GM to largely exit Russia by end of 2015

Melissa Burden, Michael Wayland and Michael Martinez
The Detroit News

Russia just a few years ago was a cornerstone of General Motors Co.'s global growth strategy in developing markets, and now it's falling apart.

A week after warning its business in Russia was under "serious review," the Detroit automaker said Wednesday it plans to stop selling all Opel and most Chevrolet vehicles in the Russian market by the end of the year and will idle indefinitely its 6-year-old St. Petersburg plant. That could cost 1,000 people or more their jobs.

The aggressive restructuring comes amid a collapse in the Russian ruble, rising interest rates, a slowing economy, deepening political issues over territorial disputes with Ukraine and no sign of improving sales in the emerging market. GM sales fell 28 percent last year in Russia, a stark contrast from 2013 when it was one of the top five global markets for Chevy sales.

"This change in our business model in Russia is part of our global strategy to ensure long-term sustainability in markets where we operate," GM President Dan Ammann said in a statement. "This decision avoids significant investment into a market that has very challenging long-term prospects."

Added Karl-Thomas Neumann, CEO of GM's Germany-based Opel Group GmbH: "We had to take decisive action in Russia to protect our business."

A supplier consultant who formerly was managing director of GM Russia attributed the move to near-term profitability goals. But Warren Browne called GM's decisions to withdraw its mainstream brands in Russia, to sell only premium nameplates and to idle St. Petersburg "strategic errors" if the company wants a presence in Russia when the economy and sales outlook improve.

"It's a three-pronged death strategy," he said.

The company said it will still sell Cadillacs and U.S.-built Chevys such as the Camaro, Corvette and Tahoe in Russia. GM sold 123,000 Chevys, 1,300 Cadillacs and 65,000 Opels in Russia last year.

GM said restructuring in Russia — once considered a critical new market for the automaker, along with China, India and Brazil — means about $600 million in special charges, taken mostly in the first quarter. Its Russian restructuring does not change its goal to return to profitability in Europe next year.

Many automakers, including GM over the past six months, have trimmed production and raised vehicle prices to minimize some of the economic impact in Russia. Nissan Motor Co., for example, said this week it will halt production in Russia for 16 days.

It appears no other major automaker intends to follow GM's moves in the economically deteriorating Russia. Rival automaker Ford Motor Co., whose Model T was assembled in Nizhni-Novgorod to fulfill the first Soviet Five-Year Plan, said it has no plans to pull out of Russia.

Reuters news service reported that Russia's economy ministry said no other foreign auto company with an assembly plant in Russia has said it plans to leave the market, which it expects will begin growing again in 2016. Reuters cited the RIA news agency.

The company does not have the "appropriate localization level for important vehicles built in Russia," Neumann said. GM concluded the challenging economic environment does not justify investing more to buy or produce Russian-made parts from local plants to meet Russian mandates.

Ford blamed much of its 2014 $1.06 billion loss in Europe on geopolitical issues in Russia, and CEO Mark Fields said the region would "be a drag on our earnings" for the foreseeable future.

Ford operates three plants there — in St. Petersburg, Yelabuga and Chelny — as part of its joint venture with Sollers OAO. Last year, it slashed 950 jobs at two plants due to falling demand.

"We believe the Russian market has significant potential in the longer term," Ford said in a statement. "In the short term, however, Russia remains a volatile and challenging market. We are working intensively with our partners in the Ford Sollers joint venture in every area of the business to reduce costs, match production to the real demand, manage the difficult pricing environment and limit the financial impact of the current crisis.

"We continue to expand Ford product portfolio in Russia to fill new segments and tailor vehicles to the unique needs and wants of Russian customers. This will put us in a better position to grow when the market recovers."

Fiat Chrysler Automobiles NV produces no vehicles in Russia, and its sales in the region are limited. It sold less than 17,000 there in 2014.

Brian A. Johnson, an analyst with Barclays Capital Inc., said in a note to investors that GM's moves in Russia improve the company's ability to break even in Europe next year. He forecasts GM Europe to lose $700 million this year and earn $50 million in 2016.

GM's fast decision on Russia is "further proof of our thesis that GM management is beginning to execute more quickly and consistently — a sign that GM is shedding its image as a value trap," he said.

The Russia restructuring follows recent GM restructuring announcements in Thailand and to stop producing vehicles in Indonesia. GM also in late 2013 announced plans to stop building vehicles in Australia by 2017 and to stop selling most Chevys in Europe by the end of this year to focus on its Opel brand.

GM in 2012 said it planned to invest $1 billion over five years in Russia. GM declined to comment Wednesday on the status of that investment; nor is it clear whether GM plans to reopen the St. Petersburg plant because "at this time improvement is not foreseeable," a spokesman said.

Joseph Spak, an auto analyst with RBC Capital Markets LLC, said in a note to investors that the moves in Russia are good for GM in the near-term but could impact them over the long-term.

"While GM still plans to have some presence in the country, their go to market strategy will be decidedly more high-end and de-emphasize the mass volume opportunity," he said. "This is in stark contrast to Ford which has similarly acknowledged difficult conditions in the country, but continues to view Russia as potentially becoming Europe's largest market."

IHS Automotive managing director Michael Robinet said Russia is not like other countries such as Mexico, where automakers can export vehicles to dozens of countries tariff-free. Automakers build cars in Russia for Russia, and their destiny is really determined by where the Russian market goes.

Robinet said GM's actions likely will not benefit any other automakers in the short-term, given the dismal Russian sales outlook.

"If the market dynamics change abruptly, then you might have a situation where Ford, Nissan or others that have a significant presence in Russia could benefit," he said. "But there's very little sign that's going to be the case … There's going to be some continued issues."

Global automakers continue to face challenges in markets such as Turkey, Thailand, Venezuela and Argentina. S&P Capital IQ equity analyst Efraim Levy, in a recent note to investors, said the outlook for automobile manufacturers in emerging markets for the next 12 months is positive.

But he warned Russia and parts of South America "still look likely to be challenged areas, with declines."

Staff Writer David Shepardson contributed.