Autos fuel revolution in Russian plant

VSEVOLOZHSK, RUSSIA — VSEVOLOZHSK, Russia -- For Gennady Vovoyev, the best thing about working in Russia's first auto factory built, owned and operated by a foreign company isn't the salary and benefits.

For the 26-year-old welder, the best thing is the feeling that he is accomplishing something.


At the Ford Motor Co. plant in this wooded village north of St. Petersburg, workers don't head out for a smoke whenever they feel like it. They don't habitually show up late, leave early or moonlight during working hours. Nor do they make cars that are likely to break down after a few hundred kilometers.

The factory is one of a growing number of oases in the previously chaotic world of Russian industry.


"The work is more disciplined," he said. "That is why it is better. Because you know who is responsible for what. And you know whom to apply to with questions. It is much better than when you work where everything is bedlam and nobody knows what he is doing."

Russia has enjoyed a four-year economic boom, fueled largely by high oil prices. But now, deeper changes are finally taking place in the nation's struggling economy. A revolution is sweeping Russia's rust belt, long regarded as doomed to extinction.

Those changes are being spurred by economic competition from abroad. But they are percolating down to production lines in former Soviet factories, which have been faced with a stark choice: adapt or die.

This is a tale of two automobile factories -- Ford's new one near St. Petersburg and the Russian-owned GAZ factory in the industrial city of Nizhny Novgorod, 240 miles east of Moscow.

Both were built by the Ford Motor Co., 70 years apart. Both produce passenger cars aimed at middle-income Russian consumers. Both hope to tap what could become an enormous new market. But the St. Petersburg plant is leading a revolution in the Russian auto industry, while the GAZ factory is struggling to compete.

At its new plant, Ford has gone to extraordinary lengths to ensure a clean break with the past.

It refuses to hire anyone who has previously worked in a Russian automobile plant. It trained all of the top Russian managers at a factory in Spain. And it focuses relentlessly on workplace discipline and quality control.

Since it opened in July 2002, the Vsevolozhsk factory has been swamped with orders. Ford had expected to build 13,050 cars here last year. Instead, it churned out almost 16,000. It sold about 6,300 of the vehicles in just the first three months of this year -- double that for the same period last year. Buyers must wait months to get their cars.


Every day, Vovoyev walks past the barbed wire surrounding a parking lot filled with the snub-nosed Ford Focuses and into the airy, spotless new factory.

The work isn't challenging, says the welder, who smokes Marlboros and keeps his hands plugged into a worn leather jacket. Neither is the salary much higher than at a Russian factory. He earns just $281 a month -- about one-sixteenth of what his counterpart makes in an American plant, according to United Auto Workers data.

But he also has an apartment, two cars, a wife and a 3-year-old daughter. Ford offers decent benefits, including health insurance and the chance to advance. He has a job with a future, in a country that has sometimes seemed trapped in its tragic past.

Painful changes

As they move into the free market, Russian workers face painful changes. During the post-Soviet period, people remained on payrolls for years even when there was little for them to do and nothing to pay them with. Now, wages are rising and new factories are opening up. But about one in 12 Russian workers is unemployed. And the guarantees of the past are crumbling.

Economists say this pain is necessary if Russia wants to become part of the world economy.


"Some sort of restructuring is taking place," said Yevgeny Gavrilenkov, chief economist with the investment bankers Troika Dialog in Moscow. "Many industries are finally just firing people. This is a real change."

Workers at the Ford plant must accept strict discipline and are not guaranteed a job for life. Still, there are five applicants for every job. "People are privileged to get jobs here," another worker said. "And they are very careful not to lose them."

Henrik Nenzen, the silver-haired president of Ford Russia, has an office that looks out over the Khrushchev-era apartment blocks that march north from the center of Moscow. He says the country's booming economy could soon make it one of the fastest-growing car markets in the world.

"The expansion is not only in the oil business, in our opinion," he said. "It's in the manufacturing business, the retail business. It's an enormous expansion."

Most Russians are still relatively poor, by Western standards, earning on average about $188.40 a month. But the Russian economy has grown by about 6.5 percent a year over the past five years. Disposable income shot up nationwide almost 14 percent in the first quarter of this year, while wages rose almost 16 percent. Both are rising much faster in big cities compared with the countryside.

There are one-sixth as many cars per capita in Russia as in the United States. In the next decade, rising incomes and pent-up demand here could double the number of cars made here every year to 3.5 million -- making it the largest car market in Europe.


