Russian vehicle market struggles

During early 2008 it seemed that Russia was on course to become the number one new car market in Europe. Fuelled by a boom in commodity prices, the country was developing rapidly, allowing more people to afford a modern car. Also, leasing became an easy option that helped to drive sales.

According to statistics released by ASM-Holding, a Russian industry association and the Association of European Businesses, in April last year, close to 300,000 new passenger cars and LCVs were sold in Russia. However, the rapid decline in oil prices since then, coupled with the global credit crunch lent a deadly blow to the Russian auto market. By the end of 2008, monthly sales dropped to 200,000 units and in early 2009, to 150,000 units.

Vladimir Putin, the former president turned prime minister of Russia, hastily put together a rescue package,which offers incentives and easier loans to those who buy cars made in Russia. The downturn in the market caused further trouble to both domestic and foreign companies operating in the market. Ever since the Russian government announced new measures to attract foreign investment into the sector in 2005, there were a number of announcements on new plants. GM, Hyundai, PSA Peugeot Citroén, Mitsubishi, Nissan, Suzuki, Toyota and Volkswagen announced the construction of new factories, while Ford and Renault embarked on expansion plans. But all these plans have either slowed down or been delayed. Both GM and Toyota have introduced three-day weeks at their factories, while Hyundai is seeking bank loans to finish its plant on time for a 2010 launch. Also, PSA Peugeot Citroén and Mitsubishi have delayed their investments.

But others are weathering the storm. GM, which designated Russia as one of its key future markets, will launch the new Cruze saloon this summer, which is made at its St. Petersburg plant. Meanwhile, Renault will introduce the Sandero hatchback later this year. Over at Ford, small-scale assembly of the new Mondeo luxury saloon has also just been launched.

Domestic carmakers badly hit

The crisis hit Russian carmakers much harder. AvtoVAZ or Lada, the country’s biggest car producer, faced a difficult future even before the crisis. At times it seems like there are two AvtoVAZ companies. One is the real AvtoVAZ – a sprawling conglomerate based in the city of Togliatti, 800km from Moscow. This company was set up in the 1960s by Soviet leaders with assistance from Fiat. It employs over 110,000 people, with its assembly lines stretching for over a kilometre. The company churns out close to 900,000 cars and semi-finished kits a year and its most popular models are the Classic and Samara, which were launched back in the 1980s. In fact, its Classic is based on a rear-wheel-drive platform, supplied by Fiat in the late 1960s. The two models sold close to 330,000 units last year and compete with cheap, second-hand cars imported from Japan.

And then there is the other AvtoVAZ, which is a modern, flexible player on par with its foreign competitors. During the early 2000s, it spent $630 million developing a brand new sub-compact model. The company also set up a new assembly hall and dedicated paint shop. For the first time, industrial robots were employed in the production process. After some delays, the new car, named Kalina, was launched in late 2004. Plans called for the production of 220,000 units of this model per year by 2008. Another $100 million was spent on modernising the 110 model, which was a mid-size family car that was originally introduced in the mid-1990s. The revised, more upscale model, called the Priora went on sale in 2007 with the intention of grabbing sales from foreign models. Its designated capacity was 235,000 units a year. But this shiny new AvtoVAZ exists only in the dreams of its managers. In 2008, AvtoVAZ sold 94,000 units of the Kalina and 167,000 units of the 110 and Priora combined.

It turned out that the Lada brand, which is associated with sturdy cars offered at rock-bottom price, was not able to bring in buyers for these new models. The company was only able to survive as it was too big to fail. But when its massive debts were no longer sustainable, the Russian government stepped in and in late 2006 Rosoboronexport, a state-owned arms exporter, took a majority stake in the company.

A year later Renault-Nissan bought 25 per cent of the company and decided to turn AvtoVAZ around. Things got off to a shaky start as it wasn’t able to scrape together enough funding in order to obtain the licence for the use of Renault's B-platform. After lengthy negotiations, Société Generale Vostok, the Russian subsidiary of French bank Société Generale lent the necessary 220 million euros and a memorandum of understanding was signed in April this year. This means AvtoVAZ will be able to produce the Renault Logan MCV from 2011.

