Alain Batty, Ford president for Russia

Since 1907, Ford Motor Co has played a colourful and pivotal role in the automotive history of Russia. Its presence has waxed and waned over time, but it is on the verge of launching its largest venture there.

The initiative comes despite continuing softness in car demand, following the country’s economic collapse in August 1998. Foreign carmakers remain interested in producing in Russia despite the turmoil, but Ford alone is persevering in opening a plant able to fully assemble autos. The US automaker expects to build and sell mid-sized Focus for $13,000-$15,000, though many observers believe few Russians can afford these prices. However, if the market rallies, Ford will be the global player best positioned to exploit the opportunity: the windfall could be big.

Alain Batty, president of Ford for Russia and Commonwealth of Independent States (CIS), outlined the company’s plans in a 90-minute interview at his office in Moscow. He talked to Ryan James Tutak, associate editor of just-auto.com for Eastern Europe and former Soviet Union. An edited transcript of the conversation follows.

Ford & Russia in the 20th century Four years after constructing its first vehicle in 1903, Ford Motor Co appointed an agent in Moscow to sell Model T. The automobile became renowned quickly for an ability to cope with the country’s rugged terrain, even featuring in military-transport trials performed in the presence of Tsar Nicholas II in 1914. At the time, 21 Russian princes reportedly owned a Ford. Early Ford ad in Russia After the 1917 Revolution, Ford continued business in Russia, delivering 400 cars to Ivan Stacheeff & Co of St Petersburg in 1919. By 1926, Ford had sold over 25,000 Fordson tractors to the country (then the Soviet Union). GlobalData Strategic Intelligence US Tariffs are shifting - will you react or anticipate? Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis. By GlobalData Learn more about Strategic Intelligence In 1929, Ford undertook its biggest project there: erecting the country’s first plant to mass-produce passenger vehicles – at the behest of Josef Stalin. The factory, built 400km east of Moscow in Nizhny Novgorod (a city re-named Gorky 1932-1991), became OAO Gorkovsky Avtomobilny Zavod (Gorky Auto Factory or GAZ), now the second-biggest automaker in the ex-USSR. The plant opened in 1932, making Ford Model A cars and Model AA trucks under a GAZ badge for 10 years. [As preliminary steps, assembly of A and AA (branded as Ford) started at factory Gudok Oktyabrya in Nizhny Novgorod and factory KIM in Moscow.] First Ford built in USSR Banner over car reads: “We are fulfilling the five-year plan with the first Soviet-made Ford” After World War II, Ford explored manufacturing opportunities in the Communist empire, contemplating car production in the 1960s and truck production in the 1970s. In 1988, the company looked at assembling its luxury model Scorpio at GAZ, but no plans materialised. When the USSR dissolved in 1991, Ford resumed investigations, and it sought to serve demand in Russia from neighbouring Belarus with a plant opened in July 1997 to assemble Escort cars and Transit vans. The site, partly owned by the Belarusian state headed by autocrat Alyaksandr Lukashenka, never generated feasible volumes however. It was plagued by red tape in customs-clearing and transporting vehicles over the Belarus border to Russia. Meanwhile, demand in Russia failed to develop, due to the collapse of its economy in August 1998. The factory stopped production in June 2000, and it was sold in July 2000 to plastics specialist Sanderson of the UK. Ford Output – Belarus 1997 1998 1999 2000 Escort 990 1150 194 40 Transit 163 697 240 320 TOTAL 1153 1847 434 360 SOURCE Ford Meanwhile, Ford was hatching its biggest-ever project for Russia, roughly 30km outside St Petersburg in Vsevolozhsk at an idle facility of defence-industry concern Russky Dizel. It was announced in early 1998 to be a $250m factory for 100,000 vehicles a year, including Escort and Transit. In reaction to the country’s financial crisis, Ford abridged plans in March 1999 to a $150m plant that would start by making only Focus cars. (Annual capacity, initially 25,000, could expand without major investment to 100,000.) The facility would weld, paint and assemble vehicles out of kits supplied from Ford operations in Cologne, Germany. Investment is on schedule, and the plant should be ready by third-quarter 2001. But the launch of serial output, officially set for second-quarter 2001, could be delayed until fourth-quarter 2001 or even second-quarter 2002, depending on the pace of Russia’s economic turnaround. The production target is 10,000-15,000 the first full year of operation, but some observers estimated volumes may reach only 5,000-6,000 in 2002 and 9,000-10,000 in 2003. After considering alliances with automakers from Russia (including GAZ), Ford chose to open a plant there with no links to local producers. This strategy, unique among foreign players aiming to build cars there, looks increasingly wise, given dramatic upheavals in the domestic industry last year. Big changes in ownership at GAZ and AOOT Ulyanovsky Avtomobilny Zavod (UAZ) likely will affect each company’s strategy. The country’s largest producer, Lada-maker AO AvtoVAZ, also may face takeover threats. Consequently, major ventures of Fiat Auto SpA (existing with GAZ) and General Motors Corp (planned with AvtoVAZ) suffer uncertainties.

