Like a child in a playroom full of beautiful but broken toys, Alexander Muhin wears an expression that's not hard to read on this July day. Surrounding the frustrated production manager in long rows radiating across a cavernous workshop is an army of distressed Japanese robots.
Once used to build Sebring sedans at a Chrysler plant in Michigan, the robots--all 310 of them--seem to be screaming in metallic pain here in their new home on the other side of the world. In the months ahead, it's Muhin's job at the GAZ Group's car plant in Nizhni Novgorod to get them singing again. Stooping to reach beneath a nearby machine, Muhin grasps a thick power cord housing scores of crudely severed control wires. "I guess they were in a hurry when they packed them up over in Michigan," grouses Muhin in an unexpected departure from the cheerful confidence of a man atop one of Russia's most famous proletarian pyramids. "The problem is," he says, "we don't have the repair documentation."
A lesser man than Muhin, who has logged 43 years at GAZ, would have petitioned for a pension last year on hearing of a startling plan to match up GAZ--one of Russia's two largest carmakers and for decades an icon of Russian industrial self-reliance--with Aurora, Ontario-based Magna International. One leg of the plan is a drive to transplant Sebring production into GAZ's massive, dilapidated sprawl of Soviet-era car and truck factories along the banks of the Volga River, 500 kilometres east of Moscow. Inspired by Magna, which is one of Canada's great industrial success stories, GAZ's directors say their company can only regain its once-cherished place in Russia's motor-loving soul through radical restructuring and modernization. They want Magna--which employs 83,000 people in 23 countries and acts as a parts supplier and vehicle builder for almost every carmaker worldwide--to salvage GAZ from collapse. And they want it done with stunning speed. They're in a race for Russian market share that both companies are taking extreme measures to win.
It started with a shotgun marriage. Just around the time the robots appeared in Muhin's shop last spring, GAZ's parent company, Russian Machines, invested $1.6 billion in Magna (market value $10 billion). The deal handed six of Magna's 14 board positions to Russia's most powerful industrialist, 39-year-old Oleg Deripaska, whose Basic Element consortium controls Russian Machines. The arrangement--which gives Deripaska decisive influence over Magna's future in return for an investment totalling less than 20% of the company's market value--was just the latest master stroke for a takeover genius who stitched up many of Russia's heavy industries while still in his early 30s.
Magna officials describe Deripaska--who boasts the sine qua non of Russian business, excellent connections to Vladimir Putin's government--as a "strategic partner" who will give Magna access to car-crazy Russia. Counterparts at Russian Machines claim Magna's world-beating prowess building parts and assembling cars will help them revive a Russian car industry reeling in the face of heavy pressure from imports. Possibly confirming suspicions in Canada that Stronach has effectively surrendered control of Magna--later if not now--the Russians also say they generally go for controlling stakes when doing partnership deals like the one they've crafted with Magna.
Both companies say the plan is to start building the Chrysler Sebring in Nizhni Novgorod by mid-2008, using parts imported from North America. They'll then set up a series of plants that will build parts for the Sebring and the models of other Russian manufacturers. As the industry modernizes, GAZ and its influential owner will serve as Magna's local host while it pursues business with the strategies it honed with great success elsewhere around the globe. By 2010, Magna, working with GAZ, aims to supply $1,000 worth of parts for every vehicle built in Russia, generating at least $2 billion a year. How Magna will produce cars without alienating its parts customers remains to be seen; likewise, it's unclear how many contracts Deripaska himself will deliver. But Magna chairman and founder Frank Stronach boasts that he secured personal approval from President Putin before signing the deal--which includes a $150-million payment from Russian Machines to Stronach's personal consulting company, along with substantial rewards for other Magna insiders.
After pivoting Magna's future from Detroit to Nizhni Novgorod, Stronach, 74, offered a characteristically epigrammatic explanation to the many skeptical investors and analysts scrambling to keep up with him. The new slogan at Magna, says Stronach, is "Let's build jeeps in Russia." Yet, as he set out to conquer Russia, Stronach also handed over the keys to the company--now Canada's sixth largest, with $20 billion in annual sales--that he launched from a Toronto garage in 1957.
