Russia has the biggest population in Europe (149 million people), nearly double the size of Germany. But Russia ranked only sixth in new car sales in Europe in 1999, selling below 25% the volume of Germany. Moreover, demand in Russia largely is for domestic vehicles like Lada and GAZ, brands uncompetitive on most of the continent.

In car production last year, Russia ranked sixth in Europe and twelfth in the world. So the market potential in Russia is vast, and the basis of an industry exists to meet it. But means of production must improve significantly, and means of consumers must improve significantly to buy the output, especially the hundreds of thousands of new vehicles that foreign manufacturers are keen to build there every year.

This report explains and evaluates strategies of international automakers to pursue opportunities amid high risks in Europe's final frontier. Big projects involve Fiat SpA, Ford Motor Co, General Motors Corp's Adam Opel AG, Renault SA and Volkswagen AG's Skoda auto as.

ORIGINAL PLANS FOR FOREIGN INVESTMENT
Brand Local Partner
US$m
Annual Capacity (1,000s)
BMW Avtotor
26
10
Chevrolet ElAZ
50
50
Fiat GAZ
500
150
Ford Bankirski Dom
150
100
Lada/Opel AvtoVAZ
2,350
310
Opel AvtoVAZ
200
150
Renault City of Moscow
300
120
Skoda Izhmash
250
80

Most small projects seem ephemeral, including BMW, Chevrolet, Daewoo, Hyundai, Kia and Land-Rover. This report ignores minor ventures, since the large ones are still tiny.

FIAT

Fiat, the foreign producer most experienced in car production in Russia, provided the turnkey plant that launched Lada in 1970. The Italians also built cars there before the 1917 Revolution.In late 1997, the company outlined plans for the biggest foreign investment in the auto industry in Russia: an $850 million venture in Nizhny Novgorod to make 150,000 cars a year - including Marea sedan, Palio Weekend estate and Siena three-box.The project, ZAO Nizhegorod Motors, is owned 40% by Fiat, 40% by Russian automaker OAO Gorkovsky Avtomobilny Zavod (GAZ) and 20% by European Bank for Reconstruction and Development (EBRD).

FIAT - INVESTMENT PLANS
Name of Venture: ZAO Nizhegorod Motors
Location: Nizhny Novgorod
Ownership: 40% Fiat. 40% GAZ. 20% EBRD
Investment Plan: Originally $850m. Now E400m
Start of Production: Originally Mid-2000. Now 2002
Annual Capacity: Originally 150,000. Now 75,000
Originally:
Marea, Palio Weekend, Siena
Products :-
 
Currently:
Palio, Palio Weekend, Siena

After economic crisis hit Russia in August 1998, plans for annual production stayed the same. But the investment target fell 40% to roughly $500 million, and the product profile changed with Palio hatchback replacing Siena. Fiat dropped Siena, finding the hatchback better and cheaper for Russians. The Italians then decided to source kits for Palio and Palio Weekend from Tofas Oto Ticaret AS, Fiat's main venture in Turkey. Originally, Fiat's operations in Poland were to supply kits of Palio Weekend and Siena. But the source was switched because Poland makes no Palio, while Turkey makes Palio plus Palio Weekend.

In March 2000, Marea was dropped in favor of a new version of Siena with a stretched wheelbase, named Maxi-Siena. Investment plans downgraded further to Euro400 million, and annual production capacity was halved to 75,000 units. Production, originally to start in autumn 1999, may not begin before early 2002. Output was to evolve from basic assembly to complete manufacture, but it is now envisioned to start completely with stamping, welding, painting and assembling.

FORD

Ford has struggled to find the right place and time to launch a successful venture in car production in Eastern Europe. Assembly plants in Belarus (opened in 1997) and Poland (opened in 1995) underperformed expectations, and both are closing this year. But the company hopes its third attempt will charm the markets - this time in Russia.

In June 1999, Ford announced plans for a $150-million factory to build its compact Focus in all body styles in Vsevolozhsk (30 kilometers outside St Petersburg) at an idle facility being renovated on premises of Russki Diesel, a defense-industry concern.

