GENERAL MOTORS AND AVTOVAZ IN RUSSIA

Group Members: Archana, Biswash, Kaushal, Nirakar, Prateekshya, Rubina, Suraj

Presented By: Nirakar and Prateekshya

Case Overview

Establishing a Joint venture negotiation between General Motor Corp. and AvtoVAZ according to the MOU signed in March 3, 1999. David Herman, President of GM for Russia, is setting for all the negotiation process as per instructed from GM headquarter.

Russia: Opportunities & Challenges

Russian market account a large market share over the next decade.
Every

automobile industry is focusing towards

there. Low cost of material and labor

Russia: Opportunities & Challenges

The main challenges were:

Weak

and uncertainty of economy Confusion of tax and government laws. Takes more working hour from manufacturing point of view. Lack of consensus about different parts of GM to Russian JV company.

General Motors Corporation

Founded in 1908 Largest automobile manufacturer in the world

13.6%

of global market share.

Very good technological know-how and sufficient investment capacity. International operations divided into several segments according to the different geographic regions.

Russian Automobile Industry

The Russian auto industry lagged far behind that of the Western European, North American, or Japanese industries. Inadequate capital, poor infrastructure, and deep-seated mismanagement and corruption resulted in outdated, unsafe and unreliable automobiles

AvtoVAZ

Russias struggling largest automobile industry

Capacity

of 750,000 vehicles per year

Headquartered in Togliatti

Original manufacturing facility

Built

in the late 1960s JV with Fiat of Italy

Employed more than 250,000 people Average salary: $333 per month

AvtoVAZ

Unclear ownership Depended on variety of suppliers for components Most of the dealership owned by AvtoVAZ management Suffered from tax problems
Charged

with tax evasion which was later thrown

out Gave tax authorities the right to 50% plus one share of AvtoVAZ

International Activity

Increase of weak currencies from country to country and imposition of new import duties

AvtoVAZ was losing sales.

1991-1999: export percentage decreased from 60%-7% gradually

Russian Market

1998 - Financial Crisis in Russia

Price - an important factor Vehicle with fewer features Greater price advantage required

Russian Auto Market Share by Price

1998 Price Range Below $5,000 Segment 3% Cumulative 3% Segment 85% 1999 Cumulative 85%

$5,001-$10,000
$10,001-$15,000 Above $15,000

65%
15% 17%

68%
83% 100%

12%
1% 2%

97%
98% 100%

Marketing Research GM

Russians did not want to buy cars reassembled by Russians Russians pay additional $1000-$1500 for a Chevrolet label or badge Proposal 2 stage JV investment with AvtoVAZ
Reach

price targets and position the firm for expected market growth

JV Investment

First Stage
Co-produce
Target

a 4-wheel drive sport utility vehicle Lada Niva II

price $7500 Plant capacity 90,000 cars Russian-engineered

JV Investment

First Stage
Benefit
Avoid

for GM

development costs Issues of local content compliance

Benefit

for AvtoVAZ

Suppliers

Get paid on time Receive technical support Receive advances for new tools

JV Investment

Second Stage
Construction

of a new factory Opel AG: pre-engineering starting point Car

Cheaper
Noisy

and rough

Acceptable
Engineering

adjustment Better materials

Without GM, AvtoVAZ would probably take 5 years to get Niva II to market; with GM the time could be cut in half

JV: Debate

Market Strategy Scope Timing Financing Structure

Market Strategy

Debate were based on 2 points:

Afford
Export

the Opel-based car: Opel T3000

reduced to $100m

Investment

sales:

Export

market development Export of one-third of all Chevrolet Nivas produced

Market Strategy

March 2000
GM

announced an alliance with Fiat GM acquired 20% of Fiats automotive business

Paid

2.4 billion Fiat owned 5.1% of GM

Timing

In 1999,
AvtoVAZ - Opel Astras and Chevrolet Niva GM - postpone Chevrolet Niva to launch until 2004

Both the sides agreed to launch on tentative 2003 launch date

Financing

May 2000: Herman proposed 250m investment

GM

would not risk more than 100m

European Bank for Reconstruction and Development (EBRD)

Provide

debt and equity Lend $93m to venture Invest $40m for an equity stake of 17%

Financing

Proposal of an investment of $332m

GM

management: insufficient to build state-of-theact manufacturing facility AvtoVAZ: believed to be sufficient to launch new Niva

Financing

Planned facility
a

car body paint shop assembly facilities testing areas

AvtoVAZ would supply the JV

car

body engine and transmission chassis units interior components electrical system

Structure

GM

Management control of JV Minimize the number of expatriate managers

Expected GM to develop and support organization structure

AvtoVAZ

Ensure technology transfer to JV Turned down

Demanded increase the price for Niva parts by 25%

Unclear Issues:

Compensation to GM for technology transfer to Russia Control of JV documentation

Progress

Frustrated with negotiations

AvtoVAZ decided to sell prototypes of New Niva GM- adamant and disagreed on its entry to market
GM Board approved Herman to pursue and complete JV negotiation GM Russia: David Herman and Heidi McCormak AvtoVAZ: Vladimir Kadannikov and Alexei Nikolaev

February 6, 2001:

From June

JV: GM and AvtoVAZ

From further reading:

The

Joint Venture between GM and AvtoVAZ was successful.

Cultural Differences
America
Authority Change Rights Diverse Views Economy Cultural roots Warfare
Diffused from people, flows up From below, individual

Russia
Centralized, flows down Imposed from above, society

Celebrated, protected
Tolerance, pluralism

Subordinated for communal good

Consensus, single truth

Private free market

Western Europe Wars fought mostly abroad Little/No devastation

Government-centered
Europe, Asia Constant cruelties, wars Devastation, hardships

Effect of Cultural Differences

Americans:
Complex
For

situation
break down into sub-points

Negotiation:

their own benefit

down the process

Slow