Tuesday, May 30, 2006

GM boosts its bets on Russia

Tuesday, May 30, 2006
GM boosts its bets on Russia

Automaker juggles plans to build plant there, mending joint venture with state-owned company.

Christine Tierney / The Detroit News

General Motors Corp. plans to build its own factory in Russia as well as try to salvage a troubled joint venture with the country's largest carmaker in an effort to beef up its presence in the fast-growing Russian auto market.

Deep strains in GM's relationship with Avtovaz, the state-owned manufacturer of Lada vehicles, emerged early this year after a new slate of government-appointed directors clashed with GM over the venture's parts procurement. A dispute over price increases demanded by Avtovaz-owned suppliers led to a 10-day production halt in February.

On Monday, the Russian government took action to defuse the situation by replacing two of its three directors on the GM-Avtovaz board, including the venture's chairman Igor Yesipovsky, who is also head of Avtovaz.

"What this means is that the new board members will be able to concentrate on running the joint venture's business more effectively than when the joint venture chairman was also the head of the key supplier," Warren Browne, GM's executive director in Russia, said in a telephone interview from Moscow.

Browne said the venture's shareholders -- GM and Avtovaz, with 42 percent each, and the European Bank for Reconstruction and Development with 16 percent -- all endorsed the new directors at a meeting Monday in Moscow.

While the board changes are a step in the right direction, the two automakers have a long way to go to align their agendas and make the venture work, say industry experts familiar with the situation.

GM is banking on growth in booming overseas markets, such as Russia and China, to offset a decline in its U.S. market share. But its difficulties with Avtovaz illustrate the risks automakers face in forging partnerships with local, state-owned firms in countries with vastly different business cultures.

A Moscow source close to the venture pointed out that the new directors, including GM-Avtovaz Chairman Viktor Baunov, come from Rosoboronexport -- the state arms trading agency that seized control of Avtovaz last December in a surprise maneuver.

"The arms export agency has consolidated its position," said the source, who spoke on condition of anonymity. Its leaders have close ties to Russian President Vladimir Putin.

The source said GM's plans to build a factory on the outskirts of St. Petersburg might be the start of an alternative strategy -- a scenario that GM flatly denies.

"GM enjoys 75,000 units of capacity that we have in Togliatti," Avtovaz's huge plant on the Volga River near the Kazakhstan border, Browne said.

"Any strategic move we could make in Russia would be viewed only as incremental to that capacity," he said. "We've made that clear to our partners and to the government."

The Russian market is growing by double digits each year, and most analysts expect sales to total at least 1.8 million vehicles in 2006 -- making it one of Europe's biggest markets. GM's goal is to double its stake to 10 percent, but it faces a crowded field as new rivals pile in.

"It's more attractive than unattractive to go into Russia," said Juergen Pieper, auto analyst at Metzler Bank in Frankfurt.

Auto executives say doing business is still tricky in Russia, where the transformation from communism to capitalism has been bumpy. But the economic outlook has improved, with a middle class emerging in the cities, inflation under control and foreign investment on the rise. Foreign auto manufacturers also avoid high import duties by setting up local production.

Russian brands are still the top sellers, but the biggest growth is occurring among foreign nameplates, with Hyundai in the lead and Chevrolet in second place.

Last year, Toyota Motor Corp. broke ground on a $140 million facility outside St. Petersburg.

In comparison with other emerging markets, "there's potential in Russia for sales growth because they have plentiful natural resources," Shinichi Sasaki, president of Toyota Motor Europe, said in a recent interview.

Renault and the city of Moscow have a production venture, and Renault's alliance partner Nissan Motor Co. said in April it would invest $200 million to build a factory in St. Petersburg.

In 2001, when GM forged a $340 million partnership with Avtovaz, the U.S. automaker appeared to have secured a choice position in Russia.

The venture is profitable and debt-free, but it hasn't met expectations. Both parties at times failed to deliver on promises: Avtovaz wanted modern technology on the cheap, and expectations on both sides were too high, say sources familiar with the venture.

Its recent results have been hampered by rapid increases in component costs that appeared to benefit other parts of Avtovaz.

GM's objectives now are to lower the venture's costs, improve quality and help make the Avtovaz suppliers more efficient.

GM declined to confirm plans to build a new plant, also confirmed by wire reports citing government officials. GM is expected to make an announcement in June when Chairman and CEO Rick Wagoner will travel to St. Petersburg for an economic forum.

GM also has a kit-assembly facility in Kaliningrad with a private Russian partner.


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