Here's an interesting first: On Thursday, a factory owned by Ford's (NYSE:F) Russian joint venture built the very first Ford Explorer ever made outside of the United States.
Explorers have been assembled outside of the U.S. before, but until Thursday, all of those SUVs started out on an assembly line in Chicago. Those Explorers were partially assembled, and then shipped abroad as "knock-down" versions – kits, essentially – to be finished in other countries.
Ford, like other automakers, uses those "knock-down" kits as a way to get around some countries' tariffs on imported vehicles. But Thursday's start of Explorer production in Russia is about something else: Ford's goal of becoming a leading player in a quietly growing new market.
Still a relatively small market, but with huge potential
Russia is no longer a communist country, but Russians don't buy a lot of new cars, at least not yet. Sales volumes in the world's largest nation are still tiny compared to the huge market for vehicles that has blossomed in its southern neighbor, China, over the last decade.
Russians bought just 2.94 million vehicles last year, compared to 14.5 million here in the U.S. and 19.3 million in China. And that number is growing very slowly – sales in the first quarter of 2013 were essentially flat versus year-ago totals.
Russia is still kind of a challenging place to sell cars, and not just because folks don't have a lot of money. Many of Russia's roads and bridges are poorly maintained, and the infrastructure isn't there to support lots of traffic, at least not yet. Most people still move about the country by rail. But given Russia's vast wealth of natural resources, the potential, like Russia itself, is huge.
Ford thinks Russia will soon overtake Germany to become Europe's largest car market – perhaps as early as next year, a Ford executive said last week. And Ford is one of a handful of carmakers working hard to get established in the Russian market while it's still relatively small.
A sizable presence in Russia, set to grow soon
Already, Ford has three factories in Russia, built with its local joint-venture partner, Sollers. And the brand is well-established, with the Focus compact a regular on Russia's best-selling-car charts. It was the country's fourth-best-selling car last month, according to the invaluable Best Selling Cars Blog.
Right now, Ford has the capacity to build 120,000 vehicles a year in Russia, a number that will expand to 300,000 as it adds additional production lines over the next couple of years.
The challenge so far for Ford – as well as for General Motors (NYSE:GM), which is also establishing a local presence in Russia -- has been supply lines. Unlike China, Russia doesn't (yet) have many local companies that can produce parts and supplies for Ford at a global standard of quality. That means that Ford has had to import many parts, a cumbersome process that can involve long customs delays and other hassles.
But that is changing. Ford only gets about 20% of its parts locally now, but hopes to reach 60% by 2015, the company said recently.
Ford has clearly learned from experience
One of Ford's biggest mistakes in the last decade was its failure to get established in China's booming market early on. Preoccupied with its problems elsewhere, the Blue Oval looked on as rivals like GM and Volkswagen (OTC:VWAGY) established themselves as China's market heavyweights.
Ford is now scrambling to catch up in China (and doing a good job of it, by the way). But its efforts to get established in Russia while the market is still small should serve it well as the market there continues to grow.