International Business: Foreign Auto Manufacturing within the Russian Federation - Essay Example

Section/# Foreign Auto Manufacturing within the Russian Federation Introduction: Whereas emerging markets within Asia and South America have provided a burgeoning level of growth and consumption of automobiles, the collapse of the Soviet Union and the subsequent economic growth that has been exhibited within the sphere of the Russian Federation has provided one of the fastest growing markets for automobiles in the entire world. Prior to the collapse of the Soviet Union, the centralized economy that existed throughout Russia and many of the former Soviet satellites states was one in which only a few individuals were capable of affording an automobile. Furthermore, for these few individuals that were capable of affording an automobile, the ultimate level of choice that was provided to them was miniscule; at least as compared to the market dynamics of choice that currently exist. As there were only a handful of domestic Russian auto manufacturers, these enjoyed complete and total market domination within the Soviet bloc. With the collapse of the Soviet Union in the early 1990s, economic hardship and poverty affected nearly each and every individual within this particular space. However, the development of Russia’s oil and gas sector has provided a newfound level of wealth and created a new middle class; where none before previously existed. The size of Russia’s middle class has created a market dynamics in which the demand for automobiles, specifically demand for imports automobiles has skyrocketed. As a means of keeping up with this demand, firms initially sought more liberalized import and tariff agreement with the Government of the Russian Federation. However, as imported products were taxed at an exorbitant level, the overall competitiveness that these manufacturers could exhibit, at least as compared to domestically manufactured automobiles, was vastly limited (John & Radebaugh, 2009). Recognizing this determinant and seeing domestic manufacture and the opening of foreign operated plants within the Russian Federation as a means of addressing this, a fundamental shift came to take place. It will be the role of this particular analysis to discuss the manufacturing dynamics that are currently represented within the Russian Federation, how they think the, as well as representing investment and environmental factors that have encouraged, or continue to discourage, other auto manufacturers from engaging in a similar approach to the Russian market. Analysis: As referenced within the introduction, the economic growth that was exhibited within the Russian Federation, most notably after the economic collapse of 1998, encouraged many businesses to look to Russia and the Russian consumer market as potential opportunities for expansion. As a middle class began to grow and develop, individuals that had previously not factored in to the marketing reach and consideration of these companies were quickly reconsidered and analyzed as potential consumers. Whereas many markets began to grow within the Russian Federation during this particular period of time, the car market was one of the fastest-growing; with some analysts indicating growth statistics in excess of 350% in the early 2000s. However, as alluded to within the introduction, one of the hardships that international (nondomestic) on a manufacturers face with respect to the Russian market was the extraordinarily high tariff level that must be overcome prior to further expansion within this market even be possible. Compared to other nations around the globe, Asians that these auto manufacturers regularly sold automobiles to, the Russian Federation and tariff and import duties that, when added up, exceeded 40% of the total value of the automobile being sold. This was of course a staggering sum; especially with respect to the fact that the automobiles within the Russian Federation were already being priced above market value. Recognizing this is a fundamental impediment for further development, a litany of different auto manufacturers began to approach the Russian government as a means of establishing Russian (domestic) on the manufacturing factories. As almost all stakeholders that have analyzed the Russian market can attest, navigating the myriad of bureaucratic regulations and corrupt officials is a dizzying; and one that discourages many companies from doing business within the Russian market. However, the lucrative nature of Russian demand for automobiles, coupled with its astounding level of economic growth, encouraged many auto manufacturers to ignore these difficulties and focus solely upon developing manufacturing companies for their foreign products within the boundaries of the Russian Federation. One of the first to establish joint operations within the Russian Federation was General Motors. Recognizing the domestic Russian auto manufacturing was ineffective and supplying market demand, General Motors entered the market in a somewhat timid joint operation with Lada; one of the most well known and commercially successful Russian domestic auto manufacturers. GM’s initial integration with LADA hat was not one that saw the company invests tens of millions of dollars within Russian plant or equipment. Instead, it was initial investment that produced a small SUV styled after a European model of Opel branded SUVs and rebadged these within existing LADA factories within the Russian Federation (Hinkkanen et al., 2014). Interestingly, this level of joint operation was very much a test case with respect to the way in which other auto manufacturers would consider and ultimately open manufacturing presence within the Russian Federation. So successful was GM’s joint operation with Lada that