just-auto.com:
How are plans developing?

Batty:
In March 1999, Ford’s board of directors approved the project with the aim to ready the plant in mid-2001. This will happen. We are completely on time. The building was acquired, it is refurbished, its surroundings are landscaped, and offices are finished. In October 2000, we began installing machinery. Our planned investment of $150m is fully allocated. All agreements with federal and local governments and utilities are on track. Difficulties remain because a project of this size is never simple, but overall plans are progressing well. This is a great satisfaction. If we want, we will be ready to produce cars in mid-2001.

just-auto.com:
But will you want to launch production in mid-2001?

Batty:
Before hiring the workforce, we will want to know: will the demand be back? We believe the answer is ‘yes.’ Though the recovery is slower than forecast last year, we still expect the market to reach pre-crisis levels in 2002-2003.

just-auto.com:
How many workers will you need to start?

Batty:
Based on plans to make 10,000-15,000 cars a year initially, we would hire 300-400.

just-auto.com:
How many people are already hired?

Batty:
116 in two locations – the office in Moscow and the plant in Vsevolozhsk. New personnel at the factory include manufacturing managers plus staff in accounting and human resources. Floor workers will be added later – we are finalising the number now.

just-auto.com:
What demographics can you disclose about your team?

Batty:
The average age is 30. 63% are male, 37% are female.

just-auto.com:
Is attracting talent hard?

Batty:
No. We aim to be the employer of choice in Russia, and we offer salaries and wages that are highly competitive here. We provide everyone with comprehensive training, and we offer transportation to employees between St Petersburg and the plant, since our operations are not in the city.

Batty:
We are putting in the paint shop, a complex process. Then we must prepare the body shop and assembly line.

just-auto.com:
Will you build all versions of Focus?

Batty:
We will make all body types – 2-door hatchback, 4-door hatchback, sedan and station wagon. We will offer most trim levels too, except editions sold in limited volumes. It makes sense to import those completely built, due to intricacies of the kits, not to limitations of the factory’s capabilities. But, as demand matures, we could make them in Russia. Technically, we could produce every variation in Russia.

just-auto.com:
What will be the launch sequence of body types?

Batty:
There will be a sequence, but it is undecided. We face no constraints here, and spreads between introductions of body styles will not be long. In contrast to starting with high volumes tied to inflexible manufacturing processes, our philosophy is to begin with low volumes, while remaining highly flexible.

just-auto.com:
Where will the kits originate?

Batty:
Mainly from Germany. Some parts will come from France, Spain and the UK. In sourcing patterns, we should mirror the Focus plant in Germany, except certain components will derive from Russia with job one.

just-auto.com:
Will kits be completely-knocked down (CKD) or semi-knocked down (SKD)?

Ford Focus

Batty:

CKD. The plant will have a body shop, welding shop, paint shop and assembly
shop. We agreed this with the Russian government, and our project falls under
Decree 135 of former President Boris Yeltsin. This measure grants fiscal advantages
to foreign ventures meeting two conditions: investment of 1.5bn roubles (roughly
$250m when the decree was issued in February 1998, $50m now); and localisation
of 50% of the value of production within five years of launching output. We
easily meet the first requirement with $150m, and we fully plan to achieve the
second provision on time.

just-auto.com:

What local suppliers have been appointed?

