Why GAZ Is Pinning Its Hopes on Opel

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GAZ and Magna have adapted the Sebring—making the car rounder and higher, because of potholes on Russian streets. They've also outfitted it with better rust protection. Only one problem remains: nobody wants to buy it. Production started in July 2008 and now car number 2,439 is rolling off the assembly line. The factory, though, is actually capable of churning out 150,000 cars a year—60 times what they have achieved thus far.

The engineers and managers at GAZ have mastered a leap in quality that only few believed was possible. But even they couldn't shake the chronic illness of the Soviet-communist economy: they have remained blind to the desires of their customers.

As a result, they came up with a car they dubbed the Volga Siber. The name combination of Volga, the repair-prone GAZ classic, and Sebring, an unknown American car, put off customers. Russians don't want the discontinued models of the West—instead they want budget-priced brands associated with quality.

During the debate about the name, Oleg Deripaska, notorious for his lone decision-making, reportedly had the last word. This significant model policy failure is fueling doubts about whether GAZ is the right partner for Opel.

Even in Moscow's government circles, people are discussing whether the GAZ managers are possibly following a fundamentally flawed strategy: They are using all their resources to pump life into the production of personal automobiles, a weak point for the company, but they are running the risk of neglecting their strength—the production of vans and light trucks. Since the mid-90s, the "Gazelle" has been the company's bestseller. The line of minibuses and pick-up trucks has reached a 58 percent market share in Russia. The quality is passable and the €8,000 price unbeatable.

Unbroken Optimism

Recently, however, GAZ lost a bid to manufacture ambulances for the Russian Ministry of Health to a joint venture between Fiat and the Russian manufacturer Sollers. It was a warning shot. The outdated GAZ bestseller urgently needs to be modernized. On top of that, the £50 million (€59 million) purchase of the British lorry company LDV ended in disaster. The company is now insolvent.

The Gazelle and the other GAZ vans and light trucks "aren't suffering losses during the crisis—we have had to reduce our production from the peak value of 15,000 vehicles a month in 2007, a boom year, to 5,000," says one manager. At the assembly shop in Nizhny Novgorod, there is only one shift still working—and then only three or four days a week. GAZ has just announced 5,000 more lay-offs to the employment office. The company's acting human resources director hanged himself in December in an office bathroom. "Because he couldn't bear the pressure," the newspapers wrote.

Nevertheless, Slepushkin's optimism is unbroken. He believes in Opel, even if the deal is not at all secure: The Germans are still flirting with interested parties in China. And Sberbank head German Gref suddenly predicted publicly that the Opel would also be a good partner for AvtoVAZ, a GAZ competitor, located in the southern Russian city of Tolyatti.

The GAZ directors hope that the market will rebound. In the first half of last year, Russia overtook Germany as the strongest auto sales country in Europe. The accumulated demand is huge in the massive country. In Russia, there are just over 200 cars per 1,000 people—in Germany, it is over 550. Experts are confident that the country will have sales of over 5 million automobiles in the year 2020.

If that is the case, GAZ might be able to succeed at accomplishing what is promised by a slogan posted at the exit of its headquarters—"a breakthrough in the Fatherland's automobile industry." With Opel's help, the failure of the Volga Siber could still turn into a fresh start.

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