General Motors Corp is considering building a second vehicle at its venture with AO AvtoVAZ in Russia, revisiting plans to make the mid-sized Astra from GM’s German subsidiary Adam Opel AG. Ryan Tutak examines GM’s evolving manufacturing strategy for Russia.


GM-AvtoVAZ ZAO (GMAV) wants to start producing sedans of current Astra (code-named T3000) in September 2003 with annual volumes forecast to reach 10,000 in 2004 and 25,000 in 2005-2008. Models would be badged Chevrolet and sold only in Russia.


The project awaits approval from the European Strategy Board (ESB) of General Motors Europe AG (GME), following a presentation by GMAV managing director John Mylonas to GME’s portfolio strategy committee at Opel headquarters in Russelsheim on 28 November 2002.


T time?
But the timing of a decision is unclear. The project, bumped from the agenda for ESB’s meeting in December 2002, could gain a hearing in January 2003. It faces internal scrutiny, though backers are said to include G Richard Wagoner Jr (GM’s chief executive and president as well as incoming chair) and John F Smith (GM’s outgoing chair).

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The car’s cost is key because buying power in Russia remains weak. Since the
Soviet Union collapsed in 1991: no imported new vehicle has sold over 15,000
units a year there; the country has not built even 5,000 units a year of any
foreign model; and over 95% of the market is for autos below $10,000. Astra
can sell for 16,500 euro to 23,500 euro ($16,630-US$23,690) in Western Europe
for versions fancied by GMAV, but the venture believes it can cut the base price
to 9,000 euro ($9,070), by sourcing major parts in Russia (excluding certain
electronics).



































Country Contrasts


Indicator
Russia

Hungary
Population
144m

10m
1991 Car Output
1,029,800

0
% Foreign
0

2001 Car Output
1,021,600

143,300
% Foreign
5

100
SOURCE just-auto.com


Output targets for T3000 in Russia seem too low to localise components economically, but GM-AvtoVAZ sees creative solutions.


To stamp body parts, the venture aims to achieve profitable volumes by becoming the sole supplier of replacement panels for T3000. As this generation of Astra ceases production in Western Europe in 2004, dies and tools would be available for Russia from plants making the vehicle in Belgium, Germany and UK. Moreover, replacement panels can be priced 200%-300% higher than original pieces, and Russia offers cheap production costs, so this proposition could appeal to GME as well as GMAV.


Magyar motors
GM-AvtoVAZ also wants to assemble engines for T3000 from kits from Opel Hungary Powertrain Ltd in Szentgotthard, Hungary (a subsidiary of Fiat-GM Powertrain BV, a 50/50 venture between Fiat Auto SpA and GM.) Annual volumes could top 50,000 (double the anticipated car output) because the 1.8-litre, 16-valve petrol motor is the same powerplant designated for export versions of GMAV’s first model – Chevrolet Niva, a compact sport-utility vehicle (SUV), based on Lada Niva 2123 from AvtoVAZ.







































Opel Hungary



Engine Production
2000

2001

1-11 2002
Total
480,030

399,945

394,200
% of 1.4L, 16-valve petrol
24

24

18
% of 1.6L, 16-valve petrol
27

24

30
% of 1.8L, 16-valve petrol
49

52

52
SOURCE just-auto.com



Output of Chevrolet Niva, officially launched on 23 September 2002, is expected to reach 456 in 2002, 35,000 in 2003, 60,000 in 2004 and 75,000 in 2005. [A pickup version is to be added in 2004, and a ‘combo’ (covered pickup) is to follow in 2005.]


Export editions (upgraded to engine-emission and road-safety standards current in European Union) could comprise as much as half of overall volumes. Slated to enter production in September 2003, these models could be shipped to Europe (East and West), Latin America (especially Mexico) and Middle-East.




















































































































































Chevrolet Niva











Previous Projections


2003

2004

2005

2006

2007

2008

2009

2010

2011

Russia

Sales

20,000

26,023

26,937

28,269

29,628

30,856

32,084

33,103

34,260


US$ Price

7,500

7,500

7,500

7,500

7,500

7,500

7,500

7,500

7,500

Europe – West

Sales

10,874

19,640

20,034

18,432

18,628

17,833

15,893

13,336

10,496


US$ Price

14,896

16,365

17,101

17,339

17,556

17,776

17,999

18,225

,18,398

Europe – East

Sales

1,920

3,468

3,536

3,252

3,288

3,148

2,805

2,353

1,852


US$ Price

14,141

15,535

16,235

16,460

16,667

16,876

17,087

17,301

17,466

Mexico

Sales

2,206

3,000

4,500

5,000

7,000

6,500

6,000

5,500

5,000


US$ Price

16,321

16,525

16,732

16,941

17,153

17,367

17,584

17,804

18,027

Capacity Available

Units


7,869

4,993

20,047

16,456

16,663

18,218

20,708

23,392

Capacity Total

Units

35,000

60,000

60,000

75,000

75,000

75,000

75,000

75,000

75,000




SOURCE: General Motors CIS (issued March 2002)

[Standard editions of GMAV’s Niva run on a Lada powertrain (1.69-litre, 4-stroke petrol engine with multi-point injection plus 5-speed synchronised transmission). These are mainly for Russia, but they meet emission standards (Euro 2) adequate for China and countries of the ex-USSR, and sales to these markets could start in mid-2003.]