Operations are slated to start in October 2001, assembling kits from plants in Saarlouis (Germany) and Valencia (Spain). Output of 25,000 cars is targeted for 2002. Later, annual capacity is expected to reach 100,000 units with further investment (undisclosed) for stamping, welding and painting.

FORD - INVESTMENT PLANS
Name of Venture:
Ford Vsevolozhsk
Location:
Vsevolozhsk 30km outside St Petersburg
Local Partner:
Bankirski Dom
Ownership:
Undisclosed
Investment Plan:
$150m
Start of Production:
Mid-2001
Product:
Focus
Production Target:
25,000 in 2002

Ford is looking at building Volvos there, but this is unlikely in the short-term. The Swedish automaker sold 756 cars in Russia in 1999, hardly a basis for even assembly.

GENERAL MOTORS

GM has talked about building cars in Russia with AvtoVAZ for nearly 10 years. In the early 1990s, GM jostled with Fiat over taking a stake in the Lada manufacturer. In the mid-1990s, the Americans and Russians envisioned a $1.0 billion venture to make 300,000 units a year of Opel Corsa plus engines and transmissions. Output of Chevrolet S-10 pickup was even contemplated. Now GM aims to assemble Opel Astra with initial capacity of 35,000 units a year. Investment of $200 million by 2005 could boost annual capacity to 150,000 units.

GM - INVESTMENT PLANS - PHASE 1
   
Name of Venture: Undecided
   
Location: Togliatti 1,000km southeast of Moscow
   
Start of Production: 12-14 months from agreement
   
Ownership: Undecided
   
Investment Plan: $200m by 2005
   
Product: Opel Astra
   
Annual Capacity: Initially 35,000. Ultimately 150,000
   

A second step in cooperation would produce 90,000 units a year of Lada Niva 2123, an all-wheel-drive off-road vehicle, debuted as a concept at the Moscow motor show in 1998.

GM - INVESTMENT PLANS - PHASE 2
   
Name of Venture: Undecided
   
Location: Togliatti 1,000km southeast of Moscow
   
Start of Production: Trial in 2000. Serial in 2001.
   
Ownership: Undecided
   
Investment Plan: $350m by 2005
   
Product: Lada Niva 2123
   
Annual Capacity: 90,000
   

Here is a photo of the 2123, the best-looking vehicle ever unveiled by AvtoVAZ.

A prototype appeared at the Moscow exhibition in 1999, and AvtoVAZ wants to assemble a trial set of 500 units in 2000.

The final stage of an AvtoVAZ-GM engagement would produce 220,000 units of Lada Calina 1119, a small car premiered as a prototype at the Moscow show last year.

GM - INVESTMENT PLANS - PHASE 3
   
Name of Venture: Undecided
   
Location: Togliatti 1,000km southeast of Moscow
   
Start of Production: Trial in 2001. Serial in 2002.
   
Ownership: Undecided
   
Investment Plan: $2.0bn by 2005
   
Product: Lada Calina 1119
   
Annual Capacity: 220,000
   

Here are pictures of Lada Calina 1119. It looks like Corsa, and AvtoVAZ developers acknowledge they aped Opel's design.



                                     

(A note on nomenclature for Russian cars. Generally, the lower the codename, the smaller the model. Oka, the shortest, is dubbed 1111. GAZ's Volgas, the longest, are 3102, 3110, 3111, etc.)

The feasibility of the second and third stages are under review, and the cost is a big issue. AvtoVAZ said it needs $350 million for the 2123 and $2.0 billion for the 1119. All stages would rely heavily on AvtoVAZ's capacity to design, engineer and produce vehicles to save money. But plans have changed before, and they could change again. Some sources hint GM is reconsidering Corsa assembly, as Astra may prove too expensive for the market. AvtoVAZ engineers also have reservations about Astra's suitability for Russian roads.

RENAULT

In May 1999, Renault became the first car mark from Western Europe made in post-Soviet Russia. Before, foreign brands built there had been only American and Korean.