From the perspective of Magna headquarters on the outskirts of Toronto, it seems Alexander Muhin's robots are the vanguard for the transformation of not just GAZ, but Magna as well. But as Muhin himself attests, even with all the help that Magna's legendary experts can muster for their new-found Russian partners, the road ahead for GAZ--a Soviet-era company strongly associated with building uniquely ungainly Russian vehicles in a uniquely antiquated Russian way--is likely to be bumpy at best. As plenty of expansionists have found in the past, Russian conquests seldom go to plan.
Two days after the meeting at which Magna shareholders approved the Deripaska deal in late August, one of Magna's top men in Europe, Volker Barth, was already in Moscow gearing up for Magna's eastward blitz. As the CEO of RM Systems Inc., an offshoot of GAZ, Barth--at 60, a globe-trotting veteran of GM and Delphi as well as Magna--is charged with using Magna know-how to rebuild the Russian car-parts business. "Russia is a new frontier to be taken," he says.
On a tour of components displays at the Moscow auto show, Barth is unimpressed by the various Chinese knock-offs on offer alongside Russian-made components. "Some of the international suppliers are here, but not many. It reminds me of Brazil in the early 1990s," he says. Having helped bring that industry up to speed, Barth must now do the same here. He notes that GAZ faces stiff competition from foreign manufacturers. "With the inclusion of Magna into GAZ, I think it's doable," he says. It's a race that must be won on factory floors, and winning it won't be easy. "I've never seen so much obsolete capacity. Everything is totally outdated," he grumbles as he scans the Russian component displays. "The Russian products are 20 years behind the rest of the world." For a man still waiting for his work permit, it all seemed rather daunting.
Archaic as GAZ's plants are, the company unquestionably offers Magna a solid base to build upon. Since 1956, GAZ's automotive mainstay has been the Volga, a mid-size sedan touted as the narodni machina, or "people's car"--fondly named for the river that has played a starring role in Russian history and culture. Although arm-wrenchingly difficult to drive and notoriously fume-filled, the Volga enjoys a proud place in modern Russian folklore. The car's reputation rests on its high ground-clearance, indestructible suspension and a drivetrain built for gear-mangling abuse. In other words, it's a car suitable for Russian roads. It's been a successful formula for GAZ since 1967--the last year the Volga's chassis was substantially redesigned.
While the rest of the automotive world tirelessly innovated with minivans, hatchbacks, SUVs, jeeps, all-wheel drives and ever more refined luxury coupes in the mid-size market, GAZ unswervingly sold between 50,000 and 100,000 Volgas--priced at about $8,000--year after year, decade after decade. Until sales suddenly ditched four years ago in the face of exploding competition from scores of budget-priced imported models, the Volga seemed as unstoppable as its namesake. GAZ says it will keep making Volgas as long as they're profitable. Russian Machines PR manager Pavel Erasov warns, however, "that could be as little as just two more years." So the idea of bringing in Magna to build Sebrings isn't just an experiment, Erasov says: It's a last-ditch survival plan for one of the international automotive industry's last dinosaurs.
"There's a big gap between GAZ and its international competitors," Erasov notes over tea at a Moscow café. In the bus and truck sectors, the company's products are selling well in Russia and in export markets like India, he stresses. But GAZ is heading for a crash. "We have to take urgent steps immediately to catch up," Erasov says. "Our strategy is to buy existing technologies. It might be possible to modernize internally. But we don't have time. The challenge is to launch a new car suitable for Russian drivers. And it can't be a car built for Germans, who read the user manual three times before first inserting the key."
To get a sense of what Russian car buyers really want, GAZ officials could do worse than to pick up a copy of WhatCar?, a new monthly national consumer magazine. There's a reason the magazine--which is published in Russian--has an English title. English is, after all, the lingua franca of the imports. Amid pages of glossy reviews of the latest offerings from Nissan, Volvo, Ford, Honda, Kia, Peugeot, Renault, Volkswagen and a dozen more manufacturers now competing in Russia are detailed listings of the characteristics and pricing of hundreds of models of imported cars--many priced only slightly above the Volga. Foreign car ads on Russian television, radio and public billboards are also at saturation levels. It's a feeding frenzy.
