Vladimir Shlyomin

There are quite a few things happening in Russia that have been unheard-of until recently. AvtoVAZ JSC, the leader of the country’s automotive industry, is calling back for a checkup 1,086 cars of the Lada-2110 model because of possible deviations in the technology of making guiding chocks of the front brake. As compared with the world practice this event as well as the figure itself do not impress: foreign companies do call back their cars by tens of thousands. The important thing in this case is that at long last Russian producers are starting to apply the generally recognized standards of the marketing and trade policy. And this is taking place exactly at the moment, when assembly lines are being filled up with new models that should supposedly catch up with the up-to-date requirements of the market.

The model set of AvtoVAZ cars is getting the new one, model 2170, which is called Kalina (snow-ball tree) and which represents the tenth series of Lada. Vladimir Kadannikov, the chairman of the board of directors at AvtoVAZ JSC said that the capacity of the Kalina assembly line will amount to 220,000 cars a year.
As the plant’s chief designer Vladimir Guba pointed out, there are three types of motors designed for Kalina: the modernized 1.7-liter motor that is based on the one used in the previous models, the 16-valve, 1.6-liter motor that corresponds to the Euro-2 standards and the imported Opel motor.
Project-2170 that is the product of the significant remaking of the previous Lada model brings this car closer to the European standards. In particular, it provides for installing safety cushions and ABS system. So far the Russian automotive industry has not made series cars having such options.
The competition in the relatively open market and periodic overproduction crises have taught AvtoVaz some lessons. When working out its production plans the company tries to be in keeping with the dynamics of demand. Its specialists are guided by the fact that up to 90% of all cars are now assembled with dealers’ orders taken into consideration. Besides, it seems that the leadership of AvtoVAZ has realized that today having the complete cycle of car making at a single enterprise is anachronistic and it is gradually transferring some of technological functions to outside contractors.
The desire of AvtoVAZ to make a stake on new models looks quite reasonable. Although Vyacheslav Smoliayninov, the analyst with NIKoil, doubts that the company has enough resolve to completely give up making cheap outdated cars, he points out anyway that in recent years the demand for them has gone down very much. However, having moved to the next price level, the leader of the Russian automotive industry may risk facing the world competition. Its reserves are practically exhausted: by their cost models of the "upper level" being made by AvtoVAZ are already close to foreign-made cars.
In the opinion of Yan Dorizon, the director for public relations at the car-making company AutoFramos, the Russian car market today is divided into three segments. New Russian-made cars account for about 60% of it, second-hand foreign-made cars’ share amounts to 30%, while a 10% share belongs to new foreign cars that are either imported or assembled in Russia by the "screwdriver method". The aggregate volume of sales comes to about 1.5 million cars a year.
There are approximately 140 to 150 cars per one thousand Russians, while in Western Europe a private car is owned by every second person.
"These figures prove not only Russians’ poverty but also an enormous unmet demand for cars that are affordable and commensurable with Western models by quality", believes Dorizon. "What is more, the demand for them is growing in proportion to the economic growth. That is why I think that in the nearest years needs of the domestic market will hardly get satisfied to the full even by joint efforts of foreign and domestic car makers", he says.
In their turn, specialists from AvtoVAZ note the change in customers’ preferences. Till 2003 most buyers in Russia could realistically afford to purchase a car with a price tag of no more than $7,000. At present, the growth of real earnings by the population makes the demand shift towards more expansive cars – from $8,000 to $10,000 and from $10,000 to $15,000 – with better consumer characteristics.
It should be admitted that preferences of Russian consumers have been influenced, to some extent, by the customs policy. The sharp increase of import duties on foreign-made cars older than 3 years has strengthened positions of the national automotive industry and has spurred up the competition among foreign companies operating in the Russian market. Import shipments of second-hand cars have fallen down significantly. If in 2002 a number of cars being brought to Russia reached 447, 000 vehicles, in 2002 and 2003, after import duties were raised, first, on cars older than 7 years and, later, on those of 3 to 7 years old as well, shipments of second-hand foreign-made cars began decreasing. This downward trend has become stronger in the first quarter of 2004, when the total number of second-hand foreign-made cars has amounted to only 42,000 vehicles or less than one tenth of the total number of cars shipped in 2003. In 5 months of 2004 the Russian fleet of cars has been replenished with only 127,000 second-hand vehicles. This has led to the reduction of the market share of second-hand foreign-made cars from 27% in 2003 to 12% in the first quarter of 2004.
