MOSCOW - A bomb goes off in a downtown shopping mall, sparking fears of a terrorist.
An aging president changes his senior ministers about as often as he changes his clothes. Russian consumers lack the money to buy cars, and the economy continues to stagnate.
So why are Europe's major automakers clamoring to get a piece of the Russian market? The answer is potential.
'There are al-ways going to be ups and downs,' said Alain Batty, president of Ford of Russia. 'There are always good reasons not to do something, but we have to look at the potential.'
That potential is a population of 150 million consumers. While sales have stalled now, foreign automakers still want to establish production capacity in the region.
Vehicle sales in Russia were expected to fall 10 percent from the previous year, according to Brunswick Warburg, a consulting firm in Moscow. Nearly all of the losses will be taken by foreign automakers.
Competing against local manufacturers and a devalued ruble, foreign automakers' share of the Russian market was expected to drop to 30 percent in 1999, down from 45 percent the previous year.
The foreign companies will recover, predicted analyst Alexander Andreyev of Brunswick Warburg. 'Some projects have been postponed, but nobody has left,' he said.
Andreyev expects a sales upturn over the next three to five years. That timetable may be a little too cautious for the industry, though. Most executives hope for a turnaround within 18 months.
Some foreign automakers have launched sales incentives to stimulate the market. Those with production facilities want to increase local content.
Foreign automakers are cutting prices, adding equipment such as air conditioners and car alarms, improving warranties and introducing consumer financing. Ford is pioneering a leasing plan.
Consumer leasing is a new concept in Russia. In fact, car loans are rare because potential lenders have no way to check the customer's credit. If Ford can arrange consumer financing, its vehicles will be much more affordable, Batty noted.
Ford Credit Europe now offers leases to businesses. Although the lease business has been modest so far, Ford is optimistic it will catch on. The company also plans to introduce consumer leases soon.
Russian manufacturers set such low prices, they don't need to offer financing. However, Ford has no intention to compete at that level, Batty said.
'To build a car to sell at $5,000 or $6,000 would involve too many compromises,' he said. 'To produce a cheaper car for Russia would be wrong. We have to make our existing products more affordable.'
Given Russia's economy, Ford doesn't have much choice. In response to slow sales, Ford closed its plant in Belarus from September 1998 through last March. Even now, the plant is operating at reduced capacity.
So why go ahead with its new project to build a new assembly plant in St. Petersburg?
'We have to look at this in the long term,' Batty said. 'We will start with smaller capacity and build up as demand grows.'
A new plant
Ford is wrapping up negotiations with local officials to build a $150 million plant to produce the Ford Focus. The joint venture - dubbed Ford Union - will include the Rus-sian government and Lada OMC.
The partners will start with an annual capacity of 25,000 cars. As market demand grows, Ford will increase production capacity to 100,000 units.
The facility includes a body shop, paint shop and final assembly. Production is scheduled to begin in mid-2001. About 20 percent of the Focus' parts will be Russian-built. Over the next five years, the venture will boost local content to more than 50 percent.
Ford will encourage its suppliers to form joint ventures with local companies, Batty said. At first, local suppliers will produce simple parts, then gradually will take on more complicated parts.
'They will have to meet our quality standards and our engineers will work with them to develop this quality,' Batty said. 'We have a team of people visiting suppliers to see if they have the potential to meet quality, reliability and cost.'
Ford wants to expand
Now that Ford is building a plant in St. Petersburg, the automaker wants to expand its Russian network of dealerships. The Moscow and St. Petersburg markets account for 70 percent to 80 percent of the Russian auto market. Sales elsewhere are modest, said Nigel Brackenbury, general director at Ford of Russia.
Ford now has dealers in 27 cities and is considering dealerships in 13 more cities, Brackenbury said. But Ford's expansion plans are problematic. Since last August, markets outside St. Petersburg and Moscow have been hit especially hard by the shaky economy.
To survive, Ford dealerships in Belarus and Russia cut their payrolls, and remaining employees took 25 percent pay cuts.
'We have had a tough time, but the important thing is we have not lost any dealers,' Batty said. 'They have invested a lot of money to build world-class facilities ... and they have been badly hit.
In the first nine months of 1999, Ford sold 895 cars in Russia. With such modest sales, it is hard for Ford to maintain its dealer network. But Brackenbury said the network remains intact.
'Our priority has been existing customers and our network,' he said. 'We have not lost one dealer.'
GM's slow sales
General Motors has found the going equally tough. In July, GM sold 50 vehicles, mostly Chevrolet Blazers built at its joint-venture assembly plant in Yelabuga, Tartarstan. Even those disappointing numbers were better than March results, when GM sold 17 vehicles. GM does not believe the market will pick up for some time. With sales running in double figures each month, the automaker pulled out of the Moscow Auto Salon in August.
'It was just too expensive,' said GM spokesman Dmitri Choulga. 'When you look at the number of cars we have been selling, plowing money into the auto show just did not make sense. We took the decision that it would be better putting our money into dealerships and sales campaigns.'
GM recently launched a new ad campaign, sponsored test drives and offered discounts. The automaker also is promoting fleet sales. But the company does not expect the market to improve for some time.
In response to sluggish demand, the Yelabuga plant halted Blazer production. Now it produces the Opel Vectra.
Like Ford, GM also is pushing ahead with joint-venture plans with Lada manufacturer AutoVAZ. The venture will produce the Astra Classic plus some new Lada models, Choulga said.
Although import sales are suffering, Russian automakers are actually boosting production to meet demand for cheap transportation.
Industry analysts expected a 4 percent growth in domestic production to 870,000 cars in 1999. The main beneficiaries will be Russia's Big Two, Lada producer AutoVAZ at Togliatti and GAZ in Nizhny Nov-gorod. Both said they were on course to produce 7 percent to 10 percent more cars than they did in 1998.
VAZ has huge tax debts but still is churning out its old Fiat-based models for little more than $3,000, a price people can afford. It cannot, however, afford to develop the Calina, shown at the Moscow Auto Salon in August. This Opel Corsa look-alike has the potential to lead the company back into western markets.
VAZ also can spin off a sedan, wagon, coupe and small minivan - if it had the money.
Its potential joint venture with General Motors at Togliatti, which will eventually produce the Astra Classic at the giant plant, could hold the key to the Calina project.
GAZ is to launch the much larger and all-new 3111 model next year. Although the car is executive-sized, it is no-frills transportation. It is expected to cost $10,000 to $12,000, about twice the price of a Lada.
Andreyev of Brunswick Warburg noted that the Russian automakers have no competition in this price segment.