Why is Ford still in Russia?

[Biker16]

In Russia: Ford holds; GM folds U.S. rivals take nearly opposite strategies as market crisis persists

Christiaan Hetzner

Automotive News

March 23, 2015 - 12:01 am ET

Ford may be suffering just as badly from the meltdown in Russian car sales, but don't expect it to follow General Motors' lead and abandon dealers, suppliers and employees in Russia by exiting the market.

Indeed, Ford's approach is almost the polar opposite of GM's handling of its Russian operations. Ford is deepening ties to the country -- preferring to swallow losses in the short term in hopes of emerging from the crisis in a position to capitalize on the departure of competition such as GM's Opel.

In Russia, Ford has three key advantages over GM.

1. Ford is limiting its risks through a joint venture with Russian local partner Sollers.

2. It is reducing its reliance on imports by shifting more production to its plants in Russia, which GM failed to do.

3. The products Ford builds there are better suited than GM's to meet local demands.

"We are fully committed to our JV and we are just about to launch a lot of very relevant localized products, which is important for our ruble exposure," Ford of Europe sales chief Roelant de Waard told Automotive News this year.

Ford Sollers is launching four models in Russia this year, including the Fiesta, and will open an engine factory in Tatarstan in addition to its three vehicle plants. Altogether this allows it to meet the Russian government's target of local capacity, a hurdle that GM was not on track to achieve

Ford Sollers offers four crossovers in Russia, a body style that is popular because of the country's severe weather and challenging road conditions. Two of the crossovers are built locally -- the small EcoSport and the full-size Explorer. GM builds only the Chevrolet Cruze and Opel Astra in hatchback and sedan derivatives.

"Our position hasn't changed. We believe Russia has significant potential in the longer term," a Ford spokesman said. "We are working very intensively with our partner Sollers, really looking into every single area of the business every day to cut costs and ensure we match production at our three plants to real demand while dealing with the difficult pricing environment."

Sales for both U.S. carmakers have fallen off the cliff in Russia as price hikes to offset a collapse in the ruble severely cost them market share. Chevrolet sales plunged 71 percent to just 6,300 vehicles in the first two months while Opel downright imploded, with volumes falling 82 percent to fewer than 2,000 vehicles. The market was barely kinder to Ford, which notched a 70 percent drop to around 3,200 vehicles.

Both U.S. carmakers have cited Russia as a key risk to their profitability targets for their European operations, with GM reshuffling management in Russia last September and Ford lowering its 2015 guidance for the region in January.

But GM blinked first. Last week it announced it would all but pull the plug on its operations there.

Opel will exit the market, and GM will abandon production at its plant in St. Petersburg by year end. GM will scale back its presence in Russia, selling "iconic" U.S.-built models such as the Chevrolet Corvette and Cadillac Escalade. It will mean GM will go from less than 200,000 sales among Chevy, Opel and Cadillac to likely just 2,000.

GM, the first major carmaker to back out of Russia, is prioritizing meeting its 2016 breakeven target for Europe over a long-term stake in a strategic growth market.

Last year overall sales in Russia amounted to 2.5 million vehicles, the seventh-largest market in the world and one that is widely expected to eventually surpass Germany.

"To give up on a major market with your volume brands is extraordinary really and a pretty drastic step," said IHS Automotive analyst Tim Urquhart.

Still, industry analysts largely applauded the move because it avoids the need to invest heavily in fresh production capacity to meet localization targets.

"This demonstrated a new decisiveness at management and showed us a different side of GM that we've historically not seen, when it would form committees and hire consultants while losses would fester," said Brian Johnson of Barclays.

For Ford it's also good news. Last week, the company said it would offer a trade-in bonus for customers of brands leaving Russia, while telling dealers abandoned by GM that it was looking to expand its retail network and would be open to cooperation.

You can reach Christiaan Hetzner at christiaan.hetzner@gmail.com.

[fuzzymoomoo]

It sounds to me that they feel like the risk is worth the reward since they've already put so much effort into meeting government regs and consumer demand

 

There's only one of two ways this will end, Ford will either look like a bunch of geniuses or a bunch of morons.

Edited March 23, 2015 by fuzzymoomoo

[jpd80]

For a company that was risk averse a few years ago, Ford is now taking some big gambles in Russia and China,

[rmc523]

For a company that was risk averse a few years ago, Ford is now taking some big gambles in Russia and China,

I'm sure they (along with the other companies) view the Chinese market as one of the last markets where they can really increase sales/market share (and therefore ideally profits), so the risk is worth the potential reward. As for Russia, they likely think they can take some of the sales from GM's departure. Also, theyll be in a better position to take advantage of an improving market (if it does improve) by maintaining operations as opposed to exiting like GM did. But the same is true of the opposite--should the market continue to tank, GM will obviously take less of a hit by exiting now.

[bzcat]

Ford is taking a long term view of things in Russia. GM is cutting bait.

 

You can only judge these things in hindsight. There is no point to debate the merits of these decisions now. It depends on your view on geopolitical issues that is beyond the control of Ford or GM.

 

One thing is for sure... car companies with lots of production investments in Russia (e.g. Ford, Renault-Nissan) cannot exit as easily as ones with only minimal manufacturing footprint (e.g. GM, VW, Toyota).

