Russia's involvement in the deal to rescue troubled European carmaker Opel could provide a lifeline for cash-strapped oligarch Oleg Deripaska's GAZ, but the Russian car industry remains on the skids as sales plummet and foreign carmakers cut back production.
This week saw two high-profile, car-related public appearances by Prime Minister Vladimir Putin - first, as he drove his vintage GAZ automobile to a ceremony at Skolkovo Business School over the weekend, and then the opening of the $200 million Nissan plant in St. Petersburg on Tuesday.
At the opening ceremony, also attended by Nissan CEO Carlos Ghosn, Putin witnessed the first Teana sedans and Xtrail sports utility vehicles rolling off line.
Putin took a Teana for a test drive around the factory, with Ghosn in the passenger's seat. "It's a good car - high-quality and beautiful," Putin told reporters.
Nissan currently plans to assemble 18,000 to 36,000 cars a year - less than the plant's capacity of 50,000 units - and is counting on parts from 40 local suppliers.
But neither the Opel deal or Nissan's show of confidence in the market could dispel the gloom and sense of unease about the future of the industry, which until the crisis hit last fall was one of the biggest success stories for foreign investment, with around a dozen foreign-owned plants across the country.
On Monday, Sberbank emerged as an unlikely potential saviour of both Opel, the European arm of bankrupt US giant General Motors, and GAZ, which could benefit from its tie-up with its Canadian partner in the deal, Magna International.
Under the tentative deal, rushed through to help GM manage its US bankruptcy, the US company will reduce its stake in Opel to 35 per cent, Sberbank will take 35 per cent, Magna will have 20 per cent and the remaining 10 per cent goes to Opel employees in Germany.
Sberbank hopes to utilize Opel's new technology at GAZ's struggling Nizhny Novgorod plant, replacing its unpopular GAZ Siber model production with Opel cars.
The deal intriguingly would make Russia and America direct partners in the car industry for the first time, as US President Barack Obama is taking 60 per cent of GM into state ownership.
But the exact advantages for GAZ and synergies in the deal were not clear to industry experts.
"GAZ's strong suit is not passenger vehicles, but light commercial vehicles and buses," said Elena Sakhnova, an automotive analyst at VTB. "It would have been better for GAZ to concentrate on that. So far, all their [passenger] projects have been quite unsuccessful. GAZ does have production capacity, and the result may be good, but the risks are high."
While the deal would help GAZ boost its market share, it would take Deripaska's company three to five years to overtake AvtoVAZ as the biggest Russian car company, as customers would take time to trust its products, Sakhnova said.
Putin this week said the Opel deal should boost the Russian car industry, which has lagged behind its foreign competitors in recent years as Russians increasingly switch to foreign brand models.
Last year, locally-produced foreign branded cars were the most dynamic segment of the Russian automotive market. While Russian brands sold almost 10 percent fewer units, 32 per cent more locally-made foreign brand cars were sold, representing a 57 increase in cash terms.
The foreign brands made in Russia maintained this level of growth despite the drastic drop in sales in the last few months of 2008.
Overall car production in Russia dropped drastically in the first quarter of this year, due mainly to the overall market decline, and both foreign-branded and Russian carmakers have slashed production to cope with left over stock from last year.
The highest drop was so far in the production of local-brand Russian cars, and Russian carmakers, including GAZ, made the headlines with three-day work-weeks, pay cuts and extended holidays, causing rising workers' discontent.
"Russian manufacturers were more affected because it's no secret that Russian people prefer foreign brands," said Christoph Schenk, KPMG's top auto expert in Russia and the CIS. "I believe that when money gets tighter, people think twice about whether they should invest a bit of their savings in a product which they do not believe in, or put a bit more money on the table and buy a foreign branded car. The latter seems the better investment over time."
That is not to say that foreign brands have not suffered setbacks. Ford, which has been assembling cars near St. Petersburg since 2002, is cutting its work week to four days from June 8, when the workforce comes back after an extended vacation from May 25 to June 5.
Ford insists the four-day week is simply bringing Russia in line with its production slowdown in other European countries.
The prospects for a recovery in the Russian market are not particularly bright, as unemployment is over 10 per cent, salaries are falling and car-loan providers are demanding bigger down payments as well as higher interest rates.
The US, Japan and most countries in Europe are tempting potential buyers with incentives to scrap old vehicles and replace them with new, more fuel efficient models.
Such incentives could be particularly helpful in Russia, given that the average car here is older than elsewhere in Europe, said Stanley Root, an auto expert at PricewaterhouseCoopers. "Russia's road safety record lags behind that of its European counterparts partly because of the age and condition of its cars," he said. "Moreover, such a scheme would have an immediate impact on consumer demand."
With import duties on foreign made cars hiked to 30 per cent in January, many Russian buyers are being forced to choose locally manufactured foreign brands.
"It does not make sense for the top segment to produce locally, but medium-priced cars should see growing demand in Russia," said Schenk. "Opels, Fiats, Peugeots, Citroens, VW, they will continue to localise, they will invest, and if they are smart, they will not stop their activities in the Russian market."
One of the government's best moves was to make cheaper car loans available to buyers of cars costing up to 600,000 roubles, up from a limit of 350,000 roubles before, said Ivan Bonchev, an auto expert at Ernst & Young.
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