In July 2002, Ford Motor Company officially opened its first Russian car factory near St. Petersburg. The factory, which cost some S150 million 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 $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 standards—120 cars per 1,000 people compared to 580 per 1,000 in Western Europe— car sales have been rising by 7 to 8% a year. In 2002, about 1.5 million new and used cars were bought in Russia, about 1 million of which were Russian cars. New Russian models sell for $5,000 to $8,000. Ford intends to sell its locally produced Ford Focus for about $10,900, a price premium that Ford believes is justified given the poor reputation of Russian cars. An imported Ford Focus currently sells for $14,000 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%, and the political climate stabilizing, Ford thought it was time to establish local production. Although most imported automobile components face a 25% duty, in exchange for duty-free status Ford has agreed to make sure that 50% of all components for the Ford Focus come from Russia within five years. Initially, however, only 20% of components will be sourced locally. To help increase this, Ford plans to invest some $45 million 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 going it alone, however, GM opted to enter a joint venture with AvtoVAZ, Russia's largest auto company, to produce a new version of its popular SUV, the Niva. AvtoVAZ 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, AvtoVAZ 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 AvtoVAZ venture for a 41.5% ownership stake. The joint venture plans to produce 75,000 Nivas a year by 2005, each selling for about $38,000. In addition to selling the car 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 3,500 new jobs.
AvtoVAZ 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 Severstal Steel, which has a stake in the UAS automotive plant,...