Batty:
I cannot name any because no negotiations have been finalised. But our local purchases should include airbag-deactivation switches, rear package trays, rubber mats, seat belts, seat components, seat fabric, tyres and wiring. Plus we expect to buy some small stampings from Russia. We feel confident about these items, and they would put us beyond our obligations under the decree for our first year of operation. In general, we should be in good shape for our localisation objectives.

Sketch of Ford plant in Vsevolozhsk

just-auto.com:

What is your localisation schedule?

Batty:
The decree calls for Russian content of: 10% the first year; 15% the second year; 20% the third year; 30% the fourth year; and 50% the fifth year. We have a plan to reach this, and we are ahead of our targets.

just-auto.com:
Could suppliers in Russia export to Focus plants elsewhere?

Batty:
We initially planned for suppliers in Russia to deliver only to our plant here. But Focus is a global model, and our parts bought in Russia must meet our quality and reliability standards worldwide, so we are considering sourcing components from Russia for our factories elsewhere. This should boost our content goals for Focus in Vsevolozhsk, as prospects for higher production volumes should be an attractive inducement for suppliers here. Qualified parts makers in Russia could contribute to Ford’s broader competitiveness targets for Europe too.

just-auto.com:

Are cost advantages of Russian suppliers significant?

Batty:
Russia is gifted in many ways. It is rich in natural resources and raw materials like aluminium, nickel, platinum and steel. An abundance of skilled labour is relatively cheap, and a variety of basic costs are low. All of this is important, but suppliers will need to work hard to meet our quality standards.

Batty:
We once thought this, but we now anticipate a better balance with indigenous manufacturers.

just-auto.com:
So you see a bigger role for Russian firms. But, increasingly, automakers expect a supplier of a part for a model to be the component’s single source for production of the vehicle worldwide. Focus essentially is built this way. Can Russian companies hope to deliver parts to Focus plants served under global contracts with non-Russian suppliers?

Inside of Ford’s plant in preparation

Batty:

I regard this question from a slightly different perspective. More and more
suppliers are global. So, when we choose to make a vehicle in another location,
the model’s suppliers usually follow us there. When we decided to invest in
Russia, we consulted our largest suppliers. Most of them looked at Russia with
anxiety and doubts, as we first did. They may have been waiting to see if we
were serious about Russia. But developments now are changing their views: they
see we have a plant, the market is recovering, and other automakers want to
produce vehicles here. So some suppliers already are here. Others are considering
investments – or finalising investments. Our suppliers will look increasingly
at opportunities in Russia. Part of the responsibility of global suppliers is
to support global automakers. Of course, the simplest parts will be localised
first, and the components that I noted earlier are relatively easy to produce.
High-tech and sophisticated pieces will take more time to source here.

just-auto.com:
Is Ford still working to co-source parts in Russia with others looking to build cars here – Fiat Auto SpA, General Motors Corp, Renault SA, etc?

Batty:
In sourcing components for car production in Russia, all foreign players confront a major obstacle: the initial volumes of their output is too low to interest most suppliers. So automakers see logic in cooperating to acquire parts – to increase volumes through combined purchasing. Obviously, design differences among models from each company rule out a lot. But basic parts like batteries and tyres are possible, and purchasing teams from each company are exchanging ideas, though nothing concrete has been agreed. Another difficulty: each project is on a separate timetable, and we are ahead of others. But foreign manufacturers share interests in commonising all parts feasible. Of course, items like dashboards always will be too specialised to co-source.

just-auto.com:
What is the expected price range for Focus from Vsevolozhsk?

Batty:
We always have said it will be $13,000-$15,000. This has not changed because our costs have not changed, and the project has not changed. But we may test these prices, before launching production.

just-auto.com:
Are the prices realistic in the current market?

