General Motors and Avto Vaz

To make and sell cars in the former Soviet Union and eventually export a considerable percentage of them. This can be successfully achieved through a Joint Venture with AvtoVaz to penetrate the Russian market and produce and sell Chevrolets. Be of the first auto makers to strongly penetrate the Russian market and gain first come benefits: Having the chance to get a network and get started with suppliers and other partners in Russia in a way that will put GM among the leaders.

(Avto Vaz dealers across the country make up the only truly national distribution network for cars in Russia. And the existence of this dealer network is very positive for GM because building a dealer network from scratch is enormously difficult. ) To increase GM Global Market Share above its 13. 6% mark by entering emerging markets: Due to GM shrinking global market share in 2000, Emerging markets like Russia represent the so called white-territories which are still unclaimed and uncertain markets for the traditional Western automakers and therefore provide a huge opportunity.

Situational Analysis: Political Environment Recent economic reforms and the perceived stability of President Putin’s government indicate that the conditions are right for investment at this point. The European Bank for reconstruction and Development seconds this assumption.. Economic Environment The Russian economy, although recovering from the 1998 collapse is still weak, uncertain and subject to confusing tax laws and government rules. The Russian car industry seems to reel from one crisis to another.

Domestic car production was on the growth again after the re imposition of import duties in 1994, but the 1998 financial crisis tremendously hurt the Russian economy and auto industry. Exceptions and concessions have been made before: The Russian government has already given the blessing to the joint venture between Ford Motor Company and Russian manufacturers by allowing the elimination of import duties on imported inputs as long as the local content of the car reaches 50% within five years of the startup. Legal and regulatory structure

The relatively lax legal and regulatory structure for corporate governance has been one of the primary deterrents to foreign investment in Russia. Identifying the owners of most major Russian companies is extremely difficult. Actual ownership of Avto Vaz is unclear and this may present problems like the hostile takeover bid of GAZ. Two main groups control Avto Vaz: AVVA 32. 35%and AFC 19. 19%. AVVA itself has been at some point influenced, controlled or owned in part by one of the most high profile oligarchs in Russia, Boris Berozowsky.

By 2000 AVVA changed its status to a holding company and many speculate it was positioning itself to run AvtoVaz which had reorganized into divisions (car production, marketing and sales, research and development). Recent warnings from the Kremlin that the new administration of President Vladimir Putin would not tolerate continued industry profiteering and manipulation by the country’s oligarchs have put company’s with dubious under reporting of automobile production on the spot, like Avto Vaz, who was accused off falsifying vehicle identification numbers, the basis for the states assessment of taxes.

The case has been dismissed. Automobile Industry Environment Lags far behind that of Western Europe, North America and Japanese industries. Inadequate capital, poor infrastructure and deep seated mismanagement and corruption have resulted in outdated, unreliable and unsafe automobiles. The industry is promising because of the gap between Russian market demand and supply and because of expected future growth in demand. Auto sales in Russia as a whole fell 8% after the Economic financial crisis of 1998 but the industry experienced a strong resurgence in 1999 and 2000.

Purchases of cars in Russia grew dramatically in 1993 due to the reduction of import duties and therefore at the expense of domestic producers, but imports came back from 49% to 10% with the re imposition of import duties in 1994. Crime and organized Crime was prevalent in the factory floor with mobsters entering the factory and taking card directly from the production liens at gun point. By 1997 the intrusion of organized crime was so rampant that Russian troops were used to clear the plant of thugs. Supplier market

Auto Vaz is not vertically integrated and depends on a variety of suppliers for components and subassemblies and an assortment of retail distributors. Auto Vaz was prohibited by law of retail distribution, and in recent years the supplier base has been continually consolidated with the three biggest suppliers being DAAZ, Plastik, and Avtopribor. All are owned by SOK. Auto Vaz, short on cash frequently paid taxes, suppliers and management in cars. Dealership and Distribution Most trading companies that were formed around Avto Vaz would exchange parts and inputs for cars at prices 20% or 30% below market value.

