To Russia with Hope

Fifteen years ago, Russia was a powerful enemy of the United States and the other capitalist countries of the world. As the leader of the Communist world, its teachings and actions were antithetical to those of the free world, and within its borders free enterprise was officially treated as a disease to be eradicated. But much has changed in a decade and a half. In today's Russia, free enterprise is regarded as the key to success both by individual citizens and by the government. Because of this attitude, many of the world's car companies are flocking to Russia, seeing a growing market with unlimited potential.

It is easy to see why the world's carmakers, desperate to sell down some of the industry's endemic overcapacity, have set their sights (and their sites) on Russia. After all, Russia is a huge country (1.8 times the size of the United States) with a very large population (more than 150 million citizens.) And unlike the other "growth markets" in the world, it is not a Third World country bedeviled by illiteracy. In fact, its literacy rate is higher than that of the U.S. To auto marketers worldwide, this looks like a place where they can sell cars.

Trying to sell cars in Russia is something they have attempted with a vengeance, but the effort has been accompanied by a substantial amount of sturm und drang. After all, this is Russia -- where several centuries of characteristic impetuosity were smashed under the iron boot of Communism. To a people just beginning to taste the fruits of a free-market economy, there were bound to be upheavals, and that is just what took place in 1998.

Following the collapse of the Soviet Union (Russian Independence Day is June 12, 1990), most Western automakers took their time in assessing the Russian opportunity. But by 1998 several of them, including General Motors and Ford Motor Company, were ready to throw the dice on Rusian subsidiaries. Certainly, a huge opportunity seemed to lie before them. Though Russia's population is roughly four times that of California's, its all-time new-vehicle sales record is right around the number of vehicles sold in California in a typical year. That statistic, plus a literate, technologically skilled workforce, seemed to spell future car sales.

Despite this, the GM and Ford experience in Russia got off to a faltering start. The chief culprit was financial. In 1998 Russia's economy faced a crisis that sent the ruble tumbling versus the dollar and other hard currencies. By the time the ruble bottomed out, it was worth roughly a third of what it had been worth prior to the panic. This, in turn, made imported goods like automobiles significantly more expensive.

Another factor weighing heavily against importers is that fact that the average Russian still doesn't make much money, at least in Western terms. Because of the rather feeble personal income in Russia, its citizens most often opt to buy very inexpensive domestically built cars. Just how inexpensive are they? Some 90 percent of vehicles sold in Russian cost less than $4,500. This, of course, puts most importers at a very grave disadvantage. After all, when is the last time you saw a brand new $4,500 Chevrolet? Ford, which is planning to open a plant in St. Petersburg in the spring, will be trolling the upper-middle of the market with its Focus, an entry-level model in the U.S.

Obviously, one way to exploit the Russian market is to combine operations with Russian manufacturers. GM is doing just that, sinking $40 million into a joint venture with AutoVAZ to build a vehicle that will be marketed as the Chevrolet Niva. (No, not Nova; the Niva is a small sport utility.) Soon, GM may also control the Daewoo-operated factory in Ukraine that builds the Daewoo Nexia, which is Russia's top import model.

Another way to exploit the Russian market is to skim the cream from the very top of the market. Mercedes-Benz, BMW, and Volvo are three prestigious manufacturers who are doing just that, and all three have found that if Russian consumers have it, they flaunt it. The top-of-the-line Mercedes S-Class is the best-selling Mercedes model in Russia, and the flagship S80 is Volvo's best-selling model there. Volkswagen is another strong player in Russia, and its top dog is the Passat, not the lower-priced Golf, Polo, or Lupo.

Where will Russian sales go from here? The industry is predicting that 2001 will be a good year for Russian car sales, perhaps topping the previous record of 1.2 million car sales. (In comparison, U.S. car sales this year will be in the neighborhood of 17 million.) Imports are just a small percentage of the total, but those imports are expected to climb significantly as well. As to the future, it seems very bright as Russia joins the consumer culture of North America and Western Europe.


Based in Villeperce, France, Tom Ripley writes frequently about human relations and the world automotive scene.