Batty:
We are pricing Focus for the sector of imported models. Pre-crisis, Ford sold an average of 1,000 cars a month – 10,000-15,000 a year. When you build locally, you immediately enjoy a major price reduction by avoiding customs duties (30% in 2000, 25% in 2001). The more we use local parts, the more we save in purchasing – this will be progressive. If the pre-crisis market returns by 2002-2003, demand will be in line with our forecasts for production and prices… Anyway, our capacity is flexible. We will start with an ability to make 25,000 annually. We are not putting in place a burdensome capacity of 200,000 a year.

just-auto.com:
GM found Russians favoured imported Vectra over locally-assembled Vectra.

Batty:
I cannot speak for the marketing capabilities of others. But, before the crisis, our sales in Russia of Escort from Belarus totalled 400-500 a month. Escort sold for $13,500, so a market existed at that price, the price of Focus. Now customers can buy a new Focus at the cost of Escort. The only question: the timing of the market’s recovery. Is it six months from now? A year from now? We are not sure. But it will not be 10 years away or even two years away.

just-auto.com:
What will the market be in 2003?

Batty:
Our outlook may be conservative for growth in gross domestic product (GDP) in Russia for 2000. We forecast 3-4%, though a stronger performance is possible. Internal demand has expanded rapidly. Sales of durable goods like refrigerators and washing machines already have returned to pre-crisis levels. Cookers are selling even better. Sales last year rose 30% for computers, 20% for groceries. We monitor the trajectories of turnover for consumer goods because they often foretell emerging trends for cars… We see positive signs from the government too. Russia approved a new tax code that is good for business. Corporate turnover tax fell from 4% in 2000 to 1% in 2001, while individual income tax has been reduced from a range of 12%-30% last year to a flat rate of 13% for everyone this year. Terms for manufacturers to depreciate equipment have improved… So economic indicators and fiscal policies are looking favourable.

Specifically in the auto sector, demand for new cars and trucks in Russia hit 1.226m in 1997, eroding to 1.056m in 1998 and rebounding to 1.163m in 1999. Data for 2000 are not out yet, but we expect 1.194m, nearing the level of 1997… Among imported models in the C-segment of Focus, sales were 29,000 in 1997 and 1998 and 16,000 in 1999. We hope to see a recovery to 24,000 in 2000, and the volume for foreign marks in the Focus class could reach 180,000 in 2005, partly because several global players plan to assemble cars in Russia… The total market in 2005 could hit 1.338m, fuelled by newcomers, as local manufacturers already operate at full capacity.

just-auto.com:
Buying power of consumers remains limited here. Have you considered making a smaller vehicle – Fiesta not Focus?

Batty:
Our plan is Focus. Even if we would want to switch, we could not. A model change is highly complex. Plus Focus is in a model segment, C, comprising nearly 50% of demand among imported vehicles – and nearly 60% of demand among all vehicles. Fiesta is in a minor segment (sub-B) that may have generated sales of only 46,000 in 2000, under 5% of the estimated market. Larger vehicles like Lincolns also offer limited promise. Segments C/D and D/E together may have failed to capture 15% of all sales last year.

just-auto.com:
Volvo Car Corp is studying whether its cars could be built at your plant.

Batty:
Our plant is owned by Ford Motor Co, a parent of eight brands. The factory is not limited to building Ford-brand models. It could make any vehicles in the Ford family. The plant is highly adaptable and flexible. It could produce Volvo as well as Land Rover and Mazda, when the time is right. But a factory launch is a big undertaking, and the plan is to start only with Focus. Then we shall see.

just-auto.com:
How much property do you have for the factory?

Batty:
35 hectares of land. The plant space is 51,000 square metres, and we can expand its annual capacity from 25,000 to 100,000 under the same roof, simply by adding people and tools. The factory is as flexible as our operation in Taiwan, where we can assemble four different platforms on different lines; the paint shop is common, and it is complicated, but it is feasible. We work similarly in South Africa too. In Russia, we have space for more than one line. The current plan is Focus, but we do not exclude other models later, maybe Transit. But none of this is defined.

