General Motors (GM) plans to drop the Opel brand from the Russian market and scale back Chevrolet offerings, as well as idle its plant in St Petersburg.
IHS Automotive perspective | |
Significance | General Motors (GM) is pulling the Opel brand from the Russian market by the end of 2015, as well as mainstream Chevrolet products. The Chevrolet brand remains represented in the market by the Camaro, Corvette, and Tahoe. GM will also continue to sell imported Cadillacs in Russia. Production at the GM plant in St Petersburg will end in mid-2015 and the plant will be idled. The GM-AvtoVAZ joint venture will continue to produce the current-generation Chevrolet NIVA. Contract assembly of Chevrolet products at GAZ will be discontinued in 2015. GM will take a USD600-million charge on the changes, most of which is expected to hit its second-quarter 2015 earnings. |
Implications | GM says these changes are intended to protect its business and manage financial risk in a very difficult market. GM will continue to work with dealerships to provide service, parts, and support for vehicles already sold in the market, as well as to support the Cadillac and Chevrolet products, which will continue to be imported and sold. |
Outlook | The move may ensure the company is able to reach its target of European profitability in 2016, and suggests GM does not expect market conditions to improve in the near or medium term. GM will import niche, low-volume products that command strong pricing. GM's plant is being idled rather than sold, which leaves a facility in place, should conditions change for the better. With the reduction in Chevrolet models in the country, however, the brand's sales may fall below 1,000 units per annum by 2016. |
General Motors (GM) announced yesterday (18 March) it will discontinue the Opel brand and drastically reduce its operations in Russia, including halting production by mid-2015. The Chevrolet and Cadillac brands will continue to be offered in Russia, though the mainstream Chevrolet products will be discontinued and the brand's Russian sales range will be limited to the Camaro, Corvette, and Tahoe.
In a company statement, GM president Dan Ammann said, "This change in our business model in Russia is part of our global strategy to ensure long-term sustainability in markets where we operate. This decision avoids significant investment into a market that has very challenging long-term prospects." Opel Group CEO Karl-Thomas Neumann said, "We do not have the appropriate localisation level for important vehicles built in Russia and the market environment does not justify a major investment to further localise… We had to take decisive action in Russia to protect our business. We confirm our outlook to return the European business to profitability in 2016 and stick to our long-term goals as defined in our DRIVE!2022 strategy."
GM's production changes being made in the country include idling its plant in St Petersburg. GM also has contract production through GAZ, which will be ended in mid-2015, while the GM-AVTOVAZ plant will continue to build the current-generation NIVA.
GM also committed itself to honouring obligations to existing consumers while working with the dealers in Russia to "define future steps". Neumann said, "We can assure our customers that we will continue to provide warranty, parts and services for their Chevrolet and Opel vehicles. We want to thank our customers and dealers for their loyalty to the Chevrolet and Opel brands."
In terms of bottom-line impact, GM has said that it expects to claim net special charges of about USD600 million over the changes in the Russian market, with the most impact in the second quarter of 2015. GM said these special charges will include sales incentives, dealer restructuring, contract cancellations, and severance-related costs. Non-cash expenses will amount to about USD200 million, GM said.
Outlook and implications
Russian economic conditions have deteriorated as a consequence of international economic sanctions imposed over Russia's involvement in Ukraine, as well as the collapse of the rouble and declining oil revenues. The falling sales in the Russian market have caused production declines (see Russia: 24 February 2015: Russian passenger-car production falls 25.7% y/y in January and Russia: 10 February 2015: The "perfect storm" hits Russia with 24.4% y/y decline in January's light-vehicle sales). GM's move is among the most drastic of the past several months, but it is a decision taken to best position the company to meet its target of breaking even in the European market in 2016.
