The mood at General Motors' giant car plant in St. Petersburg back in June 2012 could not have been more hopeful.
Company officials -- including former chairman and CEO Dan Ackerson -- and their local partners gathered at the factory to break ground on a planned multimillion dollar expansion. The investment was to be part of an injection of some $1 billion into the country over five years that would lead to the production of some 350,000 vehicles a year.
Ackerson, at the time, hailed Russia as one of the world's fastest-growing auto markets. Indeed, conventional wisdom in 2012 had it that Russia would soon eclipse Germany as Europe's biggest market for new cars.
Fast forward to March 2015 and that rosy growth scenario is long gone, the victim of a Russian economy teetering on recession and hampered by a fall in oil prices, international sanctions over the war in Ukraine, and the collapse of the ruble.
Car sales in Russia are now in free fall. Sales in February were 40 percent lower than one year ago.
We're Out Of Here
The dire situation for automakers in Russia was driven home by GM's shock announcement on March 18 that it would shutter its St. Petersburg plant and drastically reduce operations in the country. Under the changes, the company's Opel and Chevrolet brands will all but disappear from the market, leaving only a few well-known niche and luxury brands like the Corvette and Cadillac.
GM said in a statement the decision was part of its global strategy to ensure long-term sustainability. Company president Dan Ammann was quoted as saying the move would allow GM to "avoid significant investment into a market that has very challenging long-term prospects."
Those anticipated challenges must have been formidable. Shuttering the plant and withdrawing from the market will cost GM something like $600 million in one-time charges.
Douglas Bolduc, the managing editor of Automotive News Europe, says the writing was on the wall for GM -- and by extension for the many other big international carmakers operating in Russia. "It doesn't really make any sense," he says, "to invest in a market that is on track to lose another 35 percent of its sales [this year] after losing 10 percent of its sales last year."
Done In By A Weak Ruble
One of the main issues automakers are facing in Russia is the recent collapse of the ruble, which has dropped to 60 rubles per dollar from around 30 rubles less than a year ago. Russia is under pressure from falling oil prices to keep its currency weak in order to pay domestic salaries and benefits (oil is sold in dollars and then converted locally into weaker rubles). The weaker ruble, however, eats into automakers' profits because it dramatically raises the costs of importing components needed to make the cars.
Bolduc says domestic parts suppliers are not yet proficient enough to allow carmakers to produce vehicles from 100 percent locally sourced parts. "The automakers that were going into [Russia]," he says, "have been asking their global suppliers -- the Bosches, the Continentals, and the Delphis of the world -- to come into the market and build up a presence there. But they have been very reluctant to do so."
To be sure, GM's problems are not strictly related to the Russian market. The company will likely have to pay out millions of dollars in penalties in the United States for hiding a dangerous problem with its ignition switches.
Bolduc says GM had to make some very hard decisions in deciding how and where to spend their money. "They were obviously looking at losing probably triple digit millions in Russia during the course of this year."
Who's Next?
It's not clear how GM's competitors in the market, including arch-rival Ford and international giants like the Renault-Nissan alliance, will react, though none of the carmakers is expected to turn a profit on the Russian market anytime soon.
Renault-Nissan, which has a controlling stake in Russia's AvtoVAZ, has sunk billions of dollars in the country. It likely has no choice but to ride out the bad times and wait on an eventual recovery.
Similarly, Ford has a joint venture with the Russian carmaker Sollers and its problems may be even worse than GM's. Demand for Ford models like the Focus and Mondeo are off by nearly 80 percent from a year ago. In recent years, the company has pursued an aggressive expansion plan at factories near St. Petersburg and in Tatarstan.
"Ford is not going anywhere," Bolduc says, "because just like Renault-Nissan, Ford has invested a ton of money in that market."
On March 20, the Russian government said it would make subsidies available to automakers worth some 10 billion rubles ($168 million) and come up with incentive programs to encourage people to buy new cars.
It's a start and a sign that at least some officials understand the problems carmakers are facing, but it's unlikely to provide much relief. No real turnaround is forecast until 2016 at the earliest.
GM 'On Track' In Uzbekistan
GM's decision to withdraw from Russia was not expected to have much of an impact on the carmaker's operations in Uzbekistan -- at least according to the company's Uzbek joint venture, GM Uzbekistan.
The JV said last week that despite GM's pullout, it would continue to export cars, including Chevrolet models, to Russia, but it conceded the market was "very difficult."
"General Motors kind of has a lock on that market because of the deals that they have made there in the past," Bolduc says. "So, when you are sort of a king of the market, you can weather the fluctuations in the market a lot better."
General Motors owns 25 percent plus one share in the company, with the remaining 75 percent owned by UzAvtosanoat. In recent years, nine in 10 cars sold on the local market have been GM models. Russia had been an increasingly important export market for the company's vehicles.
