In this month’s management briefing, Mark Bursa reviews developments in Russia’s automotive market and industry. In this concluding third part, he looks at the manufacturing alliances taking shape in Russia.
AvtoVAZ-Renault
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Built in 1970, AvtoVAZ’s Togliatti plant is the pinnacle of Soviet Central planning. The plant – and its adjacent town – was built on a strategic location on the banks of the River Volga with the sole purpose of building cars for the Soviet Union.
It started building versions of the Fiat 124, then a contemporary car that had won the European Car of the Year award in 1967. And it only stopped building the car, known locally as the Zhiguli, and sold in the west as the Lada Riva in the 1970s and ‘80s, in 2010
The last Zhiguli may have rolled off the line at Togliatti but it hasn’t been killed off completely. There is still demand for the ultra-cheap saloon, especially as part of the current scrappage deal, and production has been shifted to another plant, IzhAvto in Izhevsk.
In December 2010 AvtoVAZ signed an agreement to take over IzhAvto’s assets – the company had been declared bankrupt – and it is considering producing Lada-brand light commercial vehicles at IzhAvto. These are likely to be Renault-designed vans.
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By GlobalDataTogliatti is still building other elderly AvtoVAZ models, including the 1980s Samara and the 1990s 2110 range, plus the newer Kalina hatchback and the Niva 4×4, which is built on a separate line as part of a JV with General Motors that dates from the late 1990s.
Since 2008, AvtoVAZ’s principal partner has been Renault, which acquired a 25% stake in the Russian automaker. It is clear that, without Renault’s intervention, AvtoVAZ may have collapsed. The company’s former director, Christian ève, told just-auto in October 2010 that “AvtoVAZ was basically bankrupt.” Collapse of Russia’s biggest carmaker would have been catastrophic, not least for the city of Togliatti, where 110,000 of the total 750,000 population worked at the plant.
Renault has pumped cash into AvtoVAZ, bringing in production efficiency and new models. The company’s finances have been turned around – AvtoVAZ posted a net profit of around USD48m in 2010 after unveiling losses of around USD12m for 2009 according to Russian media, although accounting standards were not available.
Output at AvtoVAZ rose 85% year-on-year to 545,450 vehicles in 2010.This is some way short of AvtoVAZ’s capacity – in Soviet days, production topped the 1m units mark, and as recently as 2007, Togliatti churned out an impressive total of 902,000 cars – 736,000 CBU and 166,000 CKD kits for assembly in Algeria, Egypt, Kazakhstan and at IzhAvto.
New models should help those volumes recover, and AvtoVAZ is forecasting production of more than 700,000 cars in 2011. place of the Zhiguli are new “B-zero” models – basically Lada-branded versions of Dacia models, specially adapted for Russian tastes. The same line also builds one Nissan model and two Renaults, all of which use the same platform. In total, the B-zero line will be able to build up to 300,000 cars a year. “
Introducing the new Dacia-derived “instant Ladas” is one of five major initiatives that Renault is undertaking with AvtoVAZ. A chassis project is developing a new platform for AvtoVAZ; new engines and gearboxes will also be built at Togliatti; and a supplier integration project will aim to raise the quality of locally sourced parts.
The final project is the development of a new AvtoVAZ car, based on the newest current AvtoVAZ model, the Kalina. This new car will be called the Lada Granta, and will be marketed as a low-cost car, selling for EUR5,600 (USD7,100).
Renault – Avtoframos
Renault’s first Russian venture was established in 2005, in partnership with the Moscow city government. The Avtoframos plant was once part of the complex that produced Moskvich cars. It has a production capacity of 160,000 cars per year and produces a growing range of vehicles, mainly Dacia Logan and the four-door sedan Renault Clio Symbol.
Last year Renault announced it would add the Fluence sedan and Mégane hatchback (from semi-knock down kits) at Avtoframos in the first half of 2011. CKD assembly of the Dacia Duster SUV assembly will commence toward the end of 2011, as well as the automatic Dacia Logan, Sandero and Sandero Stepway models, also from CKD kits.
All Dacias are sold in Russia as Renaults, as the Romanian badge is not felt suitable for the Russian market. Russian versions have interiors, equipment and engines adapted to Russian customer preferences. Renault has ranked as the number-four brand in Russia since April 2010, and the Logan is Russia’s top-selling foreign car.
Nissan
Nissan is playing a major role in the Renault-Nissan Alliance’s plan to gain a 40% stake in the Russian market. Rather than participate in Avtoframos, Nissan instead chose to build a new plant in St Petersburg, which opened in June 2009.
