Interesting Article in the Moscow Times

[Marika]

St. Pete Touts Itself as a Detroit in the Making

By Anna Smolchenko

Staff Writer

Sergei Grachev / MT

ST. PETERSBURG -- As the world's car giants line up to show their wares to the country's driving public at the Moscow Auto Show opening Wednesday, it is St. Petersburg that has been making the running -- attracting General Motors, Nissan and Toyota to set up shop in the city.

Governor Valentina Matviyenko's administration has been eagerly touting the city as a Russian Detroit in the making, and foreign car executives have returned the compliment, singing the praises of the city and its leadership.

"You need to walk like you talk at every step, and Governor Valentina Matviyenko's team walks like it talks," General Motors executive Warren Browne said at the city's recent international economic forum. "A positive, pro-business, get-the-job-done kind of attitude" was the main reason GM chose St. Petersburg, President Vladimir Putin's hometown, for its new assembly plant, Browne said.

Other executives joined the love-in, with Nissan executive vice president Carlos Tavares saying Matviyenko's administration had "a very supportive mindset," while Ichiro Chiba, head of Toyota in Russia, hailed its professionalism.

As well as showing off their new models at the Moscow Auto Show, which runs until Sept. 10 at the Krokus Expo center, foreign carmakers will also be touting their plans for new assembly plants in St. Petersburg.

Yet amid the fanfare -- and despite the city's attractive location, near West European and Scandinavian markets -- automotive experts say the companies are taking a huge leap of faith, given the lack of good-quality infrastructure and suppliers here, not to mention a shortage of skilled car workers.

"There is a serious infrastructure deficit at the moment in the Moscow and St. Petersburg areas," said Maxine Elkin, editor of Automotive Logistics, a London-based industry magazine.

"As Toyota and GM start planning their production start-up phase, they will face a hurdle in supplying their plants and moving their vehicles," Elkin said by e-mail. "There is also criticism that the government's plans to address this issue are not progressing fast enough."

Elkin recently visited St. Petersburg, where her magazine organized an industry conference attended by some 120 representatives of carmakers, suppliers and logistics companies.

Among the sticking points highlighted by conference participants were the limited capacity of the city's port and delays for car-carrying vessels and in customs clearance, she said. As a result, much of the cargo that might otherwise come directly into the port comes overland via Finland instead, Elkin said.

"With the inevitable increase in [auto industry-related] demand, the local infrastructure needs to improve drastically and quickly," Elkin said.

Carl-Peter Forster, president of GM's operations in Europe, said the infrastructure crunch was "sort of a challenge" at a groundbreaking ceremony for GM's St. Petersburg assembly plant in June. The carmaker, which picked the city over 11 other possible locations around Russia, will continue talks with authorities about improving rail connections, among other things, Forster said.

GM and Toyota are planning to build assembly plants in Shushary, a suburb near the city, while Nissan's plant is to be built in another suburb, Kamenka.

GM's Shushary plant is expected to begin producing automobiles in late 2008. The $115 million plant will initially produce 25,000 Chevrolet Captiva sport utility vehicles per year and will later begin producing a next-generation compact car.

Nissan plans to start building a $200 million plant next spring and produce its first cars in 2009.

Toyota's plant will produce its first 20,000 Camry models next year and hopes eventually to increase output to 200,000 units per year, Chiba said in a recent interview.

Chiba, who in the past decade has worked in India, Poland and the Czech Republic, said Russian roads in many aspects compared favorably with those he had seen elsewhere, and that he was hopeful that local infrastructure would improve before long.

"It is naive to think that the present port facilities are enough ... but I personally think that an influx of various companies will synchronize with the city's industrial base," Chiba said.

But the paucity of good Russian car parts suppliers is a serious hurdle.

"You can count them on the fingers of one hand," said Carl Watt, who oversees a program by the World Bank's International Finance Corporation to help Russian firms produce better car parts.

