IHS Global Insight Perspective | |
Significance | Volkswagen (VW) and the GAZ Group have firmed up their original memorandum of understanding (MoU) and have signed a full contract to manufacture VW Group vehicles at GAZ's Nizhniy Novgorod plant from 2012. |
Implications | VW is investing EUR200 million in GAZ's enormous Nizhniy Novgorod plant to modernise the facility for production of VW and Skoda passenger cars, with the companies planning to begin manufacturing the Skoda Yeti as the first model off the new production line. |
Outlook | VW is tapping into the Russian government's new automotive industry policy which means that foreign OEMs will be granted favourable import tariffs on imported components and other tax breaks and financial benefits if they pledge to manufacture 350,000 units in Russia by the mid-part of the decade. |
Volkswagen (VW) and Russian light vehicle manufacturer the GAZ Group have firmed up their initial memorandum of understanding (MoU; see Russia: 21 February 2011: Ford Signs MoU with Sollers As Fiat Steps Aside; GAZ Expects to Sign Deal with VW This Week) to manufacture VW Group passenger cars at the Russian OEM's plant in Nizhniy Novgorod, according to a company press release. A full contract manufacturing agreement has now been signed between the two companies to manufacture 110,000 units per annum (upa) at Nizhniy Novgorod once full capacity is reached. The contract will run until 2019 and will provide much needed use for spare capacity at the giant facility. Under the contract the GAZ Group will build the VW Jetta, Skoda Yeti and Skoda Octavia models for the Russian market, with VW looking to tap into the significant growth potential that exists in the Russian market as a result of its ongoing recovery from the accelerated downturn that took place in 2009. Commenting on this potential, VW chief executive officer (CEO) Martin Winterkorn said, "The Russian market is a growth engine for the automobile industry and an important pillar of our Strategy 2018. The quick expansion of production capacity in cooperation with GAZ will significantly strengthen the Volkswagen Group's position on this key market."
At the same time as signing the deal with GAZ, VW also confirmed that it would redouble its commitment to manufacturing at its existing wholly owned production facility which it operates in Kaluga, the south of Moscow. VW's general representative in Russia Detlef Wittig said, "The agreement with GAZ is a further milestone in expanding our industrial commitment in Russia. Apart from the contract manufacturing of 110,000 vehicles per year at GAZ, we will also be expanding capacity at our plant in Kaluga in order to participate in the boom on the Russian market. We look forward to continued open and constructive cooperation with GAZ." VW will invest EUR200 million (USD288.8 million) in modernising GAZ production lines in preparation for the new VW production lines. This investment will cover investment in the plant's existing paint shops and assembly facilities as well as establishing a new body shop. In addition, VW and GAZ will implement a comprehensive training programme for employees in Nizhny Novgorod, thus ensuring that the locally produced models meet the VW Group's global quality standards.
Outlook and Implications
The basis of the new agreement between GAZ and the VW Group are the additions to the decree 166 directive that was signed off by the Russian government in May. This piece of legislation basically governs the rules of automotive assembly in Russia, which specific reference to how foreign OEMs operate in the country. The new legislation will allow foreign OEMs tax breaks and custom duty benefits on components and parts imported into Russia for production. Foreign OEMs will only be able to access this favourable taxation structure if they pledge to form major assembly JVs with local OEMS aimed at usng the huge amount of excess capacity that exists at domestic carmakers. Ford only last week signed a similar deal (see Russia: 9 June 2011: Ford Finalises JV Agreement with Sollers) with Sollers (formerly Severstal-Avto) while Renault and Nissan will also qualify as a result of their plans to manufacture cars at AvtoVAZ's Togliatti plant, with Russia's leading carmaker already 25%-owned by Renault. VW's deal with the GAZ Group should allow the company to reach the level of production which the government wants foreign OEMs to commit to, especially as the company plans to add additional capacity to its existing Kaluga plant.
Under the terms of the Industrial Assembly automotive policy, the companies must agree to build new facilities in Russia each with a total annual production capacity of 300,000 units within the next four years, or to expand existing plants with a total annual capacity of 350,000 units within the next three years, as well as increased levels of localisation. In return, the companies will receive benefits relating to import tariffs on components for around seven years. However, Fiat seems to have managed an exemption to these figures, possibly as a result of it having split with partner Sollers in February. However, whether these kind of production volumes will be achieved in such a short timescale is open to some conjecture. IHS Automotive's current forecast only has passenger car sales in Russia growing to 2.7 million units by 2015, with total light-vehicle sales coming in at just under 3 million units, up from 1.76 million and 1.9 million respectively in 2010. That would indicate that the sales forecast that are being used as justification for these investments by foreign OEMs in Russian JVs appear to be wildly optimistic