't an easy one."

The SUV is built in a new facility located on the grounds of the AvtoVAZ plant in Togliatti--Russia's Motor City. GM essentially assembles the vehicle using bodies stamped nearby by VAZ. The joint venture, until very recently, also used VAZs paint shop.

Most of the assembly work is then done by hand with the only robot in the plant spraying on window adhesive. When the new paint shop is up and running it will be fully robotized.

Production started in September with the vehicle selling out into the summer. GM will meet the robust demand by adding shifts at the plant. It will also start exporting to other Russian countries and, more importantly, to Western Europe.

In the beginning, Mylonas admits quality was questionable but GM worked on it and continues to work on it

Ford took the opposite approach. It entered the market by itself with only a bank as a partner. It also located in Vsevolozhsk, near St. Petersburg, but far from other automakers. And while GM essentially assembles the Niva, Ford presses, welds and paints the Focus, which it builds at the plant in three different body styles with four different engine options.

It is a complete manufacturing plant, says Henrik Nenzen, head of Ford's operations in Russia, at a seminar about the Russian auto industry.

Ford set up shop in what it calls a green-field location even though the walls were already standing. A start-up decision was made in June 2000 with production starting in July 2002.

According to Nenzen, the automaker decided to make the $160 million investment because the basic strategic resources are in Russia. Labor costs are low, the government is stable and trade is possible. Couple that with the low vehicle ownership and the venture is highly viable, he says.

Besides selling locally, like GM, Ford hopes to use its Russian operations as a global export location. But unlike GM, Ford would also like to export components and its European operations have already expressed interest in parts.