The plant assembles Teana sedans and X-trail SUVs, and in the nine months to March 2010 it built 45,000 cars. This was doubled in the next 12 months to March 2011 – during this period more than 100,000 cars were assembled.
A third model has been rumoured for this plant, though with Nissan adding production of a small car at the AvtoVAZ Togliatti factory it is unclear whether further models will be added to St Petersburg, which is close to capacity. Before the effects of the Japanese earthquake on March 3, 2011 started to affect Japanese global production, Nissan had considering switching the plant to operate on three shifts instead of two. Nissan had to shut the plant for five days in May 2011 because of disruption to supplies from Japan.
Ford – Sollers
Ford first announced a plan to build a plant in St Petersburg in 1998 – and while the plan was delayed by the Asian “Tiger Economies” crisis, Ford still got up and running ahead of most rivals, opening the factory in 2002. The Vsevolozhsk plant was originally built to make 25,000 units a year, but by 2008 it was turning out 100,000 units, having just added Mondeo to the Focus range already built there.
Ford has spent around USD330m on the plant, and in 2011 has moved to a three-shift production pattern to expand capacity there, adding 500 new employees. Under two-shift working, daily output was 300 cars, which will now rise to at least 400, equating to annual output of around 125,000 units.
The Ford Focus has been Russia’s best-selling car manufactured in the country by a non-domestic manufacturer for the past seven years. The latest version of the Focus will be added later in 2011, and the Russian plant is the only Ford manufacturing facility which produces the Ford Focus in all three body styles: five-door, four-door and wagon.
Future development for Ford in Russia will centre on its new joint venture with Sollers. Sollers was formerly known as Severstal Avto and is owned by Severstal steel. It makes UAZ 4×4 vehicles, as well as contract assembly Fiat, Isuzu and SsangYong models.
Ford and Sollers plan to establish a 50:50 joint venture, including the Ford plant and some of Sollers’ operations. It is expected to be in place by the end of 2011. The proposed joint venture called Ford Sollers will manufacture and distribute Ford vehicles using both companies’ local production facilities in St Petersburg where Sollers assembles UAZ,.
The JV will also produce engines, operate a stamping facility that will boost local parts content for Ford vehicles built in Russia and establish research and development activities. A Ford spokesman told just-auto: “We are merging our existing opportunities in Russia with Sollers and creating a 50:50 stand-alone joint-venture. It is a great opportunity and will allow us to build the business in Russia. Sollers has a very strong presence.”
GM-Avtotor
GM saw the potential of the Russian market in the 1990s, but attempts to set up major production ventures stalled, and as a result, GM’s Russian presence is not as well advanced as the company would like.
Its first Russian venture built Chevrolet Blazer SUVs at a large former military works in Yelabuga, but this never achieved anything like its expected production levels. GM subsequently tried hard to set up a JV with AvtoVAZ, but ultimately ended up with a low-key JV to develop the AvtoVAZ-designed Niva SUV.
This is built at Togliatti in a facility that is separate from the main production building, and sold via GM’s Chevrolet dealers as the Chevrolet Niva. GM-AvtoVAZ built 36,996 Nivas, up 60.15%, in 2010, and sales have continued to rise in the first quarter of 2011.
Subsequently, GM became one of several automakers to set up new manufacturing facilities in the St Petersburg area, with production starting in early 2009. This plant produces Opel Astra, Chevrolet Captiva, Opel Antara and Chevrolet Cruze models at a rate of 60,000 units a year.
Further Russian assembly of GM models is provided by contract assembler Avtotor, based in Kaliningrad. At present, Chevrolet Aveos are assembled in Kaliningrad; 22,000 were made in 2010. In addition, Avtotor assembles some older Chevrolet Lacetti and Opel Astra models. The assembler has capacity of 200,000 cars a year, and its location in the Kaliningrad enclave gives it access to the Baltic sea.
The Avtotor relationship is likely to change following the signing of a new deal between GM and GAZ. This will see Russia’s second-largest automaker assemble the next-generation Chevrolet Aveo under contract at GAZ’s facility in Nizhniy Novgorod, 700km east of Moscow. Production is scheduled to start in mid-2012
However, other reports suggest GM and Avtotor are planning a closer alliance, which could result in a new joint venture to produce at least 300,000 cars per year in Russia. As this figure is greater than Avtotor’s total capacity, it could be that GM will put its own St Petersburg plant into the JV, creating an alliance that is structured in a similar way to the Ford-Sollers deal.