These trading companies then sold the cars themselves capturing significant profit meanwhile Avto Vaz waited months for payment of any kind from them. This was possible because most of the trading companies were owned and operated by AvtoVaz managers and Russian law did not prevent management from pursuing interests related to their own enterprises. Avto Vaz dealers across the country make up the only truly national distribution network for cars in Russia. The existence of this network is very positive for GM because building a dealer network from scratch is enormously difficult.

International Players There are a number of foreign automobile producers in various stages of entry into the Russian marketplace. Daewoo of Korea has quickly reached a sales level in Russia of 15,000 units in 1999. Renault of France followed the kit assembly strategy with the Renault Megane in 1998 and assembled and sold 1,100units. Ford Motor Company of the United States announced a JV with Russian manufacturers to actually build automobiles in Russia and plans to launch the Ford Focus in 2002 for approximately $14,000.

Fiat is the most formidable competitor forming a JV with GAZ, the second largest car manufacturer in Russia, and plans to introduce their Fiat Siena and Fiat Palio in 2002. The fiat Palio is considered as the right product for the market if made at a low enough price and Fiat’s intentions are to have 70% of its contents be Russian as soon as possible. Another foreign auto producer in Russia is BMW, though its car pricing of around 40,000 targets another market than what GM is aiming at. Pricing Strategies For most Russian’s price is very important since average income levels are way below those Western countries.

The average Russians salary is about $100 per month. Car prices have also dropped as a result of the 1998 financial crisis. Analysis estimate that almost the entire market in Russia is for cars priced below the $10,000 level. GM cannot make an interesting volume with a base price above $10,000. Such a vehicle would have few specifications like the auto-lock braking system and airbags plus a 1. 6 liter 16-valve engine. Nevertheless if the care then only costs 2,000 less than some foreign imports the price gap may be too small to generate enough sales to justify a factory.

Together with Avto Vaz, we can make a vehicle cheaper and ensure the price advantage of T3000 imports over competitive models is closer to $7,000 than $2,000. Russians will gladly pay an additional $1,000 to $1,500 per car if it has a Chevrolet label or badge on it. Demand The demand for cars in Russia has always been very high. It is a very promising market that has been under supplied for years. The Russian car market is expected to account for a significant share of global growth over the next decade. If GM does not move decisively and soon the market opportunity will be lost to other automakers.

Strategies to attain company’s goals through joint venture: A two-stage JV investment with Avto VAZ that will allow GM to both reach price targets and position the firm for expected market growth: consisting initially of the Lada Niva II four wheel drive car, and a secondary stage of construction of a new factory to produce Opel Ostras for the Russian market. The secondary stage would be reviewed once the first stage was well under way and successful. Export market development. One third of all the Chevrolet Nivas produced will be exported. Find a third party to reduce investment risks, having GM not invest more that $100 million themselves.

Maintain and improve the existing distribution channel of Avto Vaz. Avto Vaz dealers across the country make up the only truly national distribution network for cars in Russia. To increase profitability and given the new wave of international competitors, differentiate GM- Avto Vaz product so as to increase its price point, focusing on after-sales services and marketing, leveraging the brand equity of GM as one of the ? first movers’. Russians will gladly pay an additional $1,000 to $1,500 per car if it has a Chevrolet label or badge on it. Operational Plan: The two stage investment: 1.

Introduction of the Lada Niva II. First Stage. In the first stage GM will co-produce a four wheel drive sport utility vehicle named the Lada Niva II. Avto Vaz has willingly contributed their best product to the joint venture, the rejuvenated Lada Niva which is their brand new baby and has already been shown in auto shows. GM must take advantage of this opportunity and make this their first entry into the Russian market. 2. Construction of New Factory to produce Opel Ostras The second stage of the project will be the construction of a new factory to produce 30,000 Opel Ostras (T3000) for the Russian Market.

