GM: Learning the Ropes In Russia

It's seen some rocky road in its joint venture with Russian carmaker Avtovaz, but now sales are rising and it's No. 2, behind Ford

Last year was a fabulous year for foreign carmakers in Russia, and U.S. car giant General Motors was among those celebrating. Russian sales of GM's Chevrolet rose by 68%, to 111,458 units. That made the brand second only to Ford. Other GM brands—Opel, Saab, Cadillac, and Hummer—also saw briskly rising sales, bringing GM's total sales in Russia to 132,600, some 73% more than in 2005. "Russia is enormously important to us. It's our fastest-growing market in Europe right now," says Marc Kempe, GM's spokesman for Central & Eastern Europe based in Budapest.

But despite those good results, GM's experience in Russia hasn't always been a happy one. GM (GM) first invested in Russia in 2001, when it teamed up with Avtovaz, the country's largest carmaker. They created GM-Avtovaz, a $340 million joint venture based near the main Avtovaz factory in Togliatti. The thinking was that partnership with Avtovaz would give GM an inside track on penetrating the Russian market and help GM keep costs down by sourcing cheap components from Avtovaz. In turn, Avtovaz expected that GM would help provide management know-how, technology, and access to export markets.

The first model produced at the plant, the Chevrolet Niva, seemed to show the potential for cooperation. Designed by Avtovaz, the sturdy off-road vehicle was adopted by GM as a Chevrolet brand. GM had high hopes for the Niva, targeting sales of 75,000 a year. But though the Niva found buyers, it never proved quite as popular as hoped. Sales fell by 7% last year to 41,155.

Up in Arms

The reason, says Evgeniy Shago, an auto analyst at Trust Investment Bank in Moscow, is that the Niva is built mainly from Russian components, hurting the model's quality and image. Plans to develop an export version were repeatedly delayed and finally scrapped in 2005. Warren Browne, General Motors' director in Russia, says GM is planning improvements to the Niva. "The Niva is the No. 1-selling SUV in Russia. It will maintain that position this year," he said in an e-mail response to questions.

While the Niva has fallen short of expectations, another GM-Avtovaz product, the Viva, positively flopped. Launched in 2004, the Viva was based on a previous generation Opel Astra. But only around 5,000 were sold. Dealers complained that at $17,000 the car was overpriced for an old design, and Russian consumers proved to be just as discerning as Westerners when it comes to insisting on the latest technology.

To add to the joint venture's woes, tensions between the two partners erupted into open conflict in early 2006, when Rosoboronexport, Russia's state-owned arms-export agency, took over Avtovaz and brought in new managers. Avtovaz suddenly stopped supplying engines and other components to the venture, accusing GM of underpaying for parts. Production ground to a halt for two weeks last February, fueling speculation that GM would be forced to sell out.

New Partners

The row was eventually settled, and both partners now say they are committed to the venture. "The working relationship between GM and Avtovaz is very constructive, and we're looking at ways to develop the relationship in future," says Kempe. Avtovaz spokesman Ivan Skrylnik notes, "Our relations are developing in a very positive manner."

But questions about the venture's long-term future remain. Rather than pouring more money into the partnership, both Avtovaz and GM are putting energies into other projects. Avtovaz, struggling to compete against a tide of foreign imports, has been courting investment from Renault, although so far without success. Since last year, the two companies have been in talks over the creation of a joint venture to produce the Renault Logan, a model Renault already produces in Russia at its factory in Moscow. Renault was even considering acquiring a stake in Avtovaz itself, according to statements by Avtovaz management, but that idea now seems to have been shelved.

GM, meanwhile, has been expanding its partnerships with other local car manufacturers. In October, 2005, ZAZ, a Ukrainian carmaker, began exporting the Chevrolet Lanos, built under license, to Russia. The compact car, originally developed by Daewoo and adopted by Chevrolet in 2004, is imported duty-free from Ukraine and sells for around $9,000, enabling it to compete with the similarly priced Renault Logan. In its first full year of Russian sales, the Lanos sold 37,215, making it GM's second most popular model after the Niva.

Ford's Model

GM's other partner in the region is Avtotor, a Russian-owned factory in Kaliningrad, which uses imported kits to assemble around 20,000 GM cars, including the Chevrolet subcompact Aveo, compact Lacetti, Rezzo van, and Evanda Sedan, as well as the Hummer H3 SUV. In December, GM signed a deal with Avtotor to begin production of 15,000 Lacettis a year in 2008. The Lacetti, another model adopted from Daewoo, is GM's third most popular model in Russia, with sales of 16,191 last year.

When it comes to its own investments in Russia, GM now seems to be copying the successful example of its rival Ford (F), now the best-selling foreign car brand in Russia. Ford rejected a joint venture in favor of a greenfield investment, opening its own plant outside St. Petersburg in 2002. In June, GM broke ground on a brand new $115 million plant, 100% owned by GM, also outside St. Petersburg. The plant, due to come on-line in late 2008, will begin by producing Captiva sports vehicles, with an initial production run of 25,000 a year.

GM's Kempe insists that the opening of the St. Petersburg plant is "totally unrelated" to GM's partnership with Avtovaz. But many aren't surprised that GM is now shifting gears. "For them, the best option is to copy the example of Ford…. That's a more successful strategy," says Trust Investment Bank's Shago. The betting is that GM will do better on its own, rather than entangled with a Russian partner.