Deteriorating Market

GM Unit Opel to Leave Russia

opel-Handelsblatt
Good bye, Russia. Opel will end production at the end of this year.
  • Why it matters

    Why it matters

    Opel will need to come up with a solid plan to compensate the loss of Russian sales.

  • Facts

    Facts

    • Opel sold 82 percent fewer cars in the first two months of 2015 than in the same period a year ago.
    • The plant closing, planned for the end of this year, will cost the company about $600 million.
    • The manufacturer will terminate 180 dealer contracts.
  • Audio

    Audio

  • Pdf

As the Russian rubel has plunged, losing 40 percent of its value to the U.S. dollar over the last year, Russians are no longer buying cars.

Opel, the German-based European unit of General Motors, has been among the hardest hit by the slump.

In January and February of this year, Opel sold just 1,985 cars in Russia – 82 percent fewer than a year ago. Sales at Volkswagen plunged 40 percent in the same period, but VW has no plans to halt production – yet. Although Japan’s Nissan reported a smaller decrease, 32 percent, the automaker has decided to put production on hold until the end of March.

Sergei Tselikow, a car analyst with Autostat, expects Russian car sales to drop 40 percent in 2015, and one in four car dealers to go out of business.

In an interview with Handelsblatt, Opel Chief Executive Karl-Thomas Neumann said Russia’s deteriorating economy, a consequence of sanctions imposed after it seized Crimea and funded separatist rebels in eastern Ukraine, was key to Opel’s decision to close its factory in Saint Petersburg.

 

Handelsblatt: Only a year ago, you were full of optimism about the Russian market. And now Opel will be the first automaker to pull out of the country. Why?

Mr. Neumann: It was a difficult decision, but the situation in Russia is a great burden for us. The market has declined by more than half. The depreciating ruble has forced us to raise prices considerably. And then we also saw a sharp drop in sales. We concluded that the outlook for the Russian market is not good, and not just in the short term, but also in the medium and long term. If the economy is ailing and exchange rates are going haywire, you eventually end up with a perfect storm. That’s why we’re withdrawing Opel and the high-volume Chevrolet models from the Russian market. We will only continue to sell imported premium Cadillac models and more expensive U.S.-produced Chevrolets, like the Camaro.

What will happen to your plant in St. Petersburg, where Opel currently builds the Astra for the Russian market?

We will shut down the St. Petersburg plant for the time being, and we will have to lay off the 1,150 employees there. We will only retain a small work force to maintain the plant. We don’t know yet how many employees we will have in Russian in the future. We would like to preserve a certain distribution structure.

What financial burdens will result from the plant closing?

We anticipate exceptional charges of about $600 million (€557 million). These special costs include, for example, expenditures for restructuring the dealer network and the costs associated with settlements and canceling contracts.

When did you lose confidence in Russia? You sounded downright euphoric in early 2014, when you unveiled Opel’s growth plans for the Russian market.

At the time, we were all pleased that we could add Russia to our European Opel family. All the experts were predicting that Russia would be Europe’s biggest market by early 2020. But when you realize that things are not turning out as you had envisioned, you have to take action – and do it quickly.

Some of your competitors would disagree. Toyota and Hyundai have even announced new models for the Russian market.

There are various strategies. We raised prices to offset the effects of the weak ruble and, as expected, we lost a great deal of market share in Russia as a result. Others have kept prices stable, essentially buying market share, so that each car they sell actually costs them money. Every company has to find its own approach. But the only truly effective strategy to avoid losses is to increase localization. If you build the entire car locally and your suppliers are also in Russia, it doesn’t matter to you where the ruble stands.

Wouldn’t that be an argument to invest in Russia now?

That was the choice we faced. But given the current situation, we see no basis for massive investments in Russia. We were already on the path toward localization. But we still import more than half of all parts, along with all of our engines. We would have had to convince our suppliers to go to Russia. This is hardly possible at the moment, since experts believe that the ruble is unlikely to recover anytime soon. In other words, at the moment, we can no longer operate profitably in the Russian volume segment. We have to take this step now if we hope to achieve our long-term goals.

