Industry, manufacturing

Jilted Fiat woos RF for new $2.8bn assembly plant

6 Apr '11
Oleg Kouzbit, Online News Managing Editor

Apparently undeterred by failed attempt to set up shop in Russia with Sollers (who quickly joined forces with Ford), Italy’s Fiat has just announced plans for its own $2.8bn assembly plant here. Unlike its international competition, the firm is reportedly seeking more than 80% of the funding from government-run VEB-Bank. Even if given the green light, Fiat must then produce at least 300,000 cars a year in order to receive special RF benefits that will make the venture profitable.

After February’s ‘broken engagement’ with Russia’s Sollers, Italy’s Fiat hasn’t given up. According to reports, the company has approached Russia’s largest government-owned financial organization, VEB-Bank, for $2.3bn to fund most of the cost of a prospective $2.8bn assembly plant here.

VEB…and maybe EBRD too

The negotiations are said to “be making headway”, and if the loan is approved, the Italian firm will be the first international automotive major to receive such massive government financial support. According to Reuters, the company is also talking to the EBRD in an attempt to make the bank a co-investor.

In order to make the venture profitable, Fiat will have to produce at least 300,000 vehicles a year. This is the number that will help the Turin-based auto maker qualify for the RF’s newly-adopted Industrial Assembly policy which allows international manufacturers duty-free imports of vehicle parts into Russia.

In addition to an annual production requirement, other stipulations include a requirement that 60% of vehicle components must be produced locally, $750m must be spent building new Russian production sites and at least $500m spent upgrading existing facilities.

Although Fiat has not disclosed what models it would build here, analysts feel that the Italians will have to spread their bet to produce 300,000 vehicles each year. In addition to C and D segment Fiat passenger cars, SUVs and LCVs, Fiat would most likely also build Chrysler and Jeep brands, which it partially owns.

If at first you don’t succeed

This is Fiat’s second major attempt to make inroads into the potentially lucrative Russian automotive market. In February 2010 the company reached a $3bn JV agreement with Tatarstan-based Sollers.

The JV’s stated goal was to start producing 300,000 vehicles annually and then by 2016, ramp up the numbers to 500,000 Fiat, Chrysler, Jeep and UAZ vehicles a year.

The RF backed the deal and considered a $2.89bn, 15-year loan to be processed by VEB-Bank. But a year later the Italians abandoned talks with Sollers who then immediately struck a deal Ford.

Analysts from Expert-Online blame the divorce on VEB who supposedly didn’t like how the deal was structured and backed away at the last minute. Fiat persevered. In February 2011, without a partner, the company applied to the RF for Industrial Assembly benefits.

Looking to Lipetsk, Nizhny, Rostov…or?

Although Fiat is mum on where it will build its new plant, most experts think the firm will choose the Lipetsk region’s SEZ (special economic zone) because of its tax and duty benefits and the fact that Novolipetsk Steel (NLMK) has an automotive sheet metal factory there.

Another option could be the Nizhny Novgorod region where Fiat’s subsidiary, Iveco, has an assembly site, or the Rostov region where the firm is rumored to be in talks with TagAZ, a domestic car manufacturer.

Finally, Fiat might also consider joining efforts with Derways, a medium-sized Russian auto maker based in Karachaevo-Cherkessia, Russia’s Northern Caucasus. Since 2004, the firm has been assembling China’s Lifan and Geely brands.

According to some insiders, Russia’s Sberbank, who promoted Derways as a partner for GM and the Hyundai-Kia alliance, is now pushing Fiat.

It could be a combination of all or some of the above options, analysts say. Fiat CEO Sergio Marchionne last week fueled speculation about a possible partnership by saying his company did not “rule out” an alliance with a Russian manufacturer.

A tall order

Fiat is believed to have finalized all project details to secure financing support this time around. However, sector observers still question the car maker’s ability to sell 300,000 cars a year here, especially given the fact that Fiat has never been a top selling brand in the Russian market.

PWC estimated Russia’s 2010 passenger car market was worth $33.7bn on sales of 1.76 million. In 2011, sales of a maximum 2.4 million are forecasted.

Analysts forecast annual Fiat-Jeep-Chrysler sales of maybe 100-150,000 cars. They say even if the firm sells 20-25,000 Fiats and 125,000 Jeeps and Chryslers (brands which historically have had more appeal for Russian customers), it will still be less than 50% of what Fiat needs to win RF benefits.

To reach a goal of 300,000, Fiat will not only need very aggressive marketing, but also the support of Russia’s large dealerships. But these same mega-dealers will also be courted by other international makers coming to Russia for Industrial Assembly largesse.

The one thing analysts do agree on is that with Fiat and other international majors “forced” to sell such huge numbers of cars here, it will be a fabulous new car buyers market for Russians.
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