Volkswagen – GAZ Group
Volkswagen and GAZ Group are planning a joint venture to produce 300,000 cars a year in Russia. The JV will make the VW Jetta, Skoda Octavia and Skoda Yeti models.
GAZ, controlled by oligarch Oleg Deripaska, will use its plant in Nizhny Novgorod for the joint venture project. This has an annual capacity of 120,000 units per year, so it appears that VW will commit its existing 150,000-units-a-year production facility in Kaluga to the JV – again, a similar arrangement to the Ford-Sollers deal. Volkswagen’s wholly-owned Kaluga facility was upgraded from an SKD assembly plant to a CKD kit assembly operation in the second half of 2010.
Under the company’s agreement with Russia’s economic development ministry, September 3, 2010 was the last day when Volkswagen was allowed to supply semi-knocked down (SKD) kits for assembly at its Russian plant. Opened in October 2009, the Kaluga plant makes two VW and two Skoda models: Volkswagen Tiguan, Volkswagen Polo, Skoda Octavia, and Skoda Fabia. The plant’s capacity is currently around 100,000 vehicles a year.
Volkswagen could also build an engine plant in Kaluga, the Kaluga region governor, according to local reports. Achieving local production of 300,000 units and sourcing at least one-third of engines locally are key elements of the Russian ‘Decree 166’ rules.
GAZ has some spare capacity following the ending of production of the GAZ Siber, a licence-produced Chrysler Sebring, after just two years. The Siber line can make 100,000 units a year, but just 2,500 were built in 2009 as the car failed to find favour with Russian buyers.
Fiat
Fiat’s long-standing history in Eastern Europe is well-documented – in the 1960s, it built AvtoVAZ (as well as FSO and FSM in Poland, and Zastava in Yugoslavia) and transferred technology and cars to these plants. But in the post-Communist era, Fiat has struggled to re-establish itself in Russia.
A plan to build large numbers of Project 178 “world cars” (Palio and Siena) in a JV with GAZ fell through, and a recent agreement to develop manufacturing with Sollers has also now come apart following the formation of Sollers’ new JV with Ford.
The Fiat-Sollers talks had extended to producing as many as 500,000 vehicles a year in Russia by 2016, and indeed, the venture had started building the Linea, a Grande Punto-based sedan specially designed for emerging markets and which is also made or assembled in Turkey, China, India and Brazil. Around 1,400 Lineas were assembled in 2010 at Sollers Naberezhniye Chelny, located in Tatarstan.
Now Fiat has effectively been forced to go it alone, and has told the Russian government that it plans to install capacity to produce up to 300,000 vehicles in the country, a combination of Fiats and Jeep SUVs. “The product plan will be principally based on production of C and D segment cars, SUVs and light commercial vehicles,” a Fiat spokesman told Russian media. More details of Fiat’s plans are expected to be announced before the end of 2011.
PSA Peugeot Citroën – Mitsubishi
PSA Peugeot Citroën and Mitsubishi Motors Corporation have opened a EUR470m joint venture production facility at Kaluga, 180km south-west of Moscow. The plant, called PCMA Russia, is 70% owned by PSA and 30% by MMC.
It started assembling C-segment vehicles from CKD kits: the Peugeot 308 stated in April 2010 and the Citroën C4 in July 2010. These were followed in September 2010 by production of the Citroën C-Crosser, Peugeot 4007 and Mitsubishi Outlander SUVs, which share most of their componentry. The plant currently employs 400 staff and production is being ramped up to reach full capacity of 125,000 in 2012.
At the 2011 Geneva Motor Show, Dow Jones reported that Mitsubishi CEO Osamu Masuko was considering an approach to PSA about joint production of another model at the Kaluga plant as a way to meet new Russian rules aimed at increasing the local content of cars.
Hyundai
Hyundai officially opened its Hyundai Motor Manufacturing Russia (HMMR) manufacturing plant in St Petersburg in September 2010, with full production starting in January 2011.
Annual production at is slated at 105,000 vehicles in the first year, which will increase to 150,000 units per year in 2012, by which time the plant will employ 5,300 workers. The plant is a full assembly facility, with stamping shop and highly automated body welding shop. HMMR is claiming to be the first foreign automaker to have a full-cycle manufacturing facility in Russia.
The first car to be produced at HMMR is a four-door sedan called the Solaris, essentially a restyled Accent, powered by a 1.4 and 1.6-litre petrol engines. Ride height has been raised to cope with Russian winter conditions. Hyundai plans to sell 85,000 Solaris annually in Russia starting next year, including a five-door hatchback, which will join the line-up later in 2011.