Renault's project, a 50/50 venture with the Moscow municipality, is named OAO Avtoframos ('Avto' for auto; 'fra' for France; 'mos' for 'Moscow'). It is based at Moskvich, a carmaker controlled by the Russian capital. Moskvich is not actively involved in Avtoframos, but its site might have seemed logical for Renault: in the 1960s, the French company supplied equipment and technology to the Russian manufacturer, then known as Automobile Factory of the Lenin Komsomol or AZLK (Avtomobilny Zavod Leninskovo Komsomola).

RENAULT - INVESTMENT PLANS
   
Name of Venture: OAO Avtoframos
   
Location: Moscow
   
Ownership: 50% Renault. 50% City of Moscow
   
Products: Megane Classic, R19
   
Start of Production: 05 1999 - Megane Classic
11 1999 - R19
   
Investment Plan: Initially $420m. Currently $300m
   
Production Schedule: 4,000 in 2000. 100,000 in 2005
   
Annual Capacity: Initially 120,000. Currently 100,000
   

Initially, Avtoframos forecast production volumes of: 2,000 in 1998; 10,000 in 1999; 65,000 in 2001 or 2002; and 120,000 in 2005. But these plans, like others, have been slowed by Russia's economic crisis. Output started a year late, and only 535 units rolled out in 1999. Avtoframos still aims to make 100,000 cars in 2005, only slightly off original plans. But investment plans for 2005, once $420 million, are now 30% lower: $300 million.

Avtoframos began making only Mégane Classic sedans. However, poor sales prompted the introduction of a second vehicle in November 1999 - the cheaper R19.
(Both models are assembled from kits from Renault's plant Turkey, similar to Fiat's approach to Russia.)

Avtoframos later could produce engines, and it may build a version of the Euro5,000 vehicle that Renault plans to launch in 2003 at SC Automobile Dacia SA of Romania, which the French company acquired in October 1999. The option of making Dacias will become increasingly attractive, if prices for Mégane Classic and R19 remain too high for most Russians.

SKODA

In mid-1999, the Czech company agreed to build Felicia hatchbacks and station wagons in Russia with OAO Izhmash in a venture named Skoda Auto Udmurtia (SAU) - owned 75% by Skoda, 25% by Izhmash. It will be based in Izhmash's broad complex in Izhevsk in the Udmurt Republic, the easternmost site of car production in Europe, over 1,350 kilometers outside Moscow.

Skoda cautiously hopes to launch output in third-quarter 2000. Plans eventually call for investment of $250 million to make 100,000 vehicles a year - including stamping, welding, painting and assembling. SAU was scheduled to switch production to Felicia-replacement Fabia in 2002, but delays in the start of operations could lead the venture to begin with the new vehicle.

SKODA - INVESTMENT PLANS
Name of Venture: Skoda Auto Udmurtia
Location: Izhevsk 1,350km east of Moscow
Ownership: 75% Skoda. 25% Izhmash
Products: Felicia. Fabia in 2002
Start of Production: Third-Quarter 2000
Investment Plan: $250m
Production Schedule: 4,000 in 2000. 100,000 in 2005
Annual Capacity: Initially 80,000. Currently 100,000

The project may look ill-conceived. Izhmash has performed the poorest among carmakers in post-Soviet Russia: its output plunged from 133,200 units in 1990 to 4,756 units in 1999. Logistics on the edge of Europe could prove costly and tricky. But other signs are auspicious. Izhmash has notable engineering credentials: the main producer of the famous assault rifle AK-47 Kalashnikov; the largest motorcycle maker in the ex-USSR (its first bike was built in 1928).

Car production began only in 1966 with Moskvich-based sedans, but Izhmash has innovated vehicles. In 1973, it created the first Soviet hatchback. It also rolled out many early car-derived commercial vehicles in the USSR, including pickups and vans, based on Moskviches. And there is an upside of the distance from Moscow: Izhevsk is ideally suited as a distributor for Skoda in Asian and European Russia. Since Izhmash now builds few cars, its commitment to Skoda should be immune to any concerns that its output of foreign models could harm the viability of its products.