Thanks to rapid economic growth, sales of foreign car brands in Russia have increased 12-fold since 2002. As the roads clogged up with foreign models, sales of Russian brands slipped 13% in the same period. And Russia's car boom is far from over. Vehicle sales in Russia are expected to double by 2021, from 1.6 million in 2006 (about the same as the Canadian market) to 3.2 million, according to J.D. Power Automotive Forecasting.
The underpinnings of the boom aren't hard to see. Largely due to rising energy prices and Russia's emergence as the world's leading oil and gas exporter, personal incomes in many homes have increased dramatically. Although poverty is still widespread in the country, many Russians own their own apartments, which boosts discretionary spending power, as do low consumer taxes.
On the demand side, the picture is equally clear: Prior to 1991, when the Soviet economy collapsed, only a small percentage of Russians owned cars. Although demand soared in the 1990s, the tough times dampened sales of new foreign cars and favoured cheaper Russian brands and floods of second-hand or even stolen Asian and European imports. In 2001, around 450,000 foreign cars were imported into Russia, only 90,000 of which were new models. As a result, the average car on the road today is at least a decade old. And 15 years after the advent of consumer freedom in Russia, only 20% of adults own cars, which is less than half the percentage in Germany. Now, with the economy improving, Russian motorists are letting the good times roll.
Some of the shrewder minds in the international automobile industry saw a lot of this coming. In 1998, Renault had the foresight to snap up the remains of Avtoframos, a collapsed Soviet carmaker owned by the City of Moscow. Since the French company installed a state-of-the-art facility amidst the ruins of the old plant, tens of thousands of Russian-built Renaults have rolled out the doors. Ford, which built an assembly plant near St. Petersburg, employed much the same approach. Its Russian-made version of the Focus has been a huge hit. Chevrolet also got in early. Since 2002, it has been producing a Russian-made jeep in collaboration with AvtoVAZ, GAZ's top rival. In the year ahead, Mitsubishi, Toyota and Volkswagen will also be opening Russian assembly plants. Thanks largely to high tariffs on vehicles assembled outside Russia, auto-industry consultancy CSM Worldwide Inc. forecasts that production in Russia will grow to 2.1 million vehicles by 2012, from 1.3 million last year. So when GAZ's Russian-made Sebrings are ready to roll, the passing lanes will already be crowded with Russian-built competitors. Of course, if things go right, Magna and GAZ will soon be building big chunks of those vehicles, too. It's a plan, to be sure. But whose plan is it?
In a country where almost all infrastructure and economic activity for most of the 20th century was plotted according to infamously rigid five-year plans, it comes as no surprise that the Russian government remains deeply attached to industrial planning. Oleg Deripaska's success in gathering so many remnants of the Soviet economy into his company, Basic Element, stemmed from two factors. One was his application of tactical ruthlessness--and smarts--during the chaotic, crime-wracked post-Soviet period (one former associate once threatened Deripaska with a grenade launcher). The other factor was Deripaska's willingness to pay fealty to Vladimir Putin's vision of a state-dominated, domestically controlled economy (the state has increased its share of Russian businesses from 20% to 35% since 2003). While tycoons who challenged the Kremlin by moving to sell Russian resources and industries to foreigners fell from grace, Deripaska (who is married to the daughter of former president Boris Yeltsin's chief of staff) promised to keep Russian assets in Russian hands. In an interview last July, he took that pledge even further: "If the state says we need to give it up, we'll give it up," he told the Financial Times in reference to his globally significant aluminum holdings, much of which face legal challenges relating to allegations that Deripaska used illegal takeover techniques. "I don't separate myself from the state," he said. "I have no other interests."
Given the economic importance of the automobile industry--which directly supports 250 companies and 800,000 workers--it's not surprising the Russian government takes a keen interest in the sector. To that end, in 2002, the Kremlin produced a master plan titled "The Government Concept of Automotive Industry Development up to 2010." It's a document that Deripaska likely knows well: As noted in an assessment of the plan produced by the U.S. Department of Commerce in 2004, Russia "has expressed a strong commitment to encouraging co-operation between local and foreign strategic investors in construction of new automobile and spare-parts production facilities." To speed things along, the Kremlin aims to continue taxing new imported cars and parts at 25% well into the future. The plan also recommends that similar duties be applied in future to cars assembled by foreign carmakers from imported kits--like those now made by Renault and Ford. Meanwhile, duties are to be lowered for equipment used to manufacture cars (like the Sebring) in Russia, and tax-free zones created for components plants.
