Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Moscow, Prague Sign Skoda JV Plan

Russian and Czech officials signed a letter of intent Thursday to form a joint venture between Izhmash Holding and Skoda Auto that would manufacture up to 170,000 cars a year in Russia.

This kind of project "instills optimism and hope for overcoming the crisis," said Russian First Deputy Prime Minister Yury Maslyukov after signing the proposal with his Czech counterpart, Pavel Mertlik.

Under the terms of the deal, Skoda Auto will spend $300 million over the next two to three years to upgrade a Izhmash plant in the central Russian republic of Udmurtia. Skoda, in which the Czech government owns a minority stake and Volkswagen AG more than 70 percent, will also hold a majority stake in the joint venture. Izhmash was a major automaker in Soviet times.

"The equity basis still has to be negotiated with the joint-venture partners," Detlef Wittig, deputy chairman of the Skoda board, told reporters. "The equity injection will come from both sides according to the share distribution."

A final agreement is expected at the end of May, and 5,000 of Skoda's compact Felicia cars are expected to be assembled before the year 2000 at the plant in Izhevsk. Production should reach an annual output of 80,000 cars in five years, and the cars will be sold for $10,000 to $11,000 each.

Officials said the factory, which in the past produced Moskvich cars and most recently worked with Hyundai, will initially assemble cars from only imported parts. Over four years, the factory will shift over to domestically produced parts. Some 2,000 to 4,000 workers will be employed at the plant.

As a major investor, the Skoda-Izhmash venture will receive customs-tax exemptions for several years, Wittig said, adding that the company is negotiating for other tax breaks.

Skoda's $300 million investment will come in the form of technology, machinery and equipment as well as cash, Wittig said. No bank loans are considered at this point, he added.

Automotive analysts, however, did not predict a bright future for the new venture because the demand for cars is dropping amid Russia's economic crisis. The ruble has lost some 60 percent of its value since August, sharply reducing consumers' buying power.

Analysts also pointed out that a number of similar operations have been studied in Russia, and they have borne little fruit. Ford, Fiat and BMW are among the Western carmakers that have been drawing up plans in Russia.

"We have heard about many ... projects to assemble [foreign] cars in Russia, but there are practically no cars so far," said Erik Wigertz, analyst with Brunswick Warburg. "Only Daewoo has started to make cars."

Russian company DonInvest, under license from Daewoo, finally started producing its first cars two weeks ago after two years of preparation. In the end, only massive tax breaks on imported parts allowed the firm to roll cars out of its $268 million Taganrog Auto Works in southern Russia. Those cars sell for $7,000 to $9,500 each.

Wittig said Daewoo's cheaper price tag would not deter Skoda. "We will be able to compete with any foreign manufacturer as far as prices are concerned," he said, adding that he believes the demand for cars in Russia is "huge."

Wigertz said, however, that the number of cars being built in Russia is falling. During the first nine months of 1998, 620,906 cars were produced, a sharp drop from the 724,603 made over the same period last year, he said.

The trend is expected to continue. "We believe that this year about 19 percent less cars will be produced and next year 10 percent less than in 1998," Wigertz said.