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Automobiles factory
Wednesday, Dec. 19, 2007

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Yelabuga, an economically depressed city of 70,000 in Russia's republic of Tatarstan, is an unlikely staging area for the march of globalization. The city's biggest claim to fame: it's where noted Soviet-era poet Marina Tsvetayeva spent her final days before committing suicide.

But things are looking up. Yelabuga may be getting some economic help from an unlikely quarter. On the outskirts of the city lies the Alabuga special economic zone (SEZ) where, among a smattering of grime-encrusted buildings and two unfinished helipads, Great Wall Motor, one of China's up-and-coming automakers, plans to build a $70 million factory capable of churning out 50,000 cars and SUVs a year. If it gets a green light from Russian officials, the factory will be Great Wall Motor's sixth overseas manufacturing facility — and one of the company's launching pads in an effort to become a multinational manufacturer.

Great Wall is not the only Chinese car company on the ground in Russia. While there has been a lot of noise about fledgling efforts by Chinese carmakers Chery Automobile and Brilliance China Automotive to break into the hugely competitive U.S., Russia is currently the world's largest overseas market for Chinese cars. It's home to three joint Chinese-Russian factories assembling cars for seven mainland marques, including Chery, Great Wall, Geely and BYD Auto. While China's overall share of Russia's foreign-car market is relatively small — just 3% in mid-2007 — sales jumped 472% in the first half of the year and are projected to double in 2008 to between 100,000 and 150,000 units, says Moscow-based Ernst & Young auto analyst Ivan Bonchev. "The Russian market is growing extremely fast, with heavy demand for cars, which domestic makers far from satisfy," says Great Wall Motor president Wang Fengying.

Russia offers more to China's carmakers than the opportunity for fast growth. It may take decades for Chinese cars — which today are cheap, technologically unsophisticated and unable to meet tough Western safety and emissions standards — to be accepted by U.S. and European consumers. Russians, though, are snapping them up, giving Chinese companies a chance to gain experience navigating the overseas market while the training wheels are still attached. Russia is a "guinea-pig market," says Bonchev. That doesn't mean it's insignificant. Russia's growing middle class provides a big pool of would-be car owners. Viktor Semyonov, deputy industry director at the Ministry of Industry and Energy in Moscow, says the number of cars sold in Russia topped 2 million in 2006 — a 20% increase — and was up 28% in the first half of 2007. If growth rates continue, Russia could rank fifth in the world in sales by 2010, overtaking England, France and Italy, Bonchev says.

Chinese cars are well positioned to tap that growth because they are seen as more reliable than Russian-made models and are significantly cheaper than Korean and Japanese imports. The average Russian blanches at the thought of paying more than $10,000 for a car. At the low end of the price spectrum, "it's better to buy Chinese models, like the Chery Amulet," says Rustam Gubazov, a 34-year-old taxi driver in Kazan, Tatarstan's capital. Gubazov says he has owned eight cars in eight years, including four Russian-made Zhigulis. The Amulet, the top-selling Chinese car in Russia, lasts longer, he says, and it has a base price of $9,000, about 30% cheaper than one of its chief competitors, the Hyundai Accent.

With that kind of word-of-mouth, Chinese cars could account for 10% of Russia's foreign-auto market in 10 years, says Bonchev. But profits may depend on whether Chinese manufacturers are able to own and operate factories independently on Russian soil. Currently, mainland automakers are forced to rely on joint-venture assembly plants and licensing agreements to sell cars to Russians. To protect its domestic car companies, Moscow may keep it that way. Though four Chinese automakers have applied to open their own Russian plants, none have been approved, according to the Ministry of Economic Development and Trade. Indeed, there appears to be a growing backlash against Chinese manufacturers. Earlier this year, a Russian car magazine crash-tested a Chery Amulet at facilities owned by the country's biggest carmaker, OAO AvtoVAZ. The magazine, AvtoRevu, claimed the Amulet was so badly mangled in the crash that the car should be pulled from the market for safety reasons. Chery said the test was unfair.

Meanwhile, Great Wall Motors is waiting for Russia's Ministry of Industry and Energy and the Federal Customs Service to give the go-ahead to build its planned factory in the Alabuga SEZ. Wang, the Great Wall Motor president, says her company "cannot lose the Russian market," partly because Russia is seen as a stepping-stone to Eastern Europe and Central Asia. But if Moscow decides to throw up roadblocks, Chinese carmakers — and Yelabuga — could be stuck in neutral for years to come.Close quote

  • Joyce Man/Moscow
Photo: Igor Zarembo / ITAR-TASS | Source: Russia has become a stepping-stone for Chinese automakers eager to expand overseas