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. Last Updated: 07/27/2016

Car Parts Makers Follow Auto Majors Into Market

Foreign auto parts makers have begun trickling into Russia -- tagging along with major foreign carmakers such as Ford Motor Co. and General Motors that will soon begin producing locally.

Russia is the "last big opportunity in the developed world" for parts makers, Henrik Nanzen, president of Ford's Russia operations, said Wednesday at an Adam Smith Institute forum on investment in the auto industry.

"You can count the Western parts suppliers on the fingers of one hand," said Alexander Ostrov, Russia director for Michigan-based Delphi Automotive Systems, which has a joint venture with the Samara Cable Plant to produce wires for AvtoVAZ cars.

Despite little demand, parts makers are hoping for growth as foreign auto companies enter the market. Ford and GM -- the two largest foreign investors in the auto industry -- are both expected to begin production in Russia later this year.

The Western carmakers said they would have to establish themselves in Russia before the parts makers would follow, and they need those parts makers to establish themselves locally in order to get a vital import tariff break on supplies.

Foreign investment law states that if foreign carmakers increase the share of locally produced components to 50 percent in five years, they can import the rest of their parts duty free.

Ford and GM, meanwhile, are currently in discussions with Russian parts suppliers. Jack Keaton, director of supply for GM in Russia, said the company is in talks with six local suppliers and "could easily go 50/50" on local and foreign parts; while a Ford official said the company hopes to go beyond the 50 percent level "because that's desirable for us."

Ford plans to use two locally made components -- windows and rubber mats -- when it begins producing Ford Focuses in May at its plant near St. Petersburg.

Besides making a profit in Russia, parts makers have a bigger reason to enter the local market -- to keep good relations with the big automakers outside Russia.

"We worry about protecting our old business in other countries, not just our new business here," said John Morgan, regional director of tire maker Continental. "When our partners Ford came to Russia, they want to work with us, so we followed; otherwise, we jeopardize the relations we have developed with Ford in the West."

Although the parts makers are leery of entering Russia, they're equally afraid not to. "Russia is a dangerous market," said Jerry Koenig, general director of parts maker Johnson Controls' Russia division.

"But its even more dangerous to not go in," he said.

The greatest difficulty in working with Russian parts suppliers, said Ford's Nanzen, is establishing a relationship with the company. "You don't just sign a contract and start producing -- you have to learn to work together," he said.

There are some advantages to operating in Russia. "Other countries don't have the intellectual capital and the people," said GM's Keaton.