Nearly a decade after the collapse of the Soviet Union, Russia's car industry remains in deep trouble.
Neighboring countries such as Poland, the Czech Republic and Romania have seen their ailing former communist carmakers bailed out by Western or Asian manufacturers. But Russia's biggest automakers have, with one or two exceptions, struggled to stay afloat.
On paper, the situation does not look so bad. The No. 2 and No. 3 automakers, GAZ and AZLK Moskvich, both announced tie-ups with Western automakers last year - GAZ with Fiat, and Moskvich with Renault. AvtoVAZ, the dominant player with an 80 percent market share, built 673,000 autos in 1997, and seemed on the brink of signing a major partnership deal with General Motors.
But this year the market has taken a turn for the worse. Russia's financial turmoil prompted Ford to abandon plans to build a $250 million assembly line for Transit vans and the Escort near St. Petersburg.
The project, to build about 25,000 vehicles annually, 'doesn't feel right, right now,' said Ford Chairman Alex Trotman. Ford said the project might be revived in the future.
Hardest hit by the slump has been AvtoVAZ, which builds Lada cars. The market for Ladas has all but collapsed. AvtoVAZ has slashed its output target for 1998 by 125,000 units to 623,000. Production of the Euro-Samara model, an upgraded export version of the 12-year-old hatchback design, at Valmet Automotive in Uusikaupunki, Finland, has been stopped because sales in western Europe have collapsed.
Last month AvtoVAZ had an estimated 47,000 unsold cars at its Togliatti plant. AvtoVAZ Vice President Nikolai Lyachenkov said the drop in demand is because the cars' main buyers, people living on a salary, are worried about the country's economy and prefer to save their money in foreign currency than make large purchases.
But analysts believe the problem stems from poor product quality. One in four new Lada cars was found to be defective by a commission of Samara region inspectors last year.
Meanwhile, better-quality Korean models, produced by a number of kit assembly operations in Russia, are gradually edging into AvtoVAZ's traditional stronghold at the lower end of the market.
The federal agencies working with AvtoVAZ have recommended that it reduce the prices of its cars and streamline its archaic dealership network. AvtoVAZ's best hope remains General Motors, which has been in complex negotiations with AvtoVAZ for many months. The two sides initially discussed a new plant at Vyborg, near the Finnish border, but now talks are centered around establishing Astra production at Togliatti.
The role model for the turnaround of a Russian automaker is GAZ. The Nizhni Novgorod-based company was worse off than AvtoVAZ after the demise of the Soviet Union because it built the Volga large sedan, a vehicle favored by Communist Party apparatchiks. Since then, however, GAZ President Nikolai Pugin, former head of the Soviet auto industry ministry, has turned GAZ into a success story.
Concentration on the light truck market with the relatively new Gazelle vehicle saved the company, and an openness to foreign investment has led to several cash infusions from the European Bank for Reconstruction and Development.
Last year GAZ landed a major deal with Italy's Fiat. The $850 million Nizhegorod Motors joint venture will produce about 150,000 Fiat Siena, Palio Weekend and Marea cars annually.
The EBRD has a 20 percent stake in the joint venture, the first major foreign direct investment in the manufacturing industry in Russia. Production will start later this year, initially from complete knockdown kits but with local content gradually increasing.
The EBRD is also considering financial backing for GAZ's latest self-developed car, the 3111. GAZ wants to make 100,000 of the Volga replacement cars by 2000. The project would cost an estimated $1 billion.
The EBRD said GAZ was the only Russian industrial operation it was prepared to support without financial guarantees from the government.
Even AvtoVAZ's traditional volume-car rival in the Soviet era, Moskvich, has pulled off a partnership deal. Moskvich sales also collapsed in the 1990s.
Following bankruptcy in 1996, the plant was rescued by the Moscow city government, which assumed responsibility for its $300 million debts in exchange for a 60 percent stake.
The Moscow authorities took control of truck and limousine maker ZIL at the same time.
Moskvich late last year signed a $350 million agreement on a joint venture to make Renault Megane Classic four-door sedans starting next year.
The joint venture will be owned 50-50 by Renault and the Moscow city government. Assembly of Megane Classic from CKD kits is due to start by the end of this year with the aim of reaching the 120,000 target by 2000. Production of the Megane from Russian-made parts will start within two years.
The plant will start assembling a second Renault vehicle in 2002. Moskvich has produced 10,000 cars so far this year, 40 percent of which remain unsold.
Last year the plant made only 3,000 cars despite a capacity of 160,000 vehicles.