Coupes d’Etat : Auto Makers Gear Up Assembly Lines as Car Ownership Becomes Possible for Average Russians

In this placid Volga River city known as Russia’s Detroit, the giant Avtovaz car works is lurching into gear after a five-year breakdown to seize what is becoming the ultimate captive market.

Sleek Saabs, Mercedeses, Volvos and BMWs have been the status symbols of choice among newly rich mobsters and moguls. But ordinary Russians, who make up the fastest-growing pool of potential buyers in Europe, are increasingly compelled to shop at home.

The reason: Stiff new customs and import duties make foreign cars prohibitively expensive. That fact and a recent edict that the government “buy Russian” are creating demand for more domestically built cars than the struggling Russian industry can produce.

This is triggering a shortage of affordable new cars just when Russians’ spending power is on the rise, and the shortage seems certain to drive prices up--putting even Russian-built cars out of the reach of many.

And the country’s newly emboldened consumers, sounding like 1980s Californians protesting import limits on Japanese cars, are complaining.

“It’s pure protectionism,” insists Gennady Ageyev, a Moscow teacher who recently sold an older Zhiguli with the hope of buying a foreign compact.

“The import tariffs don’t encourage competition--just the opposite. They protect the Russian manufacturers’ right to mediocrity.”

The protectionism is a response to Russians’ overwhelming preference for the Western imports that have flooded into this country since the borders opened six years ago.

Passenger-car sales in this country have soared from barely 500,000 a year in all of the former Soviet Union a decade ago to 1.2 million in Russia alone last year. Only 875,000 of those cars were made in Russia, though, with the balance filled by imports.

“Every Russian now wants to live better and experience more, and a personal car is the quickest source of satisfaction because it opens up the country to them,” says Vadim Kutenev, director of the federal Automotive Research Institute in Moscow. He predicts at least a 50% expansion in Russia’s personal-car fleet, currently 15 million, by 2005.

One in 10 Russians owns a car today--more than double the figure from the communist era but still far behind U.S. levels where at least every other citizen, on average, owns a car.

“As personal incomes rise across Russia, annual sales could easily exceed 3 million within a few years,” says Nikolai Lyachenkov, vice president and acting director of the auto works in this city named for Italian Communist Palmiro Togliatti. “Our main challenge is to be competitive in the Russian market for inexpensive small cars.”

But as with most Russian auto makers, Avtovaz’s ability to rise to the occasion is limited by staggering debts and antiquated equipment. One of the biggest industrial debtors in the country, Avtovaz racked up $493 million in unpaid taxes during its troubled withdrawal from dependence on state subsidies, and that bill looms menacingly over discussions with potential foreign partners about cooperative ventures.

Production at Avtovaz fell from its 1990 Soviet-era peak of 736,000 cars a year to 513,000 in 1994, when the company realized it couldn’t sell its Zhiguli sedans and Niva four-wheel drive vehicles for as much as it cost to make them, spokesman Vladimir Isakov says.

Wage cuts, gradual reductions of the work force to its current ‘s111,000, and--until last September--studious dodging of tax collectors allowed Avtovaz to achieve cost-effective production and meet expenses.

The federal government, seeking to force Avtovaz to pay its delinquent taxes, has ordered the auto maker to sell a controlling interest to one of several foreign manufacturers that have expressed interest so that it can simultaneously boost production and pay down its bills.

Industry sources report that South Korea’s Daewoo has proposed a $2-billion investment to produce its compact cars here but that the communist-era holdovers in the Avtovaz hierarchy are resisting the deal because they would be likely to lose their jobs.

Instead, Avtovaz and the other Russian auto makers have been spinning off ventures to partner with foreign auto firms, which promise to add to the inventory but offer little relief from their debts.

Avtovaz announced in late May that it will build a new car plant in Vyborg, on the border with Finland, in a venture with General Motors to manufacture 30,000 to 50,000 Opel sedans each year during a start-up phase and eventually 250,000 cars and 375,000 engines a year.

Managers expect 1997 production at the Togliatti plant to exceed 700,000 vehicles for the first time since the Soviet era, but plant spokesman Isakov notes that output will never exceed 800,000 a year without a major technological upgrade of the 27-year-old facility.

More Russian-built autos will come from a $250-million project partly owned by GM that began assembling Chevrolet Blazers in the neighboring republic, Tatarstan, earlier this year. South Korea’s Kia Motors last year opened a $180-million plant in Russia’s Baltic exclave, Kaliningrad, where 55,000 cars are expected to roll out of the factory each year.

The GAZ auto works in Nizhny Novgorod, upriver from Togliatti, has embarked on a renovation aimed at boosting annual production from its current 125,000 Volga sedans and Gazelle pickups, and Moscow-based auto plants ZIL and Moskvich are likewise undergoing reorganization.

But meanwhile, domestic production continues to fall woefully short of demand. And even used imports are subject to the new tariffs. Teacher Ageyev notes that the newest Zhiguli sells for nearly $10,000. For that, a buyer in Western Europe could get a 2- or 3-year-old car with a considerably better service and performance record. But in Russia, the import tariffs double the price.

Russia’s customs authorities have created so complicated and costly a tariff system that import duties can run as high as 120% of the value of the car, even though the law fixes an 80% ceiling.

Most Russian buyers are now settling for domestic models, which are still so few they can be counted on one hand.

For first-time buyers such as Natalya Samusenkova, low price and affordable maintenance are the domestic product’s attractions.

“I think most people would prefer to drive a German or American car,” says the 21-year-old advertising saleswoman from Moscow who just bought a Zhiguli, “but that remains a fantasy for most of us.”