Automotive Industry Revs Up in Russia

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Researched by Industrial Info Resources (Sugar Land, Texas)--Although the automotive industry in the U.S. continues to face headwinds from the housing market, the credit crunch and talks of possible inflation or stagflation, the automotive industry in Russia is thriving. Russia's economy is booming because of its vast natural resources (oil and natural gas), which are fetching premium prices and easy access to credit. Two plants have commenced operations in the past two months with several more under construction or in the planning stages with investments totaling more than $3.2 billion.

Volkswagen AG (Wolfsburg, Germany) and Toyota Motor Corporation (Aichi, Japan) have recently opened plants in Russia. Volkswagen started assembling vehicles in the Grabzevo techno-park in Kaluga, Russia, on October 28, 2007, exactly 13 months after the first stone was laid at the groundbreaking ceremony. The $735 million plant will be brought online in two stages. In the first stage, 66,000 Passats and Skoda Octavias will be assembled from kits. In the second phase, the company plans to add production of the Skoda Fabia and a Russian remake of the VW Polo. In the second phase, the plant will begin full assembly with its own body shop, paint shop and final assembly line. When fully operational mid-2009, the factory will churn out VW's Jetta sedan, Passat, Tiguan and Touareg, and two Skoda models: the Octavia sedan and the Fabia hatchback. Annual capacity is slated to be 115,000 vehicles annually with a maximum capacity of 150,000 vehicles.

Toyota opened its $202 million plant in St. Petersburg, Russia, on December 21, 2007. Initially, the plant will assemble 20,000 Camrys a year with the potential to increase to 200,000 vehicles per year.

General Motors (NYSE:GM) (Detroit, Michigan) has a $300 million plant under construction in the Shushary region of St. Petersburg. The plant began construction in June 2006. Once operational in 2008, the plant will begin production with 70,000 Chevrolet Captiva SUVs. Originally, GM had planned to invest $115 million for a 25,000 vehicle-per-year plant, but because of favorable conditions and the expectation for high demand, GM announced a larger investment. Russia is currently the largest market for Chevrolet.

Several other manufacturers have announced plans to build plants in Russia. It seems that most of the companies are looking to build in two areas: Kaluga or St. Petersburg. PSA/Peugeot-Citroen has announced that it will begin constructing a $440 million plant in Kaluga in 2008, with start-up slated for 2010. Volvo is building a heavy-duty truck assembly plant in Kaluga, as well. The $138 million plant will build 10,000 Volvo trucks and 5,000 trucks for Renault. It is expected to be operational in 2009.

Joining Ford and Toyota in St. Petersburg are Hyundai, Nissan, Suzuki and possibly Magna and Mitsubishi. Hyundai will build a $400 million plant capable of assembling 100,000 vehicles a year. A vehicle that is being designed specifically for Russia has not yet been announced. The plant is to begin construction in 2008 with completion set for 2011. Nissan is building a $200 million plant, which will assemble 50,000 Nissan Teanas and X-TRAILs in 2009. Suzuki's $124 million plant will assemble the Grand Vitara and SX4 passenger cars in the second half of 2009. Production will begin at 5,000 units annually and increase to 30,000. Magna is in negotiations to build a $500 million plant that will assemble between 150,000 and 300,000 vehicles for Chrysler. Mitsubishi is looking at either Kaluga or St. Petersburg for its potential $177 million plant to assemble 50,000 Outlander XLs annually in Russia by 2010.

Automakers are flocking to Russia because of its labor costs, generous tax breaks and proximity to European markets. Another reason automakers are building cars in Russia is to avoid 25% duties on imported cars. The Ministry of Economic Development & Trade of the Russian Federation is also granting incentives for industrial assembly under "decree 166," which covers the granting of incentives for automakers relating to establishing local production facilities. These incentives include customs-duties relief or privileges for importation of automobile parts and components.

Foreign-brand car sales are soaring, up 64% in the first 10 months of 2007 to 1.3 million units. Currently, General Motors is the biggest single foreign seller in the country with 15.3% market share of non-Russian vehicles. It is followed by Ford and Nissan-Renault, both with 13%, and Toyota at 10%. Russia is on track to become Europe's largest market by 2011. The combined output of foreign carmakers' plants in Russia is expected to reach 1 million around 2011-12.

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