Thomas White Global Investing
Russia Stamp
September 7, 2012
A Postcard from Europe
Russia: Riding in the fast lane

Symbol of a bygone era

The fall in oil and natural gas prices has prompted the Russian government to turn its attention to the country’s hitherto ignored manufacturing sector.

Even during their heyday, Russian cars such as the boxy Lada sedans and Volgas were at best a reflection of the state-controlled economy: dull , drab, and unwieldy. Today, communism is long gone, while the automobile manufacturing sector is getting a complete makeover, thanks to huge investments from big European car manufacturers reeling under the effects of the debt crisis on their home turf.

The mood was upbeat at the recently-held Moscow International Auto Salon, with car makers promising to pump in billions of dollars in investments to the domestic auto market, which is forecasted to become the largest in Europe by the year 2014, as a WSJ report pointed out.

The investments could not have come at a more opportune time for Russia as it formally becomes a member of the World Trade Organization (WTO). Like China, which leapfrogged its way to become the world’s second-largest economy after joining the global free-trading club in 2001, Russia stands to gain if the country seizes the golden chance to modernize its industrial manufacturing sector. The jolt received during the financial crisis, when energy prices crashed, forced the Kremlin to wake up to the fact that its dependence on extractive industries could prove to be costly in the long run.

The history of Russian car manufacturing can be traced way back to 1929 when the Gorky Automobile Plant (GAZ) was established in the Nizhny Novgorod region of the then Soviet Union with assistance from the legendary Henry Ford. However, rather than catering to the tastes of the public, the company began producing military vehicles and bulky limousines for use by officials.  Then, after the “privatizations” of the 1990s, the auto maker fell into the hands of oligarch Oleg Deripaska. Under its new owner, the Economist points out, GAZ stepped on the gas pedal and started manufacturing commercial vehicles and also began assembling Skoda cars and Mercedes vans. Deripaska also roped in a former GM executive to make GAZ a leaner and meaner company, rewarding performers and shedding laggards. AvtoVAZ, another Soviet-era car-maker, also realized the need to modernize, hitching its bandwagon to the Renault-Nissan alliance. Mikhail Prokhorov, who like Deripaska made his money in metals, has invested in the production of electric cars.

In his comeback address as president in May this year, Vladimir Putin said 25 million highly skilled jobs would be created. Facing pressure from all corners over a slowing domestic economy, the new administration seems to have given the green flag to foreign investors to rev up the fortunes of the sagging automobile manufacturing sector. On the sidelines of the Moscow auto show, General Motors said it will spend $1 billion over the next five years to increase production in Russia, while Renault sees Russia emerging as its number two market ahead of Brazil, according to a Reuters report. German automobile maker Volkswagen forecasted a sales growth of 30% in Russia this year and said it will pump in $1.3 billion by way of fresh investments. As well, Italy’s Fiat SpA and Sweden’s Volvo Car Corp., and Japanese car makers Mazda Motor Corp. and Nissan Motor Corp., have put the Russian market at the top of their agendas.

If global auto makers are making a beeline for the Russian market, it is not without reason. Statistics are encouraging as the industry reported a 70% rise in sales to about $60 billion last year, according to a PWC report cited by the Wall Street Journal. The familiar emerging market story of a rising middle class is the key. Moreover, about 33% of the cars on the Russian roads are more than 15 years old, with car ownership a mere 200 per 1,000 people, the report adds. Despite the notorious bureaucratic hurdles and corruption, the foreign car makers know too well that the burgeoning Russian consumer could be the elusive growth driver they desperately need. What’s more, Russia’s famed technical institutes, which are known to impart world-class training, would ensure a steady supply of engineers and skilled workers to foreign car makers who want to set up manufacturing facilities in the country.

Russia’s WTO entry will likely change the rules of the game for local car manufacturers who will have to compete with some of the world’s best. But as they say, only the test of fire makes fine steel. And the results were there for all to see — the remodeled curvaceous Lada Kalina supermini was the smash hit of the Moscow motor show.


Image Credit: Mindaugas Danys on Flickr under a Creative Commons License

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