As Nikolai Sorokin, the deputy director of the industry department at the Russian Ministry of Industry and Energy, believes, in the recent past precisely the mass shipments of second-hand cars to Russia caused periodic stoppages of assembly lines. Now car makers are steadily overcoming consequences of the too-low customs duties. However, in Sorokin’s opinion, they have not had enough time yet to use new opportunities to the full extent. For example, it took the whole 2003 just to overcome the sales crisis of late 2002.
At present, Russia’s automotive industry is growing. In the first half of 2004 534,000 cars have been made, by 16.5% more than a year ago. According to the Federal Customs Service, in 9 months of 2004 the volume of shipments of new foreign-made cars have reached 372,3 vehicles that amounts to approximately 18% of Russia’s car market volume. By experts’ calculations, the average price for foreign-made car sold in the Russian market has grown up by 10%, from $19,400 in 2002 to $22,500 in the current year.
In experts’ opinion, in the coming years the competition in the Russian car market will be getting stronger. High duties are reducing demand for second-hand foreign-made cars. But, at the same time, they cause more interest in new foreign-made cars of the low and average cost segments, which may become actual rivals of Russia’s automotive industry in the coming years. In the struggle for Russian customer foreign companies are using all means possible: they build car assembly plants in Russia, offer consumer credits on a wider scale, start selling new models in the Russia market simultaneously with sales in markets of leading countries, improve and develop dealer networks.
When in the summer of 2002 the Ford Motor company brought to the market its Russian-assembled model, it caused a sensation: the 1.6-liter motor Ford Focus model with the minimum equipment cost $10,900, i.e. cheaper by approximately
$2,000 than similar European- and Asian-made cars. Russian customers had to recall such an already forgotten phenomenon as queues of car buyers. There were offers in the Internet to sell places on a waiting list of customers wishing to buy Russian-made Fords.
However, dealers from other companies did not get worried by this step of competitors. First, Ford Focus was developed several years ago and by the time of coming off from the Russian assembly line it was not exactly brand-new. Second, sales of this model in Russia are relatively small. Despite the ongoing growth of sales, Ford Focus occupies between the 5th and 7th places in ratings of the most popular foreign-made cars. One of the dealers described the situation in two sentences: "You do remember, how intensive the Ford Focus advertisement campaign was. But do we see many of these cars in the streets?".
But Ford is not going to give up. It has started a credit program that makes it possible for a buyer to pay only 30% of car cost. The crediting period is up to 2.5 years, the credit interest rate is 10%. In other words, after paying $3,500 to $5,000 and being free to pay out $240 a month, any Russian can become a happy owner of a new foreign-made car. The price level unambiguously proves that Ford is targeting the most populous category of buyers, the segment, where until now AvtoVAZ has had a complete domination.
Another American car giant, General Motors, is more cautious in its approach to the Russian market. There is a joint venture enterprise set up by GM and AvtoVAZ, each having the 41.5% stakes with a 17% stake belonging the European Bank of Reconstruction and Development. This enterprise makes the hybrid model Chevrolet Niva but it has nothing from Chevrolet, except the name. Design and engineering solutions were proposed by Russian designers, who originally intended to apply them in the Niva-2123 project that was abandoned. These solutions were just bought out. The price of this model with the basic equipment comes to $8,000 and the de luxe one costs $9,300. It is quite understandable, why this car is in the price category that is lower than the psychologically important limit of $10,000. Whatever emblem it has on its radiator, Niva has been and is a Russian car, expenses on making it are less than Ford’s. And Chevrolet Niva will have no such a competition as Focus does.
However, the JV of GM and AvtoVAZ is not in a hurry to win over a mass customer. So far the company has not offered its own crediting system: it has promised to do that, when the plant starts operating to the full. In several years Chevrolet Niva will get rid of the classic Niva, its chief rival. AvtoVAZ made an obligation to completely stop producing this model in 2005 and this is one of the conditions set by the agreement with GM.
Having made 25,000 Chevrolet Niva cross-country vehicles in 2003, the Russian-American joint venture announced the start of making a new model, Chevrolet Viva. That is the name of the Opel-Vauxhall Astra model changed for the Russian market. The company is planning to demonstrate assembling of this model by the end of this year and by 2006 it intends to reach the annual production volume of 25,000 cars.
As for Chevrolet Niva, a portion of these cars will be exported and it is quite possible that the model will be offered in foreign markets under different brand names, which GM owns. For example, Opel or Daewoo.
Photo captions:
• Chevrolet Niva, Russian-American cross-country vehicle
• FORD assembly line in Vsevolzhsk ( Russia)