The company is also working on a stripped-down version of the Kalina model which may replace the Classic and Samara models. Renault is also lending a hand in the development of a new C-segment saloon, which may be launched sometime next year.

Over at GAZ there are more serious problems. GAZ is the biggest producer of light-commercial vehicles in Russia. Its Gazelle and more luxurious Sobol vans and pick-ups, which are derived from the 1990s Ford Transit model, are being used as public transportation in many cities. The company also produces passenger cars and its subsidiaries are working on smaller and bigger buses. Until late 2008 GAZ and its ambitious owner, Oleg Deripaska, an oligarch who made his fortune in aluminium, were on an expansion path. GAZ took control of British light commercial vehicle manufacturer, LDV and bought the platform for the outgoing Chrysler Sebring. But lately everything seems to have fallen apart. The Sebring-based saloon, called the Volga Siber is glued to the showroom floor as it is too expensive. A dispute with ZMZ, the main engine supplier for the Gazelle-Sobol model resulted in the installation of inferior engines – and even lower sales. To add insult to injury, GAZ was not able to pay its suppliers on time.

Between January and April this year, production volumes fell a massive 70 percent. Some suppliers are even considering legal action against the company. GAZ will reduce its workforce from 84,000 to 60,000 employees by July and plans to introduce further cost-cutting initiatives. It is possible that its loss-making bus subsidiaries will also be closed and it had to let LDV file for bankruptcy.

A much smaller auto company, IzhAvto is also facing bankruptcy — and may become the first Russian automobile maker to go down since the early 1990s when Moskwitch Automobile was closed. IzhAvto has been here before: a decade ago it almost disappeared as well. At that time the SOK Group, a holding company made up of key AvtoVAZ suppliers took it over, refurbished the Izhevsk plant, launched assembly of AvtoVAZ models and got Izh back on track. In 2005, an agreement was signed with Kia of South Korea for the local assembly of the Spectra, followed by the Rio and Sorento models.

After spending a fortune on Izh and setting up a dealer network for Kia products, SOK never saw any return on its investment. In 2008, SOK asked AvtoVAZ to buy the debt-ridden company but in early 2009, AvtoVAZ decided not to take up this offer. Matters were not helped by currency issues: the devaluation of the Russian rouble resulted in price increases for CKD kits imported from South Korea. SOK had enough and sold a majority stake in IzhAvto to its managers.

A much less publicised story concerns the Taganrong Automobile Plant (TagAZ), located near the city of Rostov. For years it assembled old Hyundai models, including the Accent (LF), Sonata (EF) and the Elantra (XD). In 2007, TagAZ took over the production line of the discontinued Ssangyong Korando and Musso. The upgraded models, known as the Tagaz Tager and Road Partner, were launched last year to a lacklustre reception. By end-2008 TagAZ had to announce series of layoffs as it was no longer able to pay customs duty for its imported kits and parts. It also owed serious money to Hyundai and a debt restructuring program is under way, which may see TagAZ emerging healthier by end-2009.

Sollers Auto does well


The situation is bleak at Russian suppliers as well. Amstel-Vredestein, a Russian-Dutch joint venture which controls 30 per cent of the local tyre market will file for bankruptcy soon. Several AvtoVAZ suppliers were only saved by a government loan. However, with Volkswagen, GM, Hyundai and others set to open new plants, opportunities are emerging. Hyundai's Korean suppliers Mobis and DongHee will set up shop with Hyundai. Magna is setting up in St. Petersburg, while Johnson Controls and Lear are already operating their own facilities. Magneti Marelli, Valeo and Faurecia are also entering via the joint venture route.

A lot of question marks hang over the future of the Russian auto market. But when the recession is over, there will be plenty of production capacity waiting for customers.

Pál Négyesi is head of CEAuto, a Budapest, Hungary- based automotive industry consulting and market intelligence company. Its website www.ceauto.co.hu offers the latest news on the Central and Eastern European automotive industry, including Russia and Ukraine. A comprehensive supplier database and an event’s calendar assist professionals looking for in-depth information on this region.