MOSCOW - The economic crisis in the Asia-Pacific region sent shock waves around the world, but nowhere was it felt more than in Russia, which suffered complete financial meltdown this past summer. That meltdown forced automakers to adjust dramatically their strategies for what had been considered one of the most promising, and immediate, growth opportunities.
General Motors, Ford Motor Co., Renault SA, Fiat Auto S.p.A. and Daewoo Motor Co. had ambitious plans, but they are all trimming their estimates.
Much of the Russian population has been seduced by commodities from the West, and these Russians are eager to buy. The problem is that there is no money available. Even before the financial crash, which sent the ruble into free fall, only a small minority could afford a vehicle that cost more than $12,000, and most could not swing even that.
There is a simple reason why obsolete technology in the shape of Ladas and Volgas still is bought in huge numbers: It is all people can afford.
Even so, local producers have been hit hard. AutoVAZ has experienced difficulties obtaining parts as cash-strapped suppliers suspend operations. AutoVAZ imports some 20 percent of its components, and a falling ruble means the cost of its cars is rising.
Renault has revised its plans for Megane production in Russia, and Ford has adjusted Escort and Transit output schedules.
David Herman, who last spring moved from his post as chairman of Adam Opel AG to become GM's chief executive for Russia and the former Soviet republics, said growth strategies would have to be managed carefully.
This point, he said, is key to GM's strategy in the region. GM currently produces Blazers on a simple kit basis but gradually will ramp up production over the next two to three years and add a second line for the Vectra, increasing capacity to around 50,000 units a year.
GM's negotiations with AutoVAZ about producing the Astra and perhaps the Corsa are expected to continue through this year, but Herman said it would be some time before GM would consider investing in paint shops.
'It is important to keep things under control in the short term,' he said. 'If you invest too much capital straight away, you get killed. We have a small number of people based here who are highly qualified to keep monitoring the situation, ready for when the market turns around.'
Pricing is a key issue in the region.
Herman added: 'There is very little purchasing power at the moment and a lack of credit facilities. Once you get above $12,000, there is only a small amount of people who can afford a car, and there are a lot of automakers competing for a very small piece of the pie.'
He said the other problem is a lack of technology available among local suppliers. 'It all has to be brought in, and that is very expensive when the economy is bad,' Herman said. 'Suppliers in Russia recognize they need access to the technology, expertise and quality of their counterparts in the West.
'Russian suppliers are on their heels. The economy is tough, some of them are not getting paid, and it is going to take a while to get through that.'
Herman, however, still thinks the potential is much greater than in China because Russia has a much more open economy, despite the problems it is encountering currently.
'The very nature of China's central planning policy makes it very difficult,' he said. 'You have to bid for projects and then invest heavily in them. In Russia, they recognize you need to make money and will allow you to develop at your own pace.'
Herman also cited the lack of consumer credit as a big problem. He said less than 1 percent of cars sold in Russia last year were sold on credit. 'It is not readily available from banks, and it is not yet in the psychology of people,' he said.
Herman used Poland as an example of how important consumer credit can be. 'We have seen the boom in the market in Poland where a similar situation was reversed,' he said. 'You are behind the curve without credit.'
Fiat's brave face
Fiat is putting on a brave face, having announced a new joint venture with AutoGAZ and the European Development Bank to build the Marea and 178 Palio models at Nizhny Novgorod. The venture will produce and sell cars as part of Fiat's global 178 strategy. Total investment is $800 million and will produce 150,000 cars a year, including the Fiat Marea, Siena sedan and Palio Weekend wagon.
Roberto Testore, chief executive of Fiat Auto, described the project as 'the most important project in Russia today.' He called on the Russian government to be more active in encouraging investment in the auto industry, which has played a leading role in the economy.
Testore said the economy will turn around quickly. 'We remain convinced by the potential,' he said.