General Motors Corp is scaling down plans to build cars in Russia with AO AvtoVAZ, signalling continued hesitation of foreign manufacturers to invest there, sources told today. The project was to invest $500m-$600m to produce two types of vehicles under the US automaker's Chevrolet brand: one based on a mid-sized Astra from GM's Adam Opel AG; another derived from AvtoVAZ's new small sports-utility vehicle, currently made in limited volumes as Lada Niva 2123.

Now, though, Astra will be dropped, and the investment may be only $400m-$500m, according to sources close to the negotiations. One insider said the sum could even fall below $400m.

Investment targets still may be in flux, but sources said each automaker would contribute at least $170m: AvtoVAZ's share including the license and trademark for Niva 2123 plus access to Russian parts suppliers; GM's share including $120m in cash and $50m in technology transfer.

According to plans disclosed by sources to in August, the European Bank for Reconstruction and Development was to provide $170m in loans and $50m in equity to the venture. AvtoVAZ and GM each would hold 43% stakes in the project with EBRD taking the remaining 14%. (The US automaker was expected to buy out the bank in 4-5 years.)

The ownership structure may stay the same, but the amount of EBRD's credit could shrink to reflect the project's reduced size, sources said.

GM's board of directors, expected in the middle of this year to decide on the project in early October, now is slated to vote on it on December 5. The abridged program is believed to improve the chances for approval.

Other elements remain unchanged. The venture still could launch output in fourth-quarter 2002 at AvtoVAZ headquarters in Togliatti, roughly 1,000km southeast of Moscow. It would aim to achieve an annual production capacity of 75,000-90,000 cars with 1,200 people by 2006.

Officials at AvtoVAZ, EBRD and GM declined today to comment on any plans.

However, sources added, the automakers have not ruled out the possibility of building a second vehicle later. This still could be Astra, though many options exist.

A second model could come from Daewoo Motor Co Ltd, if GM buys the bankrupt Korean producer. Observers even have speculated the US automaker has been postponing a decision about AvtoVAZ until the future of Daewoo is settled, since the Koreans already have ties to car plants in three countries in the ex-USSR (Russia plus Ukraine and Uzbekistan). GM officials deny this.

Fiat Auto SpA also could supply a vehicle. (GM owns 20% of the Italian company, which in turn owns 5% of the US automaker.) Fiat already has agreed to build cars in Russia with OAO Gorkovsky Avtomobilny Zavod plus EBRD. But this project, ZAO Nizhegorod Motors (NM), has delayed plans to launch output from fourth-quarter 1998 to second-quarter 2002. Moreover, GAZ apparently faces a hostile takeover threat that could jeopardize this venture. (Read story here.) If NM does not happen, the US automaker may consider building Italian vehicles in a venture with AvtoVAZ. (Fiat and GM talked earlier this year about consolidating their manufacturing plans in Russia, and the Italians have strong ties with AvtoVAZ, which began operations in 1970 by building Fiat-derived models under the brand Lada.)

A third option for another model could be Calina, a family of vehicles from AvtoVAZ, first unveiled at the Moscow motor show in August 1999. A hatchback (code-named 1119) was shown then, and a sedan (1118) bowed at the exhibition in August 2000. The Russian automaker has wanted to launch production independently, but it lacks the funds, and company officials have shown interest in building Calina with GM.

GM, periodically in talks to build cars with AvtoVAZ since 1990, postponed an expected decision on the AvtoVAZ venture in October over continuing concerns about the market potential and risks in Russia. Since the economic crisis there in August 1998, all foreign plans to build vehicles have been significantly delayed or downsized, except plans by Ford Motor Co, though the start of this venture also could be pushed forward from mid-2001 to mid-2002.

AvtoVAZ is the biggest carmaker in Eastern Europe with capacity to make 750,000 units a year. An AvtoVAZ deal would give GM and its affiliates over one third of the annual production capacity of all light vehicles in the old East bloc (about 4.0m units), eclipsing empires there of Daewoo and Volkswagen AG.

Observers said EBRD is drawn to the innovative strategies of the AvtoVAZ-GM project to extensively use Russia equipment and technology as well as labor and material, enabling the venture to start selling the Niva at $7,500. This is crucial to success, as 98% of demand for new vehicles in Russia is for models costing under $10,000, and many foreign players plan investments there to make vehicles priced at $12,000-$15,000.

The US automaker learned this the hard way. In a project launched in late 1996 in Elabuga in the Tartarstan region of Russia, GM hoped to build 50,000 Chevrolet Blazer off-road vehicles a year, many priced over $25,000. Output was halted in late 1998 due to low demand (3,600 units were made over two years), though prices fell to $15,000 for some models.

Contact Ryan James Tutak, associate editor of for Eastern Europe:
F +36-1 / 317-7257
T +36-1 / 266-2693