MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) – The Russian car industry is witnessing a boom in foreign investment.
Most of it is going to projects related to the production of foreign models. Yet this only highlights the obstacles Russia still has not managed to overcome in developing a modern car-making industry.
Earlier this month, General Motors announced that it was almost tripling its investment in the construction of a car assembly plant near St. Petersburg, from $115 million to $300 million. The plant's capacity will also be increased: it will produce 70,000-100,000 cars a year as of 2008 instead of the planned 25,000. But even this will not be enough to meet the growing demand of the Russian market, company managers said. Indeed, the car-making business in Russia is in an extremely favorable situation right now, especially businesses with foreign capital.
There are several reasons behind this explosion in the foreign-car market. First, the quality of Russian cars is inferior to foreign ones. Soon they will not be able to compete with foreigners even in terms of price. The country's engineering schools, which were quite strong in the past, have lost their potential after 15 years without sufficient financing. So there is almost no other alternative for the Russian car industry but to develop using the achievements of international carmakers.
At the same time, Russia offers fantastic opportunities for carmakers. The market easily absorbs ever larger amounts of new cars. Last year, car sales in Russia grew by 23% on the previous year, to just above 2 million. Sales of foreign cars soared by 65% to 1 million a year. The European car market, meanwhile, grew by a mere 0.7% last year.
The reasons for the Russian boom are obvious. The national economy has been growing by at least 5% a year for several successive years, so the population's incomes have also been going up. Per capita disposable income has been rising annually by 8-10% in the last five years. An increase in consumer loans has also contributed to the growth of the market: loans to individuals have surged over the last three years. The availability of inexpensive loans has drastically increased people's spending limits when making big purchases.
Thanks to this unprecedented consumer activity, Russia has become the fifth biggest car market in Europe for GM and the second biggest for Mitsubishi and Mazda. All foreign carmakers are now increasing their supplies to Russia. Most of them are also developing their own production in the country. Speaking to the Russian parliament, Economic Development and Trade Minister German Gref said that by 2010 Russia would manufacture from 800,000 to 1 million foreign cars a year, while foreign investment in the sector would exceed $2 billion.
General Motors is not the only foreign investor developing its business in Russia. The country now has eight projects manufacturing foreign cars with foreign capital.
The Izh Avto plant, which belongs to the SOK machine-building holding company, manufactures compact cars for KIA, a Korean company. TagAZ assembles several models of Hyundai. The Avtotor assembly project in Kaliningrad cooperates with four foreign concerns: GM, BMW, Chery and KIA. Severstal Auto, a former subsidiary of the steel giant Severstal, produces a line of cars for Fiat and SUVs for Korea’s SsangYong. Russia also has two joint ventures, GM-AvtoVAZ (Chevrolet) and Avtoframos (a project involving France’s Renault and the Moscow city government to produce inexpensive Renault Logan cars). Ford, which was the first foreign car-maker to set up its own manufacturing in Russia, has a plant near St. Petersburg. GM is building a factory nearby.
Ford started producing cars in Russia in 2002. Now it is the most popular brand on the Russian market (its sales last year reached almost 116,000 cars), a success to be envied. GM was not the only one to follow suit. Seven foreign plants are about to be launched. Toyota, Nissan, Volkswagen and China's Great Wall are building their own plants in Russia. A joint venture involving Avtotor and China's Chery will soon go on stream. So will GAZ Group's project to produce Chrysler cars. Another two carmakers, Mitsubishi and Peugeot-Citroen, are considering setting up their own plants in the country. Even Russia's biggest domestic carmaker, AvtoVAZ, is in talks with Renault and Magna about building new facilities in its home city, Togliatti, to assemble foreign cars.
Investors are generally satisfied with the conditions the government is offering companies that want to set up car production in Russia. In 2005, it introduced a program of tax breaks for firms ready to produce at least 25,000 cars a year and invest at least $100 million in the project. The only condition is that the share of Russian-made parts in the assembled cars must exceed 30% within five years of the launch of the project. Later, similar conditions will be offered for producers of car parts. It does not take more than twelve months to get all the necessary permits to launch a car assembly project. Businessmen say that large investors working via government agencies or regional authorities do not encounter problems with red tape and bribery. High-profile, image-shaping projects could even help foreign companies get assistance from local authorities, including the construction of infrastructure, roads and communication at the expense of the state.
Investors are still attracted to Russia by its cheap resources and labor. Although Russian wages, as well as commodities and energy prices, are moving toward the European level, they are still competitive. A worker on a car assembly line earns 41-43 euros an hour in Germany, 15-35 euros in Belgium, France and Italy, and at least 7-8 euros in east Europe. In Russia, however, such workers earn 3-4 euros an hour even in Moscow and St. Petersburg, the most competitive labor markets. This is tempting to HR managers.
Given all these advantages, Russia should have become Europe's car assembly line long ago, replacing east Europe. But it is not. In spite of the favorable conditions, there are still a lot of obstacles hindering the development of car production in the country. Most of the current investment projects in the industry are assembly plants. Most foreign investors do not venture beyond putting money in assembly lines, painting and welding. Not a single foreign concern plans to produce high-tech parts such as transmissions or engines. Few producers seriously consider Russia as a potential exporter to third countries. Why?
The government's short-sighted and to a large extent inconsistent policies are to blame. Russia does not have a modern car parts industry. Most Russian producers are oriented toward domestic standards for car parts. Few of them have been able to obtain modern quality certificates and meet the requirements of new foreign clients. Only recently has the government extended tax breaks to investors putting money in the production of car parts, encouraging their entry into this sector.
The government's customs policies on imports of new and old cars were also a mess until recently. It was long undecided about what to do about import duties on old cars: raise them to 100-200% of a car's cost, following China's example, or keep them liberal for the sake of consumers. It did not stop the inflow of old right-wheel cars that flooded the eastern part of the country. It hesitated about duties until the terms of Russia's entry to the WTO set them at the current "medium" level (25% of the cost of a new car).
It has taken Russia too long to create an attractive and favorable investment climate in the car-making industry. As a result, investors are coming, but Russia is not among their favorites. International producers are willing to invest billions of dollars each in the Czech Republic, Hungary, Slovakia and China. Russia, however, has to be content with hundreds of millions.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
