Russia’s Sberbank, City of Moscow Plan Auto-Making JV

VIENNA – Sberbank Rossii, Russia’s largest bank, and the City of Moscow government sign a letter of intent to establish a contract manufacturer of cars and commercial vehicles.

Plans call for the assembly of Jeep and Fiat vehicles, as well as other brands.

The bank and city plan to form a joint venture called MosAvtoZil, in which Sberbank would hold a 51% stake and the City of Moscow a 49% share.

The JV is expected to consist of two manufacturing sites. It will include the Moscow-based struggling commercial-vehicle maker Zil,of which Moscow owns 64.8%.

The second site will be the Avtomobilnaya Korporatsiya Derways car plant in Cherkessk, the capital of the Karachay-Cherkess Republic in South Russia. Derways, which assembles Chinese cars from complete-knocked-down kits, is owned 51% by Sberbank subsidiary Sberbank Kapital.

Up to 150,000 vehicles annually could be built, including 100,000 in Moscow and 50,000 at Derways in Cherkessk. The JV should reach its full capacity in three years.

“A total of about RR12 billion ($367 million) will be invested in this project,” German Gref, president and CEO of Sberbank, says during the signing ceremony.

“This sum includes the assets being transferred, such as the factory site and the city of Moscow’s block of shares, financing, the repayment of debts and the contribution of the Derways factory, as well as financial resources and investments.”

According to unofficial reports, Sberbank could contribute a loan of RR6 billion ($183 million) and thus provide half of the overall investment.

“I hope that we can start structuring and implementing the project in the second half of the year,” Gref says. “Based on our experts’ evaluation, the first cars will be assembled at the new facility in the first quarter of 2013.”

The MosAvtoZil project is connected to plans to produce Jeep and Fiat vehicles in Russia. Fiat is expected to sign an agreement for the construction of a new plant in St. Petersburg this month. Sberbank is to finance the project and take a minority equity interest of up to 20% in that JV.

In addition, Fiat and Jeep vehicles also are expected to be assembled at MosAvtoZil. The Jeep Grand Cherokee likely will be among them.

“The first stage will involve semi-knocked-down assembly of models from the Fiat-Chrysler alliance,”Igor Kulgan, Managing Director of MosAvtoZil, tells Russia’s Kommersant business daily.

MosAvtoZil is expected to assemble the vehicles in Moscow until the Fiat-Chrysler plant in St. Petersburg is completed in 2014.

“The production of light-commercial vehicles such as, for example, the Fiat Ducato will begin toward the end of 2014,”Kulgan is quoted as saying. Initial capacity is expected to be 40,000 units annually.

Fiat and Chrysler are not the only possible customers for the new contract assembler MosAvtoZil.

Russian media quote Svetlana Sagaydak, Sberbank’s director in charge of managing problem assets, as saying the JV also could build Renault and Hyundai vehicles, and talks are under way with other foreign auto makers.

Renault is looking into possible Russian productionof two different LCVs. While plans for a smaller commercial vehicle are well advanced, the other model, a big commercial van, is at the business-case phase.

“A big van could be popular in the Russian market,” Bruno Ancelin, Renault senior vice president-Eurasia Region and managing director-Russia,tells WardsAuto. “But to this point, we have not found the right solution for manufacturing it.”

It is impractical to build a big van at a car plant, such as Renault’s Avtoframos factory in Moscow, because of the size of the dip-coating facilities and paint shop. So the vehicle might be built by another auto maker with an adequately sized paint shop.

MosAvtoZil’s Kulgan is quoted as saying so far, there is no legally binding agreement either with Fiat-Chrysler or Renault, but there is an “agreement in principle on the model lines and production processes.”

The signed letter of intent is of key importance to “reach the final stage of talks with the vehicle makers,” he says.

Sberbank does not plan long-term ownership of a controlling stake in MosAvtoZil. “We make no secret of the fact that we do not want to take on a strategic role in this project,” Gref says. “I hope we will find an investor to whom we can sell our share of the company after the planned capacity is reached.”

Low production has plagued Zil for years. Several projects to modernize its CVs have failed, as have plans for cooperation with foreign auto makers.

Zil stood on the brink of bankruptcy in early 2011, and its assembly line was shut down between spring and September of last year, when it built only 1,265 CVs. Its total debt of RR24.6 billion ($751 million), which it accumulated between 2007 and 2011, was restructured last year.

A number of future MosAvtoZil employees are to be carried over from Zil’s current workforce of 5,600. “The main stipulation of the mayor was that the project carry over the people working there today as much as possible,” Gref says.

“This project makes it possible to breathe life back into one of the leading Russian automotive companies.”