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. Last Updated: 07/27/2016

Foreigners Drive Up Auto Industry Standards

MTThe Ford factory outside St. Petersburg has committed itself to buy half of its components from domestic producers by 2007.
It might not look like a Russian car, but the Ford Focus is in many ways a homegrown product.

Although many of its parts are shipped in from abroad, the car is assembled outside St. Petersburg, with the company racing to meet a commitment to rely increasingly on domestic parts.

Auto enthusiasts and industry experts alike are hoping that requirements for foreign automakers to use Russian components -- as well as the know-how they bring with them -- will trickle down to domestic producers and attract new international players to the market.

While Russian companies have been slow to catch on, there are signs they, too, are changing.

"Russian carmakers will take advantage of more readily available foreign-designed components -- making their products better -- while Western companies will slightly lower the quality of their cars for cost reasons and get into the mass niche they covet," said Alexei Yazykov, an automotive analyst at Aton.

Ford, which opened its sleek plant in 2002, wasn't the first foreign carmaker to build a factory in Russia. But Ford was the first international automaker to promise that 50 percent of its parts would be domestically manufactured by 2007. In return, the Focus' foreign components remain duty-free. Last year Ford produced 15,900 cars here and expects to hit its capacity of 25,000 in 2004.

U.S. giant General Motors has been operating a joint venture with AvtoVAZ since 2002, producing the locally designed Chevy-Niva 4x4. This year the venture plans to build more than 55,100 of the SUVs, up from 35,200 last year.

Last week the venture started production of the Opel Viva on a $241 million assembly line under the same customs terms as Ford, meaning it will be able to keep the car's price as low as $10,000. Opel is forecasting production of 7,500 cars in 2005.

France's Renault is also gearing up to begin production of the Logan, which it is billing as "the 5,000 euro car" at a $260 million plant in Moscow. The annual capacity of the plant is set at 60,000.

Joint ventures with Western companies will produce more than 100,000 cars this year, compared to last year's 54,000, according to the Industry and Energy Ministry.

"The more Russian cars the merrier," said Matt Donnelly, president and CEO of Rolf, a leading Moscow dealership.

The price of the Focus shrank by $3,000 after Ford started making the car in St. Petersburg instead of importing it from Spain. The model immediately became a hit among Rolf customers.

"People are starting to get used to the fact that cars in Russia don't have to be bad. The simple fact is that they're popular because they're cheaper," Donnelly said.

The government is also eager to attract foreign car companies.

"There has to be a wide range of automobiles on the market," Nikolai Sorokin, deputy head of the Industry and Energy Ministry's department of industry said in a statement last week.

"The presence of foreign models on the internal market will lead to competitive conditions ... [which] will help develop the Russian auto industry."

But price isn't the only thing moving the domestic market, which analysts project will grow from an estimated 1.5 million cars this year to 3 million in 2010.

In a break with the past, today's consumers are beginning to place a premium on quality.

Imports of new cars exceeded imports of used cars for the first time this summer, a little noticed development that shows how far the market has come.

"Essentially this means that not only is demand growing but it is shifting to new automobiles," said Gayrat Salimov, an analyst who follows the sector for Troika Dialog.

Increasing demand for new cars combined with factors like strong economic growth and high import tariffs on used vehicles mean the time is ripe for foreign companies to enter the market, Yazykov said.

External factors have also influenced the growing popularity of new cars. A sluggish economy in Germany, the largest source of secondhand cars in Russia, has meant drivers there are holding on to their cars longer, said Donnelly. Furthermore, Poland's entry into the European Union has made it easier for Poles to buy up the ones that go on sale.

"Short of a market collapse, we don't expect things to get worse anytime soon," said Yazykov.

Despite shifting trends, many foreign automakers that have been eyeing the market are hesitating to make a commitment. Others are opting to license assembly of their brands without sinking a large investment into the country.


The Avtotor plant in Kaliningrad assembles mostly KIAs and BMWs. This year it will nearly double production to 15,000 vehicles.

Toyota, the best-selling foreign car brand in Russia, and Volkswagen have dropped hints about their interest in building plants but have yet to put forward concrete plans.

Industry insiders have speculated that Toyota has already selected a plot of land for the plant in Stupino, just outside Moscow. Company spokeswoman Anastasia Kokareva would neither confirm nor deny the information. But she said that should the Japanese firm choose to build cars in Russia, the plant would be a greenfield project in line with Toyota's global policy of avoiding joint ventures.

Other foreign companies wary of taking the plunge are licensing select models for assembly by domestic companies.

Avtotor, a private car plant in Kaliningrad, has been assembling South Korean KIAs and BMWs for several years. The company plans to build some 15,000 vehicles this year, up from 8,000 in 2003.

No. 2 passenger carmaker IzhAvto has produced a test batch of nearly 600 KIA Spectra sedans this year with plans to launch full-scale production at its Izhevsk plant next year. IzhAvto will invest $63.5 million to import modern welding and painting equipment for the KIA, as well its own models.

"That way we can improve the quality of the automobiles we already make, too," said IzhAvto spokeswoman Inna Levikina.