Russian car maker optimistic about Polish market
It was a love-hate relationship between Wojtek and his 1988 Russian-built Lada sedan he loved to drive it, but hated taking it out of Warsaw.
"Because whenever I did, it would break down," he explained. "It was more human than machine: It was imperfect. It was moody, and it only liked to run in cold weather a bit like a Siberian!"
After four years of honorable service, Wojtek swapped his baby blue Lada for a Geo, and while he still has fond memories of his clunky car, he's quick to add that he'd never buy another Lada. "It was a bit like driving a tank," he said.
But that's the kind of challenge that excites Lada Polska's president, Ukrainian-born Piotr Kowalski. With the planned opening of Lada Polska's first Polish assembly plant in the first quarter of 2001, Kowalski said he is going to do more than build cars he's going to rebuild consumer confidence in the cheap Russian brand.
"Criticism exists, but it's not always justified," he said. "If you speak to Lada drivers today, they have very high opinions of the car. I'm not talking about people who do not drive Lada because their opinion is a different matter."
To entice Polish drivers back to this Russian classic, the new Ladas, which will be available in the first quarter of 2001, will undergo a process of "Polonization." This means they will be fitted with engines manufactured by the southern-Poland engine plant Andoria. They will also have locally made components such as tires and insulation, and improved safety features. The cars will meet all Polish ITS automotive regulations.
"These Polish elements will help the customers feel more confident about the car because they're Polish parts, not Russian (ones)," Kowalski said. "But basically, Russian cars have one feature: they bend but they never break."
The plant to be located in Central Poland and include an assembly factory and a "Polonization" or PDI center is only part of Lada Polska's zl. 50 million ($11 million) investment plans, which entail the company's complete restructuring.
The company was created in October 1998 when it was sold by Russia's Volga Automotive Plant (WAZ) to a group of investors. Under the restructuring plans, which have already commenced, Lada Polska will eventually be made up of three different companies. The first, Lada Polska, will produce the Lada and GAZ brands. The latter is a make of medium-sized commercial vehicle. The second, Commercial Vehicles East, will manufacture UAZ off-road vehicles and Samsung commercial vehicles following a July agreement with the Korean giant. The agreement, which will soon expand to include Samsung trucks, gives Lada the exclusive right to sell and service Samsung vehicles in Poland through 77 centers.
The restructuring will be completed with the formation of a third company as soon as negotiations conclude with Kamaz, another Russian firm that manufactures trucks heavier than 3.5 tonnes. Until its plant opens, Lada will commence in October with the assembly of Samsung models at the KIA and Hyundai plant in Kunow.
Lada Polska is financing these investments with zl. 20 million ($4.4 million) of its own funds and will raise a further zl. 30 million ($6.7 million) by a private placement share issue available to financial institutions in December 2000.
"Frankly, we are investing a lot in Poland. The acquisition of the factories, the equipment all this absorbs a lot of funds, so I hope that we will break even by the end of the year," Kowalski said, adding that in 1999 Lada Polska's turnover was zl. 34 million ($7.6 million) and net profit was zl. 1.08 million ($240,000).
But auto industry monitoring agency Samar is not so sanguine. According to Samar, in the first six months of this year, Lada sold a total of 430 units. During the same period last year, that number was 590. In 1999, total sales reached 1,440, but Samar doubts Lada will hit the 1,000 mark this year. "They are losing market (share)," said a Samar spokesperson. "The decrease in sales this year is more than 27%." It's a problem experienced by the whole automotive industry. Samar's figures show that up until the end of August, car retailers sold 357,000 cars almost 17% less than during the same period in 1999. And those hardest hit are cheaper, domestically produced vehicles Lada's future market.
The culprits, according to Samar, are an increase in excise tax (from 2% last year to 6% this year), plus the increasing cost of fuel, insurance and credit in a country where 60-70% of car buyers use financing. Correspondingly, European Union (EU) car manufacturers saw import duties drop by 5%. By 2002, in accordance with Poland's EU agreement, that figure will be 0%. Worse still, Samar can see no change to this downward trend.
"The development of the market has a cyclical character so in order for us to enter the market again, we need to take some steps," Kowalski said. "Even though the Polish automotive market is in decline at the moment, we have started to make all the necessary efforts to start our own plants."
"Regardless of the situation on the market, if you want to exist on it, you have to make sure your operations can be sustained no matter what the tax regulations or external difficulties are. No matter what difficulties there are relating to the credit interest rates."
Kowalski predicts that in two to three years' time, the number of passenger cars sold in Poland each year will hit the 750,000 mark including annual sales of 6,000 Ladas.
As for Samar's statement that Lada will be lucky to sell 1,000 units this year, "Well, that's their opinion," Kowalski said, "but we've got big plans for the Polish market."
