Following lengthy talks, Volkswagen's attempts to move into Russia with manufacturing operations have seemingly been put on ice. Nevertheless, with its western European sales still in the doldrums, the German group must continue to look east in a bid to remain price-competitive, shifting plants to cheaper manufacturing posts and looking for new markets.

Volkswagen was expected to invest approximately €30 million to build an assembly plant in Moscow by 2006 at the latest. It appeared set to sign a long-term deal with Russia's Ministry for Economic Development and Trade, involving a 200-hectare site at Stupino, just outside Moscow. However, Reuters has reported that no agreement has yet been reached.

The news is certainly a blow for VW as it battles to cope with some tough trading conditions. As with many other vehicle manufacturers, it has struggled to sell enough cars in the more mature global auto markets of late: despite new model launches, the company recorded a 0.6% decline in the saturated western European passenger car market in the first 9 months of 2004.

One of VW's biggest problems is its cost base. Even though its current Russian expansion plans appear to have temporarily stalled, the company still needs to look east for future investment opportunities to combat this issue.

The Wolfsburg-based firm has joined a group of other vehicle manufacturers that are moving their manufacturing operations to cheaper labour areas, such as eastern Europe, to manufacture vehicles more cheaply and thus boost demand. In such a competitive industry, European consumers have become increasingly price-conscious. However, this strategic decision is risky, as new car registrations in western Europe are particularly static at present - uncertain economies having made consumers very cautious.

Another method by which to improve European sales is to focus on the emerging markets of eastern Europe. The standards of living in that area are improving, bolstered by the EU accession of several former Eastern Bloc countries, and there is a strong and growing demand for cars. However, to be competitive in the region, it is vital to establish local assembly plants to meet local demands - and this, of course, keeps costs down.

SOURCE: DATAMONITOR COMMENTWIRE (c) 2004 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

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