Volkswagen, Ford rush to seal Russian deals before tax-incentive deadline

Bloomberg News - Russia's government closes the door today to new tax incentives aimed at attracting investments by foreign automakers in a country where car sales may overtake Germany's within four years.

In the past two weeks, Volkswagen AG and billionaire Oleg Deripaska's OAO GAZ agreed to produce VW brand and Skoda cars at a Russian factory, while Ford Motor Co. announced an assembly and distribution venture with OAO Sollers. The Ministry of Industry expects as many as six applications from foreign manufacturers and their Russian ventures, Alexey Rakhmanov, head of the ministry's automotive department, said in an interview.

Under the new rules, carmakers may import components with zero or 3 percent duties in return for investment agreements to build at least 300,000 cars locally a year. As the western European car market braces for another year of shrinkage, manufacturers are closing deals in Russia, where passenger-car sales my reach 3 million by 2014 to surpass Germany as Europe's biggest auto market, according to Rakhmanov.

"Foreign carmakers don't want to expand their own capacities to 300,000, but they may apply for benefits with a Russian partner, that is why we saw so many deals recently," said Elena Sakhnova, an analyst in VTB Capital in Moscow.

Russia may become the world's sixth-largest auto market in 2020, with 4 million deliveries a year, the Boston Consulting Group said in a report this month. The nation now is the world's 10th-largest, with 1.9 million annual sales, according to the consulting firm.

Kaluga Factory

Volkswagen, Europe's largest automaker, plans to build more than 100,000 VW and Skoda cars at GAZ's plant in Nizhny Novrorod, the companies said Feb. 24. VW, based in Wolfsburg, Germany, has a factory in the Kaluga region with annual production capacity of 150,000 cars.

The companies haven't decided on the type of cooperation, said two people with knowledge of the matter who asked not to be identified because the talks are private. GAZ is more interested in a joint venture than building VW cars in return for assembly fees, they said.

Ford Sollers, the 50-50 venture between Dearborn, Michigan- based Ford and Sollers, Russia's second-largest automaker, plans to manufacture Ford vehicles at plants near St. Petersburg and the Republic of Tatarstan starting this year. Sollers's factory in Tatarstan, east of Moscow, can build 200,000 cars a year, while Ford's near St. Petersburg has annual production capacity of 125,000 vehicles.

The companies plan to build in Tatarstan Ford Transit, Explorer, Kuga and a new sedan, Russian newspaper Vedomosti reported last week. Zoya Kaika, a Sollers spokeswoman, declined to comment.

Fiat Deal Scrapped

While setting up its venture with Ford, Sollers backed away from a 2.3 billion-euro ($3.2 billion) deal with Fiat SpA, the Italian carmaker that owns 25 percent of Chrysler Group LLC. Fiat said last week that it submitted to the Russian government a plan based on the production on C- and D-segment cars, sport- utility vehicles and commercial vehicles.

"The Fiat and Jeep brands will be the mainstays of the project," the Turin-based carmaker said in a Feb. 25 statement.

Russia's government presented details of the new industry- assembly regime, which replaces a 2004 plan, in February last year. In addition to receiving tax benefits for eight-year investment agreements, automakers may also pursue so-called semi-knocked down production during the first three years.
Local manufacturing

After that carmakers should start to produce engines locally and by the eighth year, local components should make up 60 percent of the vehicles. By 2020, Russia will produce 3.6 million cars -- double the figure last year -- with 80 percent of the foreign models to be assembled locally by the time, the Ministry of Industry's Rakhmanov said.

"The main target of new rules is to save and develop full- scale automotive production in the country as well as deepening components manufacturing," Rakhmanov said.

OAO AvtoVAZ, the largest passenger-car maker in Russia, and partners Renault SA and Nissan Motor Co. have applied to work under the new regime along with truck manufacturer OAO KamAZ and its German partner Daimler AG. The companies are treated as a group because KamAZ and AvtoVAZ have common shareholders.

General Motors Co., which has a factory in St. Petersburg with production capacity of 60,000 cars per year, is also seeking to expand its own capacity, said two people familiar with the matter who asked not to be identified because the plan isn't public. GM may set up a venture with Avtotor from Kaliningrad, which has a production capacity of more than 200,000 cars a year, they said.

Toyota, Hyundai

GM and Avtotor Chief Executive Officer Valery Gorbunov declined to comment. Earlier this month, Detroit-based GM signed an agreement with GAZ to produce the new Chevrolet Aveo model.

Toyota Motor Corp., the world's largest carmaker, signed an under the old regime in 2008 and continues to receive the incentives until 2016. Hyundai Motor Co. has an agreement with the government through 2019.

The new rules will also help boost component manufacturing in Russia. Magneti Marelli's Automotive Lighting, owned by Fiat, has made eight applications to produce parts locally, while truckmaker Volvo AB has submitted requests for 22 components, Rakhmanov said.

"The effect is already noticeable," Rakhmanov said. "While with the old decree only 38 auto-component suppliers came to work in Russia, now we have 80 applications from the suppliers to work under new rules, and we expect them to rise to 100."