[bzcat]

VW announced major cutbacks in Russia today. Its Kaluga plant (Tiguan, Polo, Skoda Rapid) will be idled on Fridays, and the remaining 4 days will have only 2 shifts instead of 3 shifts.

 

http://www.wsj.com/articles/vw-to-reduce-russian-output-1427114176

 

http://www.bloomberg.com/news/articles/2015-03-23/vw-said-to-cut-jobs-at-russian-factory-as-car-market-shrinks

 

http://www.detroitnews.com/story/business/columnists/neil-winton/2015/04/09/car-sales-russia-dive-nearly/25522031/

 

 

Car sales in Russia could dive nearly 30% in 2015

Neil Winton, Special to The Detroit News 1:35 p.m. EDT April 9, 2015

Russia’s new vehicle sales are expected to fall nearly 30 percent in 2015 to 1.81 million, as the weak rouble continues to push up prices of imported cars and sanctions enfeeble the economy, IHS Automotive said.

 

In March, light vehicle sales plunged 42.5 percent to 139,850, bringing the first quarter performance 36.3 percent lower at 383,691, IHS Auto said, quoting statistics from the Moscow-based Association of European Businesses.

 

According to IHS Auto’s Russian market analyst Svyatoslav Kuchko, the numbers may be bad, but probably won’t get much worse.

“I think that this March, the market has already reached the bottom in terms of year-on-year decline. In the coming months the market will continue to fall but not at such an accelerated rate,” Kuchko said.

 

Kuchko said a government loan program to boost car sales is helping, inflation is slowing and the rouble exchange rate is improving.

Auto manufacturers in Russia face a dilemma. Cut their losses and quit, or hang on losing money waiting for the rally and cash in sometime in the future. Last month General Motors decided to cut its losses and pretty much withdraw all its assets from Russia. The rest, so far, have decided to tough it out, take current losses on the chin and hope to feel smug when Russia eventually becomes Europe’s biggest market.

 

GM said it would withdraw Opel by the end of this year, and most of the mainstream Chevrolet vehicles. It will stick with Cadillac and upmarket Chevys like the Corvette and Camaro. GM will halt production at its St Petersburg plant by the middle of the year.

 

Ford Europe, which has a local partner Sollers, is hanging on in there.

 

So is Renault, which through its affiliate Nissan of Japan and its control of local AvtoVAZ has more than 30 percent of the Russian market. Renault and Nissan indirectly own 50.01 percent of AvtoVAZ, which makes the Lada, among other vehicles.

 

Peugeot-Citroen and Mitsubishi have a joint venture plant in Russia, and said they will halt production for the second time this year and cut 100 jobs.

Volkswagen will reduce output at its Kaluga plant, and shed 150 workers.

 

Late last year PricewaterhouseCoopers said Russian car sales could shrink another 35 percent in 2015, after falling 10 percent to 2.49 million in 2014.

In March, Russia said it would spend the equivalent of $424 million to support the auto industry, after announcing $166 million of aid the previous week. The money will be used to subsidize interest on car loans and finance the purchase of trucks and commercial vehicles by state institutions.

 

Meanwhile, Mercedes still plans to build cars in Russia, and a Russia media report Thursday said it has narrowed down the location to three potential sites. It will decide next month, the report said, Automotive News reported.

 

The Russia economy will have to wait for a resurgence in the oil price, and an end to hostilities with Ukraine and the sanctions that go with this, before beginning to rally.

[Biker16]

VW announced major cutbacks in Russia today. Its Kaluga plant (Tiguan, Polo, Skoda Rapid) will be idled on Fridays, and the remaining 4 days will have only 2 shifts instead of 3 shifts.

 

http://www.wsj.com/articles/vw-to-reduce-russian-output-1427114176

 

http://www.bloomberg.com/news/articles/2015-03-23/vw-said-to-cut-jobs-at-russian-factory-as-car-market-shrinks

 

http://www.detroitnews.com/story/business/columnists/neil-winton/2015/04/09/car-sales-russia-dive-nearly/25522031/

 

 

[jpd80]

Ford having a local partner helps, it gives Ford the perception of "we're here to stay".

Edited April 9, 2015 by jpd80

[MKII]

Press-release 8 April 2015 March car market decrease is 42,5 %

 Sales of new passenger cars and LCVs in Russia decreased by 42,5 % in March 2015

 All ten bestselling models are locally produced In March 2015, sales of new cars and light commercial vehicles in Russia decreased by 42,5 % compared to March 2014 or by 103 482 sold units, and amounted to 139 850 cars, according to the AEB Automobile Manufacturers Committee (AEB AMC).

This year in January—March 383 691 cars were sold. Joerg Schreiber, Chairman of the AEB Automobile Manufacturers Committee commented: “Total market performance in March is bad, of course, but not much worse than expected.

What we are seeing now in the sales statistics is the long-predicted 'hole' in consumer demand, caused by the pull-ahead of car purchases at the end of last year, and compounded by heavy price inflation in the current year.

Sooner or later, the situation will stabilize, but we are not at this point yet”.

 

http://aebrus.ru/upload/iblock/e3a/eng_car-sales-in-march-2015.pdf

[Moosetang]

Ford having a local partner helps, it gives Ford the perception of "we're here to stay".

It also helps from the risk side. If Ford has to throw in the towel eventually, they're not on the hook for every last piece of hardware that needs to be shipped out, sold, or written off.