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Russia: Is Historic Auto Partnership Nearing Its End?

By Michael Scollon --> Russians are ready to trade in their old Ladas (AFP) PRAGUE, June 12, 2006 (RFE/RL) -- When it was formed in 2001, the General Motors-AvtoVAZ joint venture was considered a major step toward economic revival in postcommunist Russia. The marriage of the American and Russian automotive giants has for the most part been successful.

But cracks in the relationship emerged after AvtoVAZ was taken over by the Russian state last year. Now, with General Motors expected to announce on June 13 the construction of its own independent assembly plant, some are wondering if the partnership is meant to last.

General Motors Corporation (GM) began courting AvtoVAZ in 1999, as Russia was emerging from a ruble crash and subsequent economic crisis.

Within two years, GM-designed cars were soon rolling off the assembly lines at a new plant in Russia's automaking hub of Tolyatti, 1,100 kilometers south of Moscow. By 2005, the venture was producing about 50,000 mid-priced sedans and sports utility vehicles -- the Viva and Niva, respectively -- sold under the Chevrolet brand.

The companies were equal partners in what was seen as a mutually beneficial project.

General Motors stood to gain access to Russia's largely untapped auto market, one of the fastest-growing in the world. The number of cars sold in Russia is expected to jump from the current 1.8 million a year to 2.8 million annually by 2010. And of the $22 million Russians currently spend on new automobiles, more than half was used to purchase foreign cars.

AvtoVAZ, meanwhile, looked to benefit from Western expertise and capital. The Russian company was hoping to revitalize its own outdated lineup, which consisted mostly of its low-cost Lada models.

The third investor in the deal was the European Bank for Reconstruction and Development (EBRD), which viewed the $332-million project as key to its efforts to revitalize Russia's ailing automotive sector.

Revival Hopes

Richard Wallis, senior adviser to the EBRD in Moscow, said the bank had high hopes that the joint venture would lead to a major revival of the auto industry in Russia.

"It was the first auto major setting up production in Russia after the fall of communism and, of course, the hopes were for GM's suppliers to follow in GM's footsteps. These goals have not all been met. But there have definitely been major investments in related industries -- for instance, in tires and particularly in windscreen glass," Wallis said. "And there have been others as well, which are the result of the arrival of GM, which was followed by other automakers, and by the creation of this joint venture."

Automakers to follow GM in setting up plants in Russia included U.S.-based Ford, the French automaker Renault, and South Korea's Kia.

And in recent months, deals worth about $1 billion have been announced by Japan's Toyota and Nissan, Germany's Volkswagen, and Italy's Fiat. Russian Economic Development and Trade Minister German Gref has predicted investments by foreign automakers may double by 2008.

But at the same time, GM-AvtoVAZ -- Russia's first car-production joint venture -- showing signs of falling apart. It's a scenario that highlights the risks automakers could face in forging future partnerships in Russia.

Chevrolet Niva (courtesy photo)

The joint venture enjoyed some success. Among other things, it gave GM the foothold it wanted -- the automaker's Chevrolet make is now the second-highest-selling foreign car in Russia, seeing sales increase over 40 percent for the first five months of 2006. And early large profits paid for GM's initial investment.

But sales consistently fell well below target, and the venture barely posted a profit in 2005. Together and individually, both GM and AvtoVAZ have begun experiencing financial strains.

Fall In Profits

AvtoVAZ's profits slumped by 75 percent between 2004 and 2005. GM, meanwhile, reported a global loss of $8.6 billion in 2005.

Jason Stein, a staff reporter for the Munich-based "Automotive News Europe," said the relationship also took a hit when AvtoVAZ was taken over by Russia's state arms exporter, Rosoboroneksport, in late 2005.

"The relationship has been tense at best. It was launched in 2001 with basically a joint venture with GM and AvtoVAZ, and the intention was to get General Motors into the Russian market. But of late that situation has been a little bit strained, mainly because the AvtoVAZ plant is a state-owned plant and the Russian government is quickly realizing the benefit of increasing car production -- increasing car sales, and my feeling is that they would like a larger piece of that action," Stein said.


Within months of the Rosoboroneksport takeover, a dispute with suppliers led to a 10-day production halt. By April 2006, AvtoVAZ said it was looking into ways to end its relationship with GM.

The Russian company also announced plans to build a massive new factory to produce an all-new car of its own -- with $5 billion in promised funding from the state. In addition, its arms-export management was expressing interest in producing a new military vehicle.

Other potential suitors have also entered the scene. Vladimir Yakushenko, a spokesman for AvtoVAZ, early this month told the Russian business daily "Vedomosti" that the firm is in talks with "a huge number of hypothetical partners."

Renault is reportedly offering to provide AvtoVAZ with a new car design and is seeking a 20 percent share of the Russian automaker. Others have expressed interest as well, including China's Shanghai Automotive Industry Corporation, which is reportedly interested in producing automobiles at AvtoVAZ facilities.

Those reports, coupled with GM's expected ground-breaking of a $100 million plant near St. Petersburg, have led to speculation that the joint venture could be nearing its end.

AvtoVAZ did not respond to a formal request for an interview. But Marc Kempe, spokesman for General Motors in Central and Eastern Europe, downplayed such talk.

Kempe characterized GM's joint venture with AvtoVAZ as the "first leg" of the company's Russian operations, with the "second leg" being its assembly of GM Hummer SUVs, Cadillacs, and other vehicles at a Russian factory in Kaliningrad. St. Petersburg, he said, will soon be the company's "third leg."

"We're just about to announce a third leg to our approach in Russia, which will be an assembly plant -- the details of which we'll announce very soon, in the next few days," Kempe said. "So we will then have three legs to stand on in Russia. What we are going to be announcing very soon doesn't replace either of the first two."

Recent changes to the board of directors of the GM-AvtoVAZ venture may help smooth things over. But Stein of "Automotive News Europe" wonders how long GM will be willing to endure tension in its relationship with AvtoVAZ once its new plant, expected to start production this summer, becomes fully operational over the next two years.

Market Growth

One thing that is clear is Russia's market potential. Flush with oil money, Russians' spending power is on the rise, and Stein says they are looking "to turn in their old Ladas and buy shiny new Western-automaker models."

But those automakers without a presence in the Russian market better hurry. Duty-free regulations (up to 30 percent) currently granted to automakers producing in Russia are expected to expire once the country joins the World Trade Organization -- something, theoretically, that could happen by the end of this year.