So SAU has potential for success. Crucially, it has a car with a feasible price: Felicia could start around $7,000, though Fabia could run close to $9,000. Skoda already has over 40 sales sites in Russia, the biggest retail network among foreign brands. Plus the main marketing slogan is focused and strong: "Slavic cars with German technology" - referring to Skoda-owner VW.

As an aside to explain the difficulties at Izhmash: much of the company's potential was untapped during Communism because its major role in arms production kept the company under the Ministry for Defense. Izhmash was the only producer of motor vehicles in the ex-USSR not under the Ministry for the Automobile Industry, so it lost out on subsidies for new models.

INVESTMENT SUMMARY

By 2005, aggregate annual capacity is projected to reach 1.0 million units with investment to approach $4.0 billion.

Each project embraces creative ideas: Fiat and Renault will exploit their sophisticated operations in Turkey as low-cost sources for kits and parts. GM plans to maximize use of resources and talent at AvtoVAZ to make cars affordable and attractive to Russians. Skoda hopes to draw on the remarkable technical traditions at Izhmash.

Also foreign automakers are identifying parts that can be co-sourced for their models in Russia - to boost volumes of components orders high enough to entice investment there by international suppliers that have been averse to locating in a high-risk market with low returns in the short-term. This pooling is start with 10-15 items like batteries, cables, glass, mud flaps, tires, wheels. A positive undercurrent: Russian automakers are shaking their dependence on barter; foreign suppliers now can seek opportunities with Russians, expecting to be paid in cash, not in kind.

EVALUATIONS

Much in these investment strategies looks good, and optimism is returning to Russia. Economic and political turmoil has hurt before, but elections recently passed with some promise, and car production rebounded 14% to 955,406 in 1999 from 839,608 in 1998. This total was only 27,000 below the post-Soviet high of 985,809 in 1997.

CAR PRODUCTION IN RUSSIA
               
Company 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Avtotor 0 0 0 0 0 0 0 1,862 1,589 976
AvtoVAZ 736,055 677,280 676,857 660,275 530,876 609,025 684,241 748,828 605,728 717,660
Doninvest 0 0 0 0 0 321 4,062 13,225 4,988 9,395
ElAZ-GM 0 0 0 0 0 0 41 2,060 1,464 320
GAZ 72,000 69,000 69,001 105,654 118,159 118,673 124,284 124,339 125,398 125,486
Izhmash 133,200 123,100 56,500 31,314 21,718 12,778 9,146 5,544 5,079 4,756
KamAZ 1,962 3,114 4,483 5,190 6,118 8,638 8,935 17,933 19,102 28,004
Moskvich 106,004 104,801 101,870 95,801 67,868 40,600 2,929 20,599 38,320 30,112
UAZ 53,450 52,491 54,317 57,604 53,178 44,880 33,701 51,411 37,932 38,686
ZiL 20 14 14 6 7 1 0 8 8 11
Total 1,102,691 1,029,800 963,042 955,844 797,924 834,916 867,339 985,809 839,608 955406
                     

Nevertheless, foreign investment and production targets in Russia look improbably high. Plans may be padded to lure global suppliers there, but many signs suggest the objectives are fundamentally misguided.

Forecasts for the car market still vary widely. Predictions for 2005 span from 1.15 million units to 1.56 million units, indicating the great uncertainty governing outlooks.

FORECASTS - CAR REGISTRATIONS
                   
New & Used Units
(in 1,000s)
2000 2001 2002 2003 2004 2005 2006 2007 2008
                   
Forecast 1 1,017 1,090 1,099 1,125 1,145 1,153 1,174 1,191 1,135
                   
Forecast 2 1,045 1,131 1,232 1,288 1,315 1,368 1,483 1,500 1,570
                   
Forecast 3 1,317 1,387 1,439 1,498 1,538 1,560 1,615 1,650 1,710
                   

Also foreign makers may have chosen to build models that are too big and pricey. Most ventures aim to offer C-segment or mid-sized cars from $10,000 to $17,000.

