Fiat, Daimler Increase Exposure to Russian Market

Fiat and Daimler have both announced that they have signed deals which will see them expand their presence in the Russian market, which, despite having been in decline for the past year, has a great deal of future potential.

Fiat Signs 2.4-bil.-Euro JV with Sollers

Italian automaker Fiat has announced it has established a new 50:50 joint venture (JV) with Russia's Sollers which will see the production of passenger cars and sport utility vehicles (SUVs) in Russia. According to a statement released by the two automakers, the deal was signed yesterday by Fiat chief executive officer (CEO) Sergio Marchionne and Sollers CEO Vadim Shvetsov in the presence of Russian prime minister Vladimir Putin. Under the alliance, the pair are aiming to increase production capacity of Sollers current facility in Naberezhnye Chelny (Russia) to 500,000 units per annum (upa) by 2016. Nine new models are expected to be built as part of the relationship, and these will be targeted at the C and D segments as well as SUVs, of which six will be built on a new global Fiat-Chrysler platform. While most are expected to be sold in Russia, the partners added that a minimum of 10% of vehicles built will be sold in export markets.

The deal will also see the establishment of an Engineering Technical Centre which will develop and adapt vehicles to the specific requirements of the Russian market. As well as this, a technology park for component production will also be built in Togliatti. This, alongside engines and transmissions manufactured by ZMZ, is expected to ensure more than 50% localisation.

In order to achieve this, the company said that it expects the investment of around 2.4 billion euro (US$3.3 billion), and that it would expect support for its plans from the Russian government through long-term loans at subsidised rates of interest. This was confirmed by Putin, who told Reuters that he would support the deal through 2.1-billion-euro-worth of favourable loans from state-controlled banks.

Daimler to Increase Stake in KamAZ

On the same day, Daimler Trucks announced that it would be ramping up its stake in Russian truck-maker KamAZ. In a statement released by the German truck-maker, it said that it had signed a memorandum of understanding (MoU) with Russian investment bank Troika Dialog to acquire 1% of its stake in the business, taking its shareholding to 11%. The remainder of Troika Dialog's current 5% stake will be sold to the European Bank for Reconstruction and Development (EBRD), giving it a seat on KamAZ's board.

Andreas Renschler, Daimler Board of Management member responsible for Daimler Trucks and Buses said in a statement that "The planned increase of our stakes in KamAZ is strengthening the strategic partnership of Daimler Trucks at KamAZ." He added "This is not only a strategically important step for Daimler Trucks, especially under the currently difficult economic conditions — it also sends a clear signal."

Outlook and Implications

These recent announcements underline the potential growth that the Russian market is expected to achieve in future, despite the recent downturn in demand as a recent of the global economic crisis and local macroeconomic conditions. While the light vehicle market slumped by 52.5% year-on-year (y/y) during 2009, the heavy commercial vehicle (HCV) segment crashed by over 70% y/y. While some manufacturers may have been put off by this dramatic slump, Daimler is expanding on the initiative which it took in December 2008 when it began a strategic partnership with KamAZ, Rostekhnologii and Troika Dialog in December 2008, and acquired an initial 10% stake in KamAZ. This was followed by the announcement in November 2009 that it would take part in two 50/50 JVs with KamAZ, one to begin importing semi-knocked-down (SKD) kits of Fuso trucks in the first quarter of 2010, while the second, known as Mercedes-Benz Trucks Vostok, will initially build Actros and Axor trucks from SKD kits from the second quarter of 2010. According to IHS Global Insight's head of global truck research Roman Mathyssek, this is another big step for Daimler "as it further cements their position in the Russian truck market, which will display strong growth again from 2011, when the first joint products should be ready to hit the market." IHS Global Insight is expecting growth of over 60% y/y in 2011 and return to levels seen prior to the downturn by 2014. This is unlikely to be the end of Daimler's stake investment, however, and the automakers' relationship is likely to expand as success is seen from these joint projects.

Fiat's targets from its plans for its Russian operations are somewhat further in the future than Daimler's, but also more ambitious. Sollers, which was founded in 2000 as Severstal-Avto, already assembles vehicles for other manufacturers including Fiat, but this announcement will be a significant step for it, pitting it against the country's current biggest automaker AvtoVAZ. The financial support from the Russian government will undoubtedly be welcome and take away the immediate financial pressures that an investment in the region can cause. However, this is unlikely to be seen as a charitable offer from Putin, as the investment should also support employment in Togliatti where AvtoVAZ is looking to lay off thousands of staff. The move should offer Fiat and especially its new partner Chrysler, a further expansion of its global sales footprint. Fiat and Chrysler's combined sales in the region reached just 45,000 units in the market during the peak of 2008, amounting to a market share of around 1.5%, and this investment would help it massively as demand begins to pick up. This Russian investment will join those which Fiat has already made in Brazil, India and China. It has already seen success in Brazil, where it is now the one of the largest selling automakers in the country, while it is hoping for similar from India and China where it has JVs with Tata Motors and Guangzhou Auto Industry Group, respectively. However, it remains to be seen whether the JV will see the planned production totals. While there is plenty of potential in Russia, many other automakers are also hoping to take advantage of this with existing plants and future investments. Not least of these is Renault, with its 25% stake in AvtoVAZ. Under recently announced plans, the company is set to adapt its already successful Logan platform to be sold under the AvtoVAZ nameplate as part of the reinvigoration of the automaker's severely ageing line-up. Although the expected Fiat-Sollers models seem to be focused on different market segments to this model, it would not be surprising to see this expanded in future as AvtoVAZ gets back on its feet and offers stiffer competition. With this in mind, it would be unsurprising to see Fiat and Sollers have to export a greater number of vehicles than the around 10% level noted if it is to achieve the production levels it has targeted.