Why the Russians backed the Opel-Magna-GAZ deal??

Evolution of Russian Market PC Regs. Credit: R L Polk

Evolution of Russian Market PC Regs. Credit: R L Polk

Keep three facts in mind: the Russian car market will be the largest in ‘Europe’ by 2012. The average amount people are willing to spend on a car is rising rapidly ($21,700 in 2008). Foreign car makers are taking a growing slice of the market away from domestic producers. Potentially, Russia is one of the globe’s ‘prize’ markets and its domestic car makers do not intend to give it all away to foreigners.

Since the collapse of the Soviet Union in 1991, the car market in Russia has split into two broad geographic segments: in west Russia, the affluent ‘have’ buyers acquire cars that match European standards. They are mostly full or Russian-built imports; in east Russia, the majority ‘have-nots’ buy cheaper, domestic cars.

The challenge facing the domestic producers is that their customer base want cars of similar standards as the imports.

Domestic and Foreign Shares of the lucrative Russian Car Market 2003 - 2008

Domestic and Foreign Shares of the lucrative Russian Car Market 2002 - 2008

So, what’s the problem? To start with, domestic cars are still plagued with sub-standard suppliers and counterfeit after-market parts. Quality control in the factory’s is embryonic, so electrical and trim parts are poor, engineering in unreliability. To cap it all, many domestic brands are tarnished by their terrible reputation established in the ‘90’s—with the fall of the Soviet Union—when production quality collapsed as they couldn’t pay their workers.

Another obstacle is emissions compliance. Most domestic cars meet Euro 0 standards and only in 2010 will Euro 2 be required.  Compliance costs are estimated at $500 per unit. This puts a complete brake on Russian car exports and curtails domestic sales.

One quick way to restructure the industry is to find a way of transferring European standard technology to Russian car makers. Now take another look at the Opel-Magna-GAZ deal.

This deal – if it comes off – gives Sberbank (state controlled) 35% of the firm. This it could transfer to Rostekhnologii, Russian Technologies, also state controlled, who could then fold the largest Russian auto maker, AvtoVaz into the Opel-Magna-GAZ alliance. AvtoVaz with GAZ would become the Opelcar builder in Russia. Rostekhnologii already own 25% of AvtoVaz

GM aren’t best pleased with the idea of building a rival so they’re trying to finesse the deal—asking the Russians to stump up €7BN in investment. AvtoVaz are offering to buy out GM’s share in their joint venture, GM, AvtoVAZ. This would return say $200MN to GM. AvtoVAZ would recoup the money by building and selling the Chevrolet Niva – the best selling off-roader on the domestic market in 2004-2008 – as a Lada. They’d pay a lower royalty to GM.

 That could leave AvtoVAZ building Renaults under licence as well as Opel’s. To add manufacturing capacity, Sberbank are reputedly paying GM €65MN for their St. Petersburg plant. It’s a poor deal for GM who invested €700MN in the plant.