AUTOMOTIVE MANUFACTURING IN NW RUSSIA - DOWN BUT NOT OUT

UNCLAS ST PETERSBURG 000051


E.O. 12958: N/A
TAGS: RS ECON EIND EINV
SUBJECT: AUTOMOTIVE MANUFACTURING IN NW RUSSIA - DOWN BUT NOT OUT


1. (SBU) Summary. The St. Petersburg region - "Russia's
Detroit" - is home to the largest concentration of foreign car
manufacturing plants in Russia. These plants have suffered
substantially from the economic crisis, and have significantly
cut their production in recent months in the wake of a sharp
reduction in demand. The Russian government's support measures
for the car-making industry have so far been of little
assistance, and in the short run the situation looks bleak.
Nevertheless, the manufacturers generally remain optimistic
about the long range outlook for the Russian car market. End
Summary.


2. (SBU) St. Petersburg and Leningrad oblast have during the
past eight years become the leading car-producing regions in
Russia. Development of the auto cluster began in 2002, when
Ford opened its assembly plant in the town of Vsevolozhsk in
Lenoblast. Currently, the oblast and the city account for 7% of
Russia's total automobile production, and for about 20% of the
foreign-branded cars. Last year, Ford assembled sixty-five
thousand cars, GM forty one thousand, and Toyota six thousand.
Nissan plans to open a new facility in St. Petersburg in June
this year with a yearly expected production capacity of fifty
thousand cars. In 2008, both Suzuki and Hyundai signed
agreements with the St. Petersburg city government to construct
their own plants in the city, which will have the annual
capacity to produce fifty thousand and one hundred thousand
cars, respectively.


3. (SBU) However, the car-making industry in Russia has been
hard hit by a sharp decline in demand due to the global
financial and economic crisis. During the first quarter of
2009, sales of new cars in the Russian market fell by 47 percent
compared to the same period last year, and experts fear a
further market contraction for the rest of the year. The
severity of the situation has prompted the Russian government to
enact several measures aimed at avoiding the collapse of the
country's car-making industry. One of the most important of
these measures has been the 30-percent increase in customs
duties on imported cars, which put imported cars at a
considerable price disadvantage vis-a-vis those manufactured in
Russia. American cars assembled in Russia fall within the
category of domestic production.


4. (SBU) The federal government has also set up a new program
which subsidizes the interest rates for the buyers of
Russian-produced cars that are priced under RUR350,000 (about
$10,000). Though this program is technically impartial, in
practice it substantially benefits only the native Russian car
industry, as virtually all foreign-brand cars produced in Russia
are more expensive. For example, amongst all the St.
Petersburg-based car-assemblers, only Ford produces a car model
inexpensive enough to benefit from the government subsidized
interest rate program.


5. (SBU) So far, the government's support measures for the
automobile industry seem to have been of little help for the
foreign auto makers in St. Petersburg, who continue to
experience declining demand and factory shutdowns. Declining
demand forced GM to suspend production at its new plant just a
month and a half after its opening in early November 2008.
After several weeks of standstill, the plant resumed operations
with just one shift working three days a week. However, the GM
plant again suspended even these reduced operations for two
weeks in early April. Toyota has announced plans to suspend
production at its plant in St. Petersburg for the first week of
May, which will be Toyota's third production halt since the
beginning of the year. Ford halted production for a month in
January, and it plans to reduce its operating schedule down to
four days a week beginning June 1. Nissan, which had planned to
open its new plant in St. Petersburg in early 2009, has
postponed the opening until June, even though the plant itself
has already been fully constructed.


6. (SBU) Another factor that has hurt the competitiveness of
foreign car manufacturers in Russia compared with wholly
Russian-made cars has been the recent devaluation of the ruble.
Because these manufacturers use predominantly imported parts,
their costs in rubles have gone up significantly and they have
had to pass those increased costs on to the Russian consumer.
For example, the ruble sticker price for cars assembled at
Ford's plant in Lenoblast have gone up nearly ten percent after
two price increases earlier this year. And, Ford has announced
a further nine-percent increase that will take effect in May.
GM, for its part, has increased prices for its Chevrolet Lacetti
and Opel models by about six percent since January.


7. (SBU) Comment. The car manufacturers in the St. Petersburg
region are definitely feeling the bite of the economic crisis
despite the federal government's efforts to support the
industry. Despite their current difficulties, none of the
manufacturers has cancelled its future plans nor downgraded
Russia as a potentially lucrative future market for their
automobiles. Thus, when the crisis ends, the manufacturers will
be in a good position to quickly ramp up production to meet the
inevitably increased demand for their autos. As one young
Russian told the Consul General "once you've driven an American
car, you never go back." End Comment.

GWALTNEY