By Olena Horodetska
MOSCOW, Sept 17 (Reuters) - Goodbye Lada, hello Ford!
With foreign producers making forays into the automobile market, Russians are ditching the once pervasive Soviet Lada for faster and more modern Western cars.
Sales are booming and production rising but while the future looks rosy for foreign car makers the current boom may spell doom for Russian producers struggling to shake off a Soviet legacy of shoddy quality and clunky design.
"Last year about 1.6 million cars were sold in Russia and this year we expect around 1.65 million cars to be sold," said Andrei Kormilitsin, a car sector analyst at Troika Dialog.
"In the coming three years the market will continue to grow at an average pace of between four and six percent. People are not delaying big purchases. They are more confident in their future incomes and ready to spend more."
Russia is enjoying unprecedented economic and political stability. President Vladimir Putin looks set to win a second four-year term in an election next March while an oil-exporting economy is buoyed by high crude prices.
Growing purchasing power in the country of 145 million has helped drive car market growth and caught the attention of the world's biggest car producers, many of them struggling with flagging demand at home.
"The car market is big and potentially very attractive. Russia is now one of the world's six most attractive markets for growth potential," Kormilitsin said.
Maxim Matveev, an analyst at Alfa Bank, said new foreign cars sales would be the fastest growing segment of the market in coming years.
FOREIGNERS FLOOD IN
Western producers are eager to grab a slice of a market where far fewer people own a car than in Europe or the United States. Russia's car ownership stands at about 140 cars per 1,000 people compared with 580 in Germany.
But some of the world's biggest car makers are pursuing different strategies to win over consumers.
Ford has started from scratch, building a $150 million plant outside St Petersburg, Russia's second largest city. The first Focus compact car rolled off the production line in July last year.
The car has been such a success that Ford had to start an extra shift to meet growing demand.
Ford plans to make between 12,000 and 15,000 cars this year compared with 6,300 a year ago and annual production of the Focus in Russia is expected to increase to 35,000 by 2007.
Henrik Nenzen, Ford's president in Russia and the Commonwealth of Independent States, has said the company was aiming to capture a tenth of the Russian car market by 2010.
General Motors, the world's biggest car maker, is taking a different tack.
The U.S. giant started producing a sports utility vehicle, the Chevrolet Niva, in a joint venture with Russia's AvtoVAZ in the Volga region.
After launching the car in 2002, GM expects to produce between 30,000 and 35,000 cars this year.
France's Renault has announced it too will start production of a new saloon next year at a Moscow plant it owns jointly with the city's government.
Annual production is forecast to reach 60,000 vehicles after about three years.
Germany's Volkswagen, Japan's Toyota and Italy's Fiat say they are keeping an eye on the market, although they have no plans to start local production yet.
The influx of foreign producers means the structure of the market will change, analysts said.
"Imports now account for about one third of the total market," said Matveev. "This figure is set to drop to about 25 percent. Imports will fall because foreign makers will step up production in Russia."
Russian consumers, whose choice for decades has been mainly limited to Lada and Volga cars, have welcomed the change and are prepared to wait for months for new foreign cars.
RUSSIANS IN TROUBLE
It looks as if Russian producers are already in trouble in the face of the foreign onslaught.
The post-Soviet car industry has a reputation for lacklustre design and shoddy workmanship but it has dominated the market for years thanks to the relative cheapness of Russian made cars.
AvtoVAZ, Russia's biggest car maker and producer of the Lada, dominated the market with a 70 percent share just two years ago.
This year the company says it is having to work hard to hold on to a much reduced share of between 45 and 48 percent as foreigners make increasing inroads into the market.
Consumers can afford to become pickier as banks and foreign producers rush to launch credit plans, putting more expensive vehicles within reach of a growing middle class.
Lada's basic Zhiguli model sells for between $4,000 and $7,000 while the Ford Focus starts at about $13,000. GM's Chevrolet Niva, an offroad vehicle, sells for around $8,000.
"Last year was not the most successful for us," said Mikhail Moskalev, AvtoVAZ's vice president. "Buyers now have the opportunity to choose cars in the range of between $5,000 and $10,000. For us it translated into a sales crisis."
Moskalev said the biggest threat for the Lada Zhiguli were second-hand cars brought in from the West.
The streets of Russia's cities are clogged with second hand foreign cars, but exact numbers are hard to come by because many of the vehicles are smuggled into the country.
AvtoVAz, based on the shores of the Volga in eastern Russia and built by Fiat as a Soviet showpiece in the 1970s, has had to slash output by 14 percent in the first half of the year.
The plant produced 320,872 cars in January to June.
Moskalev said AvtoVAZ cars lagged behind the West in quality but he the company was already improving its existing models and working on new projects in a bid to hold on to market share.
AvtoVAZ plans to launch several new models next year.
Moskalev said cost cutting was vital for the survival of the plant, which employs 119,000 people, as metal prices in Russia were rising.
Analysts said Russian companies needed to upgrade production, bring in new technologies and develop new designs to find their feet again. But it may not be easy for everyone.
"AvtoVAZ is in a better position than others as it is generating enough cash to be able to invest and design new cars," Kormilitsin said.
"But if they do not, cash generation will start falling and life will become more difficult for them."