GM hits brakes hard on Russia

Russia’s no playground now for most businesses, especially not for automakers. If the government had not provided incentives to prop up the ailing industry, analysts estimated that 2014’s sales would have declined by 20% instead of the 10% reported. The car market has declined even more severely so far this year – sales fell by 38% last month. It is now expected that total sales for 2015 will fall even further, by as much as 24% to 27%. Many automakers are already halting production and limiting imports. Read also: Automakers rethink Russia as ruble slide.

General Motors announced last Wednesday that it will be shutting down its only assembly line in Russia. The facility, set in St Petersburg, produces four models (two Cruz’s and two Opel’s) but will cease production this December. The fate of the employees remains uncertain – GM has yet to comment on that particular issue – but in all likelihood, the roughly 4,000 employees will be laid off. Just a few years ago, Russia was considered a burgeoning car market that was set to overtake Germany as the largest European market because of its growing middle class and low car ownership compared to other established markets. But the country is now struggling with Western sanctions, plummeting oil prices and a 50% drop in the value of the ruble; experts expect the country to slide into a deep recession this year.

Besides halting production, GM is going for a near total withdrawal by also ceasing sales of Opel cars and most Chevrolet models in the country; what’s left will only be the Cadillac brand and some Chevy’s, like the Corvette, Camaro, Tahoe and Niva. The company says that it will focus on pushing the all-wheel-drive Niva, which can handle the snow-covered roads of Russia, and appeal to the wealthy with their luxury models, the only car segment that is still holding up so far in the dire economic situation. According to a statement by Dan Ammann, GM’s President, the company’s change of strategy is meant to ensure long-term sustainability. “This decision avoids significant investment into a market that has very challenging long-term prospects,” he said.

GM’s new strategy is an about-face compared to just three years ago when the American automaker had plans to invest some US$1 billion to increase its capacity in Russia. GM’s drastic pullout has experts confused. IHS Automotive analyst, Tim Urquhart, said, “It is an almost unprecedented decision for a major global automaker to abandon a major regional market in such a way, especially an automaker which was a leading player and selling over 300,000 vehicles.” Other experts say that GM could have cut just one mainstream brand – Chevrolet or Opel – leaving one other, trimmed the top or bottom of the product range, or simply scale back the number of models it was manufacturing.

Russia may have contributed to only 2% of GM’s total sales last year, but when the economy recovers - however distant in the future that might be - GM might miss out on opportunities that others who stayed the course would capitalise on, and the cost of re-entering a market is much more than pulling out of one. The other American automaker, Ford, for instance, will be cutting costs but still expanding its joint venture lineup with its Russian partner, Sollers, which will put the company in a good position to grow when the market recovers. French automaker, Renault, could take advantage of the weak euro against the US dollar, which gives it the upper hand compared to its American rivals in lowering prices; Renault could also take advantage of its joint venture with Russian carmaker, Avtovaz, and fill the void left by GM’s exit.

Still, any improvement in Russia’s car market is unlikely to occur soon; oil prices must first improve and geopolitical sanctions must be eased. Both, however, seem improbable in the near future.