GM First Domino to Fall in Russia

General Motors will cease production in Russia and stop selling products in the country from its Opel brand, as well as most of its Chevrolet offerings, calling the long-range outlook for the once-promising market challenging and raising the specter of a wider industry restructuring there.

“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 says in a statement. “This decision avoids significant investment into a market that has very challenging long-term prospects.”

Russia’s No.2 automaker last year sold 227,179 units in Russia, down 64.7% compared with 2013, according to WardsAuto data. So far this year, sales are off 28.7% to 6,167.

GM’s actions in Russia will play out over the next nine months and includes halting operations at its assembly plant in St. Petersburg by the middle of this year. Two years ago, GM began a $1 billion expansion of St. Petersburg to build Opel and Chevrolet products, raising annual production from 98,000 units to 230,000 this year. Employment at the plant was expected to grow to 4,000 people from 2,500.

But the political climate in Russia soured with the Ukraine crisis and the U.S. and its Western allies plan to continue economic sanctions against the country until Russian President Vladimir Putin ceases aggression in the region. U.S. and NATO forces recently began conducting military exercises at its border.

GM has not made any updates or disclosures since the investment announcement, including today.

Russian sales industrywide tumbled 39.2% in February, compared with like-2014, to 131,288 units as the value of the ruble sank and automakers raised prices. Sales last year were down 10.5% to 2.6 million.

GM plans to stick with a strategy to import Cadillac products into Russia, as well as the U.S.-built Chevy Corvette, Camaro and Tahoe. Contract assembly of Chevrolet vehicles by Russian automaker GAZ also will cease this year, although the GM-AvtoVAZ joint venture will continue to build and sell the current generation Chevrolet Niva.

GM cites a lack of localized parts supplies, a network it had hoped would come together as the country fulfilled its promise as the next booming auto market, as a hurdle to preventing it from weathering the storm in Russia.

“We do not have the appropriate localization level for important vehicles built in Russia and the market environment does not justify a major investment to further localize,” says Opel Group CEO Karl-Thomas Neumann.

GM’s decision comes on the heels of Renault-Nissan suspending production at its St. Petersburg plant for 16 days, concluding on March 31, due to weak sales. However, the automaker says it stands by plans to double production in Russia and stick to its long-term strategy there.

Ford of Europe also will cut production in Russia, but its chief Jim Farley told reporters at the Geneva auto show earlier this month it too stood by long-term plans for the market.

Neumann says pulling out of Russia will not affect the turnaround path set for GM Europe.

“We had to take decisive action in Russia to protect our business. We confirm our outlook to return the European business to profitability in 2016,” he says.

Speaking with WardsAuto ahead of the GM decision, LMC Automotive analyst Carol Thomas says multiple automakers could pull from the country.

“There are a couple (of automakers) that have gone in (to Russia) with big plans, but haven’t achieved those plans even before times got tough,” says Thomas, who covers Central and Eastern Europe for the firm. “One or two could decide not to stay in Russia.”

Thomas expects Russia to begin a turnaround in 2017, but does not see sales in the country eclipsing the 2.75 million units sold in 2013 within that timeframe.

Stephanie Brinley, an analyst with IHS, thinks other automakers will reduce their presence in Russia.

“The weak business environment will make local production unattractive in the long term,” she says. “We do expect OEMs to reduce capacity investment and revert to imports, as GM is doing.”

GM says it plans to take a charge of $600 million, mostly in the first quarter of 2015, related to the downsizing in Russia.

– with Byron Pope

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