According to multiple sources, Italy's Fiat and Russian auto giant Sollers called it quits on their proposed joint venture this morning. Instead of Fiat, Ford will join forces with Sollers. If that name is new to you, this might help: "Sollers" is the new-and-improved name for the Severstal-Auto holding company, which controls stakes in UAZ and ZMZ, and owns a large factory, formerly part of KamAZ, that used to produce Ladas for AvtoVAZ. (Aren't command economies fun?)
As Russia continues to plod the long path toward a Free Market, Sollers is seeking foreign help in capturing a larger piece of the booming Russian auto market -- one that Boston Consulting Group projects will become the globe's sixth-largest by 2020, with annual car consumption of four million units.
Both Ford and Sollers are keeping mum on most details, letting slip only that the new JV aims to sell "cars and light commercial vehicles" in Russia. Fortunately for investors, though, details of the proposed Fiat/Sollers tie-up are more widely available, and give us a few hints as to the scale of Ford's new project. Specifically, when Sollers approached Fiat about a deal last year, it was described as a "multibillion-euro joint venture."
According to AFP, this joint venture aimed to produce 500,000 cars per year in Russia. So assuming Sollers still has its sights set on the big number, Ford's new JV could mark the most significant entree by a foreign car maker since General Motors
Deal, or no big deal?
So ... how important is this deal to Ford? By my estimates, Ford's 50% interest in a new 500,000-cars-annually producer could yield in the neighborhood of $3 billion in incremental sales -- enough to grow Ford's European auto business 10%. That said, these sales might not be as profitable as U.S. investors expect.
Unlike the U.S., Russia is a pretty brand-agnostic car market. While "foreign" cars still have a reputation for higher quality than domestic wares, Russians are more than willing to buy a Kia or Hyundai over a Ford or Opel, and still purr happily over their new "foreign" ride. In short, price competition will be key to Ford making a go of its new JV.
As Napoleon can attest, marching on Moscow in winter won't be a walk in the park.
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General Motors is a Motley Fool Inside Value pick and Ford Motor is a Motley Fool Stock Advisor recommendation, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.
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