David Herman has been General Motors’ vice president in charge of Russia and the Newly Independent States since June 1998. He had previously held the position of chairman and managing director of Adam Opel AG. He talked to The Russia Journal about major foreign auto manufacturers’ prospects in Russia.

The Russia Journal: Some analysts say the current situation in the Russian automotive sector is extremely favorable for importers. Do you share this opinion?

David Herman: I don’t think it is. I don’t think it is extremely favorable. The total of imported cars is increasing substantially in 2001 against 2000, but it has not nearly reached the pre-crisis levels. I don’t think you can say that the import-car segment is very robust, being 60,000 or 70,000 [cars] a year. That’s only a small percentage of the total, 8 or 10 percent. So, for new foreign cars, the situation is improving, but it’s certainly not very good.

RJ: Also, there is a common belief that the market is ready for foreign manufacturers to begin producing cars here.

DH: The question of whether [the market] is at the point where [foreign automakers] should begin to produce [cars] locally seems to have been resolved in a negative way, because very few projects are being done. If a manufacturer is able to achieve only [sales figures of] 5,000-10,000 units here [in] the next three to five years, it’s almost impossible to have effective local manufacturing for two or three very basic reasons.

First, the levels of duties do not encourage local investment. The levels of duties that penalize imports of built-up cars have to have a relationship to the cost of local production. In other words, if you can build a real big plant here for, say, 200,000-300,000 cars [a year] and you have a 10 percent protection from duties, maybe that’s enough. But if you build a small plant where you have to develop local content and build a paint shop and do all sorts of things that cost a lot of money, it really does not pay if you are going to produce 5,000 or 10,000 cars [a year].

It’s better then to import cars. What’s the point at which it does pay? 20,000 or 25,000 units? [But] the way it is now, no manufacturers at all, other than the Russian ones, are going to reach 10,000 units this year or even next year or even the year after. I think that foreign auto manufacturers will invest in Russia, but not for the next two or three years.

RJ: Despite all of that, GM is among the first major international auto manufacturers to become involved in a large-scale project here – a joint venture with AutoVAZ.

DH: We’ve started our project because it’s with [the] Russian vehicle [Niva]. Therefore, we can sell more [cars]. We’re going to build a paint shop for 75,000 vehicles.

RJ: Imported car sales are still lagging behind pre-crisis levels. Why is this so?

DH: Affordability. How many customers can buy cars [that cost] between $10,000 and $15,000? Something with a 1.6-liter engine, like an Astra? How many people can afford that compared to how many could in 1997? It’s a much smaller number because that was the emerging middle class and they have been affected the most by the economic crash. I would say that, if credit were available today, a very large number of people could afford this, but credit isn’t available.

RJ: Did I understand correctly that you believe there are only two strategies for a major foreign auto maker in this market – either form a joint venture with a Russian partner or just wait for the situation to improve?

DH: Yes. But if one makes a joint venture with a local manufacturer, it’s got to be based on the right product – something he can sell or do something with. And I would say that the Niva is an absolutely unique opportunity in that respect: It can be exported. It’s the only Russian [automotive] product that can be exported. There are Lada products that are being exported but very unsuccessfully. There are no GAZ products that are being exported. There are a few KamAZ products that are being exported but only to markets with very low levels of emissions-control requirements, which means Iran and Iraq, maybe Syria. The cost of building a factory is so great that if you don’t utilize the capacity very well, fairly quickly you go broke before the race starts. In the old Soviet way of thinking, it didn’t matter because you got the money and you put it in the ground and you forgot about it. But a modern businessman has to get a return on his investment.

RJ: Where do you plan to export Nivas?

DH: Everywhere, except the United States. And that’s because U.S. federal safety and emissions-control requirements are not engineered for at AvtoVAZ.

RJ: What percentage of the total output will be exported?

DH: One-half.

RJ: What’s the current situation at the joint venture?

DH: The three principal contracts have been made and [the joint venture] is starting to physically work.

RJ: You’ve mentioned economic reasons as factors that deter major foreign automakers from setting up assembly lines here. Is there anything else?

DH: There’s the so-called "Russia problem," which has to do with legal rights and their enforceability, transparency and corporate governance. People do fear that they’ll have a contract that they can’t enforce. I think there’s a lot of that.

RJ: What’s your prediction for the development of Russia’s automotive industry for the nearest future?

DH: There are two basic scenarios, [and which one will be implemented] will largely depend on the government. Under one scenario, [small and inefficient car makers] will be permitted to go broke and have to find another future, and there will be few car makers left in Russia. Under [this] scenario, the government doesn’t interfere and doesn’t provide any kinds of subsidies, which distort competition. Under the other scenario, it does and encourages a formation, in which enterprises that have no business purpose in their own right somehow are kept alive. I hope that doesn’t happen.