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. Last Updated: 07/27/2016

Car Industry Solicits Domestic Producers

The car industry is trapped inside a vicious circle: Both top automakers and suppliers are waiting for the other to be the first to commit to full-scale domestic production, sector leaders said at a conference Wednesday.

Automakers are looking for assurances of reliable supply for potential local plants, while part makers are holding out for guaranteed demand. And while they demur, the auto industry, badly in need of revitalization, continues to atrophy.

"Without a functioning components industry, the Russian auto industry will die," said Eugene Pruss, vice president of the U.S.-based Venture, a multinational auto components producer and designer.

"It's a Catch-22," he said. "Makers of components won't come until the auto giants start producing here, because they need volume to justify their investment, but the car companies won't come until they have reliable component makers available."

A year ago, the aging industry expected to be invigorated by the entrance of two major international players to the market -- Ford and GM -- both of which opened production facilities in Russia in 2002. The predicted flood of Western automakers never materialized, although some projects have begun to trickle in.

"We only started seeing a lot of opportunities in the past half year," said Van Gestel, the local head of Lear, a global producer headquartered outside Detroit, Michigan that makes seats for No. 2 carmaker GAZ. But, he said, "there is a great deal of competition."

That competition comes from fast-growing companies like SOK, long the dark horse of the Russian auto industry because of its opaque ownership structure and questionable acquisition practices. The company started out as a car dealership enterprise before snapping up auto factories in a cherry-picking spree in the late 1990s.

Today, Samara-based SOK produces 30 percent of the locally-made car components and is rumored to be owned by the management of No. 1 car maker AvtoVAZ, many of whose facilities are now part of SOK.

SOK also owns IZh-Avto, the second largest passenger car factory in Russia in the Volga city of Izhevsk.

Venture is working with SOK at its Plastik plant in the Samara region town of Syzran to help it design and produce high-quality bumpers that may be used at Ford's plant in Vsevolozhsk, outside St. Petersburg. Venture is also in negotiations with SOK to win a contract to restyle the IZh Oda sedan, SOK first vice president Vyacheslav Sheyanov said Wednesday.

But the number of industry players who congregated to speak with Sheyanov after he spoke at the conference suggests that Venture may not be the only company hoping to work with SOK.

Both Russian and foreign automakers are looking for ways to entice more components producers to enter the market because the deficit in quality parts is gaping.

AvtoVAZ is offering to rent out space on its immense factory grounds in Tolyatti in a bid to attract much-needed income as well as much-needed supplies. Part-making firms seeking proximity to customers in central Russia, where the domestic car industry is concentrated, will be able to rent production territory on the 33,000-square-meter technological park.

Some were skeptical about the prospect.

"The project is stupid," said Venture's Pruss. "They're charging too much. That will knock up the prices of components produced there and take away Russia's competitive advantage, which is cheap labor and resources."

On Tuesday, AvtoVAZ board chairman Vladimir Kadannikov said space at the park would be available for $110 per square meter per year. But Tolyatti Mayor Nikolai Utkin, after a ten minute conversation with Pruss, told The Moscow Times on Wednesday that the price could be "knocked down to $80."

Like automakers, the international financial community also hopes to spark development of the auto parts industry.

The European Bank for Reconstruction and Development's Duncan Senior said the bank was looking to increase its support for components manufacturers. The bank would be willing to partner with firms to invest into the sector and share risk, he added.