Russia: The world’s hottest auto market
SHUSHARY, RUSSIA — General Motors Corp.’s half-built plant on the muddy outskirts of St. Petersburg won’t roll out its first vehicle until November, but the new Russian hires are already hard at work.
In a warehouse near the factory entrance, young men and women drill bolts into car-sized wooden crates, spray-paint them and practice spot-welding metal sheets in the time allotted for each task. When production gets under way, they’re expected to be up to speed.
Across the road, Toyota Motor Corp. is already rolling out Camrys at a new plant to tap surging demand in Russia for cars, while Ford Motor Co. is considering building its second Russian plant.
“The market has grown at a much faster clip than we thought,” said GM President Frederick Henderson. “We’re seeing all of our global competition running hard in Russia.”
All around St. Petersburg, the world’s major automakers are putting up factories. Hyundai Motor Co. will start building a plant next month, Nissan Motor Co. expects to open a $200 million factory next year, and Ford is expanding its $230 million plant for the third time in six years.
Fueled by a surge in oil prices, Russia has turned into the hottest of the hot emerging markets — countries where automakers that can supply the right models earn a lot of money, particularly in the early stages of the boom when demand is outstripping supply.
In the past five years, auto sales have tripled. By 2010, many forecasters see Russia overtaking Germany to become Europe’s No. 1 auto market with sales of more than 4 million vehicles.
“There’s no sign that this is going to slow down,” said Carlos Ghosn, CEO of Renault SA and Nissan. The demand for oil and other raw materials that Russia holds in vast reserves is not likely to subside, he said.
As crude prices have climbed to record levels, Russia’s economy has taken off. It
While China and other emerging economies are evolving fast, the speed of the Russian transformation caught people by surprise. “We knew that purchasing power was increasing, and that the desire of customers was to start buying products everyone else in the world was buying,” said Lewis Booth, Ford of Europe chairman.
“The unique thing with Russia is that with the boom in commodities, the economy has strengthened very quickly. That’s something we didn’t foresee when we first started investing in Russia.”
For automakers like Ford, GM, Toyota and Nissan, which are struggling to boost sales in saturated home markets, emerging economies represent great opportunities at a challenging time.
In Russia, many first-time buyers are strolling into dealerships. While there are 800 vehicles per 1,000 inhabitants in the United States, there are 190 vehicles for every 1,000 Russians.
Unlike customers in the other BRICs — the acronym for the paramount emerging markets of Brazil, Russia, India and China — Russians go for the kind of big vehicles that generate big profits for automakers.
“It’s a big country with long straight roads and big-sized people, so it has many of the preferences of the American market,” said Shinichi Sasaki, a senior managing director at Toyota who has worked in Europe.
‘Selling (foreign) cars was illegal’
Global automakers have been the biggest beneficiaries of the surge in demand that began five years ago and accelerated with the growth in incomes and availability of bank credit. Foreign brands accounted for 64 percent of the 2.6 million cars and light vehicles sold in Russia last year, up from 22 percent in 2003.
“Twenty years ago, selling cars was illegal,” said Chris Lacey, GM’s executive sales director for central and eastern Europe. “It was all state-owned car companies.”
Many of those companies were privatized in the 1990s after the collapse of the communist system. Deripaska now owns Russia’s second-largest automaker, GAZ. But Russian manufacturers lag in quality and technology, and they are losing customers to international brands.
On a mild day in March, construction contractor Sergey Erofeev was leaning toward buying a Hummer H3 costing upward of $50,000 at the Laura Ozerki dealership in St. Petersburg.
“It’s comfortable, quiet, and due to the low exchange rate, it won’t be expensive to maintain,” said Erofeev, 40. He has test-driven several SUVs and also liked the Toyota Prado, but he said it cost more to insure because it’s more likely to be stolen.
GM offers a range of models in Russia under the Hummer, Cadillac, Opel, Saab and Chevrolet nameplates. Last year, Chevrolet became the top-selling foreign brand in Russia, moving ahead of Ford, which was hurt by a strike last fall at its plant.
GM executives hope to expand their share with the models coming out of the Shushary plant. It will initially produce Chevrolet Captiva SUVs, and next year will roll out a new car based on GM’s global compact-car architecture.
“The Russian market is an attractive market for us, not only in terms of revenue growth but also in terms of profit potential,” Henderson said.
In addition, Russia serves as a test market for established automakers who find themselves competing head-on against Chinese manufacturers such as Chery Automobile in a major market outside China for the first time.
For now, the Chinese don’t present a big threat. Russian dealers and auto executives disparage the Chinese vehicles’ quality and safety, pointing to the dismal performance of some Chinese models in European crash tests.
When it comes to safety features, if customers don’t ask, said Chery dealer Evgeny Voytenkov, “We don’t volunteer.”
But, he said, the Chinese are improving fast. Chery now competes against Ladas, some Korean-designed Chevrolet vehicles and Renault’s low-cost Logan models. “But next year or the year after, they’ll start nipping at better brands,” Voytenkov said.
