Magna Moving Forward in Russia

Magna International Inc. has had its eye on Russia for several years, confident it will become a lucrative emerging automotive market.

The current outlook is less upbeat, as Russia is mired in recession, partly due to a severe drop in oil exports, a pillar of the regional economy. Earlier this month, the Russian government released 2009 figures showing the economy receded 7.9%, compared with fiscal 2008. It was Russia’s worst drop in 15 years.

Still, Canada’s largest auto supplier remains patiently invested in Russia, banking on recovery. “It’s going to be interesting, the next couple years. It’s so low now it’s got to start trending back up,” Co-CEO Don Walker says of the Russian economy in an interview with Ward’s.

“I think if oil prices come back, and you believe they will come back, then their economy will start doing better,” he says. “They want automotive as a solid employer in the country.”

Magna has operations in three different regions of Russia. Under construction in St. Petersburg is a stamping and assembly plant that will be fully operational in the third quarter.

In Kaluga, Magna plans to open a new injection-molding plant to manufacture exterior plastic parts, beginning in the second quarter. In the meantime, the supplier has been producing front-end modules at an older plant in the region since 2009.

Magna also has injection-molding plants in St. Petersburg and Nizhny Novgorod, producing exterior and interior plastic parts. The plant came into the company’s fold by way of its acquisition of Technoplast in August 2008.

With 2007 sales of E29 million ($39 million), Technoplast supplied components for GAZ Group, the largest Russian producer of commercial vehicles.

2010 “transition year” for Magna Steyr operations in Graz, Austria.

“We have a great relationship with GAZ and a good relationship with other car companies,” Walker says. “They are all looking for a good supply base.”

Magna said last year it and its Russian partners plan to invest E170 million ($230 million) in Russian operations. But Magna has fewer partnerships in the region since a 2-year-old equity tie-in with OJSC Russian Machines was terminated last year. GAZ is a subsidiary of OJSC.

GAZ, Magna and partner Sberbank intended to acquire 55% of German auto maker Adam Opel GmbH, but General Motors Co. decided in November not to sell the unit.

Magna is the sole owner of three of the Russian facilities, but the new stamping plant under construction in St. Petersburg is held by a joint venture with Korean partner Shin Young Metal. The Russian market requires endurance and persistence, Walker says.

“We aren’t getting any returns on our investments yet, but we have to launch the plants,” he says. “If we have plants there, I suspect we can fill them up, and we should be able to make money as long as we are running enough production capacity there.”

With falling demand for pickup and SUV frames, Magna Cosma focusing on engine cradle production.

Separately, Walker says Magna’s Cosma International frame business is stable, despite a severe downturn in pickup and SUV sales.

In November, Cosma confirmed it will supply frame assemblies for GM’s next-generation fullsize pickups and SUVs. The business represents Cosma’s third generation of frames for GM’s high-volume truck platform.

Cosma will produce the new frames at plants in St. Thomas, ON, Canada; and Saltillo, Mexico. Magna’s other frame plants are Modatek Systems in Milton, ON, and Bowling Green Metalforming in Bowling Green, KY.

Magna’s chief rival in the frame business, Dana Corp., announced two months ago it is selling its structural products business to Mexico’s Metalsa SA de CV, a subsidiary of Grupo Proeza.

Metalsa gains control of 10 Dana manufacturing plants in Argentina, Australia, Brazil, the U.S. and Venezuela, as well as 2,800 employees.

Walker says he isn’t surprised Dana sold the business because “I don’t think it was a core product for them.”

The frame market is shrinking, as vehicle platforms migrate toward unibody architectures. “There’s too many suppliers in some of these areas, so they have to consolidate; they have to downsize,” Walker says.

But those comments do not apply to his own company. Walker admits Magna has more capacity than necessary, but says there are no plans to close or consolidate any frame plants.

Shifts could be temporarily halted to deal with production shortfalls, but Magna intends to stay in the frame business, he says. The operations are flexible enough to shift output to engine cradles or other structural components if frame demand remains light.

To make cradles, “you need all the same equipment, and you still need to have stamping capacity. It’s usually pretty heavy-gauge (steel). You still need to have assembly lines,” he says.

“Volumes are down and the frame business is downsizing. However, I also think we’re one of the most competitive in the business,” he says. “We’re going to hopefully continue to win our fair share of the business.”

Walker declines to say whether Magna is making money on frames.

Another important sector for Magna is full-vehicle assembly. The supplier forecasts 2010 revenues of up to $1.9 billion from its Magna Steyr plant in Graz, Austria, which contract-assembles vehicles for several auto makers.

Walker calls 2010 “a big transition year” that entails downsizing the Graz operations “for competitive reasons,” the loss of some vehicle programs and the addition of four new ones.

Late last year, Magna Steyr began producing the Peugeot RCZ (the first full-vehicle contract from PSA Peugeot Citroen) and Aston Martin Rapide.

In August, Graz will begin assembling the Mini Beachcomber. In spring, Magna Steyr will produce the aluminum body, gullwing doors, hood and deck lid for the Mercedes-Benz SLS. Most of the paintwork for SLS also will be done in Graz.

The plant is under contract to continue building the Mercedes G-Class "Gelandewagen" until 2015.

But the contract-assembly business is treacherous. Last April, Wilhelm Karmann GmbH declared insolvent its 60-year-old vehicle-assembly operations in Europe, eliminating 2,240 jobs at two plants in western Germany. Other assemblers have been treading water as well.

But once again, Walker says Magna Steyr must be resilient and wait for the upturn, even though some auto makers will continue pulling in-house some assembly work because of available manufacturing capacity.

“There's really nobody else left with full-vehicle engineering, program management and assembly capability,” he says. “It's hard to tell what the size of the contract-assembly business will be due to the weak production in North America and Europe over the past year.”

Walker is confident Magna Steyr has much to offer.

“We are competitive on low-volume programs, if the OEM looks at the true costs,” he says. “If the market starts coming back and people are trying to streamline their capacity, hopefully we will continue to get contracts.”

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