FORECAST PRICES: RUSSIAN-MADE MODELS
 
Model
US$
Marea
10,000
Palio
8,000
Focus
12,000 - 15,000
Astra
10,000
Megane
13,500 - 16,900
R19
7,500
Felicia
7,000
 

The prices may seem low to Westerners, but few Russians can buy cars at these levels.

Indeed, while car demand may be growing, it also is thinning. Before August 1998, models under $10,000 comprised roughly 80% of sales. But, last year, over 90% of sales were for vehicles below $7,000.

Consider samples prices of local models:

PRICES - RUSSIAN CARS
Model US$ Model US$
       
GAZ   VAZ  
3110-102 4,650 21043 3,250
3110-305 4,150 21047 3,200
    21053 3,000
Moskvich   2106 2,950
214102 2,650 21065 2,800
214102 R5 3,350 2107 3,350
    21074 3,200
Izhmash   21083 3,900
Orbita 2126 2,300 21093 4,000
    21099 4,600
UAZ   2110 5,500
31519 2,900 21102 5,400
31519-012 2,800 2111 6,400
3160 9,000 21213 3,600
       

Local manufacturers are alone with products in line with purchasing power. This is a key reason sales of domestic output jumped last year, while import volumes of new cars dipped from roughly 60,000 units in 1998 to roughly 40,000 units in 1999.

Skoda is the only foreign venture that might offer a model under $7,000 with Felicia, and R19 from Avtoframos is the only foreign vehicle to come close to that at $7,500.

To recast the numbers: before the bubble of bullishness about Russia burst in August 1998, prices commonly paid for cars still were far under levels that foreign makers hoped to charge. The gap only has widened between prices of local models and foreign price targets.

The market could toughen for foreign marks later this year, following GAZ's introduction of the 3111, a rear-wheel-drive sedan poised to become the best car ever mass-made in Russia.

A handful were built in December 1999, and GAZ is producing sample sets every month, until the launch of serial output on a new production line in third-quarter 2000.

The 3111, also the longest mass-made passenger vehicle in Russia at roughly 4800 millimeters, may not rival quality standards of similar-sized vehicles from Western Europe, but it is a big advance for Russia. It will feature many foreign parts, including Hella lights and Lear seats. Options may include foreign-brand air-conditioning, anti-lock brakes, central locking, driver-side airbags and power steering. The engine range is to include a 4-cylinder diesel from Steyr-Daimler-Puch Fahrzeugtechnik AG & Co KG, built on license by GAZ.

If base prices start around $7,000, the 3111 will impact sales of models foreign and local, though output is not expected to top 10,000 units a year in the short-term. The goal for this year is a tentative 2,000. Foreign manufacturers may not want to admit this, but the 3111 could reinforce the price wall of $7,000, and every dollar may come to count more than it already does. Indeed, Avtoframos only can hope to sell a mere 2,000 units of R19 at $7,500 in 2000.

Foreign Models Must Be Smaller

The market's price structure may force foreign players to switch to smaller vehicles. To put this into perspective: among all foreign models made in Eastern Europe throughout the 1990s, the best-selling vehicle is in the A-segment: Fiat Cinquecento.

Of course, minis may be too small for Russia, but the B-segment may be the answer. This view might seem mistaken, once comparing the dimensions of foreign models with the dimensions of local models. Astra is roughly 50 millimeters longer than Lada Samara hatchback, while Corsa is about 250 millimeters shorter than this Russian car. But Cinquecento always sold well in Poland, a market with the bigger outdated Polonez available at similar prices. Among other things, Polish customers may have believed quality advantages of Cinquecento outweighed size advantages of Polonez. Plus Cinquecento was new; Polonez was not.

A similar case could be made for Corsa against Samara - even if GM could not squeeze prices for Corsa below $6,000; even if the Russian vehicle would continue to cost $3,500 to $5,000. Or, if GM can Russify the Astra, maybe it can Opelfy the Calina.

Ford should think similarly. It argues it will start production in Russia with a new model: the C-segment Focus. But this will be a familiar vehicle, when output begins in mid-2001. Yet the next generation of the B-segment Fiesta debuts in third-quarter 2001, and insiders recently said Ford is considering making Fiesta instead of Focus in Vsevolozhsk.

