A Chinese track for the Russian auto industry

05.10.2010 — Analysis

The holding company "GAZ Group" and the FAW company (First Automotive Works) have signed a memorandum of assembly for Chinese trucks at the automotive plant "Ural". Experts see the possible deal as being mutually beneficial. In their view, the project's success will entirely depend on the capacity and willingness of the Chinese side to invest in the plant, which is located in the Chelyabinsk region. As this columnist for "RusBusinessNews" has explained, none of "GAZ Group"'s attempts to attract Japanese and European automotive technology to Russia have so far resulted in any breakthroughs in the automotive industry.

The Russian and Chinese companies have proposed to create a joint venture together. The "GAZ Group" will contribute the production capacity of its auto plant "Ural" (in the Chelyabinsk region) and its own service network, while FAW will offer technology and its Russian sales network. The automotive model and the volume of output are still under discussion. The Russians would like to adapt a truck for use in Russia and to make their own engine for it. "GAZ Group" currently produces the YAMZ-650 and YAMZ-530 engines in Yaroslavl, under license of Renault Trucks. These are designed by Russian and Austrian engineers. The Chinese company plans to compete on the Russian market against Russian and foreign manufacturers of construction and road-building equipment, and GAZ's dealer and service network should be a big help in this.

Roman Susenko, the marketing director for "FAW-Eastern Europe", LLC, was very careful in his remarks about the signing of the memorandum. According to him, the sides merely stated that they were not against the idea of cooperation, but things could still change. GAZ wants to install its own engine, but no one has seen it yet. They won't start producing the YAMZ-530 until 2011. Obviously, no one is going to put an untested engine into a truck. No decision has been made as yet as to how localized the production will be. Nor did the manager mention the size of the market share that FAW wants to take from its competitors in Russia. Roman Susenko emphasized that the Chinese company is not planning to displace anyone from the market, "KAMAZ" is our competitor, but they can't compete with our truck either on price or on quality. They're very different vehicles. FAW is more like a European truck than a Russian one."

Oleg Afanasjev, the director of the PR department for the "KAMAZ" Group, did not express any concerns about FAW's arrival in Russia. "So far we've just heard statements of intent and we don't have any idea what they're going to produce. The Chinese company has a lot of different models, so there's nothing really for us to comment on yet." He told "RusBusinessNews" that KAMAZ's production grew this year by 40%. The company plans to assemble about 30,000 cars, which is close to their most optimistic development scenario. The management does not expect to significantly reduce their output of trucks in 2011. Oleg Afanasjev suggests that they might produce over 31,000 trucks, meaning that the negative development scenario would be reversed.

Currently, there is only a limited Chinese presence on the Russian market. As of Jan. 1, 2010, only 408 medium- and heavy-duty Chinese trucks of the FAW brand were registered in Russia. But Andrei Toptun, the head analyst for AA "AVTOSTAT", claims that KAMAZ could still be affected. Since it is highly possible that the Chinese trucks being assembled in Miass will be localized and made available at a lower price range, this means the joint venture will take market share from Russian and Belarusian truck manufacturers. This expert is convinced that "GAZ Group"'s "Chinese" project is a deliberate step that will allow them to solve a number of problems at once: to make the auto plant "Ural" work at a higher capacity and to find a sales outlet for the engines made by the Yaroslavl motor plant. It might also be possible to be one of the first to enter the heavy-truck market with Chinese partners.

Andrei Korzhubaev, the authorized representative of the Siberian branch of the Russian Academy of Sciences on issues of cooperation with China, claims that FAW meets global standards for heavy-duty trucks and that they are today the leading truck manufacturer in the Asia-Pacific region. The Chinese first produced licensed vehicles under their own brand, then mastered all the metallurgical processes (including casting) and adapted Western technology to meet their own standards. They not only created their own design departments, they managed to lure away higher-paid Western specialists.

This expert believes that China is proceeding as Japan did 25-30 years ago. Within the foreseeable future, the Middle Kingdom will be producing cars at the same level as the Land of the Rising Sun. FAW has now reached an optimal balance between price and quality, and Russia is very interested in the company since Russia is developing an oil and gas facility, as well as mining and metallurgical production, in Eastern Siberia. Andrei Korzhubaev suggests that working with Chinese auto manufacturers is also profitable for the Russian side. They'll get Western technology at a lower price and create new jobs.

Pavel Chernavin, the chairman of the board of directors of the private company "Automobiles and Motors of Ural", thinks that the alliance between "GAZ Group" and FAW needs to be taken very seriously. The Chinese manufacturer has made major updates to its manufacturing base and produces good trucks. The arrival on the Russian market of a fast-growing company will create serious competition for "KAMAZ", "AMUR", and a number of foreign manufacturers (for example, FOTON).

The entrepreneur also says that FAW is behaving itself the international market, which distinguishes it from the Geely Group, for example, who for two years has not paid the $1 million it owes its Urals partner. The private company "AMUR" (in the Sverdlovsk region) assembled Chinese SUVs from 2007 to 2008, but then the contract was broken because the Russian government did not want to grant the project the status of industrial assembly. Greely still holds the money that it received as advance payments for parts, which were no longer needed once Greely and its partner in the Urals were no longer working together. Experts note that Greely frequently did not return money it owed.

It was also noticed that Greely did not want to adapt to the Russian market. In 2007, one of the group's companies produced cars that were not up to established Russian quality standards. As a result, the distributors could not get the cars certified, and could not sell them.

FAW's reputation is currently above suspicion, so entrepreneurs are hoping for success. So far all of "GAZ Group"'s attempts to attract leading global brands to Russia have come to naught. Andrei Korzhubaev hopes that Russia will have a little more success with China, because it was the USSR who built the first Chinese truck plant in Changchun, in the Jilin province in 1953.

Vladimir Terletsky