Outside of Ford’s plant in preparation

just-auto.com:
As Ford stopped output of Transit in Belarus for Russia, is assembly of this vehicle in Vsevolozhsk more likely now?

Batty:
Belarus made the old Transit. But we are considering Transit for our plant in Russia.

Ford Transit

just-auto.com:
I hear local manufacturers like AO AvtoVAZ are pressuring their suppliers not to support foreign automakers planning to build cars in Russia. Have you seen this?

Batty:
No. Frankly, we are exploring many prospects with many suppliers, and we are in contact with some from AvtoVAZ, though it is premature to say anything specific. We also have talked with GAZ (OAO Gorkovsky Avtomobilny Zavod), and we visited there in spring 2000. We discussed components synergies. The issues are complex, but I hope we start seeing results soon.

just-auto.com:
Ford has been important to GAZ in the past. Could GAZ become important to Ford in the future?

Batty:
GAZ could supply parts, if they meet our requirements for cost and quality.

just-auto.com:
What about your partner for the plant – ZAO Bankirsky Dom (Bankers House)?

Batty:
It is the most important financial institution in St Petersburg and the Leningrad Region. The bank complements our venture with expertise that we lack, such as knowledge about Russia and its financial system. When we negotiate, they come with us. They helped established our accounting and payroll systems. They can assist us in financing auto sales.

just-auto.com:
Bankirsky Dom has equity in the plant?

Batty:
They are important in many respects, but we have not disclosed the ownership structure of the factory, though I can state we have a controlling stake.

just-auto.com:
The plant is on premises owned by Russky Dizel?

Batty:
Russky Dizel is a Russian company that owns a number of facilities in the area. We bought one of its buildings not in use, and we lease the land from the government. Structurally, the facility meets all of our requirements, and it is near St Petersburg, a port open 12 months a year. The city also is the second-biggest market in Russia – and a good base for suppliers.

just-auto.com:
Did Ford look at establishing a venture with a Russian automaker before opting for a plant in St Petersburg without a local manufacturing partner?

Batty:
Yes. In two years, a team visited over 200 potential sites in Russia, but we decided to be on our own. We wanted to introduce our global management style and quality standards without needing to redo anything or retrain anyone. We wanted to start from scratch. We already have recruited 20 managers for the plant, all Russians 20-36 years old. All of our Russian engineers are highly qualified – and trained at our manufacturing sites in Germany, Spain and the UK.

just-auto.com:
Who are the expatriate executives?

Batty:
At the plant, general director is Murray Gilbert, an Australian with an abundance of experience. He launched a project like ours in Vietnam, and he has worked in the Philippines and Thailand. We are in good hands with him, and he already lives in St Petersburg. Finance director is Leonard Meany from Ireland. Purchasing director is Peter Tissington from Britain. Human resources director is Andrew Jackson from Britain. Plant construction director is Eric Muders from Germany… At the sales office in Moscow, general director is Henrik Nenzen from Sweden. Financial director is Jose Pando from Spain… Oksana Khartonuk, a Belarusian, is public affairs manager for the plant and sales office. I am French. So our team is quite diverse.

just-auto.com:
Renault soon plans to launch assembly of Clio Symbol at OAO Avtoframos, its venture with the city of Moscow. This is a budget sedan from Turkey, and Renault already sells it in Russia for $8,500. Could you face market pressure to counter with Ikon from Ford’s plant in India?

Batty:
This is a complex question, and I do not know much about final plans for Clio Symbol to be made in Russia. India is far away. Our strategy is to launch Focus successfully.

just-auto.com:
Do you worry foreign competitors could undercut you with cheaper models?

Batty:
There is always a worry. We must see. Any competitor must be taken seriously.

just-auto.com:
Could your sales operations include other brands in the Ford group?

