POST-CRISIS PROFILE:Foreign Carmakers Set Up Shop

Foreign automakers are pushing forward more strongly and deeply to produce their own vehicles in Russia.

"Last year companies were going to assemble cars. Now they are going for higher local content," said Alexander Andreyev, an automotive analyst at Brunswick Warburg brokerage.

"There were some lost opportunities; however, I think the focus of our attention has shifted from retail-oriented to industrial projects," said Dmitry Choulga, director for public affairs at General Motors CIS. Competing against Russian automakers producing with the devalued ruble, foreign automakers have seen sales slump "by at least 50 percent," Andreyev said.

Brunswick has estimated that overall car sales in Russia will fall about 10 percent in 1999 from last year's 1.4 million vehicles, with foreign automakers bearing the brunt of the loss.

"Last year [foreign automakers] had 45 percent, and this year they will have 30 percent of the total car market in Russia," Andreyev said. However, it did not take the foreign firms long to mount comeback campaigns in the potentially huge Russian market.

Marketing strategies include lower prices and free options, ranging from air conditioning and car-alarm systems to better warranties. Ford and German-U.S. DaimlerChrysler have pioneered leasing in Russia.

Foreign firms also have an eye on the tax breaks and cost advantages that stem from producing in Russia and avoiding of customs duties on imports that range from 50 percent to 100 percent.

In March, U.S.-based Ford Motor Co. put the final touches on its long-awaited $150 million project to build the Ford Focus compact at an old heavy-machinery plant in Vsevolozhsk, near St. Petersburg. In the same month, BMW, Germany's third-biggest automaker, announced a $70 million agreement to begin assembling luxury cars and sport utility vehicles in Kaliningrad.

French automaker PSA Peugeot Citroen followed with an announcement for a $270 million joint venture with TasAZ in Rostov-on-Don in southern Russian.

And in July, another French company, Renault, announced that it would begin producing heavy trucks at Moscow's ZiL manufacturing plant, to add to the Avtoframos joint venture it had in place with Russian automaker AZLK Moskvich and the city of Moscow.

And while production of the Blazer has come to a halt at the YelAZ plant in Tartarstan, General Motors CIS has continued the Yelabuga joint venture to assemble Opel Vectras; bad road and dust packages are specifically added to suit the Russian market.

Choulga says General Motors CIS is at the forefront of a fight to block "gray" imports, cars that improperly pass through customs and are sold in Russia. Along with stolen automobiles, they eat into potential foreign auto sales.

Although no official statistics are available, Andreyev estimated that of the foreign firms' projected 30 percent share of the market this year, only about 5 percent will be sold through officially franchised dealers.

In a case where medium-price models have been wiped out of the market, emphasis has shifted to low-price and luxury models.

"The luxury car market never suffered, the $10,000 to $12,000 and $25,000 to $30,000 market was the most affected," Choulga said. "The middle class has been undercut by the crisis most of all."

Russian automakers have benefited from the crisis as customers took advantage of domestic brands that suddenly held huge price advantages.

That has proved to be a boon for some Russian automakers, who are riding the momentum gained from their price advantages on low-end cars by increasing production and streamlining product lineups and distribution networks.

Some industry analysts are predicting 4 percent growth in domestic production, for a total of 870,000 cars in 1999, according to Avotmobilnaya Promyshlennost.

Central Russian automotive giants AvtoVAZ and Nizhny Novgorod-based Gorky Automobile Works, or GAZ, are expected to lead the charge. Both of the automakers are on course to produce 7 percent to 10 percent more cars than they did in 1998.

VAZ is pecking away at its huge tax debts, trying to scrape up funds to manufacture a new sport utility vehicle and streamlining distribution networks.

Meanwhile, GAZ is preparing to launch its all-new 3111 model next year. "The timing is perfect; [Russian automakers] have no competition right now," Andreyev said.

But foreign automakers know they won't be on the outside forever, and are still salivating over one of the last virtually untapped automobile markets in the world.

"Nobody left. Some projects were postponed, but nobody left," Andreyev said. "In general, the future still looks good, and that's why they are still here."

And while returns on investments have been postponed, Andreyev predicts a boom in the industry over the next three to five years akin to that seen in Russia's brewing industry.

"It will look like the beer market today ... and the big companies are preparing for it," Andreyev said.