UNCLAS ST PETERSBURG 000103


E.O. 12958: N/A
TAGS: RS ECON EIND
SUBJECT: LOCAL AUTO INDUSTRY HIT HARD BY ECONOMIC CRISIS


1. (SBU) Summary. The economic crisis has severely disrupted
the auto industry in the St. Petersburg region, with all
manufacturers having sharply curtailed production over the past
several months. A key part of the regional economy, the auto
industry has endured a series of production halts and work
furloughs at various foreign-owned auto manufacturing plants in
St. Petersburg and Leningrad oblast that call into question the
longer-term prospects for developing a robust automotive
production sector here. End Summary.


2. (SBU) Over the last several years car manufacturing has
become an important component of the regional economy. There
are four main manufacturing plants in the region: Ford (which
has a production capacity of 125,000 cars annually); GM
(70,000); Toyota (20,000); and Nissan (50,000). All of these
plants were built with the support of the respective local
government administrations who expected a rapid expansion in the
Russian car market.


3. (U) Contrary to earlier expectations that consumer demand for
new cars would continue to grow, the first six months of 2009
saw a marked slump in sales of new cars in the Russian
automobile market. According to the Association of European
Business (an independent non-commercial association of European
entrepreneurs who work in Russia), the year over yeardecline in
sales has grown progressively worse throughout the year, with
sales dropping 38% in February; 47% in March; 53% in April; 58%
in May; and 56% in June.


4. (SBU) The national downturn has negatively affected the auto
manufacturing industry in St. Petersburg and Leningrad oblasts,
as reflected in a steady barrage of press accounts detailing the
industry's troubles. There has been a series of production
halts and slowdowns at all of the region's auto manufacturing
plants, with GM, among others, halting production at its
newly-opened St. Petersburg factory for two months, from early
July through August 31. Toyota recently put its staff on
mandatory leave for two weeks.


5. (SBU) Ford introduced a four-day work week on June 6, and
announced plans to eliminate its third shift. The company
completely halted production on July 1 for ten days. It briefly
resumed normal operations, but completely halted production
again on July 20 for three weeks. The plant has since resumed
normal operations, but Ford plans to again return to a four-day

work week in October, with the new work schedule likely to last
through February, 2010.


6. (SBU) Nissan announced its plans to completely halt
production from August 3 through August 16, during which time
its workers will be on annual leave. Nissan's actions starkly
show how unexpected the downturn in the auto market was, as its
plant only opened on June 2.


7. (SBU) Suzuki responded to the economic downturn in late July
by cancelling the planned construction of a 30,000 cars/year
capacity automobile plant that was to have been located in St.
Petersburg. Construction had not yet begun on the plant when
Suzuki cancelled the lease agreement it had made with the city
for the land on which the plant would be built.


8. (SBU) Hyundai, like Suzuki, also had plans to build a new
plant in St. Petersburg when the crisis hit. Unlike Suzuki,
though, Hyundai had already begun construction of its plant
prior to the downturn. Construction began in June 2008 and the
plant is expected to be operational by December 2010, with a
production capacity of 100,000 cars a year. In a recent
interview with the local press, the Managing Director of Hyundai
Motors CIS confirmed that construction is progressing in
accordance with the original timeline, that the company does not
intend to change its plans, and that Hyundai is hopeful for a
turnaround in the Russian auto market.


9. (SBU) Overall, the automobile manufacturers in St. Petersburg
produced only 7,000 cars during first half of 2009: 4,400 at GM
(73% less than in 2008), 2,400 at Toyota (61% less), and 200 at
Nissan. These figures are far lower than the expectations the
city government had last year for production of 47,000 thousand
cars in 2009. Ford, which is located in Leningrad oblast just
outside the city, has seen its production drop by about 40% this
year, with its plant producing just 25,000 cars in the first six
months of this year, compared to an initial production plan
calling for 83,000 automobiles to be produced in all of 2009.


10. (SBU) Comment. Turning St. Petersburg into a "Russian
Detroit" had been one of the top priorities for Governor
Valentina Matviyenko's administration. However, our local
expert contacts have been critical of this policy, arguing that
the government should have paid more attention to improving the
overall business climate in the city rather than concentrating
its efforts supporting a specific industry. Their caution
appears to be supported by the recent slump in the auto
industry, illustrating the risk of having too many developmental
eggs in one industrial basket. Ironically, Matviyenko's desire
to create a "Russian Detroit" may have succeeded only in
encouraging the region's dependence on an industry currently
unable to deliver desired economic growth.


HUBLER