Ford and General Motors in Russia

In July, 2002, Ford Motor Company officially opened its first

Russian Car factory near St. Petersburg. The factory, which
cost some US$150Mn. To build, is 100% owned by Ford and
represents the first wholly owned investment by a foreign
carmaker in Russia. The factory is tiny by International
standards, it will employ 800 people and initially will produce
10,000 Ford Focus cars a year. By comparison, a typical auto
plant in the developed world produces 200,000 cars a year. If
things go well, Ford plans to increase production to 25,000
cars a year by 2007, and if things go really well, the plant may
ultimately produce 100,000 vehicles a year. If these plans
come to fruition, it could be a boon for the region. Assembly
line workers at the Ford factory will make approximately $220
a month, significantly more than the $134 average wage in
Russia and skilled engineers at the factory may make as much
as US$ 600 a month.

Ford was motivated in part by a desire to gain a foothold in

the Russian Car Market. Although car ownership levels in
Russia are very low by International Stardards-120 cars per
1000 people compared to 580 per 1000 in Western Europe car
sales have been rising by 7% to 8% a year. In 2002, about
1.5million new and used cars were bought in Russia, about 1
million of which were Russian cars. New Russian models sell
for $5000 to $8000. Ford intends to sell its locally produced
Ford Focus for about $10900 a price premium that Ford
believes is justified given the poor reputation of Russian cars.
An imported Ford Focus currently sells for $14000 due to
transportation costs, import duties and higher Wages at Ford’s
Western European factories. With the Russian government
increasing import duties on finished cars to about 35 percent
and the political climate stabilizing, Ford thought it was time
to establish local production.
Although most imported automobile components face a 25
percent duty in Exchange for duty –free status Ford has agreed
to make sure that 50 percent of all components for the Ford
focus come from Russia with in 5 years. Initially, however,
only 20 percent of components will be sourced locally. To help
increase this, Ford plans to invest some $45million in local
suppliers over the next few years to upgrade their capabilities.

Three months after Ford’s announcement, General Motors

became the second Western Company to invest in Russian Car
factories. Rather than go it alone, however, GM Opted to enter
a Joint Venture with Avto VAZ, Russia’s largest auto company
to produce a new version of its popular SUV, the Niva. Avto
VAZ was reportedly looking for a venture partner to both
invest capital and provide much needed technical expertise to
help the company upgrade product quality and lower
production costs. In recent years, Avto VAZ has been losing
market share to imported used cars.

In late 2002, it halted production in its factories for three

weeks, despite strong car sales in Russia, while it attempted
to move unsold inventory of 60,000 cars. GM will reportedly
invest some $141 million in the Avto VAZ venture for a 41.5
percent ownership stake.

The joint venture plans to produce 75000 Nivas a year by 2005,

each selling for about $8000. In additions to their being sold
locally, there are plans to export the Nivas to the Middle East,
Asia and Latin America. In total, the venture is forecasted to
create some 3500 new jobs.
Auto Vaz has reportedly also been looking for a Western Joint-
Venture partner to launch a new mass market version of its
Lada, but the company is apparently asking for a $500 million
investment and most foreign companies are still hesitant
about committing that kind of money. However, other foreign
auto companies may soon enter Russia. The Japanese
Company Isuzu announced in late 2002 that it would team up
with several Steel which has a stake in the UAZ automotive
plant, to produce Elf light trucks in Russia. Volkswagen is also
reportedly considering setting up a facility in Russia.

Questions:
1. Why are Ford and GM entering the Russian Car market
now? Why did they not invest earlier, why do they not
postpone investment until the market is bigger?

2. Why do you think Ford chose to establish a wholly

owned subsidiary in Russia, rather than license its
production and product technology to a Russian
carmaker like Avto VAZ?

3. Why do you think GM chose to establish a joint

venture with Avto VAZ rather than a wholly owned
subsidiary? What are the risks associated with GM’s
Joint venture strategy?

The End.