Batty:
We have started with the Ford brand. Volvo is already established here. Mazda has been appointing dealers, and we are sharing our market knowledge with them. All of their outlets, maybe three to five, will be linked to Ford representatives. We can find synergies here. Jaguar is imported independently. Lincoln has no plans for Europe, and Land Rover joined the Ford family only recently.

just-auto.com:
Bayerische Motoren Werke AG has contracted out assembly of its vehicles to a factory in Kaliningrad owned by ZAO Avtotor. This has included Land Rover. Would Ford want to maintain output of Land Rover there?

Batty:
We do not plan to continue this.

just-auto.com:
What percent of Ford sales are in Moscow and St Petersburg?

Batty:
Roughly 70%. Our vehicles are expensive compared to local products, and buying power still is concentrated in the biggest cities.

just-auto.com:
How many dealers do you have?

Batty:
33 sites. Most offer sales, service and a showroom. We cover all big cities.

just-auto.com:
What is the company that you head – Ford International Business Development Inc (FIBD)?

Batty:
A representative office.

just-auto.com:
What will you do when the plant opens?

Batty:
I will remain Ford’s president for the former Soviet Union. I am in charge of all commercial and manufacturing operations, but we have general directors for the plant and sales office.

just-auto.com:
What is the plant’s name?

Batty:
Originally, it was Ford Vsevolozhsk ZAO. We changed it to Ford Motor Co ZAO.

just-auto.com:
What operations are in Moscow?

Batty:
FIBD plus the sales company Ford Motor Co LLC. My office will remain here. Over time, we will consolidate and simplify these structures. The current situation reflects our approach to Russia. First the sales company was established. Then executives came to work on the plant with no involvement in sales, so the representative office was created for them. We will merge all operations into one company as soon as we can.

just-auto.com:
Ford now handles business with Asian countries of the ex-USSR from Turkey?

Batty:
The former Soviet Union is vast, and Russia is intertwined with the CIS in many matters, including trade. Naturally, our office in Moscow plays an important role. But we are busy with the plant, so we asked Turkey to supervise sales in Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan… However, in government relations with these countries, the Moscow office takes the lead because we want to speak with one voice for the region. This also is true for Baltic markets, where our sales are handled by Ford in Finland for proximity reasons.

just-auto.com:
What support does Russia offer in return for your investment pledges?

Batty:
Under the decree, we are entitled to import kits duty-free for five years, and we will enjoy this privilege with the first vehicle that we make, even though we will not need to achieve local content of 50% in our production for five years. This is important.

just-auto.com:
It seems like a paltry concession from the government.

Batty:
You need to see why Ford is interested in Russia. This is a strategic investment. Russia has 150m people; the CIS has 285m. Russia is richly endowed with natural resources. Yet only 1m cars are built and sold here. In our view, Russia is too big ever to join the European Union. It will remain separate, part of a trading block like CIS. These are the essentials… Then, the questions for us are: Can we ignore Russia? If yes, how long? If no, how fast do we enter?… If you want my answers: we cannot ignore it, and we should invest in it. How fast? Well, when is the best time to buy a stock? When it is high or low?… We decided to enter Russia during the crisis, a time when demand is low, also a time when few investors were clamouring to enter, so we received a favourable reception from the federal government, and we now enjoy good support from local and regional authorities… By investing during the crisis, we could take our time in laying the foundations for our project, so we could be ready when the economy really starts to gain momentum, perhaps only a year from now.

just-auto.com:
Ultimately, how much could you localise? Engines and transmissions too?

Batty:
We should think about the powertrain, but this only starts to become feasible with a production volume of 50,000. When we could reach this level, I do not know, maybe in 2008-2010, though the market could turn around sooner… Ideally, we would like to localise 100%. But without the engine and transmission, we will not top 70%. We know we can get to 50% in five years. After that, it will be a question of our volumes.

just-auto.com:
Could you use raw material like steel from Russia?

Batty:
Ford has teams in Europe and the USA to purchase raw materials for our global needs. We may buy aluminium and steel from Russia, but this has no bearing on our plant here.

To read an interview about GM’s plans for Russia, please click here.

To view related reports in our Knowledge Store, please follow the links below:-

• Ford Strategic Review


• The automotive industry of central and eastern Europe

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