By Vladimir Shlyomin

G

erman Gref, the Russian Federation Minister of Economic Development and Trade, Valentina Matveenko, the governor of St. Petersburg, and Tokuichi Uranishi, a Senior Managing Director of Toyota Motor Corporation, signed a memorandum of intent for the construction of a new plant to assemble Toyota motor vehicles on the outskirts of St. Petersburg. According to official information US$ 142 million will be invested into the construction of the plant to put it into production by 2007.

The seriousness of intentions of this Japanese corporation is confirmed by the fact that the Board of Directors of the European Bank for Reconstruction and Development (EBRD) have agreed to invest up to US$15 mln. into purchasing a stake of up to 20% in the Russian car assembly plant construction project of Toyota Motors. The total cost of the project, which EBRD wants to be involved in, is estimated at US$160 mln.

It is expected that in the first stage of the development of the Toyota car assembly plant its capacity will amount to 20 thousand cars a year while its design capacity will total 50 thousand vehicles a year. In the course of time the Japanese company plans to manufacture up to 200 thousand cars a year in Russia. The plant will employing 550 workers and will be built on a 240 hectare area in the Shushary industrial district on the outskirts of St. Petersburg.

With an intention to bring its suppliers to Russia, Toyota has asked for a site wider than required for construction of its own plant. Toyota plans to use services of both Japanese and European suppliers and for which purpose it arranging a site wide enough to accommodate the suppliers using their money as well.

Toyota` s intention to build its plant in Russia has been known since late 2003. At that time after a visit to the town of Nizhni Novgorod, one of the Russian car manufacturing industrial centers, Hiroshi Okuda, the chairman of the Board of Directors of Toyota, said that its company would make the final decision on where to build its plant in Russia by the Spring of 2005.

In the opinion of Yuri Senturin, a deputy of the Russian Federation State Duma, Toyota made its final decision after being held under the political and economic influence. In particular, the Nizhni Novgorod administration tried to impose a requirement that the new plan should have been constructed in the framework of a joint venture with the Gorkovsky car manufacturing plant. Such a scenario did not meet Toyota` s plans to run its supposed Russian plant independently.

Spokespersons for the Japanese company state that the new plant is supposed to assemble Toyota Camry sedans, not the more affordable cars of the Toyota Corolla lineup which according to analytical data are best-sellers in Russia.

Obviously, for most Russian buyers who prefer cars of a maximum price of US$10,000-15,000 the Toyota Camry may seem pretty expensive. By definition this Toyota model belongs to "E class" and can not be considered a mass production model. It costs about US$ 34,000 to buy. Last year Camry became the leader of the Russian automobile market in "E class" (in 2004 9,797 Camries were sold in Russia) pressing the Nissan Maxima, its immediate competitor, into third position. However, even the most optimistic forecasts show that demand for Camry has already reached its peak in Russia.

Experts believe that Toyota has no intention of seeking to reduction the costs of the Camry by localizing its manufacturing. The reason may be due to that the next model in the Toyota lineup of "D class", the Avensis, which also enjoys a significant demand in Russia. According to forecasts in 2005 about 10,000 units of the Toyota Avensis is expected to be sold in Russia at a price of US$ 28,000-29,000 a car. Thus, if prices for the Camry are reduced below US$30,000 a car, Toyota would provoke competition between its own cars.

It is very probable that the main reason for Toyota to have chosen to assemble the Camry in Russia was the company` s decision to shift to manufacturing the new modification of this car to St. Petersburg starting in 2008. The significant localization of car manufacturing facilities will permit the selling of the new Camry modification at the price of the old one thus attracting consumer interest.

At the same time the planned production volume of 20,000 cars a year announced by Toyota is far less than the maximum annual manufacturing volume threshold of 25,000 vehicles specified for foreign made cars assembled in Russia by the recent decree of the Russian government "On the Procedure of Foreign Made Car Assembly on the Territory of the Russian Federation".
Valerie Tarakanov, the general manager of Rolf Company, believes that the only explanation in such a difference is that the Toyota leadership really intends to assemble in St. Petersburg about five thousand Land Cruiser 100 or Land Cruiser Prado off-roaders. Offered at prices of US$70,000 and US$44,000 respectively for the base models, these cars are also in great demand in Russia. Last year combined sales volumes of the two models totaled 8,500 vehicles (being leaders in the segment of off-roaders).

As a matter of fact, about 35% of the prices for these off-roaders goes to Russian customs as duties applied to vehicles equipped with high capacity engines (greater than three litres). "Toyota will try to benefit from the decree "On Reducing Customs Duties for Importing Vehicle Assembly Units"," – believes Valerie Tarakanov. At the same time he is absolutely confident that the demand for expensive cars will be limited in Russia and that Toyota would step up its vehicle manufacturing volumes be way of launching cheaper modifications of the more affordable Corolla for the wider range of consumers.

There is another opinion though. The Czech Republic, Romania and Turkey, as is well known, have been successful in supplying the Old World with relatively cheap cars. In Russia Toyota plans to manufacture ten times as many Camry cars than it sells in Europe now, obviously with an eye to exporting them respectively. It is very probable that Toyota really believes that Russia with a big car manufacturing plant can perform as effective as the Czechs or Turkish.

In truth, the Japanese company does not exclude a scenario under which Russia may become the source of Toyota cars supplied to the European market. This was an idea recently proposed by Tokuichi Uranishi, a Senior Managing Director of Toyota Motor Corporation: "For sometime there has been no specific plan, only an intention. If our suppliers are in a position to provide us with high quality goods, we will probably be able to supply our cars manufactured in Russia to the European market in the future." According to Mr. Uranish it will depend on the further development of the Russian automotive industry.

"We will exert our efforts in ensuring a steady development of this project. However, to reach this target our efforts alone are not enough: we will need the stable long-term support on the part of the Russian government assuming an obligatory requirement that this project should facilitate a stable development of the Russian automotive industry," – emphasizes Mr. Uranish.

Thus, Toyota has already demonstrated its ability to make unusual decisions by proposing to manufacture in Russia the expensive business class Camry sedan and not relatively cheap Corolla, with an eye to exporting the car to European countries. In other words, if it enjoys a preference of the Russian authorities and takes benefit from local labor cost levels, then Toyota by building a full scale car manufacturing plant in Russia and bringing its major suppliers here, the company will be in a position to make its products attractive to Europe.

In any case such a decision by one of the world major automakers can not but provoke interest.

For reference:
Last year in Russia, Toyota sold 47,000 vehicles through TMR and other trading companies. In addition to the Camry, other models sold included Toyota’s Corolla, Avensis, Camry, RAV4 and the Land Cruiser 100, as well as the Lexus-brand vehicles