VW Opens Huge Factory Near Moscow

The German automaker has big plans for its future in Russia, but with all the competition, does Volkswagen have a chance?

His best shirt was ready well before the event began. Vadim Vitkov, deputy mayor of the Russian town of Kaluga, wanted everything to be perfect on Wednesday. After all, it's not every day that Volkswagen opens a factory in the town. Indeed, it is the first time that Volkswagen has started production anywhere in Russia -- and it comes after a long campaign waged by Vitkov.

"Volkswagen is a magnet," he says. "Once they're here, many more will come." That was the message he repeatedly drove home to skeptical politicians and bureaucrats who were wary of the €370 million investment.

In reality, many carmakers are already in Kaluga, located some 160 kilometers southwest of Moscow. Cars from Volvo and Renault are already rolling off the assembly lines, and a number of subcontractors likewise have factories there.

Outside of Kaluga, Volkswagen has a lot of catching up to do. Big competitors like General Motors, Ford, Renault, Hyundai and BMW began producing in Russia long ago, and they have all secured a share of the market. Cars coming in from outside are charged an import duty of 25 percent, making it hard for imports to compete. Volkswagen, in particular, has found it difficult to sell cars in Russia, with just under 30,000 cars expected to move out of showrooms this year -- not many more than in 2006.

Stiff Competition from Lada

"Volkswagen in Russia is yet to become the peoples' car of choice," admits Oskar Akhmedov, director of VW Group Russia. "We have to become a bigger player in this huge market."

The Lada remains the most beloved car in Russia, with models starting at €5,000 -- a price that Volkswagen simply cannot compete with. But by 2009, that should change. In Kaluga, a new VW model specially designed for the Russian market will enter production. VW hopes it will successfully compete against the Lada.

But there are many more taillights ahead of Volkswagen than just those of Lada. Volkwagen, says Akhmedov, sees its Russian future primarily in the €7,000 to €18,000 range and hopes that such offerings will allow it to make inroads on models such as the Ford Focus. The Association of European Businesses expects the Focus to sell over 70,000 units this year, which would make it the most successful foreign car built in Russia. Volkswagen is hoping to up annual turnover in Russia to over 150,000 units within the next five years.

Akhmedov understands that many raise their eyebrows at such optimism. But he foresees dramatic growth in the Russian automobile market in coming years. "The population is under-motorized," he says. While Germany has 500 cars for every 1,000 people, Russia has only 190. Even in other former communist countries in Central Europe, the number is between 300 and 350. In Russia today there are 2.25 million vehicles sold annually. By 2015 that number will be 3 million. "Conservatively speaking," Akhmedov adds.

The Detroit of Russia

It is Kaluga where Volkswagen's assault on the Russian market is to begin. On Wednesday, the first Skoda Octavias and VW Passats rolled out of the factory. Soon, the Jetta, the Skoda Fabia and the special Russian model will enter production. By 2009, the plant is to produce 115,000 vehicles a year.

Such plans are music to the ears of Deputy Mayor Vitkov. Kaluga, after all, has not always been a boom town. As recently as the 1990s, the town struggled mightily as the region's heavy industry failed to adjust to the market economy and went under. Thousands of residents moved away to Moscow. Now, though, the city is back on its feet, and the massive new VW factory is one of the reasons. Local companies supply the new factory with parts, hoteliers rub their hands together at the prospect of foreign guests and the construction industry has plenty to do.

Success, however, breeds new problems. "We don't have enough people who speak English and German," says Vitkov. Accordingly, the city is planning to build a center for education. But that's not all. Because city leaders are concerned that the area's gastronomy isn't up to European standards, the local government is encouraging new restaurants to open up with European cuisine. Kaluga has also started a residential building program to take care of a housing shortage.

All this because of the automobile industry. Vadim Vitkov can't hold back a wide smile. "Some are already calling our Kaluga the Russian Detroit," he says.

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