Mitsubishi, Peugeot, Citroen, Renault, Ford, Toyota, Nissan, Hyundai, and Suzuki have all subsequently opened manufacturing plants within the Russian Federation that produced finished vehicles for domestic consumption (Kuznetsov et al., 2011). It should be noted that this particular juncture that even though these companies are actively involved in the production of finished vehicles for domestic consumption within the Russian Federation, not each and every part that is utilized within the construction of these vehicles is sourced from within Russia. Essentially, the extraordinarily high tariff rates that have been discussed previously are ultimately applied only upon finished products; with mechanical details and other components/elements of vehicle manufacture being taxed at a significantly reduced rate. Within such an understanding, these auto manufacturing companies, exchange for supplying jobs to Russian laborers and buying a great deal of Russian material and real estate, are allowed to import elements of the finished product a fraction of what existing tariffs would have required if the firm or to import the entire automobile; as had been done previously. Naturally, this particular loophole is one of the largest reasons for why so many of these firms have chosen to relocate their production facilities to the Russian Federation. Another underlying reason for this dramatic shift in production has to do with the logistics of international supply and demand. As fuel prices began to surge beginning soon after 2001, the overall ability of foreign auto manufacturers to effectively reduce their cars overseas and ship them halfway around the world in some instances was drastically reduced. Seeing that point of sale production could greatly benefit their bottom line, decrease inefficiencies, and drastically reduce fuel costs of shipment, not to mention the taxation structures that have been discussed previously, the decision that was made was ultimately one that did not require a great deal of thought or planning to affect a positive financial situation. Investment Factors: Yet, regardless of many of the positive benefits that relocating manufacturing plants to the Russian Federation provides for auto manufacturers, many auto manufacturers still continue to avoid this market and only sell their automobiles as domestically produced and imported into the Russian Federation. The underlying reason for this obviously has to do with the way in which investment factors have discourage such firms from engaging with the Russian market. As indicated previously, one of the first and most salient of these concerns is concentric upon the issue of corruption. Year after year, Russia ranks within the top five most corrupt countries in the entire world; shortly after Afghanistan, a continually changing set of nations from North Africa, and/or the People’s Republic of China. As a direct result of this extraordinarily high level of corruption, it is oftentimes exhibited that business deals are hand, agreed upon, and legally binding; only to find that a given your crack or individual within government rules such an operation illegal - seeking to gain a pay off or otherwise benefit from excluding a certain company from the realm of business competition within the Russian Federation. This particular factor, perhaps more than any other, is what has kept so many firms from further investment in the Russian Federation; fearing that whatever positive benefits that could be gained by establishing a production base within the country could immediately be undone with a spate of organized corruption on the part of powerful individuals within the business sector or within government. A further concern that is represented to would-be investors within the Russian Federation has to do with the overall level of free market that is exhibited within the nation; and the degree of fear that exists with respect to the way in which the government might ultimately interfere with the operations of the given entity in question. An example of this can clearly be seen with respect to the case of Yukos; a formerly private oil company owned by a once well-known Russian oligarchs – Mikhail Khodorkovsky. As the liberalization of the Yeltsin presidency allow for oligarchs to come in control of larger and larger companies, oftentimes dominating the business environment within the Russian Federation, Yukos came to play a more and more definitive role with respect to the degree and extent to which privatized nation and not state regulation defined the Russian oil market. In what much of the rest of the world has understood as trumped up charges, Pres. Vladimir Putin had the owner of Yukos arrested; presumably on charges of tax evasion. However, outside of the Russian Federation, almost each and every analyst recognize that the way in which this company was forced to become part of the government oil-producing complex was nothing short of politically motivated. Furthermore, investors see this type of behavior more and more often within the Russian Federation; discouraging many from increasing the overall size and extent to which they are willing to base their level of investment within this particular nation. Although it is true that corruption and meddling on the part of the government are oftentimes illustrated within many nations around the world, the Russian Federation has taken this to a new extreme. As such, for fear of having a multi-million dollar investment shuttered on the order of a powerful individual within the Russian government or as the result of the fact that the new business entity is effectively competing against a Russian interest, firms are foregoing engaging with the lucrative Russian market and looking for other ways to remain successful and profitable. As with any business decision, the choice