Roadtrip to Russia
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Motors (NYSE: GM) has been witnessing continuous losses in Western Europe. This has led the carmaker to increase its footprints in the Russian auto market, where it proposes to double its capacity in its factory situated at St. Petersburg.
Russia’s auto industry rebounds
The growing Russian economy stimulated by the oil and gas industry has lots in store for the domestic auto industry. According to PricewaterhouseCoopers, the auto industry is expected to grow by 7 percent this year and soon reach the mark of 3 million units.
According to the Association of European Businesses' Automobile Manufacturers Committee, 1.14 million vehicles were sold by the automakers in the first five months of the year, which is 15 percent higher than the previous year. The sale of GM’s Chevrolet went up 18 percent to 74,788 units and Opel sales jumped 34 percent to 32,190 units in Russia. In fact, Chevrolet was the third most wanted brand for the period, following Lada and Renault.
What is the plan?
GM has been in Russian since 1992 offering Chevrolets, Opels and Cadillacs and opened GM Auto in 2008. Now the global auto manufacturer, as part of its partnership with the Russian Federal Ministry of Economic Development, plans to invest $1 billion over the next five years in its Russian operations. The expansion in its plant at St. Petersburg is part of this investment schedule. Apart from this, the company wants to further increase its production at the GM-AvtoVAZ plant in Tolyatti. The automaker wishes to boost its production capacity in both these units from a combined 200,000 a year to 350,000 vehicles.
The combined sales of Chevrolet, Opel and Cadillac increased 53 percent to 244,000 in the last year. This year, the company is said to launch 12 new vehicles in the Russian market after the previous year’s success.
In the immediate run, GM is primarily focusing on Chevrolet. Simultaneously, as part of the strategy, the company is also looking into growing the market share of Opel and increase it back to the 2008 sales level in Russia. This is why it is launching the new Opel Astra sedan as a growth plan. Where Cadillac is concerned, GM doesn’t have any ‘near term’ proposition. However, the carmaker wants the brand to become more popular in the country and account for rising global sales.
Hiring workforce
The company will be expanding its workforce by 60 percent by adding 1,500 new workers. This will boost the employment levels at the St. Petersburg plant from 2,500 to 4,000 workers.
However, GM is not the only automaker to expand in Russia. Other carmakers have plans too.
The looming competition
Russia is the second largest auto market in Europe after Germany. Not only GM, but other automakers are eyeing the fast growing market too, particularly as Western Europe suffers from continuous declining auto sales. In fact Akerson admits ‘that foreign brands are our primary competitors.’
Chevrolet was the best-selling car last year experiencing a sales gain of 49 percent to 173,484, but is falling behind Renault this year through May. Also in May, the alliance of Renault and Nissan Motors (NASDAQOTH: NSANY.PK) said that they have plans to maximize its control in Russia's largest automaker, AvtoVAZ. Other than this, Ford Motors (NYSE: F) and Volkswagen (NASDAQOTH: VLKAY) announced deals in the past year regarding their expansion plan in order to take advantage of tax incentives given to attract foreign investment. If an automaker has an investment agreement and builds 300,000 units or more annually, it is given the facility of importing components at zero or 3 percent duties.
My takeaway
GM proposes to close down its Bochum assembly plant at Germany and is postponing the pay hikes of their workers as part of its plan to curb its European losses which have piled to $16.4 billion since 1999.
The global automaker is looking to expand in the foreign market and working on increasing its global sales. The rebounding Russian economy is not only attracting GM, but drawing other auto-manufacturers that are showing interest in this fast growing vehicle market. With automakers rushing in to be a part of the growth tale of Russia’s automotive industry, GM appears to be well poised in its move.
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