General Motors and AvtoVAZ, the maker of Lada vehicles, are close to an agreement to build an assembly plant in Russia. The plant would produce an off-road vehicle and a low-cost version of the Astra.
Meanwhile, two other GM projects in eastern Europe are on the verge of collapse, said David Herman, the former Opel chairman who moved to Moscow two years ago as GM's top executive in ex-Soviet bloc countries.
The board of directors at AvtoVAZ has tentatively approved the deal to build an updated version of the Lada Niva off-roader and the Astra at AvtoVAZ's complex in Togliatti, 900km southeast of Moscow.
Herman said he expects final approval for the Togliatti program from the GM board by the end of the year at the latest. It would be run as a 50-50 joint venture between GM and AvtoVAZ, with GM taking management control.
'The basic business proposal is something both sides feel is not going to change,' said Herman. 'It now rests in the hands of senior managers at GM.'
Joint-venture talks between GM and AvtoVAZ, Russia's biggest automaker, have been going on for the past decade. Negotiations were slowed by the Russian ruble crisis in 1998 and political changes in the country. But the partners began making progress several months ago when the talks turned to producing a cheap, modern vehicle engineered by AvtoVAZ.
An earlier plan, formulated two years ago, copied GM's strategy in other developing markets. The partners discussed producing the Astra at a volume of about 30,000 units a year.
The new plan is for AvtoVAZ to design an updated Niva priced at about $8,000. The low price is a key to its success in Russia, where only 3 percent of all vehicles sold cost more than $10,000, Herman said.
The new Niva would get a modern body, a new permanent four-wheel-drive system, updated suspension and other new components. But about 70 percent of the parts would be carried over from the existing Niva, which debuted in 1976.
'This is the first time we are going to an emerging market and someone with engineering capability is offering us a vehicle that gets to the heart of the market,' said Herman. 'Originally we were looking for the same thing everyone else was - bring [one of our cars] to produce, build a factory and be happy. Of late, experiences have shown that this is not a good philosophy.'
The joint venture will produce 75,000 Nivas and 15,000 Astras a year at a new factory at Togliatti that could be completed within two years.
Herman said his team has also found ways to cut Astra production costs at AvtoVAZ so the car can be priced at about $10,000. He said that is the maximum for a volume vehicle selling in Russia.
'We spent two years going through every piece in the car and knew we could not change the sourcing of engines or transmissioons,' said Herman.
The AvtoVAZ joint venture would become GM's major project in the region since two other deals have fallen apart. Yelaz GM Corp., set up with the manufacturer Yelaz in the Republic of Tatarstan to make the Chevrolet Blazer sport-utility, is no longer building vehicles.
Production started in late December 1996 and virtually ceased after the ruble crisis. Production finally came to a stop 10 months ago. The partners are trying to sell the remaining 600 units. Herman said GM would decide by early 2001 whether to resume production or shut down the program.
With the likely purchase of Daewoo by Ford Motor Co., GM will also dissolve its partnership with Ukrainian automaker AvtoZAZ.
Daewoo acquired AvtoZAZ in 1998, but agreed to build 15,000 Astras a year for GM. That deal was never finalized because the Ukraine's economy also took a downturn when the ruble collapsed.
'If Ford buys Daewoo, what role could there be for us?' said Herman. 'There is no reason to go on with a company owned by a competitor.'