A third manufacturing contract will see previous-generation Mercedes Sprinters built on a new line transported here from Argentina. It is being installed within GAZ’s light-commercial-vehicle plant that produces the GAZelle lineup. Output will launch later this year.

The vehicle-building programs cover half the fixed costs at Nizhny Novgorod, officials say. Contracts with the three auto makers run for eight years and put GAZ at capacity. Although there’s plenty of room for expansion, Andersson is not eager to bring in any more work.

“I would not take one more (contract), because we will sweat a lot this year (to launch the current programs),” he says. “I’m getting sick of facilities management. I’m getting sick of wet cement, (fresh) white paint, new electricity, new ventilation, all this stuff.

“I’m looking much more forward to the first guy that signs up for another eight years.”

Geography could be the Achilles’ heel to sustaining the contract-manufacturing business model beyond 2020, because many industry-watchers believe the center of Russia’s auto industry is emerging further west in St. Petersburg and in Kaliningrad, designated a special economic zone with favorable tariff treatment for manufacturers importing parts.

“Everybody in St. Petersburg is committed to building the next Detroit,” notes Warren Browne, president of WP Browne Consulting and one-time point man for GM’s Russian operations. “There’s a difference between St. Petersburg, Kaliningrad and Nizhny.

“The whole epicenter of the Russian automobile enterprise is Moscow-west, not Moscow-east.”

But both Wolf and Andersson believe GAZ’s contract-manufacturing business is here for the long haul.

Only four auto makers have signed on to Russia’s New Decree 166, which requires a commitment to produce 350,000 vehicles annually in exchange for favorable tariff treatment. That could mean many others will seek lower-volume manufacturing opportunities with minimal commitments in new brick and mortar as a way around import tariffs, the GAZ executives contend.

“I see it for the long term,” Wolf says. “If you just have small volumes, you can’t build a plant by yourself.

“When I was responsible for Magna, we started the (contract-manufacturing) business in Europe, and nobody needed us because Europeans could build their cars without Magna. But we (gave) the best service to our customers, and that is the same principle, the same guideline and the same rule here at Nizhny Novgorod.”

Andersson contends the notion St. Petersburg will emerge as the country’s auto-industry hub is misguided.

“I strongly disagree,” he says simply. “Because I worked in St. Pete.”

Even with the burgeoning car-manufacturing operations and a new-generation GAZelle NEXT to join the truck lineup this year and bolster GAZ’s already 50% hold on Russia’s LCV market, there’s still much work to be done, executives admit.

For starters, Russia’s supplier network remains weak.

“You will not be able to develop any good product in the automotive market without good components,” says Deripaska. “We’re working as quickly as we can to bring more partners to develop product in Russia.”

The VW operation is beginning to draw some parts makers to the country, a few of which are leasing space from GAZ for local operations. GAZ also is seeking more direct tie-ups of its own, such as the one with Bosal to produce exhaust systems and catalytic converters.

The JV, 51% owned by Netherlands-based Bosal and 49% held by GAZ, started manufacturing 400 mufflers and 300 catalytic converters per day for GAZelle light trucks last April.

An expansion already is under way to provide the same components for the VW vehicles built on the GAZ grounds, with trial production getting under way this month.

“This is the template for a lean-supply operation in Russia,” Andersson says of the facility that will employ just 70 people at full capacity. “Russia can’t be competitive unless we can do components locally.”

Executives say the high cost of credit here, at close to 9%, or double international rates, also serves as roadblock to further progress, both for GAZ and the country’s auto industry in general.

“We have to get competitive bank rates,” Wolf says. “And the Russian central bank has to get more pressure on entrepreneurs to put money in areas where we need it. We need this bit of fertilizer.”

And although GAZ is making progress on productivity and quality, the transition to a fully modern operation that can compete with other low-cost manufacturers around the world will require more time, insiders admit.

“It took us already 12 years,” Deripaska says. “And I think we have another eight years…(before) we really can compete with the Germans and, more importantly, with the Koreans.”

Sums up Andersson: “Give me another 10 years, and I’ll have a world-class company.”

dzoia@wardsauto.com