While retaining its St Petersburg facility, rather than divesting it immediately, could leave a door open for GM's return to production in Russia when the country's economy improves, the automaker has not speculated on when or if that might happen. Additionally, after severing relationships with current dealers and terminating the contract production relationship, re-entering the market with substantial volumes could prove expensive, as the brands are likely to be damaged with consumers for having mostly pulled out. This could impact on both continuing sales of the remaining products of Cadillac and Chevrolet, as well as any attempt in coming years at making a volume return.
In 2013, GM brands held a 11.4% share of Russian market sales, although this slipped to 9.1% in 2014. GM offers the Cadillac SRX, Escalade, CTS, and ATS in Russia, with total sales of 1,475 units in 2013 and 1,326 units in 2014. This model mix is expected to continue, though with imported volume, rather than vehicles assembled at St Petersburg. As is true in the United States, the SRX is Cadillac's strongest seller in Russia.
Chevrolet sells the Niva, Cruze, Aveo, Cobalt, Captiva, Orlando, TrailBlazer, Spark, Tahoe, Malibu, Camaro, Corvette, and Express in Russia, and some sales of leftover inventory of the Lacetti and Epica were recorded in 2014. In 2013, Chevrolet sold 1,580 Tahoes and 124 Camaros. The Corvette became available in Russia in 2014, with 18 units sold. Chevrolet's sales in the country, based on our January forecast for those models, are expected to fall below 1,000 units by 2016.
The Russian economic issues caused Opel's sales in the country to fall from 81,426 units in 2013 to 63,992 units in 2014, with the Astra the best-selling Opel in the country.
Several manufacturers have slowed investment or production in Russia over the past several months, including a GM-AvtoVAZ investment falling behind schedule in early March, after output fell 25.9% in 2014 (see Russia: 6 January 2015: GM-AvtoVAZ JV's output falls 25.9% in 2014, Russia: 4 March 2015: GM-AvtoVAZ investment behind schedule and Russia: 11 February 2015: Renault to suspend production at Russian operations for three weeks – report). As well as GM, three other companies discussed Russian production changes this week as well (see Russia: 17 March 2015: Nissan to suspend Russian production for 16 days, Russia: 17 March 2015: Skoda expects slow Russian market to hinder further brand growth and Russia: 17 March 2015: Sollers plans to cut headcount at Vladivostok site). In addition, GM began production of the SKD Cadillac Escalade at St Petersburg in February (see Russia: 26 February 2015: GM begins Cadillac Escalade assembly at St Petersburg plant).
In looking at Russian production, IHS director of light vehicle production forecasting Mark Fulthorpe recently presented our expectations for Russian production through 2024. According to Fulthorpe, without further government support, the weak business environment will make local production unattractive in the long term, and Russian sales demand can largely be satisfied through imports. Because of this, we expect OEMs will reduce capacity investment and likely revert to imports, as shown by GM's example. However, Chinese OEMs are expected to launch another attempt at building a production base in Russia, as evidenced already (see Russia: 16 March 2015: JAC considers TagAZ to produce vehicles in Russia and Russia: 19 February 2015: Lifan reports 6% y/y sales increase for X60 in Russia during 2014, will begin construction of plant in June). Renault is also going forward with production investment with AvtoVAZ, despite the difficult environment (see Russia: 20 February 2015: AvtoVAZ plans to boost output with new Renault, Datsun models during 2015).
Additionally, we expect the proportion of semi-knocked down production will increase over time. In presenting our review of Russian possibilities, Fulthorpe says IHS sees the possibility of Russian production falling close to 1.5 million units per annum (upa) by 2024, if the government does not continue to support the segment, while with installed production, normal capacity is more than 2.5 million upa and our January 2015 production forecast sees production increasing from 1.4 million units in 2015 to more than 2.5 million units in about 2022. However, IHS scenario analysis also indicates that Russian production has a much more natural level in the 500,000-600,000 upa range, though Russia's Decree 166, implemented in May 2011, drove production to the levels of 2013 and 2014, prior to the current economic collapse.