The work of senior officials from no less than five federal departments (including internal security, where Vladimir Putin was formerly the boss), the Kremlin's plan focuses squarely on inducing foreign spare-parts manufacturers to inject the technology needed to rebuild the industry. With much of the sector in Deripaska's hands, Kremlin planners know where the pressure point is. As other Russian oligarchs (some now in jail, some in exile) discovered, Putin hasn't forgotten how prized national companies like GAZ were often violently wrenched from state ownership and privatized a decade ago. Frank Stronach's interview with Putin no doubt brought satisfaction to both men: Long before Magna announced its designs on Russia, the Russians were drafting designs of their own. And Magna, Putin told Stronach, fits the plan nicely.
Jabbing a finger at a dizzyingly intricate blueprint for the Sebring robot complex, Alexander Muhin concedes that foreign technologies and expertise haven't previously flourished at GAZ. "We always survived because we do things our own way," he says. The Volga, built with about a tenth as much automation as the Sebring, is a no-nonsense machine that can be repaired without delay by almost any village mechanic. That won't be the case with the Sebring, which is much fussier, Muhin observes. But that doesn't mean GAZ's decision to team up with Magna to supplant the Volga with Sebrings doesn't make sense, he adds: "Let's just say it's a very economical project. It would normally take us at least seven years to design and build a new car. This way it takes a year. We got this technology cheap, and it's a platform for a car that suits our Russian roads. The Sebring will succeed so long as it's marketed and priced correctly."
Magna's top man in Nizhni Novgorod, Albrecht Bochow, also swears that GAZ can once again rule the Russian roads. But that's where the similarities between Muhin and Bochow end. Muhin, who is 59, had already been building Volgas for six years when Bochow was born. Muhin started on the factory floor at GAZ at 16 as a proletarian apprentice within the then-Communist factory. Bochow grew up loathing communism in East Berlin. He earned a PhD in economics in 2005; his dissertation was on the internationalization of the car industry.
Sixteen years after the collapse of Soviet communism, Muhin still wears a nondescript factory uniform. The word "comrade" has fallen from use in Russia, but Muhin still views his team as a collective. He drives a Volga. He's got a powerful handshake and seldom ducks a question. He doesn't speak a word of English. For his part, Bochow favours pinstripe suits and likes to be addressed as "Doctor." These days, he too drives a Volga. He speaks crisp, clear English, but deflects discussion of what he drives back home in Berlin. He openly worries a lot about shaping his message. At 36, he's worked in Europe, Asia and North America. Last spring, Magna posted him to Nizhni Novgorod as managing director of the Magna-GAZ Group Joint Supply Organization. He doesn't speak a word of Russian.
As Bochow freely admits, life in Nizhni Novgorod is no picnic. "In winter here, you can actually see the air pollution," Bochow says. "Two hours after it snows, everything starts turning black." Then there's the job. "It's a clear start-up situation. I have to get this car into production by next March," he says. "Almost nobody here speaks English. The amount of work is colossal." A chance encounter a few minutes later between Bochow and a local GAZ PR man, Dmitri Kozikov, offers some unscripted insight into the challenges Bochow faces. The two men haven't previously met, but once the introductions are completed through a translator, Bochow spontaneously asks Kozikov to help him guide an incoming delegation of Magna executives through the maze at GAZ. Bochow's energy feels contagious, but Kozikov clearly isn't looking for more work at the moment. "That's just not my job," Kozikov responds. Then he makes the mistake of referring to Bochow as an American. "I'm not actually an American, you know," Bochow retorts. "Instead, you might actually want to try looking at me as a member of your family. Or at least that's what I hope you'll do, considering that your boss now controls six seats on the Magna board."
Family relations are considerably cheerier at a meeting the next day between Bochow and Leonid Dolgov, CEO of the GAZ car division. The two men bear strong similarities. After finishing an MBA in Europe, Dolgov signed on with Deripaska's aluminum/construction/automotive empire in 1996. Since 2001, he's held a striking array of senior strategy jobs within GAZ. At 32, he's now a veteran of some of the biggest business transformations in recent European history--making this Russian every bit as foreign to the old guard as the Austrian Bochow. As Bochow points out, the transformation under way at GAZ has triggered a remarkable generational shift: "People get amazing responsibilities very young here. They're getting the jobs people at GAZ held for 20 years."