Fiat is in better shape with Palio, but this model still could hit $8,000. (The D-segment Marea was dropped from consideration for production in Russia, since it was expected to overrun $10,000.)

One final thought on the market's price sensitivity:

Consider the Chevrolet Blazer that GM assembled in Elabuga, Tartarstan. Only 1,464 were made in 1998, and output stopped before 1999, since roughly 1,000 units were stuck in stock. Prices were slashed last year to fire-sale levels of $15,000, but sales still stagnated, and hundreds of vehicles remain unsold.

If GM struggles at that price to sell a tiny volume of roomy rugged Blazers (great for Russia's rough roads), Ford should not even pray to make 100,000 compact Focus at nearly the same price.

Exports of Foreign Models from Russia Unviable

Another drag on foreign ventures is Russia's position in the geography of trade. It is one-dimensional - in contrast to three-dimensional markets in Eastern Europe. Countries like Poland have attracted billion-dollar foreign investments in car production, partly because these places enjoy three vistas of commercial opportunity:

1 an established local market with healthy sales;
2 liberal/unimpeded access to advanced markets in Western Europe;
3 easy links to fast-growing markets nearby in Eastern Europe.

Embellishing this point, Skoda aims to sell its output evenly: a third in Czech Republic; a third in Western Europe; a third in Eastern Europe and emerging markets elsewhere. This balanced distribution of sales has buoyed Skoda's overall performance, against recent declines in Czech demand. (Daewoo and Opel are cultivating similar strategies in Poland.)

Big projects must have multiple options for channeling output to hedge risks. If producers fail to think along these lines, problems will emerge. Example: When Suzuki Motor Corp started building cars in Hungary, it focused on local sales. Unsurprisingly, the company coped poorly with an economic downturn there in 1995, as it had inadequately developed export prospects. Now the majority of Suzuki's output in Hungary is shipped abroad.

In contrast, foreign vehicles made in Russia largely must be sold in Russia, a one-dimensional market, despite its vastness. No attractive escape hatches exist to unload unsold vehicles there. Neighboring markets of the former Soviet Union are weak (even compared to Russia) with modest exceptions of Kazakhstan, Ukraine and Uzbekistan.

Moreover, Russia has no privileged trade with mature markets like Western Europe, and it would be costly and difficult to ship units from Russia to France or Germany. Plus foreign-brand cars from Russia may be regarded poorly in advanced economies.

Since Russia presents scant prospects to cope with risks of high manufacturing volumes, investors have been slow to launch operations there. They want to be especially confident about the market, as the 1990s have shown that confidence in Russia can be misplaced easily.

Foreign Players Spurn Russian Products

Another difference between Russia and the rest of Eastern Europe: In countries like Poland, foreign investors bought local manufacturers. In Russia, no outside producer has said it intends to take equity in a domestic partner.

International players also seem averse to upgrading existing Russian products. One "consequence" for foreign automakers: They will not immediately enjoy big production volumes that could tempt suppliers to follow them to: (1) first improve domestic products; and (2) later support foreign vehicles.

Automakers like VW could quickly pull parts makers to countries like Czech Republic. These suppliers chose to support plants making high volumes of old models - because they knew they would be in line for business later for modernized products. Renault is now telling a similar story to suppliers about supporting Dacia SA.

By not buying local producers in Russia, foreign players effectively prolong the existence of a huge market of cheap poor-quality vehicles. These models often linger because their producers lack the resources to roll out anything better. Russian automakers try to introduce updated vehicles, but the lag between concept model and production model can be many years. The Lada 2110 started appearing in markets in Eastern Europe only recently - roughly 10 years after the model was first announced. GAZ is an exception here with relative punctuality.

This is not a recommendation for Fiat to buy GAZ, for example. But, without foreign purchases of local producers in Russia, the country fails to get a needed push in market modernization that international manufacturers accelerated in Czech Republic and Poland.

