what kind of investors did Russian car factories manage to find two years after the imposition of sanctions?

Two years after the imposition of sanctions, half of Russian car factories are still idle. Although almost all sites that once belonged to foreign automakers have successfully changed ownership, this has not helped much in relaunching them. Car production in Russia in 2023 significantly lagged behind demand, which is quickly recovering. “Kommersant” figured out why this happened.

At the time of the outbreak of hostilities in Ukraine, there were 21 large automobile plants operating in Russia, which produced a wide range of models in all segments, from mass to premium. Including ten sites were controlled by automakers from countries later recognized as “unfriendly”, and six more factories, including AvtoVAZ and Avtotor, assembled models from such manufacturers.

By the time sanctions and restrictions were introduced, car factories were at different stages: some had already managed to recoup investments in the Russian Federation, while others, like Mercedes or Avtotor with a site for BMW, had not. The sanctions led to the suspension of almost all production for some time, even the assembly of the domestic Lada. The production of Russian models soon resumed, and almost all of the empty sites of foreign players were subsequently acquired by local investors. However, it was possible to establish machine production at these factories only in isolated cases.

Almost two years after the start of hostilities in Ukraine, half of the 22 automobile plants (including Motorinvest, launched in the fall of 2022) are still idle. The volume of car production in the Russian Federation is now much lower than the level of the previous crises of 2009–2010 and 2015–2016, although car sales in the country, taking into account imports, had already reached the level of 2016 by the end of 2023 (see infographics).

The holy place is still empty

In the automotive industry, the Russian government initially relied on the transfer of assets to new investors capable of maintaining production. “Buying or, especially, nationalizing is not part of our plans. But if the company does not have the ability to ensure the supply of components, we cannot wait endlessly,” said the head of the Ministry of Industry and Trade Denis Manturov in April 2022. “We will be forced to find an alternative.” This will affect all automakers who delay making a decision.” This is how he commented on the deal on Renault’s exit from Russia with the sale of a plant in Moscow (“Moskvich”, went to the city) and a share in AvtoVAZ (got to the state).

At first there were hopes that large Chinese automakers would become investors. However, these expectations did not come true: in two years, not a single Chinese player has bought a car plant in Russia, despite the fact that cars from Chinese brands now account for almost 60% of sales in the country compared to 9% in February 2022.

Instead of foreign investors, the assets were received either by the state (it received the Toyota and Nissan plants through the Federal State Unitary Enterprise NAMI of the Ministry of Industry and Trade), or by private Russian players associated with dealers. Thus, Art-Finance, owned by the former president of Avilon Andrei Pavlovich, bought the Russian Volkswagen plant, and is now closing the deal to acquire the Hyundai plant (HMMR). And Avtodom bought the Mercedes plant (see interview).

Sergei Udalov from Avtostat believes that automakers from China do not localize projects in the Russian Federation on their own, since potential investments are high and “there is no stability.” He also clarifies that production in the Russian Federation is profitable only in the long term, while exports from China are much more attractive. Automotive expert Vladimir Bespalov notes that making decisions on any significant investments with deep localization takes time, including studying the market. In addition, he believes, the general uncertainty associated with sanctions had an effect: “Many Chinese companies operate in a huge number of markets, and it is important for them to maintain a presence there.”

Deep Chinese essence

Chinese automakers are still actively involved in the assembly of cars in Russia, but not directly, but by supplying vehicle kits and components for new “Russian” models, which are usually converted copies of Chinese originals.

But even such interaction with Russian players – Sollers, Motorinvest, Avtotor and Moskvich – managed to build only with two concerns: JAC and Dongfeng. AvtoVAZ tried to establish cooperation with Faw, but so far has only been able to produce a limited batch of Lada X-Cross cars based on Faw Bestune. Mr. Bespalov admits that the start of assembling models from China by third-party companies may also be a scenario for “running in” these models for the Russian market.