“We now have a four-wheel drive Chery Tiggo crossover that looks like a RAV4″ made by Toyota.
In this fiercely competitive marketplace, the most vulnerable brands are the Russian brands, AvtoVAZ’s Lada, GAZ’s Volga and a handful of smaller nameplates.
“Russian brands haven’t benefited from the technological evolution in the last 15-20 years in the auto industry,” said Stanley Root, partner at PricewaterhouseCoopers Russia in Moscow. “Their cars aren’t technologically advanced. That’s one of their problems.”
Caught between big, well-financed global automakers and aggressive Chinese manufacturers, AvtoVAZ and GAZ are lining up partners to help them survive.
For Russians, proud of their past achievements in space and weaponry, their reliance now on foreign automotive know-how seems dispiriting.
Last year, when Canadian reporters questioned GAZ owner Deripaska, 40, about his investment in the Toronto-based supplier Magna International Inc., he reminded them of Russia’s capabilities.
“He told them, ‘Please don’t forget that Russia was the first country to launch a man into space, not the second,’?” said Leonid Dolgov, the head of GAZ’s car division. “That’s the spirit of our company.”
Global rivalry heats up locally
Competition in Russia will intensify as new plants churn out more locally built vehicles to avoid import duties.
Suzuki Motor Corp. plans to build a plant next to the GM and Toyota factories in the St. Petersburg area.
This week, Japan’s Mitsubishi Motors Corp. and PSA Peugeot Citroën of France said they would produce vehicles jointly in Russia. Chrysler LLC is exploring local production possibilities to increase its now-negligible sales in Russia.
By 2010, foreign automakers will have the capacity to produce 1 million vehicles in Russia, according to Roland Berger Strategy Consultants.
Investment banks are already sounding warnings about overcapacity, but the risk seems distant to executives scrambling to get new plants up and running.
Besides St. Petersburg, there are three major automaking hubs in Russia: in the Moscow area, where Volkswagen AG recently opened a plant and Renault produces Logan vehicles, and further east in Tatarstan and in Togliatti. An industrial town on the Volga River, Togliatti is home to Russia’s biggest automaker, AvtoVAZ.
But many foreign automakers are drawn to St. Petersburg, a grand city built in the 18th century by Tsar Peter the Great. Its major selling points are its transport routes — a port on the Baltic Sea and rail links — and the business-friendly policies of Valentina Matviyenko, the governor of St. Petersburg appointed by former president, now Prime Minister Vladimir Putin.
“If you’ve got issues that you need to get resolved, you’ve got an organization in the St. Petersburg government that helps you get through those issues, whether it’s roads, logistics, utilities,” said Rick Swando, the director of GM’s Shushary plant.
The city has a big aerospace sector, fine technical institutes and a well-educated work force.
“I see a lot of talent,” said Swando, a GM veteran who has worked in China and other developing markets. “People are ready to step up, and problems get addressed very rapidly. You don’t hear a lot of whining and complaining.”
Compared with the way GM and Ford are perceived at home, as embattled giants forced to retrench, Russians view them as strong global leaders.
At a recruitment center on St. Petersburg’s Vasilievsky Island, Victor Smirnov, 30, is applying to work for GM in Shushary. With a wife and two children, he wants a bigger apartment and steady work. “Among employers, GM looks the most attractive,” he said, speaking through an interpreter.
The wages are good, and then, “unstable companies don’t open new production facilities in places as far away as Russia,” Smirnov said. “I want a stable job.”
After a century of near-constant hardship and upheaval, many Russians are grateful for the stability and growth that has occurred during Putin’s rule, with the help of rising oil prices.
But Russia has also become more authoritarian, with a government willing to employ rough tactics to intimidate critics and dissidents.
Some economists worry about Russia’s reliance on raw materials, the pace of the economy’s diversification, and a yawning gap between rich and poor. But those concerns haven’t stemmed investment flows into Russia.
“One always worries about how stable the growth will be. You always worry about that,” Booth said. “Every country has its challenges.”
The rough-and-tumble nature of Russian capitalism is reflected in a brisk trade in super-luxury limousines — and armored vehicles, such as BMW’s ultra-secure B7-graded 7 Series sedan.
“That person,” BMW’s former sales chief Stefan Krause said in March, “is protected even against missiles.”
At Shushary, GM managers are contending with a different sort of menace: the plant site, bordered by a birch forest, is infested with vipers. Antivenin is now stored in the facilities, but there’s not much else that can be done, Swando said. “It’s their home, too.”
The plant is gradually taking shape: Engineers are installing assembly and body shop equipment, and the paint shop is nearly complete.
The plant will initially produce 70,000 vehicles a year, but GM has left large empty tracts for more lines. When its top executives looked at the blueprints, Swando said, “they said, let’s plan for the growth curve.” Right now, it’s almost vertical.
via Detroit News