Blog: Dave LeggettWhat's the deal with Russia?

Dave Leggett | 27 January 2005

Russia is a tricky one for automakers. It looks like it has decent long-term prospects, a sizeable market, plenty of workers with good skills and has a well established automotive culture of sorts. So what's wrong? Why are some automakers (step forward Toyota and Volkswagen) pussyfooting around when it comes to investing in Russia? (Actually, the others have only really dipped their toes in.)

Well, for starters, there are the import tariffs. Sure, you can start a CKD (or, more likely, SKD) operation up easily enough, but by the time you've paid the import tariffs on incoming kits you're left at a big price disadvantage vis-a-vis indigenous local products churned out in the hundreds of thousands by the likes of AvtoVAZ.

And then there's the market itself. Yes, there are wealthy people around Moscow and St Petersburg, but they are not huge in numbers. Most car-owning Russians are extremely price sensitive, gravitating towards those AvtoVAZ models (not exactly state of the art but cheap to run, easy to fix - a known quantity) or used cars. It may make more sense to grow market presence initially via CBU imports (especially if your customer demographic is made up of the wealthy ones who are not so price sensitive) and keep risk down.

Local supplier industry? Ahem. Well there is one, but you have to remember that the industry has developed around huge highly vertically integrated and geographically based monolithic enterprises. It is not all that sophisticated. And until the Western OEMs invest more and show some confidence, the global Tier 1s will be put off and have no reason to follow their customers.

There are also the more general cultural and business issues. Normal commercial criteria can sometimes go out of the window (see Conti's costly exit from Russian JV at end of last year). And just who do you have to bribe (get it wrong and people get shot)? Who do you negotiate with and what are the rules?

It is not just the auto industry in Russia that is starved of FDI - others are the same, potential international investors deterred by the same sorts of issues. Oh, and that Russian economy growing now has a lot to do with high energy prices. There are still big economic and political risks associated with doing business in Russia.

In short, there's a list of stuff in the 'cons' column that looks fairly formidable, especially when you consider that there are other places in the world that stack up rather better. These are the things that the Russian government should be working on as part of a strategy to modernise and reform the economy, get into the WTO. Not much sign of that at present though.   

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