It has been a struggle for established automakers to set up successful manufacturing businesses in Russia. Economic stability in the country has been difficult to achieve, while potential local partners have proved flaky, as GM and Fiat have found out in their dealings with AvtoVAZ and GAZ over recent years.
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Ford and Renault have made progress largely through going it alone, and Toyota and Nissan are looking to follow their example. But other western automakers are coming up against a new obstacle: Chinese automakers, which are increasingly forging alliances in Russia’s sprawling hinterland and making inroads into the market.
There’s a supreme irony here – western car companies’ have focused so heavily on China that Russia became back-burnered – resources were diverted toward setting up Chinese plants, where the market potential is more immediate. Indeed, it’s perhaps no coincidence that Renault and Ford are two automakers with less of a presence in China, which perhaps accounts for their stronger performance in the former Soviet Union.
For the Chinese, Russia is an obvious next step in an export strategy that has started with low-volume exports to very underdeveloped markets, such as Middle Eastern or North African countries. Russian standards of emissions and safety are lower than in Western Europe, allowing them to export current Chinese models with a minimum of modification. Given the appalling publicity resulting from the poor performance of the Chinese Landwind SUV in independent European crash testing, that’s just as well.
And Russia’s considerable but under-used engineering and manufacturing capability, a legacy of the USSR’s military might, makes it relatively simple for the Chinese to transition from importing CBU vehicles to CKD, SKD and ultimately full manufacture. Russia is giving them the chance to accelerate the learning curve about manufacturing overseas, which will stand them in good stead when they inevitably look to set up transplants in Europe and North America.
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By GlobalDataFor the Russians, the Chinese bring to the party simple but modern designs. They may not gain five Euro-NCAP stars or meet Euro V emissions rules, but the new products from Chery, FAW, or any of the other small Chinese OEMs are better than the obsolete Communist-era designs that many Russian automakers still produce.
In terms of product development, the Chinese have again accelerated the learning curve. While cash shortages mean it often takes years for the likes of AvtoVAZ to get new models into production, Chinese OEMs have followed the path pioneered by Daewoo in the 1990s and outsourced model development to experienced engineering and design houses in Europe.
The pioneer of these techniques is Chery, and it’s no surprise that Chery is already very active in Russia. It has joined Kia, GM and BMW in using Kaliningrad-based assembler Avtotor to assemble cars from CKD kits earlier this year, and has announced plans to expand the assembly line’s annual capacity to up to 25,000 units. Chery reckons it could sell 15,000 cars in Russia this year.
Avtotor, which benefits from special tax incentives in the Kaliningrad enclave, has low-volume assembly deals with a number of other Chinese automakers. An agreement with Nanjing Yuejin calls for the manufacture of 40,000 1-tonne trucks by 2010. And a deal with Zhongxing on the assembly of Admiral pick-up trucks and SUVs could see production rising to 20,000 units a year.
Elsewhere, another Russian assembler, Novosibirsk automobile factory (NAZ), has produced a batch of Chery cars, and is planning to establish volume production of up to 25,000 units a year. NAZ is a joint-venture enterprise established in 2005 by Chery Automobile and the TransService holding company, based in Novosibirsk.
Chery is also in talks with three potential local partners, including UkrAuto, to assemble cars in Ukraine, which has a free trade agreement with Russia, at a rate of 12,000 cars a year.
Chery is not the only active Chinese automaker in Russia. Far from it. Great Wall, maker of pick-ups and SUVs, is reportedly planning a US$100m plant with an annual capacity of 50,000 units per year in the town of Yelabuga in Tatarstan – the site of a failed GM project to build Chevrolet 4x4s a decade ago. Great Wall is already selling vehicles in Russia – in 2005 it sold 6,600 cars, mainly its attractive Hover SUV and various pick-ups which look like “pirated” Nissan designs. Great Wall is also reportedly in talks with – wait for it – Avtotor about assembly.
There is no shortage of distributors in Russia that are prepared to take on Chinese automakers. Irito Group, the biggest local GAZ distributor with dealerships across the country, has struck deals with Chinese automakers Xinkai, FAW, Great Wall and BYD. FAW is already selling imported trucks in Russia.
Hebei Zhongxing is now being distributed by two companies in Russia. One of them in Siberia assembles Zhongxing pick-ups under the FAW banner. Its production in Russia could reach 6,000 SUVs and pick-ups this year and 10,000 in 2007.
Russia is a logical next step for all these companies. The cost base is comparable to China, and the cars are attractive in terms of style, features and, crucially, price. By the time western OEMs get their act together in Russia, they could find the landscape has changed irrevocably.
Mark Bursa
