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GM: Stepping On The Gas In Russia

Its local joint venture aims to produce nearly 100,000 cars a year by 2005

At Avtocenter City car dealership in Moscow, Valery, an electrical engineer, and his wife, Nina, eagerly fill in the forms needed to purchase their first-ever foreign-made car, a brand-new Opel Astra. Having driven Russian cars all their lives, the couple, now in their 60s, wanted a vehicle that wouldn't break down. "We looked at a lot of Japanese and German cars, but eventually we settled on the most economical model," says Nina. Despite the $14,300 price tag, which they raised by selling their dacha, the couple never even considered buying another Russian car. "At our age, it's worth thinking about something more reliable," says Valery.

Soon, Russians may not have to make quite the same sacrifices to get their hands on an Astra. Starting next fall, General Motors Corp. (GM ) will make the car at its plant in the southern Russian town of Togliatti, where it has a joint venture with local carmaker Avtovaz. Although GM has yet to decide on pricing, market analysts expect the locally produced Astra to start at $11,000. Heidi McCormack, general director of General Motors CIS, says Russia is one of six emerging markets identified by the company as strategic growth areas worldwide. The other five are Brazil, China, India, Poland, and Thailand. "These are recognized absolutely as top-down corporate priorities," she says.

GM and Ford (F ) Motor Co. were the first Western carmakers to set up production in Russia. Ford opened a brand-new factory making Focuses in July, 2002, while GM's Togliatti plant has been making four-wheel-drive Chevrolet Nivas since September of the same year. Originally designed by Avtovaz but modified and improved by GM, the Niva caters to Russia's demand for rugged off-road vehicles.

QUALITY LEARNING CURVE. The more expensive Astra was originally designed for Western European roads and incomes. But demand for new imported Western cars in Russia is up about 40% this year, with the strongest growth for cars priced from $10,000 to $15,000. So far this year, GM has sold 3,312 Astras, twice as many as in 2002. "Russian incomes are growing, and people can afford to buy much more expensive cars," says Elena Sakhnova, an automotive analyst at Moscow investment bank United Financial Group.

GM plans to produce at least 25,000 Astras and 70,000 Nivas a year in Russia by 2005. To sell so many cars, says McCormack, the company needs to bring down its production costs, and the only way to do that is to buy components locally. Automotive supplies made in Russia to Western standards typically cost 10% to 15% less than in western Europe. But if production volumes can be increased, the cost savings could go up to 30%, says Jerry Koenig, Russia director for Tenneco Automotive Inc. (TEN ), a Lake Forest (Ill.) maker of exhaust pipes and catalytic converters.

Price is one thing; quality is another. GM will fall short of its target of producing 35,000 Nivas this year by 10,000 vehicles because Avtovaz has often supplied scratched or dented parts. GM was baffled as to why the roof lining was often full of holes even though they were cut with state-of-the-art lasers. The answer was simple: Avtovaz workers had piled their handiwork on rough wire cages nearby. "Bad habits die hard," says Mylonas.

By Jason Bush in Togliatti, Russia

Full Article Here

Chevrolet Niva:

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