Global Mergers May Kill Foreign Ventures in Russia

The fever of consolidation in the industry worldwide aggravates uncertainty in Russia. Consider the Fiat-GM partnership. The companies now discuss cooperation in Latin America and powertrain. But they may talk later of consolidating projects in Russia if they would decide that separate ventures there of Fiat and GM could cannibalize each other - especially if an overload of foreign competitors persists.

Fiat and GM each have an evolving presence in core emerging economies - Russia plus Argentina, Brazil, India, Poland, South Africa and Turkey. They may decide not to be in all countries with parallel production.

Moreover, if GM would buy Daewoo, it would have three partners for small cars: Daewoo, Fiat and Suzuki. In the ex-USSR, Daewoo owns a plant in Ukraine plus it contracts out assembly of cars in Russia. So GM likely would need to rationalize its interests in the former Soviet Union, and the abandonment of any one project may be difficult to rule out - even though Fiat and GM have been the most dedicated in negotiating ventures in Russia in the 1990s.

Russia overcrowded even before serial output starts

The sheer number of foreign investors in Russia could lead to problems, especially if their products continue to appear over-priced.

If only one foreign manufacturer would invest in Russia, perhaps its venture already would be running with modest output. But five major projects plus perhaps 10 minor operations make a crowd, even in a huge market like Russia. If each player sticks to its current plan, if the market fails to expand dramatically, foreign plants may fall into a price war to shift stock, similar to situations that have wracked India and Turkey.

The fallout could hurt investment prospects - and opportunities to make small cars, especially if price gaps between small cars and mid-sized cars erode. Yet, the first investor with an affordable appealing product still could gain an edge on competitors.

Concepts Versus Reality

To conclude, an analogy may capture the fate awaiting foreign ventures in Russia: these projects must undergo the type of transformations subsequently imposed on viable concept cars unveiled at auto shows. Like concept cars, these investments typically look best on first presentation - confident, full of possibilities, untouched.

But, if any experimental vehicle is to evolve into a mass-produced model, it must incur compromises and sacrifices. It has to become less daring, more conservative. This can take years. Still, it can die before maturity. Few actually enter production.

The same will hold true for foreign plans to build cars in Russia. Initial objectives look impressive. They are bold. But many will be abandoned. Survivors will require major revisions in the early stages of existence. Some operations will change, even once production starts.

Already, some ventures have scaled down investment plans. Some have slashed output targets. Some have softened product profiles… Some have revised all three.

To sharpen the picture of the difficulties to build cars in Russia, consider a contrast:

Hungary never built cars under Communism, and its market of 10 million people is relatively small. But, in the 10 years that Eastern Europe has been opening to foreign investment, Hungary has assembled cars from Audi, Opel and Suzuki: output topped 120,000 units last year.

Russia was the biggest car producer in Eastern Europe during the Cold War, and its market of 149 million people is the biggest in Europe East or West. But, in the 1990s, no project has been launched there that has built even 20,000 foreign models a year.

  HUNGARY RUSSIA
     
Population
10m
149m
 
Car Output (1990)
0
1,102,600
% Output Foreign
0
0
 
1999 Car Output
120,000
955,000
% Output Foreign
100
2
     

So lots of concepts of foreign ventures have debuted in Russia, but none has entered production in significant volume. Let us hope this changes.


Ryan James Tutak has covered the auto business in Eastern Europe since 1992. His work has been reported and used by companies, institutions and media in 30 countries - including Arthur Andersen, Automotive Business International, CNN, Financial Times, Japan Automotive News, KPMG, Morgan Stanley, Nikkei, Reuters, Ward's, WirtschaftsBlatt and World Bank.

This report was adapted from a presentation at a seminar that Ryan also chaired on the automotive industry in the ex-USSR in April. The event was organized by WBR Ltd in London.

Ryan can be contacted by:
E-Mail: rjt@pronet.hu Telefon: +36-1 / 266-2693
Telefax: +36-1 / 317-7257

To learn about WBR auto conferences, contact Stephen Butler:
E-Mail: sbutler@wbr.co.uk Telefon: +44-207 / 759-9007
Telefax: +44-207 / 759-9001