Ford has company

Ford isn't the only automaker who sees an opportunity in Russia. Other foreign manufacturers have also begun making cars here, including General Motors, BMW and KIA.

At the center of Ford's Russian strategy is the Focus, a car that the company has been producing in Europe for the past five years. The car is medium-sized, moderately priced and not particularly flamboyant.

It comes in a hatchback, sedan and station wagon. Prices start at 9,900 euros for the hatchback, or about $12,000, escalating to more than $16,000 for option-laden sedans with larger engines.

The Russian-made Focus looks identical to those sold in the United States and Europe. But there are differences. To cope with Russia's rugged and only partially paved highway network, the car's clearance was raised nine-tenths of an inch. The engine runs on low-octane fuel, and can start at 20 below zero.

Ford also strengthened the rust-proofing of the Russian Focus' Vehicle Identification Number, or VIN, stamped on the frame and engine block. Traffic police here frequently check these numbers, sometimes demanding bribes when the numbers have corroded away.


"When you just sit inside a foreign-made car, you can see the difference," said Sergei Makarov, a 36-year-old manager with an Internet provider from Siberia, who was sizing up the Focus at a Moscow auto show.

But foreign automakers such as Ford represent a grave, perhaps fatal, threat to Russia's domestic auto industry, which employs 800,000 people. A few manufacturers, including the makers of the Moskvitch sedan, have already closed. Others are under severe pressure.

The demand for Russia's best-selling cars, the Zhigulis made by the mammoth VAZ plant in the southern Volga city of Togliatti, plunged by almost one-sixth in the first six months of 2003. Russia's No. 2 automaker, GAZ, has cut production of its main passenger car, the Volga, by 35 percent during the past year.

Experts say the industry's troubles include huge, antiquated plants trying to produce modern cars with machinery that dates from the 1970s.

"Since then, there have been no investments at all," says Igor A. Morzharetto, an editor with Russia's Behind the Wheel magazine.

But the deeper problem, perhaps, is the psychology of the Russian workplace.


Soviet car factories were pressured to meet quotas at whatever cost, even if it meant selling defective cars. Buyers, meanwhile, became some of the most sophisticated in the world. Their cars broke down so often, every driver had to learn to become his or her own mechanic.

When the Soviet Union collapsed, Russia's borders opened to imports, both legal and otherwise. Anyone who could afford a foreign car bought one. And increasingly, Russians can afford them.

Risky business

The world's major automakers have long considered making cars here. But through the 1990s, doing business in Russia was risky. The government seemed shaky. The economy lurched from crisis to crisis. Courts showed little interest in protecting foreign investors.

Despite the risks, Ford approached the Kremlin in February 1999 and struck a deal. The company could build Focuses using mostly imported parts at its own plant here. The company agreed to increase the use of Russian-made parts over five years, until its Russian costs represented half the value of each car.

After scouting sites at 80 locations around Russia, Ford settled on the St. Petersburg region, with its educated labor force, seaport and location near Russia's biggest cities and most important auto markets.


One big concern was the Russian consumer. Ford's market research found that no one was more biased against Russian workers than Russians themselves. Car buyers were convinced cars made here would be inferior to those produced in the West. So the factory started up very slowly, building only about 10 cars a day at the plant for the first six months.

Another big hurdle was price. Russian-built Focuses are 25 percent cheaper than those made abroad, because of lower labor and other costs. But their price tag is still more than double that of domestically made cars, which sell for $6,000 to $8,000.

So Ford helped introduce the Russians to something few were familiar with: the car loan.

It wasn't easy. Credit checks are difficult here, because until recently, many people were paid off the books. After the bank failures of the 1990s, many families stuck their life savings in hollow broom handles, books and pickle jars. Only recently have people opened savings accounts and started paying their taxes.

With Ford, the banks offered a 4.9 percent interest rate with a 50-percent down payment and the balance paid over three years. Thirty minutes after Ford announced the new credit scheme, the phone lines to one bank were jammed with customers. Buyers must still wait up to five months to take delivery.

Like on York Road


Alexei Senin, general director of the Kuntsevo Ford Dealership, is one of 70 Ford dealers in Russia. Kuntsevo, located at a cloverleaf on the MKAD, Moscow's grimy and frequently jammed beltway, is the city's main car market.

