NEWSLINK: GM Russian Car Venture Is Pleasant Surprise

Niva file photo

(GM Russian Car Venture Is Pleasant Surprise – Wall Street Journal – Lukas I. Alpert – November 1, 2012 – http://online.wsj.com/article/SB10001424052970203922804578080972277444736.html)

The Wall Street Journal reports on General Motors efforts to build cars in Russia, specifically 4-wheel-drive Chevrolet Niva SUV’s for the Russian market.  A joint venture with Russian carmaker OAO AvtoVaz, the enterprise struggled at first, during GM’s reorganization and the unfolding economic crisis.  But now the operation is thriving and expanding to meet heavy demand, with newly manufactured units on back-order:

Not only is it still in business, but the tiny venture has become an unheralded success for GM in Europe, where it is struggling with demand. The factory in this industrial Volga River city cannot produce enough of the $14,000 sport-utility vehicle, which is consistently on back-order for between two and three months.

In late September, the joint venture’s directors approved a $200 million plant expansion that by 2015 will boost Niva production capacity 20% to 120,000 vehicles a year and nearly double its workforce to 2,900.

GM-AvtoVaz is a rare bright spot for GM in Europe, where the company recently sacked its management and expects to lose between $1.5 billion and $1.8 billion this year. GM-AvtoVaz doesn’t publicly disclose earnings, but an official familiar with the matter said it has averaged profit of between $50 million and $100 million a year.

Russia looks to become a major market for automobiles:

Overall, the Russian automobile market has defied gravity, with sales expected to return to precrisis levels and approach 3 million cars this year. Russia is expected to surpass Germany as Europe’s largest auto market by 2014. That prospect has several auto makers, including GM, making billion-dollar commitments to boost production in the car-hungry country.

Ironically, the Niva started out as a Soviet vehicle in the 1970s, but when its makers came up with an improved design in more recent years, GM stepped in to help with production and financing:

… when the company’s engineers came up with an updated, sleeker design for the Niva, they couldn’t afford to put into production. A few years later, GM stepped in with $100 million and a plan to slap the Chevrolet name on a reworked version of the design, betting on Russia becoming a bonanza for the auto business. GM put up $99 million in cash and equipment, AvtoVaz contributed intellectual property and equipment, and the European Bank for Reconstruction and Development chipped in $40 million.

In return, GM is benefiting from some favorable treatment by the Russian government:

The Niva is also paying big dividends for GM’s expansion plans in Russia. Earlier this year GM reached a deal with Russian officials granting them substantially lower customs duties on imported components largely due to the local parts used to make 95% of the Niva. Analysts say this gives GM a leg up on the competition as it works to increase production capacity in Russia to 350,000 cars a year.

AvtoVaz was actually taken over by Renault and Nissan, but is eager to continue its profitable cooperation with GM:

The expansion of the joint venture also represent a firm commitment from AvtoVaz to remain a partner despite GM competitors Renault SA RNO.FR +1.09%and Nissan Motor Co. 7201.TO +0.60%taking majority control of the Russian auto maker earlier this year, with the aim of making its own cars in AvtoVaz’s plant by 2014. The three-way alliance aims to produce 1.6 million cars annually by 2016.

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