To bolster the feasibility of assembling T3000, GM-AvtoVAZ would try to maximise the number of outsourced parts common with Niva. For example, Johnson Controls Inc of USA supplies Astra with seats that have been tested successfully in Niva, and GMAV has encouraged JCI to build the seats in Russia, though JCI is among many suppliers still reluctant to invest there.


Growing apart
Similarly, Chevrolet Niva shares over 50% of its parts with the original Lada Niva (code-named VAZ-21214, launched in 1977). But this percent should drop, as GM-AvtoVAZ improves its vehicle, while playing a bigger role in making it. (AvtoVAZ is obligated eventually to discontinue its Niva, and its volume likely will fall inversely with rises in output of Chevrolet versions.)



Currently, GMAV assembles Chevrolet Niva, but AvtoVAZ stamps most parts, then paints bodies-in-white. The venture hopes to finish installing its paint shop before April 2003, and it owns a welding line on AvtoVAZ premises. To refine the vehicle, GM-AvtoVAZ has contracted Group Lotus PLC in the UK for engineering support.






Model Comparisons



























































































Specifications Chevrolet Niva Lada Niva 21214
body all steel all steel
construction monocoque, unitary monocoque, unitary
doors # 5 3
seats # 5 4/5
payload kg 450 400
curb weight kg 1,350 1,210
height mm 1,652 1,640
length mm 4,048 3,740
wheelbase mm 2,450 2,200
width mm 1,770 1,680
track – front mm 1,450 1,430
track- rear mm 1,440 1,400
maximum speed km/hour 140 137
capacity of fuel tank litres 58 42
noise level – inside dB(A) 78 83
noise level – outside dB(A) 74 78
durability km 140,000 100,000




SOURCE GM-AvtoVAZ ZAO

GM-AvtoVAZ vision out of focus?
Yet a competitor could foil plans for T3000 in Russia. At a US$150m factory, 24km northeast of St Petersburg in Vsevolozhsk, Ford Motor Co builds Focus (code-named C170), a family vehicle similar in size to T3000. This era of Focus is due for replacement in Western Europe in second-quarter 2004, and the Russian plant likely would switch to the successor vehicle (code-named C307) before 2005. So, coincidentally, GMAV may be boosting output of T3000 (seven years old in 2005), while Ford in Russia starts rolling out an all-new rival. (A3300, heir to T3000, is to appear in Western Europe in first-quarter 2004, but GM-AvtoVAZ has no plans to make it.) Ultimately, the impact of C307 on T3000 in Russia will depend on the price gap between them. If T3000 is not markedly cheaper than future Focus, customers may flock to the newer model. The base Focus from Vsevolozhsk (a 1.6-litre, 4-door hatchback) carries a maximum price recommended by Ford of US$10,900 (10,810 euro), but units have been spotted for US$9,700 (9,620 euro), not far from the starting price envisioned for T3000. (Focus output in Russia is slated for 3,700 in 2002 and 9,500 in 2003.)


Blazing new image for Chevy
With floor space of 142,000 square meters, GMAV can build 100,000 vehicles a year. Since the anticipated maximum volume for Niva is 75,000, the venture has been looking to fill out the capacity with another model. A second vehicle also could help develop (even repair) the brand image of Chevrolet in Russia. (An attempt to establish the badge in the mid-1990s floundered. GM sought to produce 50,000 Chevrolet Blazers a year in Elabuga in the autonomous republic of Tatarstan, but operations never progressed beyond superficial assembly because the vehicles were too expensive: under 3,600 units were made from 1995 to 1998, and the stock took years to deplete. Still, GM believes the brand will be central to its long-term success in Russia: like Marlboro cigarettes, Chevrolet evokes the independent spirit of rugged cowboys on America’s frontier – an enduring image with proven marketing appeal to consumers across Eastern Europe.)



GMAV is owned 41.5% by each GM and AvtoVAZ plus 17% by European Bank for Reconstruction and Development (EBRD). (If GME approves the plan to make T3000 in Russia, AvtoVAZ and EBRD still must concur before GMAV can implement the project, but no objections are foreseen.)


GM-AvtoVAZ shareholders have contributed US$238.2m in capital to their venture: US$99.1m by GM in cash and equipment, US$99.1 by AvtoVAZ in intellectual property (patents and trademark for Niva 2123) and US$40m by EBRD in cash. The bank also has extended US$100m in credit, which GMAV has yet to tap.