This will be left for consideration after the successful implementation of the first stage of Lada Niva cars and their exports. A possible 3rd partner to minimize costs should be considered. Minimize Financing Risks The European Bank of Reconstruction and development, EBRD is willing to provide debt and equity. It will lend $93 million to the venture and invest an additional $40 million for an equity stake of 17%. Therefore it will be sharing the capital investment and risk, and GM would not risk more than $100 million itself.

The reputation and function of the EBRD of fostering the transition to open market-oriented economies and promoting private and entrepreneurial ventures in Eastern European and the Commonwealth of Independent States , makes them an ideal partner to use against any future problems or regulations that the Russian government may try to impose. Export Market Development Issues surrounding quality and reliability have pushed Avto Vaz to take an Emerging market strategy. It is hoped that the low-income markets will ignite the export potential of the company. GM’s strategy would be based on extreme low prices to successfully penetrate local markets.

Export to CIS countries and Baltic countries should be explored. Exports of the Lada Niva to Brazil should be explored due to the history of Avto Vaz exporting to this country in the past very successfully. Marketing and after sales services To implement the strategy of differentiation, GM must use marketing. GM must leverage its ? first mover’ and ? brand equity’ advantages in Russia to differentiate and knowing fully well due to studies that Russians treasure the “Chevrolet” label or badge on their cars, it should widely flaunt the brand as much as possible..

Investment in advertisement will be required. A system for after sales services and consumer satisfaction will need to be implemented similar to what GM already has in its other markets. Pricing Strategy Lada Niva: Target price of the Lada Niva II. shall be of $7,500 and plant capacity of 90,000 cars. The car would be largerly Russian engineered and therefore GM will avoid many of the development costs associated with the introduction of a totally new vehicle. Since the Niva II is largely Russian engineered, GM will bring capital and name to the venture.

Opel AG: This car is still considered too expensive for substantial economic volumes, even using the Russian engineering approach the car would still fall at the high end of the price spectrum retailing at $10,000 per car. This would still put the higher-priced Chevrolet in the lower end of the foreign-made market. Supplier Strategy Lada Niva: The supplier base for the Lada Niva II. is already in place and the component costs already established, so GM does not have to deal with issues of local content compliance. (which in many cases meant that multinationals had to source parts from technically unqualified suppliers).

In this way existing NIA II suppliers will likely appreciate becoming GM suppliers because they will be getting paid on time and receive technical supports and advances for new tools. Opel AG: Using a basic Opel AG vehicle platform as a pre-engineering starting point (that represents a 30% of the development cost of a vehicle). The remaining 70% will be developed by Avto Vaz 10,000 engineers and technicians who work at a much lower cost than Opels engineers in Germany. An agreement should be signed where the two parties agree that they will not try to profit from the sale of components to the JV.

Existing Distribution/Dealers Channel To achieve the strategy of maximizing the established distribution model, GM must focus on introducing elements of private sector management into Avto Vaz. Operational Detail: Management of Distribution/Auto Dealers Channels GM must coordinate and train the currently existing auto dealers for Avto Vaz and make sure the marketing benefits of the Chevrolet brand are being widely used as publicity in each of the auto dealerships to reach and attract the final consumer. A management distribution expert from GM (with experience

in similar markets like what Russia now is) should be brought to make a thorough analysis of how many dealers Avto Vaz currently has and how they operate. Identify which are the most efficient and find their qualified people that are worth training in order to be in charge of coordinating the sales for the new Lada Niva. Thos dodgy dealerships should be put in shape or replaced. . Marketing and after sales services An advertising budget of $2 million dollars should be allocated to advertising and marketing for the first year of car production.

This money should be aimed to high quality television commercials featuring the new car and its attributes, flaunting the Chevrolet name and its strength and western power and making a huge point with the price of the car and where it can be acquired. Russians value western automobiles, since Russian cars have reputation for being badly made with a lot of flaws. The commercials should be done the American way and draw attention to Chevrolets well recognized name and reputation.