Most of Kuntsevo resembles an eastern bazaar, with rows of kiosks and small shops where scores of shop owners hawk everything from driving gloves to hubcaps. Senin's showroom, though, might as well be on York Road in Towson, with lots of gleaming glass and metal. Carefully polished cars sit in the middle of the floor in Cathedral-like silence, while sales personnel rustle papers at modern desks.

Senin, 27, has helped introduce Western-style sales techniques to the Russian auto market, including the test drive. Now he plans to open a new showroom, dedicated exclusively to the Focus. And he has ambitious plans to sell fleets of cars to governments and corporations. All he needs to do is get his hands on more cars.

"I can build another 10 showrooms here if the production of Fords grows in Russia," he said.

If Senin represents part of the auto industry's future in Russia, Aleksandr Osipov, 47, symbolizes its past.

A gentle, bearish man with rosy cheeks, Osipov works at the ancient assembly line of the GAZ automobile factory in the town of Nizhny Novgorod, 240 miles east of Moscow, bolting front suspensions to Volga passenger cars.


The factory was built 71 years ago by the Ford Motor Co. for the dictator Josef Stalin. Today, workers walk briskly along its metal-plated floors slick with oil. Light filters dimly through soot-covered skylights. Ancient clanking assembly line machinery carries puffy Volga sedan bodies around in a big "U" at an altitude of about 6 feet, then gradually mates them to front and rear axles.

Osipov has been making Volgas here for 18 years. Once, the factory was a relaxed place to work. Bottlenecks, delays and parts shortages were frequent. Discipline was lax. As long as you didn't have any dangerous political views, the state was an understanding employer.

Now, everything has changed.

"It's like this," Osipov explained. "You just stay in your workplace and work. And it's hard, at first, to do that. People were very often late before. And there were workers who were making junk. Now, such cases are very rare. Now, your pay depends on discipline."

Auto industry analysts say GAZ is likely to be profitable in the long run because it has a near monopoly on the market for light trucks and vans. But its best-known product, the Volga sedan, may face extinction.

The Volga was first produced in 1957 for the tiny Soviet consumer market. Rugged and relatively dependable -- it could be fixed on a rural roadside with tractor parts -- the Volga quickly became the car of choice for mid-level bureaucrats and party hacks. It was the auto most up-and-coming Soviet citizens dreamed of owning.


But by Western standards, the Volga was always a homely, primitive automobile. Until just a year ago, all the cars were equipped with massive front suspensions that could handle most potholes, but needed to be re-lubricated every six months or after a heavy rain.

Cherished no more

By the time foreign cars started flooding into Russia in the 1990s, Russian drivers began to shun their once-cherished Volgas.

In December 2001, GAZ was purchased by Oleg Deripaska, one of Russia's notorious "oligarchs." These financiers, who had close ties to the Kremlin, bought many of Russia's largest industries in the 1990s for a fraction of their value.

Deripaska, 35, worth an estimated $1.5 billion, first invested in Russia's lucrative aluminum industry. But he has since branched out, buying failing Russian industrial enterprises, firing corrupt or incompetent management and putting his own people at the helm.

He hired new management, spun off GAZ's transmission and engine-building plants and closed some of GAZ's Soviet-era social services -- including day care centers, hospitals and vacation resorts. As a result, he reduced the company's payroll from 105,000 in 2000 to just 65,000 today.


Still, the company is struggling. In a bid to help domestic manufacturers, the Russian government decided to impose steep new tariffs of up to 35 percent on imported used cars last summer.

The plan backfired. Russian buyers bought every used import they could get their hands on before the deadline. Demand for new Russian-made cars plummeted. Volga sales dropped from about 100,000 cars annually to 65,000.

GAZ was forced to cut the price of its cheapest Volga model from $5,000 to $4,000, less than it cost to build the cars. Deripaska has talked about halting Volga production. But that may be impossible. Under Russian law, car manufacturers must give 10 years' written notice before discontinuing a car make.

Russia today is deeply divided between those who are terrified of the changes that companies like Ford are bringing, and those who are impatient for them.

"It's too slow," said Nina Oding, a senior analyst with St. Petersburg's Leontief Economic Research Center. "From the outside, it looks like radical change. But we're living inside it. We would prefer to live in better conditions in our lifetimes, not just for future generations."

But on the Volga assembly line, workers want to catch their breaths.


Osipov's father worked at GAZ. The autoworker's 15-year- old son hopes to work here one day. As for Osipov himself? He clings to a stubborn faith that he can hang on to the past.

"I am never going to leave this factory," he quietly predicts.