Die already cast
Accumulated investment is scheduled to reach US$338.2m: US$92.3m in equipment, $82.3m in cash and US$63.6m in intellectual property. By 30 August 2002, investment totalled US$195.7: US$81.1m in cash, US$63.6m in intellectual property and US$51m in equipment. (Though all funds were officially dedicated to launching Niva, roughly US$3m was quietly allocated for dies and tools for T3000, and some of this hardware already has been purchased.)






click here for a larger image

click here for a larger image

GMAV began production with 200 employees, a number expected to double before 2003. When the site makes 75,000 vehicles a year, it plans to employ 1,200 with the assembly line operating in three shifts. (Currently, a dozen expatriates are involved.)


The venture hopes to have 20 dealers in Russia before 2003 with a medium-term goal of 50 outlets and a long-term goal of 90 outlets. These sites will include existing retailers for AvtoVAZ and GM plus independents.



AvtoVAZ, originally called VAZ for Volzhsky Avtomobilny Zavod (Volga Auto Factory), is based nearly 1,000km southeast of Moscow in Tolyatti. The city, home to 721,000 people, was founded in 1737 as Stavropol, then renamed in 1964 to honour Palmiro Togliatti, co-founder and leader of Italy’s Communist Party for 1944-1964. Fiat provided the turnkey plant for VAZ to start building cars under brands Lada and Zhiguli in 1970.








AvtoVAZ















































Location Tolyatti
Output Launch 1970
Output Capacity 750,000 cars/year
Area – Land 600 hectares
Area – Plant 4m square meters
3 car assembly lines – each 1.7km long
Products cars, minivans, pickups, sport-utility vehicles
(over 20 million units built from 1970 to 2001)
Employees 117,000
2000 Net Profit (US$197m)
Net Sales US$2,379m
Total Assets US$2,747m
2001 Net Profit US$549m
Net Sales US$3,744m
Total Assets US$3,859m





SOURCE AO AvtoVAZ, Troika Dialog

AvtoVAZ’s main plant, the biggest car factory in Europe with annual capacity over 750,000 vehicles, made 677,687 in 1999, 705,561 in 2000 and 768,030 in 2001. But the Russian automaker recently slashed its forecast output for 2002 from 770,000 to 747,000.


Eventually, insiders acknowledge, GM wants to own AvtoVAZ. In mid-2001, the US automaker contemplated taking an initial stake of 1%-5%. But it now may seek 5%-10%, according to a dispatch on 26 November 2002 by Bloomberg Business News.





AvtoVAZ – Owners






























Name

Stake

Avtomobilny Vserossiysky Aliyans

33%

(Automobile All-Russian Alliance)


employees

25%

Avtomobilnaya Finansovaya Korporatciya

20%

(Automobile Finance Corp)


Rus-Invest

5%

Russian state

2%

Others

15%




SOURCE AO AvtoVAZ, Troika Dialog

Back to the future
Until October 2000, GM considered starting its venture with AvtoVAZ with both models (Niva plus T3000). But the German vehicle was dropped over concerns its price may be too high (roughly US$10,000) to attract enough consumers, so the investment program shrank from US$500m-US$600m to US$400m (later lowered a further US$61.8m to the current figure). However, GM-AvtoVAZ now expects to need under US$15m to launch T3000. (As GM sells Opel Astra in Russia, GMAV-built T3000s likely will get a new model name, besides a re-badging to Chevrolet.)


In August 2000, GM outlined a five-year program to make 80% of T3000 in Russia, per this process:







T3000 “Russification”
Sequence of Steps 2002-2006



































Stage

Process

% of Car’s Value

1

sheet metal

14.4

2

interior trim

23.2

3

electronics

8.8

4

drive train

10.4

5

power systems

11.2

6

glass & plastic

5.6

7

options deletion

6.4




SOURCE General Motors Corp

The scheme specifically called for assembly of a 16-valve petrol motor – not
1.8 litres, but 1.6 litres (also made by Opel in Hungary).


GM then forecast volumes of Chevrolet-brand models built with AvtoVAZ in 2006 at: 75,000 for Niva (unchanged now) and 15,000 for T3000 (10,000 below current view).


This constellation of information suggests GMAV has found a way to build T3000 with a bigger engine at a lower price: the goal in 2002 is a 1.8-litre model for US$9,070 versus the goal in 2000 for a 1.6-litre model for US$10,000. (Hence, the brighter manufacturing prognosis now.) However, automakers often underestimate difficulties in controlling production costs in Eastern Europe: indeed, the base price of Chevrolet Niva already has risen from its original target of US$7,500 to US$8,000.


Ukraine, too
Ancillary to plans for T3000 in Russia, the US automaker is considering assembling kits of this vehicle in Zaporozhye, Ukraine, at AvtoZAZ-Daewoo, a car factory partly owned by creditors of bankrupt Daewoo Motor Co Ltd. GM excluded this plant, when selecting parts of the Korean automaker to buy, but the site may be the best place in Ukraine to make cars.


Contact Ryan James Tutak, associate editor of just-auto.com for Eastern Europe:


E-mail: rjt@pronet.hu
Fax: 00 36-1 / 317-7257
Tel: 00 36-1 / 266-2693