The option of assembling under your own brand is attractive to Russian players, but is by no means easy to implement. Kommersant’s sources say that although Chinese players quite easily agree to give permission for assembly under someone else’s brand, they are rarely interested in actively participating in organizing the process. And an independent search for hundreds of component suppliers in China turns out to be so difficult and risky that even large Russian automakers are not ready to implement it.

Partner of the B1 group of companies Andrey Tomyshev notes among the difficulties the achievement of agreements on the assembly of specific models and its conditions (in particular, the degree of localization), as well as ensuring supply guarantees. As sources told Kommersant, AvtoVAZ also faced this problem. In addition, Mr. Tomyshev believes, at a number of factories purchased by dealer holdings, it is necessary to strengthen competencies in engineering, R&D and production processes. “Faced with an outflow of qualified personnel, the new owners need additional time to implement their plans,” he believes.

Vladimir Bespalov emphasizes that a year or less has passed since the sale of most sites, and car factories do not restart “at the snap of a finger.” “Even from the point of view of finding partners, let’s say, Moskvich is a little simpler in this sense: there is support from the authorities, understandable owners,” he explains. “But someone later started searching and therefore missed the opportunity.”

Experts believe that in the long term, Chinese concerns will still have to deepen the localization of their models in Russia. The prerequisites for this, according to Andrei Tomyshev, will be a significant share of Chinese brands in the recovering market (at the end of 2023, Russia will return to the top 5 in Europe) and government measures to tighten import conditions, in particular, electric vehicles. As car production grows, “assembly options will probably gradually become a thing of the past,” says Vladimir Bespalov.

The key barrier to localization is the lack of necessary components and the vicious circle associated with the fact that in order to restart existing component clusters in Kaluga or St. Petersburg, one must first begin assembly at Volkswagen and KhMMR plants. The automotive components industry has traditionally remained outside the main focus of attention in the Russian Federation. Thus, says Andrey Tomyshev, in 2016–2021 the ratio of investments was 20% to 80% in favor of assembly, while in countries with a developed automotive industry it is approximately 50 to 50.

However, Mr. Tomyshev clarifies that in 2023–2025 the authorities are going to allocate up to 300 billion rubles. to accelerate the localization of critical components, with a focus on electric vehicles. “A focus on the development of technology and the production of components specifically in electric cars would radically reduce the technological gap with leading automotive countries,” he believes.

At the same time, Sergei Udalov emphasizes that localization becomes economically feasible only with large production volumes, which is unattainable given the fragmentation of the market and the presence of a large number of players.

Factories ahead of demand

The problems that investors face when trying to find capacity for existing production facilities may be a harbinger of consolidation in an industry that has been living in conditions of overcapacity since at least the 2015 crisis.

As of the beginning of 2022, even before the sanctions, the average utilization of automobile plants was only 50%. Only the KhMMP plant in St. Petersburg was operating at maximum capacity, while four plants—Ford in Naberezhnye Chelny and Vsevolozhsk, GM-AvtoVAZ in Tolyatti and GM in St. Petersburg—were completely idle.

Back in 2018, then Deputy Minister of Industry and Trade Alexander Morozov said that Russian factories could produce 3.5 million cars per year: “But in 2014–2016 we had negative dynamics in the utilization of these capacities, associated with the peculiarities of the Russian economy”.

Although demand for cars in Russia is quickly recovering, even the state does not expect it to return to the 2007-2008 pace of 3 million cars per year in the foreseeable future. Andrey Tomyshev says that the target production volumes in the automotive industry strategy until 2030 correspond to the figures for 2020–2021 (approximately 1.6 million cars). This means that some investors who bought the assets of foreign automakers may be forced to find other uses for their sites.

Vladimir Bespalov believes that the industry as a whole will face consolidation, or some sites will be repurposed: “There is no point in working in factories that are underutilized. Because you either have to spread costs over fewer cars, which leads to higher prices, or work at a loss.” At some stage, the expert believes, “enterprises that will be able to operate in the new conditions will be identified, and a new landscape of the Russian automobile industry will be formed.”

Olga Nikitina