So you continue to believe that Opel will be profitable by 2016?

Our goals haven’t changed. But we will have to make additional efforts to achieve our objectives.

What exactly does that mean?

Our new models need to be successful now. The advance orders for the new Corsa are going well. And then we are coming out with the Karl, a product that enables us to enter a completely new segment. This is also an important growth area for our dealers. We will unveil the new Astra this fall, with which we intend to prove, once again, that Opel has truly changed and is capable of building fascinating cars. We aim to continue this product offensive with a total of 27 new models and 17 new engines between 2014 and 2018.

 

Karl Thomas Neumann-Bostelmann_cropped
Mr. Neumann sees no option but to end production in Russia. Source: Bostelmann

 

Where do expect to see growth if Russia falls by the wayside? The market in Europe is likely to remain challenging.

Markets develop in very different ways. That’s why, together with our dealers, we’re thinking about how to expand our market shares in a targeted way. The approach is already working very well in a few markets. We are seeing significant growth in Spain, Poland and England.

But Opel still lacks a presence in the major international growth markets.

We’re always looking for new potential. A good example is Israel, where we have already sold more cars in two years than we’ve sold in China in eight years. And then there is the strategy of exporting more vehicles in GM markets, such as Holdens in Australia and Buicks in North America. These are cars that are being built in Europe.

But this hasn’t been more than a secondary business until now.

We’re talking about the potential for 30,000 to 40,000 cars a year. Additional models will follow. But admittedly, all of this would have been little more than a secondary business without the problems in Russia. Now we have to close the gap left by Russia.

How big is the gap?

We had intended to sell about 70,000 cars in Russia. Now we are talking about several tens of thousands of additional cars we will have to sell in Europe.

What happens if your plan doesn’t work and you continue to suffer losses in 2016?

We don’t dwell on that question. I would compare it to a marathon. We got off to a good start and are proud of our success to date. But now we are in the middle of the race and are facing a strong headwind. Everyone knows that the second half of the race is more difficult. We are fighting and focusing on our strengths. Those are our new cars and brands that we are repositioning.

In light of the recent billions in losses, executives in Detroit will be taking a close look at what happens in Europe. Did GM, your parent company, order the withdrawal from Russia?

It was a joint decision, although the impetus came from [Eds. the Opel headquarters in] Rüsselsheim. For months, the executive leadership team, which we share with GM, has been discussing what happens next in Russia – not just for Opel, but also for Chevrolet. And now we have reached a joint decision. GM wants to position itself in such a way that we invest internationally in places where we can expect the best results.

Is the withdrawal ultimately a political decision?

No. It’s a purely economic decision that relates to the crisis and the weak ruble.

What happens next with your Russian joint ventures?

We’re building the Chevrolet Niva together with Avtovaz. That program will continue, because the Niva is highly localized. We’re discussing what happens after that. We’ll allow our joint venture with Gaz, which builds to order for us, to expire. That program is also no longer economically viable. We terminated a joint venture with Avtotor in February for the same reason.

Your decision is likely to severely downsize your dealer network in Russia. What are your future plans in that area?

We now have about 180 dealers in Russia, which generally sell Chevrolet and Opel. We will terminate those contracts. But, of course, we will ensure that our customers are still provided with warranty benefits, spare parts and service.

Your withdrawal from Russia seems to be a trip without a return ticket, now that you are alienating your dealers.

We are getting out of the mass-market business, but we will remain in the market with Cadillac and a few higher-end Chevrolet models. I do think, however, that we may be able to continue building cars in St. Petersburg in the future. But then, of course, we’ll need time to develop a dealer network. And the underlying economic conditions would also have to improve substantially.

 

Lukas Bay reports on companies and markets for Handelsblatt. Christian Schnell covers the auto industry. To contact the editors: bay@handelsblatt.com, schnell@handelsblatt.com

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