to engage with a market or to forego engaging with it is ultimately one of a partial gamble (Wild & Kenneth, 2012). However, the case of the Russian Federation has proven to be too much of a gamble for many of the major auto manufacturers around the world of recent years. Factors within the Business Environment: Another definitive concern that has been exhibited towards firms that already have established auto manufacturing facilities within the Russian Federation, or firms that are considering it, has to do with the way in which political and business relations have come to be extraordinarily strained between the Russian Federation and the west of late. This is primarily the result of the fact that the Russian Federation has engaged in a very offensive and territorial foreign-policy that seeks to incorporate many of the former Soviet states under the Russian Federation once again. Evidence of this can of course be seen as far back as the conflict with mold over and the way in which break away regions from this particular Eastern European country were rapidly incorporated within the Russian Federation and deemed to be semi-autonomous regions. Much the same was conducted during the 2008 Georgian War; when Abkhazia and S. Ossetia were incorporated as de-fact regions of the Russian Federation. However, most recently, and most importantly, the conflict in Ukraine has caused a complete breakdown in relations between the United States and Europe vis-à-vis the Russian Federation. As the Russian Federation has flagrantly violated international commitments and deploy ground troops into eastern Ukraine as a function of incorporating this territory into the Russian Federation as well, severe economic sanctions have been placed upon Russia by both Europe and the United States. These sanctions, although not specifically targeting the auto manufacturing sector, has significantly reduced the overall level of economic interaction and interdependence that the West has with the Russian Federation. Seeing this as tantamount to a breakdown in economic cooperation, the Russian Federation has significantly reduced its overall import levels from the West as a means of reciprocity. It is not take a great deal of extrapolation to understand why Japanese auto manufacturers, traditionally aligned more with the West as compared to Russia, are also caught up within this particular dynamic. Naturally, domestic United States auto manufacturers are already experiencing extreme hardship with respect to selling their automobiles within Russia and have recently reported that predatory practices based upon regulations and permission to continue operating within the Russian Federation are being evidenced. With this in mind, few auto manufacturers are likely to consider engaging with the Russian Federation any time within the near future. For those that are already in operation, the Russian market continues to be a lucrative market; however, the collapse of the ruble and the way in which Russia is ceasing engagement with the rest of the world over the situation in Ukraine spells a troubling economic outlook for the way in which the country will continue develop in the near future (Gurkov & Filippov, 2014). In the eventuality that Russia continues to disengage from the remainder of the world and operates under a policy of political and economic isolation, it is all but expected that the overall purchasing power of this particular demographic will decrease commensurate with this level of disengagement. Conclusion: From the information that has been presented thus far, it is clear and apparent that auto manufacturers that continue to operate within the Russian Federation have a litany of concerns that they must be mindful of. Notwithstanding this fact, the opportunity for increased investment, specifically within the current era, is one that will necessarily encouraged many auto manufacturers that have not yet engaged with the Russian Federation, to do so while the investment climate is in desperate need of foreign direct investment. Analysts have pointed to the fact that even as Western auto manufacturers, inclusive of Renault, Citroen, and Peugeot, and experience a loss of profitability and market space within the Russian Federation, a shift away from Europe and away from the United States might present unique opportunities with regard to the way in which Chinese auto manufacturers like experienced a renaissance of popularity and success within the Russian sphere. Far from indicating that the Russian Federation’s economic miracle, that has been exhibited over the past several years, has completed, the current situation and hardship that is unfolding at the present time might merely be indicative of a fundamental shift in the way that auto manufacturing and import is affected into the Russian Federation from elsewhere around the globe. References Gurkov, I., & Filippov, S. (2014). Innovation Processes in the Russian Manufacturing Subsidiaries of Multinational Corporations: An Integrated View from Case Studies. Journal Of East-West Business, 19(4), 260-290. doi:10.1080/10669868.2013.845870 Hinkkanen, J., Väätänen, J., & Podmetina, D. (2014). International Exploitation of Domestic R&D Exploration: New Insights from Russian Manufacturing Firms. Journal Of East-West Business, 20(2), 120-139. doi:10.1080/10669868.2014.908156 John D. and Radebaugh Lee H. (2009) International Business: Environment and Operations, 12/E, Prentice Hall. Kuznetsov, B., Dolgopyatova, T., Golikova, V., Gonchar, K., Yakovlev, A., & Yasin, Y. (2011). Russian Manufacturing Revisited: Industrial Enterprises at the Start of the Crisis. Post-Soviet Affairs, 27(4), 366-386. doi:10.2747/1060-586X.27.4.366 Wild John J. and Wild Kenneth L. (2012) International Business: The Challenges of Globalization, Pearson.  Read More