Photo: Moyan Brenn via flickr
Fiat has announced once of the biggest auto investments to date in Russia: a €850m (US$1.1bn) deal to build a new plant producing Jeep off-roaders adapted to local conditions, with backing from Russia’s biggest state bank, Sberbank.It confirms the importance of the fast-growing Russian market to global carmakers, which have spent heavily on opening new plants in recent years. But it is also a reminder of how difficult business conditions remain in the country.
The Italian company has downgraded its plans in Russia following the collapse of an ambitious joint venture last year—even though it had identified it as a key global growth market. Now it is going it alone on a smaller project, ditching plans to develop a Russia-specific range of models in favour of some mild tweaks to existing designs.
Fiat and its 58.5%-subsidiary Chrysler announced on Tuesday that they were setting up a joint venture with Sberbank, the biggest bank in Russia, which will fund the deal and take a minority stake in the venture of up to 20%. A new plant is being set up near St Petersburg to build Jeeps, whose design will be adapted to the Russian market. More Fiat-Group models will be assembled through a tie up with ZIL, a Russian luxury-car maker, which will assemble cars, sports utility vehicles (SUVs) and perhaps light trucks under contract at its plant near Moscow.
The first ZIL-Fiat vehicles are expected in late 2013, while production at the St Petersburg plant should start in 2014, with capacity to make up to 120,000 cars a year. This is the latest in a long line of car manufacturing deals announced over the past two years, with companies including Ford (US), Hyundai (South Korea) and Volkswagen (Germany) announcing plans to build factories or extend existing ones since the Russian government introduced investment incentives for local auto production. The Fiat deal is relatively unusual in that its Jeep plant will operate without a local industrial partner, relying instead on Sberbank as a financial backer.
A key market
For Fiat, moreover, this deal represents a new start after last year’s setback. The Italian carmaker had originally made Russia a key part of its move to become a global producer as it directed sales away from the stagnant European market. By buying a stake in Chrysler, Fiat was pushing into the US market. In Russia, meanwhile, it planned to make 500,000 cars a year through a joint venture with Sollers, a Russian carmaker, as part of a drive to hike sales in emerging markets.
Fiat’s plans for Russia dwarfed even its plans for China (the world’s biggest car market) and India. Yet the scheme collapsed in February last year when Sollers announced that it was teaming up with Ford instead, for reasons that remain less than clear. That left Fiat with a big hole in its global portfolio, given that Russian car sales are expected to overtake Germany’s by 2015, according to Economist Intelligence Unit forecasts.
Through this latest deal, Fiat is hoping to regain some of that lost ground. Though the production plans involve just a quarter as many cars as under the abandoned Sollers venture, Fiat will have far more control over the plant’s output. But by using Chrysler’s Jeeps as a basis for its production plans it appears to have backtracked on its original plans to develop an entire range of new cars to crack the Russian market.
Fiat will rely on its existing network of dealers in Russia to sell the cars, meaning it will have little more than 100 outlets to serve a geographically-vast market. Fiat still wants a big presence in Russia, but it has been forced to develop there more slowly than it would have liked.
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