R 240841Z APR 09
FM AMCONSUL ST PETERSBURG
TO SECSTATE WASHDC 2757
INFO AMEMBASSY MOSCOW 
AMCONSUL ST PETERSBURG 
AMCONSUL VLADIVOSTOK 
AMCONSUL YEKATERINBURG

UNCLAS ST PETERSBURG 000051 
 
 
E.O. 12958: N/A 
TAGS: RS ECON EIND EINV
SUBJECT: AUTOMOTIVE MANUFACTURING IN NW RUSSIA - DOWN BUT NOT OUT 
 
¶1. (SBU) Summary.  The St. Petersburg region - "Russia's 
Detroit" - is home to the largest concentration of foreign car 
manufacturing plants in Russia.  These plants have suffered 
substantially from the economic crisis, and have significantly 
cut their production in recent months in the wake of a sharp 
reduction in demand.  The Russian government's support measures 
for the car-making industry have so far been of little 
assistance, and in the short run the situation looks bleak. 
Nevertheless, the manufacturers generally remain optimistic 
about the long range outlook for the Russian car market.  End 
Summary. 
 
¶2. (SBU) St. Petersburg and Leningrad oblast have during the 
past eight years become the leading car-producing regions in 
Russia.  Development of the auto cluster began in 2002, when 
Ford opened its assembly plant in the town of Vsevolozhsk in 
Lenoblast.  Currently, the oblast and the city account for 7% of 
Russia's total automobile production, and for about 20% of the 
foreign-branded cars.  Last year, Ford assembled sixty-five 
thousand cars, GM forty one thousand, and Toyota six thousand. 
Nissan plans to open a new facility in St. Petersburg in June 
this year with a yearly expected production capacity of fifty 
thousand cars.  In 2008, both Suzuki and Hyundai signed 
agreements with the St. Petersburg city government to construct 
their own plants in the city, which will have the annual 
capacity to produce fifty thousand and one hundred thousand 
cars, respectively. 
 
¶3. (SBU) However, the car-making industry in Russia has been 
hard hit by a sharp decline in demand due to the global 
financial and economic crisis.  During the first quarter of 
2009, sales of new cars in the Russian market fell by 47 percent 
compared to the same period last year, and experts fear a 
further market contraction for the rest of the year.  The 
severity of the situation has prompted the Russian government to 
enact several measures aimed at avoiding the collapse of the 
country's car-making industry.  One of the most important of 
these measures has been the 30-percent increase in customs 
duties on imported cars, which put imported cars at a 
considerable price disadvantage vis-a-vis those manufactured in 
Russia.  American cars assembled in Russia fall within the 
category of domestic production. 
 
¶4. (SBU) The federal government has also set up a new program 
which subsidizes the interest rates for the buyers of 
Russian-produced cars that are priced under RUR350,000 (about 
$10,000).  Though this program is technically impartial, in 
practice it substantially benefits only the native Russian car 
industry, as virtually all foreign-brand cars produced in Russia 
are more expensive.  For example, amongst all the St. 
Petersburg-based car-assemblers, only Ford produces a car model 
inexpensive enough to benefit from the government subsidized 
interest rate program. 
 
¶5. (SBU) So far, the government's support measures for the 
automobile industry seem to have been of little help for the 
foreign auto makers in St. Petersburg, who continue to 
experience declining demand and factory shutdowns.  Declining 
demand forced GM to suspend production at its new plant just a 
month and a half after its opening in early November 2008. 
After several weeks of standstill, the plant resumed operations 
with just one shift working three days a week.  However, the GM 
plant again suspended even these reduced operations for two 
weeks in early April.  Toyota has announced plans to suspend 
production at its plant in St. Petersburg for the first week of 
May, which will be Toyota's third production halt since the 
beginning of the year.  Ford halted production for a month in 
January, and it plans to reduce its operating schedule down to 
four days a week beginning June 1.  Nissan, which had planned to 
open its new plant in St. Petersburg in early 2009, has 
postponed the opening until June, even though the plant itself 
has already been fully constructed. 
 
¶6. (SBU) Another factor that has hurt the competitiveness of 
foreign car manufacturers in Russia compared with wholly 
Russian-made cars has been the recent devaluation of the ruble. 
Because these manufacturers use predominantly imported parts, 
their costs in rubles have gone up significantly and they have 
had to pass those increased costs on to the Russian consumer. 
For example, the ruble sticker price for cars assembled at 
Ford's plant in Lenoblast have gone up nearly ten percent after 
two price increases earlier this year.  And, Ford has announced 
a further nine-percent increase that will take effect in May. 
GM, for its part, has increased prices for its Chevrolet Lacetti 
and Opel models by about six percent since January. 
 
¶7. (SBU) Comment.  The car manufacturers in the St. Petersburg 
region are definitely feeling the bite of the economic crisis 
despite the federal government's efforts to support the 
industry.  Despite their current difficulties, none of the 
manufacturers has cancelled its future plans nor downgraded 
Russia as a potentially lucrative future market for their 
automobiles.  Thus, when the crisis ends, the manufacturers will 
be in a good position to quickly ramp up production to meet the 
inevitably increased demand for their autos.  As one young 
Russian told the Consul General "once you've driven an American 
car, you never go back."  End Comment. 
 
GWALTNEY