Dolgov vividly recalls his arrival at GAZ in 2001--just a year after Deripaska purchased the company, which then employed 110,000 workers at the Nizhni Novgorod plant: "People behaved like slaves here," Dolgov says. "I couldn't actually find anyone making decisions about how we spend money. The culture was, 'You cannot be proud. You don't deserve a decent salary.' People simply didn't believe we could turn GAZ around." Even today, much of the Soviet culture of secrecy and arbitrary power remains apparent at the GAZ plant. Before exiting the plant's massive gates, visitors are subjected to security screenings: Vehicles are searched inside and out, including under the hood, by unsmiling, uniformed security agents.
Dolgov's first move was to hire efficiency consultants--mostly from IBM--to evaluate GAZ's production lines and introduce a version of lean production methods common elsewhere in the auto industry. The results were striking: Since Deripaska took control, GAZ has shed about 70,000 workers at Nizhni Novgorod while dramatically increasing car, truck and bus output. For those workers who held onto their jobs, salaries increased substantially.
Today, life may never have been better on the production lines at GAZ, but bolting together Volgas remains primitively physical work. Even after its efficiency overhaul, the Volga continues to be largely hand-assembled. Most of the work is done on a conveyor track that dates to 1962. "We'd like to install more automation but we'd have to rebuild the entire system," says Roman Bolatov, a technical head. As a result, there's an extraordinary reliance on heavy lifting and elbow grease from start to end. Every car is slightly different. Imperfections in side and door panels aren't hard to spot as the cars roll along the line. Victor Shevnev, a section manager presiding over several hundred of the 4,000 workers who currently bolt together 233 cars a day, acknowledges that he's running a relic. Even so, he's not convinced the Volga is really history. "It's not the first time there are such rumours," he says. "The cars are still in demand and we keep improving them. It's a good car and it's a national symbol. As a patriot, I'd hate to see it go."
For division CEO Dolgov, dropping the Volga is as much a matter of national pride as saving it is to Shevnev. "It's now time to launch new cars," Dolgov avers in a meeting at GAZ headquarters. "We have to make a major jump right now, and injecting Magna into the process is the boost we need. We plan to heavily enhance our technology. We just can't do it based on the old Volga." He estimates that about half the strategic decisions within his car plant are now already handled by Magna officials either inside the plant or in Moscow, Europe or Canada. But in the end, he thinks, the success of the venture will always depend not on Magna, but on GAZ's ability to sell the Sebring as Russia's new narodni machina.
It won't be easy, Dolgov acknowledges, to persuade the very same car buyers who count on GAZ for quintessentially Russian cars that they should begin buying the Sebring, an undeniably American offering. "We did extensive research and learned a lot of hidden things about how Russians look at American cars," Dolgov says, "and what we learned is that American and European cars have much the same value in the Russian consumer's view. But to sell the Sebring, we'll have to try to shift the perception that this is a foreign car. We'll have to prove to consumers it's a robust car made here. We have to bridge the border between political and consumer preferences."
As Magna man Albrecht Bochow points out, the Magna-GAZ partnership is as much about enabling Magna to get its parts-production and auto assembly technologies into Russia as it is about building Sebrings. "Mr. Deripaska says he wants to launch new cars and it's a major restructuring for GAZ, but it's also a manufacturing footprint in Russia that allows Magna to cover this part of the world," Bochow says. "It opens the door for high-quality component production and greatly enhanced engineering." At the table beside him, Bochow's Russian counterpart concurs: "It's part of the plan," Leonid Dolgov murmurs.
After seven decades in the car business, GAZ is asking what the customer wants for the first time in more than a generation. The hard-faced security officials hanging around beneath the Soviet stars and banners that grace the cast-iron factory gates give the project an air of invincibility. But the answer to the question is outside the gates, and may not be comforting for Magna and GAZ. Out in the dense four-lane traffic along Lenin Avenue, Russian consumers have already spoken for change. Even in the Volga's hometown, late-model Russian-made cars are a rarity. To overtake the fierce competition and make its curiously lopsided partnership pay, Magna must now attempt to exit the very gates it gave up so much to enter.