The program began in 2002, the year Ford started production at its plant in Vsevolozhsk, also in the Leningrad region. Ford set up shop under the condition that by 2007, 50 percent of its parts would be produced in the country. In return, the cars Ford assembled in Vsevolozhsk were exempted from customs duties.

This year, Ford was mired for months in a dispute over local content with the Economic Development and Trade Ministry, which withdrew the duty-free status from Ford's Focus models. The ministry said Ford was in breach of its contract, according to which the carmaker was required to have 40 percent of its parts made in Russia this year.

Although the law allows Ford to count costs such as employees' salaries toward local content, the carmaker says it has struggled to meet its percentage targets due to shortages of quality Russian-made parts.

"It's been very difficult for them," Watt said of Ford.

Other firms, including GM and Toyota, have secured better deals that allow them to gradually increase the share of domestically produced parts to 30 percent within 4 1/2 years of starting production.

Late last month, Ford managed to strike a new deal giving it similar conditions to other foreign carmakers. The ministry said July 31 that it had upgraded Ford's legal status and that 40 percent of Ford's car parts by value were now locally made. This means Ford will not have to pay the import duty.

The ministry said Ford would invest another $250 million into Russia, allowing the company to boost output of its Focus sedan to 100,000 units per year, from 60,000 currently, and increase its payroll to 3,500 employees. Ford will also start assembling Mondeo sedans and Maverick SUVs, with respective production targets of 30,000 and 20,000 per year, the ministry said.

Yekaterina Kulinenko, a spokeswoman for Ford in Russia, confirmed the change of legal status, but said Ford had no current plans to increase investment or add new models to its current lineup.

While some foreign parts suppliers are already in Russia or have recently indicated they will come here, many still need to be persuaded to set up shop here, analysts and carmakers say.

"We'll go step by step," Nissan's Tavares said in an interview, adding that the growing number of carmakers moving in would help. "Now there are four of us. The critical mass is there."

But some experts were skeptical about the city's prospects.

"It would be nice to think that it's a new Detroit, but the production volumes are not large enough and the arrival of suppliers remains in doubt," said Yevgeny Pogrebnyak, head of research at the Moscow-based Institute for Complex Strategic Studies.

Most domestic parts producers have their factories in clusters in central Russia.

To encourage more parts suppliers to come here, the government plans to introduce new incentives by year's end, a spokesman for the Industry and Energy Ministry said.

The fate of foreign carmakers' operations in St. Petersburg -- as elsewhere in the country -- largely hinges on the skills of the workforce, and hiring and training is already in full swing. But as city officials are wooing more companies to the area with tax breaks and other incentives, carmakers may soon find themselves wrestling with a shortage of qualified personnel, analysts said.

Over the past few years, major companies including Russky Standart, Pepsi and Bosch have either built or are building their plants in the city.

"We are experiencing a deficit of qualified workers," Alexei Zelentsov, Kelly Services director for the Northwest Federal District, said during a recent presentation designed to tout St. Petersburg as an investment destination.

Officials say they are aware of the city's weak points.

Mikhail Oseyevsky, a St. Petersburg vice governor, said at the same presentation that red tape and corruption were a problem, but that the city would do its best to root them out.

"The main problem is productivity," Vladimir Blank, a senior St. Petersburg economic official, said at the presentation. But, he added, the city is doing its best to meet investors' expectations.

The city has been bidding for money from the state investment fund to finance infrastructure projects and is seeing a range of large companies moving their tax addresses to the city. Last year, St. Petersburg pocketed $1.4 billion in foreign investments, a 44 percent jump from the year before. The city is spending $1.3 billion this year and $1.5 billion next year on infrastructure, Blank said.

The city is hoping that the investment will pay off in the long run, sucking in more taxes, jobs and expertise, Blank said.

A colleague of Blank's, Maxim Sokolov, used a more poetic phrase to express the hopes of city officials and carmakers.

"There is a time to throw stones and a time to gather stones together," he said.

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