General Motors will cut the ribbon on Monday on a risky US$340 million bet: that it can prosper in the Russian car market by building a new sport utility vehicle designed by its local partner, AvtoVAZ, Russia's largest and most controversial car company.
The venture, which is meant to turn out 75,000 of the boxy Jeep-like vehicles a year by 2004, is the biggest foreign investment so far in Russia's struggling auto industry, and the second from Detroit. Ford Motor opened an assembly plant in St. Petersburg in July, opting to go it alone without a Russian partner.
GRAPHIC: NY TIMES
In the early 1990s, Russian companies expected waves of foreign investment to wash over the industry, and many Western car and parts makers flirted with Russia's market. But until this year, none had made a significant commitment.
Major problems discouraged entry. Mismanagement and theft are rife in Russian car companies, which are still steeped in Soviet-era habits and accounting practices. Quality control is all but nonexistent and there are no reliable local supplies of components.
Though Russia is potentially one of the world's largest car markets, it is not yet a lucrative one: Nearly all of the 1.2 million new Russian-made cars sold last year were priced from US$3,000 to US$6,000, far less than most new foreign-made cars cost. As a result, new-car imports have made little headway except at the luxury end of the market.
"The big guys haven't entered Russia on such a large scale yet," said Vladimir Savov, an analyst at Brunswick UBS Warburg, an investment bank in Moscow.
What have arrived in quantity are foreign used cars, which have become the domestic new-car industry's main competition.
Moscow recently adopted a package of measures to support the auto industry, including raising tariffs on used foreign cars older than seven years. Prime Minister Mikhail M. Kasyanov said the purpose was to "get this junk off the roads," but analysts say more important motives are to lure more foreign investors to build cars here and to protect Russian investors in the industry.
GM says it has found the key to Russia's tricky market. The vehicle it will build in the new plant, an update of an AvtoVAZ model that will be called the Chevy Niva, will sell for US$8,000, much less than imported alternatives, and it promises to handle Russia's rough roads in a way that ordinary foreign cars cannot. GM has made some improvements to the AvtoVAZ model, but to keep its price low, it will retain the Russian-made engine and transmission, for now at least.
Geared for russian winters
"We looked for something local, something unique," said John Mylonas, who leads the venture for GM in the southern city of Togliatti. GM considered building an Opel model in Russia, he said, "but we saw that would not be successful."
The company knows that from sad experience. It first made a foray into Russia in the 1970s, negotiating with the Soviet government over a proposal to build Opels here; the deal never got off the ground. In the early 1990s, it tried again with a plan to build Chevy Blazers in Tatarstan, a republic within Russia, but the venture fell apart when the 1998 financial crisis here eroded consumers' purchasing power and pushed the price of a new Blazer far out of reach.
Mylonas, who has opened several new factories in Europe for GM, dismissed concerns about the dangers of doing business in Russia. "Life is risky to walk down the street," he said. "I don't see this as any different than any other project we did in Europe."
Russia has changed since the 1970s, enjoying four years of growth and an upturn in sales of domestic manufactured goods. Savov estimated that the car market in Russia would grow up to 5 percent annually in the next few years. And there is plenty of headroom in the market: With only 140 car owners for every 1,000 people, Russia lags far behind Poland, where the figure is 200.
Still, success is far from assured. One big question mark is GM's partner, AvtoVAZ. The Russian company dominates the domestic industry with 75 percent of the market, but it has suffered a series of financial scandals and at one point was Russia's biggest tax debtor. It has had the same management through most of the last decade.
Deadly location
Another is the plant's location in Togliatti, a city plagued by crime. As recently as 2000, contract killings there left 47 people dead.
Ford took a different path, avoiding entangling itself with a local partner. Henrik Nenzen, head of Ford in Russia, said partners meant compromises over quality and other issues. "During the 1990s, a lot of joint ventures in Russia went very sour," Nenzen said in an interview.
"Ford didn't want to be exposed to that risk."
Ford's new plant is making Focus cars that sell here for US$10,900, about one-quarter less than they would cost as imports.
Oleg Deripaska, one of Russia's most powerful executives, has concluded that the car business is "charity," after his experiences with running the No. 2 domestic automaker, GAZ. The company's sprawling factory employs about 8,000 workers but sells only about US$400 million worth of vehicles a year, he said.
"Our strategy is commercial vehicles -- busses, minivans, trucks," he said in an interview at his offices in downtown Moscow. "We are ready to close the Volga," the factory's mainstay passenger car line, which was considered prestigious in Soviet days. As for trucks, he said, "there is a place for us in that market."
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