Putin Presents Fiat with a 2.4 Billion Euro Gift
By Brendan Moore
In a surprise move, Russian Prime Minister Vladimir Putin told Fiat and Sollers executives that the Russian government would provide the major portion of a 2.4 billion euro ($3.29 billion USD) financing package for their proposed joint venture intended to become Russia’s second-largest auto manufacturer. The Russian government will also act as guarantor for loans made by any other lenders, thereby effectively making the government the default lender for the joint venture capitalization.
Fiat plans to manufacture up to 500,000 Fiat and Chrysler brand vehicles a year in the plant by 2016, in tandem with its local partner, Sollers. Fiat and Sollers currently produce vehicles together in Russia, but the annual production is only around 19,000 units annually.
The forecasted production of the joint venture would enable Sollers to leap from their current 18th place in the ranks of Russian vehicle manufacturers to a firm 2nd place, right behind AvtoVAZ. Fiat owns a large stake in AvtoVAZ, by virtue of a billion dollar investment two years ago in the struggling Russian automaker. AvtoVAZ has production capacity of approximately 750,000 vehicles per year.
A Russian government spokesman stated that the nine Fiat and Chrysler models the joint venture will produce will have a minimum of 50% local content. He also added that Fiat will export 10% of their vehicles produced in the plant.
The 50% content number is a lofty goal as there are few component makers in Russia currently; most vehicle manufacturers import their parts and part modules and assemble their vehicles at a location in Russia in order to qualify as a domestic producer.
Most auto industry analysts believe that Fiat will need to export far more than 10% of production from the new plant in order to make the joint venture a success. New car sales in Russia dropped a massive 49% last year, and the new vehicle market is not expected to recover for years.
The announcement of the joint venture financing must be making the other foreign automakers in Russia scratch their heads – they have all spent their own money to expand in Russia, and have all sustained losses to their own portfolios as the new car market in Russia has severely contracted, and they have got to be wondering what Fiat has that they don’t have in terms of pull with the government.
It is a question worth pondering from a global perspective as well, since Fiat recently received Chrysler from the US government for free, along with plenty of government-backed loans that will provide operating capital for the Italian automaker to assert itself in the North American market.
All that can be assumed at this point is that Sergio Marchionne, the CEO of Fiat, is an extremely persuasive man.
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