Part of that money will go to Huge Chevrolet signs should be displayed in all the Auto dealers that will be selling and distributing the car to the consumer and to whole page displays in the most prominent newspapers signaling the netrence of GM into Russia. An amount of $300,000 should be invested in creating an after sales management for customer satisfaction and complaints. A total of $100,000 shall be spent in a strategic course given to sales persons of the strategic dealers that already work with Avto Vaz and train them how to specifically sell the Lada Niva.

A free Chevrolet Keychain will be handed to each new car owner with their set of keys. Pricing Strategy The pricing strategy for the Lada Niva is clear, the price will be of $7,500 in order to reach the intended market and be affordable for Russians at this point. Guarantees for fixing up the car due to factory faults should be put into place that specify exactly under which conditions GM is still liable for fixing the car once it is taken out of the dealership. It should also specify how responsible and under which conditions, are the dealers themselves responsible for covering those costs. Export Market Development

Issues surrounding quality and reliability have pushed Avto Vaz to take an Emerging market strategy. It is hoped that the low-income markets such as Egypt, Ecuador and Uruguay will ignite the export potential of the company. GM’s strategy would be based on extreme low prices to successfully penetrate local markets. Avto Vaz was exporting over 125,000 cars per year to the countries of the Soviet state but sales in the CIS countries plummeted as a result of weak currencies and the imposition of new import duties at every border to Russia of 30% or more. Sales to the Baltic countries also disappeared by the late 1990’s.

New analysis should be made and possibility of exporting the Lada Niva to these markets should be re-explored. AvtoVaz has exported small special-order models of the Niva (diesel engines, Peugeot gas engines)toGermany, Portugal, Spain, UK and Greece. This market should be explored and analyzed to see if it could be made more profitable. Avto Vaz has a history of supplying the Brazilian market back in 1990’s though it withdrew when the Brazilian government excluded Auto Vaz from a list of select international manufacturers which would be allowed much lower import duties.

A special envoy should be sent to speak with the Brazilian government and see if they would now be interested in the Lada Niva. Public Relations GM top officials should be properly introduced to top government officials in Moscow, Russia. It should be clear that they are aware of the investment being made, give their consent and Gm is in good terms with them. A meeting with the representatives of government in the area of Togliatti should also be arranged to make sure GM and the local government are in good terms and work together should any legal or regulatory issues come up.

Management team structure The structure of the management team and specific allocation of managerial responsibilities should be determined by top GM managers. An agreement should be signed where it is clear that GM will have management control of the JV. The number of expatriate managers assigned to the venture from GM should be minimum. This gives Avto VAZ and opportunity for its managers to gain valuable experience and expected to have significant purchasing, assembly and marketing responsibilities. GM should develop and support an organizational structure that ensures technology transfer to Russia.

It should look into creating a technical design center like it has in China. GM should control the final documentation for the JV agreement. Location of the JV will be on the edge of the massive AvtoVAZ complex in Togliatti. Using one factory building which is partially finished and previously abandoned. The existing equipment, including expensive plastic molding and cutting tools imported from Germany in the 1990’s should be used and maximized or sold. “Doing business in emerging markets” takeaways: Takeaways: The relationship with government is very important.

All agreements reached to form the Joint Venture, who is in control of what and responsible for what should be written down and very clear. When faced with a good investment opportunity in CIS or Russia, the EBDR can be a good third party to bring into your negotiations to diminish the risk and add validity to your investment in the eyes of the government. The investing company must be aware of the dangers of the economic instability of the country and should have a good exit strategy and plan if politically things should change dramatically.

Using massive advertising in public/mass media, before your competition does can present a lot of advantages, making it clear in the eyes of nationals that you are the first to enter their market and riding the “first entry” wave high. Make sure to be on top of your auto dealers and checking up on them constantly to make sure the customer is being attracted in the right way. It is important to have customer follow-up after the sale, to make sure that the sales and distribution part is being done accordingly. View as multi-pages