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Ready To Burn Rubber In Russia

International Business: RUSSIA


Foreign carmakers are racing into the burgeoning market

Volodya Dmitriev strokes the sleek blue hood of a Skoda Felicia in the showroom of Moscow's Alan car dealership. "It's a great car," he says. "Still..." He looks over at a row of Russian-made Ladas. They start at about half the $10,500 sticker price on the Skoda, built by a Volkswagen unit in the Czech Republic. Dmitriev goes home without deciding, but VW is working hard to lure him back. This summer, it will start assembling Skodas in Russia and neighboring Belarus, sidestepping import tariffs that account for 30% of the sticker price.

For VW and other foreign carmakers, the green flag is out. General Motors and Daewoo are already assembling cars in the former Soviet Union. Ford and South Korea's Kia Motors will start in the next few months. Offerings from the transplants will cost thousands more than the best-selling domestic models. But the foreigners are betting that their spiffy designs and superior engineering will win over customers such as Dmitriev. If they're right, the race will be on for one of the world's great untapped auto markets. Only 83 in 1,000 Russians own a car, less than half the ownership rate in Eastern Europe.

Foreign carmakers have good reasons to rev their engines. Drivers stuck for years in Soviet clunkers are dying to trade up. Last year, they snapped up 50,000 imported new cars--twice what they bought in 1995. Altogether, some 850,000 new cars were sold in Russia last year, and industry analysts predict that the market will grow at least 4% annually through the end of the decade.

Governments of former Soviet republics are welcoming foreign investment in their moribund auto industries. Russia is letting GM import components for its Chevrolet Blazer duty-free, in exchange for setting up a network of parts suppliers. In January, Russian Prime Minister Viktor Chernomyrdin drove the first Blazer off GM's assembly line in Yelabuga. Uzbekistan gave Daewoo a five-year tax holiday on the factory it opened near Tashkent last summer.

MOPPING UP. South Korean auto makers are leading the way into the market (table). Daewoo began assembling sedans from kits in the Russian city of Rostov in late 1995. Its Tashkent factory, a full-scale manufacturing operation, is expected to make 120,000 cars this year. Most will be sold in Russia, which puts minimal tariffs on Uzbeki imports. Kia Motors Corp. plans two kit operations in Kaliningrad, in Russia. One will switch to full-scale production of 50,000 cars a year by autumn.

But most auto makers are investing far less in the former Soviet Union than in emerging markets such as China. To assemble cars from kits, Ford, GM, and Skoda are setting up modest operations that will cost about $20 million and produce no more than a few thousand units a year. The companies are holding back because of the region's still-shaky economy, and because they don't yet have a solid distribution and service network.

No one wants to be left out, though. Carmakers are still mopping up after a battle over former state auto giants in Eastern Europe, where VW beat Renault for control of Skoda, while Daewoo elbowed aside GM in Poland. Daewoo and GM now are vying for a possible joint venture with AvtoZAZ, the former Ukrainian state auto maker. "Once the economic situation stabilizes, [the former Soviet Union] can be a market of major size," says W. Wayne Booker, Ford vice-chairman for emerging markets. "It is absolutely essential that we be there."

In contrast to Eastern Europe, foreign carmakers aren't courting the now-debt-ridden companies that dominated the Soviet auto industry. Instead, most are teaming with smaller manufacturers. Ford plans to build Escorts in a former Belarus tractor factory, in partnership with a local car dealership and the Belarus government. GM is talking to AvtoVAZ, maker of the Lada, about a venture to produce a Russian version of the Opel Astra. But GM wants to build a plant on the Finnish border, far from AvtoVAZ's 1960s-vintage factory near the Volga River.

Bringing sticker prices down is the biggest challenge. Russian drivers prefer spacious American cars to European models. But dream machines such as the Blazer, which retails for more than $25,000 even without import tariffs, are too costly for most consumers. Prices for models such as the Ford Escort, now selling for $14,100 in Moscow, should drop once they are produced in the former Soviet Union and no longer subject to high tariffs. However, Ford is still offering even pricier brands in Russia. In early March, it introduced the Taurus family sedan, which sells for $48,467.

There may be other bumps ahead for the auto makers. Many Russians are wary of foreign cars because they are targets for thieves and bribe-hungry traffic police. Moreover, consumer tastes are hard to predict in the chaotic rush to capitalism. After surveying Skodas and Daewoos at the Alan dealership, customer Akhmed Mirzoyev announces that he has decided to buy a Lada. "I just need something for running errands around town," he explains. "Of course, I already have a Mercedes." Nobody said figuring this market out would be easy.By Carol Matlack in Moscow, with Keith Naughton in Detroit and David Woodruff in BonnReturn to top

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