Ford, VW launch $550mn engine plants in Russia

By bne IntelliNews September 4, 2015

bne IntelliNews -

 

Volkswagen Group Rus launched a EUR250mn engine-building plant in Russia on September 4, a day after Ford opened a similar factory for the same price, reflecting a drive by leading car makers to localise component production in Russia following a steep devaluation of the ruble.

 The VW facility is located in the central Kaluga region near the company's car factory and will make 1.6 -litre gasoline-powered engines for several Volkswagen and Skoda models assembled in Russia. From 2016, 30% of VW cars produced in Russia should be equipped with Russian engines, with the share eventually reaching 50%.

"We're both increasing the percentage of our cars' localisation and making them more affordable for our Russian buyers," Volkswagen Group Rus General Director Marcus Ozegovic said, TASS news agency reported.
Meanwhile, the Russian subsidiary of US automotive builder Ford, Ford Sollers, opened a $275mn auto-engine plant in the Volga republic of Tatarstan.

"Our main target in line with our long-term localization strategy was to launch engine production with a significant level of localization ... We are fully committed to this strategy which is key for our business in the current environment," Adil Shirinov, Ford Sollers' Chief Operating Officer, said in a statement, as quoted by Reuters.

Tatarstan is one of Russia's leading regions for attracting foreign investment, and already hosts a large automotive production sector. The new plant can produce up to 105,000 engines a year, with later expansion to 200,000 envisaged, Ford Sollers said in a statement, adding that at least 30% of Russian-built Ford vehicles, including the Ford Fiesta, Ford Focus, and Ford EcoSport models, will be fitted with the locally-built engines.

In turn, the VW plant will produce 150,000 engines a year to supply the company's factories in Kaluga (output 225,000 cars a year) and another in the city of Nizhny Novgorod.

Regearing in a new arena 

The competitiveness of Ford has been especially hurt during devaluation of the ruble 2014-2015 by its current low level of localisation of components, compared to rivals like Hyundai, leading to downtime at Russian plants. Ford's sales in Russia fell 52% in January-July 2015.

The US company now aims to acquire 60% of components for its Russian-produced cars in Russia by 2020, thereby qualifying for government incentives such as lower import duties on remaining imported components, it said.
After regular annual growth of over 10% in car sales, the market crashed in 2014 due to an economic downturn and devaluation. Sales of new car are predicted to drop 36% this year to 1.55mn, according to the Russian foreign business lobby Association of European Businesses (AEB), as quoted by Reuters. 

General Motors Co announced in March 2015 it would mothball a plant in St Petersburg and wind down sales of the Opel brand in Russia.

But with devaluation making locally-produced cars comparatively cheaper than imports, the first half of 2015 saw nearly 80% of cars sold in Russia produced locally, according to recent reports by Avtostat and ASM Holding, a spike of 7-9% on the year.

More join localisation race

A number of other car producers are now looking to set up production in Russia or expand localisation in order to maintain sales.

Chinese producer Lifan broke ground on the construction of a $300mn plant in the region of Lipetsk on July 16, slated for opening in 2017, and said it was also planning engine and component plants in the same special economic zone.
China's Hawtai Motor will invest $350mn in a venture with Russian truck giant Kamaz to start assembly of its cars at the Kamaz plant in Tatarstan, while the plant in Cherkessk of Chinese car concern Derways entered into an agreement with the government on localisation of production, newswires reported on September 4.

Germany car giant Daimler Benz, a minority shareholder in Kamaz, is likewise reported close to choosing a site to build its first assembly plant in Russia, possibly in exchange for being readmitted to Russian state orders to supply luxury cars for officials, and other preferences.

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