by Athan Koutsiouroumbas & Trevor Gunn
Russia’s financial collapse in the fourth quarter of 1998 presents a unique, but fleeting, opportunity for U.S. automobile producers, suppliers, and distributors to gain a strategic foothold in the NIS automotive market. The combination of Russia’s desire to promote a strong automobile industry and its auto industry’s need for modernization has prompted the government to encourage foreign direct investment and partnerships with foreign firms to revitalize the sector.
The Russian Auto Market
By 2005, Russia is expected by some to become the world’s largest auto market, with sales of over 15 million vehicles per year. From 1991–98, the Russian automobile market experienced 60 percent growth. Within four years, the Russian Transport Ministry expects the number of cars to increase from a current 90 per 1,000 persons to 300-400. However, these predictions were made before the financial crisis, which has significantly diminished the ranks of the middle class. Many growth predictions still hold true; the economic crash has simply shifted the time frame.
The NIS automobile industry is a window into the inefficiency of the Soviet past. Most Russian automobile manufacturers have been building the same model since their inception. For instance, AvtoVAZ’s Zhiguli (Lada) has scarcely developed beyond its 1969 prototype. Russia’s largest automaker, AvtoVAZ, required 450 labor-hours to produce an automobile that is typically produced in western Europe in 28 labor-hours. The low level of efficiency at which Russian automakers operated forced the government to support the industry through everything from outright subsidies to joint government-plant ownership. Major portions of the Russian auto industry are 10-12 years behind other automakers. The Russian Government estimates that nearly $2 billion in investment is required to make domestic auto manufacturers competitive with foreign producers. It is this technological deficiency that opens doors to foreign investors.
Since August 1998, production has increased sharply in most Russian auto factories, including AvtoVAZ, GAZ, UAZ, and Kamaz. In the face of the 1998 crisis, AvtoVAZ intends to produce 657,000 cars this year, a 9 percent increase from 1998. Paradoxically, the post-August crisis has improved the financial condition of many enterprises by improving their position vis-a-vis imports and from a price perspective, making these vehicles more viable on the domestic market, as well as more “exportable.”
Despite heavy competition among domestic manufacturers, Russian demand for automobiles still far exceeds supply. Only 2-3 percent of the population can afford luxury cars. Nearly all car sales focus on the mid- to low-range of prices. Most imported new cars are priced out of the market because of high duties. Russian manufacturers’ only competition in the mid- to low-range market are low-end foreign imports. The price range for this market is $6,000-$10,000.
The current lack of available cash to purchase a new car impels many consumers to “upgrade” their present car. Moreover, component parts like stereos and repair parts like knobs are in high demand. A tremendous market exists for those who can organize a system of distribution that operates under a reasonable amount of delivery time (2-3 weeks). The import tariff rate for most auto parts is currently 5 percent, low by some Russian standards.
Investment and Imports in the Russian Auto Market
U.S. automotive industry exports to Russia are down drastically as a result of the August crisis. During the first quarter (Q1) of 1999, U.S. motor vehicle exports to Russia totaled some $16 million, down from $45 million in Q1 1998 and $66.8 million in 1997. The bright spot in this category is truck exports, which rose to $9.1 million in Q1 1999 from $6.7 million during Q1 1998, but were still well below the $15 million worth of exports in the same period of 1997. Exports of auto parts during Q1 1999 were only $1.69 million, down from $5.4 million in Q1 1998 and $9.86 million in Q1 1997. For example, U.S. exports of gear boxes, road wheels, and bumpers have fallen by about 50 percent.
The list of companies capitalizing on Russian automotive market opportunities is extensive and includes:
¨ FIAT, which has formed a joint venture with GAZ, will produce automobiles by February 2000 with an $850 million financing package from the EBRD.
¨ Lear Corp. (Southfield, MI), which has formed a joint venture with FIAT, will produce seats for automobiles as a result of the FIAT-GAZ joint venture.
¨ BMW and Land Rover, which have joined with Avtotor (Kaliningrad), will build BMW cars and Land Rover sport utility vehicles. Full production will begin in September. The plant intends to reach annual production of 10,000 cars by 2002.
¨ Renault, which has partnered with Avtoframos for car production in the NIS. Renault is expected to invest over $300 million in the project.
¨ Ford, which has reached an agreement with the Russian Government to develop a vehicle manufacturing facility. The first phase requires an investment of $150 million with initial output of 25,000 vehicles and potential capacity of 100,000 vehicles. The plant is expected to become fully operational during the first half of 2001.
¨ GM, which signed an agreement with AvtoVAZ, will produce cars beginning in 2002. The $200-million assembly line will have initial annual capacity of 35,000 cars.
In most deals, the federal and local governments play a weighty role in negotiations. For instance, initial production plans for the GAZ-FIAT partnership are tentative to their submission to and approval by the Economics Ministry. The government attempts to entice investment through various types of duty exemptions with mixed success as companies are unsure of how these may be utilized on a practical level.
Additionally, rent, labor, and other costs are below pre-crisis levels, making investment with Russian manufacturers or foreign companies with ventures in Russia now even more appealing. Many U.S. automotive components suppliers have neglected original equipment manufacturer (OEM)-level dialogues with emerging Russian manufacturers—instead concentrating on major foreign manufacturers—thus bypassing an important export and partnership opportunity. The next year will afford a unique but time-sensitive (defined by tight production timetables) window during which U.S. companies can start or accelerate dialogues with Russian and foreign manufacturers in Russia.
For further information on the Russian autom markets, visit BISNIS Online at www.bisnis.doc.gov/bisnis/isa/isa.htm#Hisa or contact Michael Nikoulichev, Foreign Commercial Service, Moscow, email: Michael.Nikoulichev@mail.doc.gov.
Athan Koutsiouroumbas was an intern at BISNIS during summer 1999. He is currently studying in Nizhny Novgorod.
Trevor Gunn is BISNIS’ Deputy Director. He can be contacted via email at Trevor_Gunn@ita.doc.gov or by telephone at (202) 482-4656.