Why GAZ Is Pinning Its Hopes on Opel

Not far from the "Motor of the Revolution" metro station a huge billboard advertises a "legendary automobile factory." Portraits of the company directors who have headed Russia's second largest automaker since 1932, beam down from between red stars. A huge speedometer hits 80, 100, 120 kilometers per hour—and then abruptly jumps to 300.

The ambitions of the Gorky Automobile Plant (GAZ), located around 400 kilometers east of Moscow on the outskirts of the city Nizhny Novgorod, were always oversized. Over 17 million cars have rolled off the assembly line here. Stalin would personally choose the names for the newest models. He rejected "homeland"—because who wanted to measure that in terms of money and sales? Pobeda, Russian for "victory," was the name given to a functional passenger car designed in 1944. A mosaic in front of the factory entrance still announces a "victory in the socialist competition."

But capitalism has not been kind to the long-established company. Since the end of the Soviet Union, the number of employees has shrunk from 110,000 to 40,000. Reduced working hours, lay-offs, flawed production policies and debts exceeding a billion euros all plague the company. And this, of all companies, is to be the savior for German automaker Opel?

GAZ (GAZA.RTS) touts itself as an "industrial partner" of the Russian state bank Sberbank and the Austrian-Canadian supplier Magna (MGA), which is to acquire 55 percent of Opel's shares. The biggest part of that majority stake, 35 percent, will go to the Russians. The buyers, Opel's American parent company GM, and the German government have agreed on that much—the details, though, still need to be negotiated.

There are now increasing doubts about whether the deal will go well and whether a supplier can really help Opel. And the biggest concern of all is whether the Russian automaker can contribute when it needs help itself.

On July 24, 2008, the GAZ directors led three men through their realm who would later work hard towards securing the Opel deal: Prime Minister Vladimir Putin, who wanted to bring Russia's auto industry to a world-class level with the help of foreign partners, Magna founder Frank Stronach, who was in pursuit of his own automobile production, and GAZ principle stockholder Oleg Deripaska who, back before the financial crisis, dreamed of becoming the world's richest businessman. The trio combined exceptional creative power with a penchant for megalomania.

Andrey Slepushkin, an energetic production director in his mid-30s, has been pegged to perform a sort of miracle—turning a factory that recently was at an 1980s-level of technology into a platform that will launch Magna's bid to conquer the east. Magna believes there is great potential to increase Opel's low market share in Russia from 3 percent to 20 percent. A new plant, which produced the sports utility vehicle Opel Antara not far from St. Petersburg, would be too small for such growth.

Slepushkin has worked in General Motors factories and speaks outstanding English, much to the enchantment of Magna workers on site. In one and a half years, he managed to assemble a $290 million production facility which had been purchased in the US and brought to Nizhny Novgorod for producing Chrysler Sebrings.

Blind to the Desires of Its Customers

The engineer is proud of high-tech robots that apply adhesive to rear windows before carefully putting them in place. "In Russia, this level of automation is only available with us—just like at Opel in Rüsselheim," he said. He uses these kinds of phrases over a dozen times to envision the future collaboration. Quality control, computer-controlled precision—everything like at Opel. Andrey and his bosses leave no room for doubt that "in about nine months, we will be ready to switch from Volga production to an Opel brand."

GAZ and Magna have adapted the Sebring—making the car rounder and higher, because of potholes on Russian streets. They've also outfitted it with better rust protection. Only one problem remains: nobody wants to buy it. Production started in July 2008 and now car number 2,439 is rolling off the assembly line. The factory, though, is actually capable of churning out 150,000 cars a year—60 times what they have achieved thus far.

The engineers and managers at GAZ have mastered a leap in quality that only few believed was possible. But even they couldn't shake the chronic illness of the Soviet-communist economy: they have remained blind to the desires of their customers.

As a result, they came up with a car they dubbed the Volga Siber. The name combination of Volga, the repair-prone GAZ classic, and Sebring, an unknown American car, put off customers. Russians don't want the discontinued models of the West—instead they want budget-priced brands associated with quality.

During the debate about the name, Oleg Deripaska, notorious for his lone decision-making, reportedly had the last word. This significant model policy failure is fueling doubts about whether GAZ is the right partner for Opel.

Even in Moscow's government circles, people are discussing whether the GAZ managers are possibly following a fundamentally flawed strategy: They are using all their resources to pump life into the production of personal automobiles, a weak point for the company, but they are running the risk of neglecting their strength—the production of vans and light trucks. Since the mid-90s, the "Gazelle" has been the company's bestseller. The line of minibuses and pick-up trucks has reached a 58 percent market share in Russia. The quality is passable and the €8,000 price unbeatable.

Unbroken Optimism

Recently, however, GAZ lost a bid to manufacture ambulances for the Russian Ministry of Health to a joint venture between Fiat and the Russian manufacturer Sollers. It was a warning shot. The outdated GAZ bestseller urgently needs to be modernized. On top of that, the £50 million (€59 million) purchase of the British lorry company LDV ended in disaster. The company is now insolvent.

The Gazelle and the other GAZ vans and light trucks "aren't suffering losses during the crisis—we have had to reduce our production from the peak value of 15,000 vehicles a month in 2007, a boom year, to 5,000," says one manager. At the assembly shop in Nizhny Novgorod, there is only one shift still working—and then only three or four days a week. GAZ has just announced 5,000 more lay-offs to the employment office. The company's acting human resources director hanged himself in December in an office bathroom. "Because he couldn't bear the pressure," the newspapers wrote.

Nevertheless, Slepushkin's optimism is unbroken. He believes in Opel, even if the deal is not at all secure: The Germans are still flirting with interested parties in China. And Sberbank head German Gref suddenly predicted publicly that the Opel would also be a good partner for AvtoVAZ, a GAZ competitor, located in the southern Russian city of Tolyatti.

The GAZ directors hope that the market will rebound. In the first half of last year, Russia overtook Germany as the strongest auto sales country in Europe. The accumulated demand is huge in the massive country. In Russia, there are just over 200 cars per 1,000 people—in Germany, it is over 550. Experts are confident that the country will have sales of over 5 million automobiles in the year 2020.

If that is the case, GAZ might be able to succeed at accomplishing what is promised by a slogan posted at the exit of its headquarters—"a breakthrough in the Fatherland's automobile industry." With Opel's help, the failure of the Volga Siber could still turn into a fresh start.

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