GENERAL MOTORS ANDAVTOVAZ IN RUSSIA

Presented By: Nirakar and Prateekshya

Group Members:

Archana, Biswash, Kaushal, Nirakar, Prateekshya, Rubina, Suraj

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 Inadequate capital, poor infrastructure, and deep-seated mismanagement and corruption resulted in outdated, unsafe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

Russia’s 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 1999

Price Range Segment

Cumulative

Segment

Cumulative

Below $5,000 3% 3% 85% 85%

$5,001-$10,000 65% 68% 12% 97%

$10,001-$15,000 15% 83% 1% 98%

Above $15,000 17% 100% 2% 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 a 4-wheel drive sport utility

vehicle “Lada Niva II” Target price $7500 Plant capacity 90,000 cars Russian-engineered

JV Investment

First Stage Benefit for GM

Avoid 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 the Opel-based car: Opel T3000

Investment reduced to $100m Export 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 Fiat’s 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-the-act 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

AvtoVAZ Expected GM to develop and support organization

structure Ensure technology transfer to JV

Demanded increase the price for Niva parts by 25% Turned down

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

February 6, 2001: GM Board approved Herman to pursue and complete

JV negotiation From June

GM Russia: David Herman and Heidi McCormak AvtoVAZ: Vladimir Kadannikov and Alexei Nikolaev

JV: GM and AvtoVAZ

From further reading: The Joint Venture between GM and AvtoVAZ

was successful.

Cultural Differences

  America Russia

Authority Diffused from people, flows up Centralized, flows down

Change From below, individual Imposed from above, society

Rights Celebrated, protected Subordinated for communal good

Diverse Views Tolerance, pluralism Consensus, single truth

Economy Private free market Government-centered

Cultural roots Western Europe Europe, Asia

WarfareWars fought mostly abroad

Little/No devastationConstant cruelties, warsDevastation, hardships

Effect of Cultural Differences Americans:

Complex situation Negotiation: break down into sub-points

For their own benefit Slow down the process

Thank You!