If I Were A Rich Man...
I'd enjoy it while I could. Oligarchs' heydays can be brief in Russia
The only thing more stunning than Oleg Deripaska's wealth (an estimated $15 billion) is the speed with which he amassed it. Unlike many of his peers among the world's super-rich, Deripaska was born poor. He spent much of his childhood living with his grandparents after his father died and his mother went away to work. The family home was reportedly seized by the state after his grandparents died. After a spell in the Soviet army, he studied nuclear physics. But after the Soviet Union collapsed in 1991, he figured he'd do better in business than in science. He made a lot of money in a hurry as a metals broker in the mid-1990s, but he remained an unknown--even in Russia--until around 2000, when it emerged that he had gained control of the country's enormous aluminum and machine-production industries and had married into the political elite.
By 2003, Deripaska was attracting international attention: That year, he tried to wrestle control of Ilim Pulp, the country's biggest pulp and paper company, from its Canadian managers. But leaf through the three best books published on Russia's new rich since 2000--one by Canadian journalist Chrystia Freeland, the other two by American journalists David Hoffman and recently murdered Paul Klebnikov--and you'll discover that Deripaska's name is not even indexed. But, at 39, even Deripaska seems baffled by the incredible twists of fate that have catapulted him to prominence: "I was lucky," he recently explained. "Just consider that everything fell from the sky."
While Deripaska's fortunes soared, many of the businessmen whom Freeland, Hoffman and Klebnikov did consider attention-worthy suffered reversals thanks to mercurial Russian politics. Boris Berezovsky, the mathematician-turned-magnate profiled in Klebnikov's Godfather of the Kremlin (2000), was exiled to London shortly after his political patron, President Boris Yeltsin, handed power to Vladimir Putin. Berezovsky's Russian business interests were dismantled long ago, much to the chagrin of those who formed partnerships with him when he was a Kremlin favourite. Chrystia Freeland's book, Sale of the Century: Russia's Wild Ride from Communism to Capitalism (2000), singled out three rising stars. Two of them, bankers Mikhail Friedman and Vladimir Potanin, remain influential. But the third, Yukos Oil president Mikhail Khodorkovsky, who became Russia's richest man in an ascent just as rapid as Deripaska's, is now in jail. Many of the companies that pursued partnerships with Yukos, including Exxon, have also subsequently suffered setbacks in Russia. In The Oligarchs (2002), David Hoffman focused on six men. Along with three others, he singled out Khodorkovsky, Berezovsky and media magnate Vladimir Gusinsky, now exiled in Israel. All told, of Hoffman's six oligarchs, just two remain influential, and neither owns anything significant. The pattern seems clear: Business leaders in Russia can achieve astonishing power overnight; they can lose it just as quickly. Perhaps Putin himself put it best. When asked, a year after taking office, about Berezovsky, Putin responded, "Boris Berezovsky--who's that?"
So Magna's deal with Oleg Deripaska is a gamble on his continuing political viability. He's clearly a Kremlin favourite; in September, Putin flew to Indonesia to swing a $1.5-billion contract for RusAl, the aluminum company Deripaska controls.
But barring the unlikely event that Putin will not step down next spring, Deripaska will soon require a new mentor. Putin is widely expected to pick his own successor--some analysts think he will ultimately favour First Deputy Prime Minister Dmitri Medvedev, 42, a lawyer who worked for Ilim Pulp, the very company Deripaska attempted to take by armed force. These days, Medvedev splits his time between the Kremlin and the boardroom at Gazprom, the state-owned oil and gas company. Gazprom has benefited more than any other entity from Putin's drive to keep at least 40% of the Russian economy in state hands, in part by purging men like Gusinsky (whose media empire was vacuumed up by Gazprom) and Berezovsky and Khodorkovsky (whose huge oil and gas holdings are now in state hands). Medvedev is guiding the renationalization of assets, often using anti-corruption laws crafted to proscribe the sort of tactics Deripaska refined in his run at Ilim. Deripaska has already lost one home to the state. Will he lose another?