Previously Hyundai vehicles were assembled under licence at the TagAZ plant in the Rostov-on-Don region. TagAZ assembled Hyundai Porter light truck and Sonata sedan from 2001, but stopped production in 2010. Production topped 100,000 units in 2008, but TagAZ launched its own-brand models in 2009 and has recently signed a deal to produce cars for Chinese automaker BYD.
Toyota
Toyota opened a low-key manufacturing facility called Toyota Motor Manufacturing Russia (TMMR), based in the St Petersburg region, in December 2007. This plant builds Camry from CKD kits, but volumes are low only 8,160 cars were assembled in 2009, though this rose to around 14,700 in 2010.
In 2010 it was reported that Toyota was considering adding an updated version of the Corolla at the TMMR plant in, without disclosing details. Toyota has set a modest aim of boosting its Russian capacities to 50,000 units per year, and the opening of a second plant will help it achieve this aim.
Toyota is partnering with Russian automaker Sollers to build Toyota cars in the far east of the country. In a JV with Sollers and Japanese trading house Mitsui & Co, Toyota aims to build 30,000 Toyotas annually, probably Land Cruiser SUVs, at a factory in Vladivostok. The vehicles will be sold throughout Russia and will be transported west via the Trans-Siberian Railway, according to local reports.
The Chinese
The Russian market is still price sensitive, and being outside the European Union, emissions and crash testing standards remain lower than in the West – just as well, as some of the older AvtoVAZ models in particular would come nowhere near modern safety standards.
These conditions – plus the existence of a large parc of older vehicles – make Russia an attractive market to Chinese low-cost producers, whose vehicles can be made cheaply and represent a major improvement on Soviet-era Ladas, while still falling short of EU standards.
Russia also borders China in the East, so despite the large distances, logistics are not too difficult. And in any case, tariffs on imported vehicles have driven the more ambitious Chinese producers to look at CKD assembly in Russia.
Among Chinese entrants are:
- Great Wall: In the Moscow Region, Great Wall Motors owns a CKD assembly plant with a production capacity of 30,000 vehicles, assembling Haval H3, Haval H5 and Haval M2 models.
- BYD Auto: Taganrog Automobile Plant (TagAZ) and BYD Auto have signed a cooperation agreement to assemble the BYD F3 sedan model at TagAZ’s Rostov plant.
- Chongqing Lifan: Russian automaker Derways is assembling various Lifan models, including the Lifan 620, and it plans to add the Lifan 320, a ”Mini lookalike” five-door hatchback, next year. Derways has annual capacity of 100,000 vehicles, and has also assembled Great Wall, Geely, Chery and Haima models under license. Derways plans to make 14,000 Lifan vehicles in 2011 year and to raise that to 32,000 in 2012.
Others, including Chery, have assembled cars in Russia under license, via short-term deals with independent assemblers such as Avtotor and TagAZ. But in the light of the new rules, which encourage high levels of local content and volumes of 300,000 it remains to be seen if the Chinese will bite the bullet and build large-scale plants in Russia or whether they will remain on the margins for the time being.
Conclusions
The new “Decree 166” rules look set to reshape the Russian auto industry into a more powerful industry sector, with fewer, bigger businesses, and with joint venture agreements tying major local automakers to one main partner – though it does appear there is scope for smaller individual deals as well.
But to gain the maximum benefits of Decree 166 in terms of low tariffs on imported components, business units need to be of a critical size – 300,000 units,. With 60% local content and one third of powertrains sourced locally.
Apart from AvtoVAZ, few of the Russian automakers – and none of the overseas investments – can reach that critical mass. So there is a great deal of sense behind the mooted GAZ-VW, Ford-Sollers and possibly GM-Avtotor tie-ups. And given the commitments made under Decree 166 – due to be finalised as this report was written – it’s clear that the Russian auto industry will be capable of producing a lot of cars – maybe 4m by 2020, which would make it the sixth-largest producer in the world.
The move toward larger businesses is also encouraging global Tier 1suppliers to enter the market – essential if quality is to reach internationally accepted standards.
The only problem is whether Russia will be able to sustain demand growth to take up the cars that will be produced. It’s hard to imagine that many of these vehicles will be exported, so economic stability in Russia and the CIS is essential – without this, overcapacity will become a major problem, and less successful JVs could be in trouble.
On the plus side, car ownership is low – less than half Western European levels – and much of the car parc is old and in desperate need of replacement. Building the right vehicles will be essential – and that will involve offering low-cost models as well as more up-market global cars.
The outlook, overall, is positive – Russia could become a much more stable BRIC in the future.
See also: Parts 1 and 2
