Ford Motor Company opened its first plant in Russia to produce cars for the domestic market last month, just as the Kremlin zeroed in on protecting the domestic industry.
The initial production run of a few thousand at the Vsevolozhsk plant, in the Leningrad region, will be boosted to 25,000 Ford Focus cars a year by 2007 if things go well. And if things go really well annual production could rise further to 100,000 units.
After a decade of standing on the sidelines, international car companies are beginning to take the plunge into the Russian market. Retail sales are booming as the average wage continues to rise relentlessly and car sales have been rising by 7% to 8% a year to reach the current 120 cars per thousand of the population – still low by international standards.
The Vsevolozhsk plant is typical of this foreign initiative in that it will start life assembling parts imported from western Europe. However, Ford hope to source half the inputs locally within five years and plans to pump $45 million into local suppliers to bring them up to scratch.
The Focus has a relatively modest $10,900 price tag and Ford estimate that it has some 300,000 potential customers. To boost sales Ford plans to introduce financing deals for customers, a strategy that has yet to make its debut in Russia.
“We were serious when we came to Russia and mean to stay here for the long term,” says Khenrik Nenzen, president of Ford’s Russian representative office.
International car companies have avoided Russia until recently. AvtoVAZ, which produces the ubiquitous Lada, has been begging for a strategic investor for years, but the $500 million it wants to launch a new mass-market model is too much for even the biggest investors to consider at the moment.
But the sheer size of the Russian market makes it hard to ignore. After 10 years of dithering General Motors started the ball rolling last year by setting up a $300 million joint venture with AvtoVAZ to produce a new version of its popular SUV (sports utility vehicle) the Niva. The Ford plant goes one step further as it is the first 100% foreign car production company in Russia.
Other producers are in the wings: Japanese company Isuzu announced last month that it was planning to tie up with Severstal Steel, which has a stake in the UAZ automotive plant, to produce the Elf light truck. Currently this market is almost completely monopolized by GAZ, which produces Russia’s “other car”, the Volga. Volkswagen has also said it is considering setting up in Russia.
Ford’s decision is timely as the Kremlin has itself changed gear: starting with knocking the oil and gas sector into shape, in the last few months president Vladimir Putin has turned his attention to tackling problems in the major manufacturing industries.
Peter Westin, an economist with Russian brokerage Aton, says: “Now that Russia is making good money from oil and gas exports and has gone a long way towards breaking the country’s addiction to high international prices, the Kremlin intends to use the extra money to fix the production sectors. The automotive industry is an obvious place to start.”
The cabinet is considering a comprehensive automotive strategy but Putin slammed the government for failing to approve the plan before it broke up for the summer holidays at the start of July.
Details remain sketchy but the plan seems to be to slap high tariffs on imports – already about 35% of a car’s value – to encourage foreign producers to set up in Russia rather than import. The high tariffs have already restricted imported vehicles to the rich, but even this market is growing.
