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Modern science and arts

Fac 411
Submitted to Dr. Amal Tolba Submitted by
Yasser Mohamed Sherif Zeina Mostafa El Wakeel

Chapter one
y y y y y y y y y The Development of the Russian Car Industry Objective of the research Methodology Hypothesis Scopes and limitations Significant of the research History about GM and Avtovaz. About General Motors and AvtoVAZ of Russia

Literature review
Chapter two:
y y y y y Why joint venture Goals of GM joint venture Pros of joint venture for GM Why not buy a company The original JV agreement balance-out strategic needs versus financial needs for the two JV partners.

Chapter three:
y y y The role of kit-assembly approach. Would the two parties consider the JV successful? Financial drivers and expectations: o Exports. o Ruble depreciation.

Chapter four:
y y y y Hedging strategy. General motors decisions. Observation on GM-Avtovaz JV. Why this JV is interesting.

Chapter Five
y y Student`s opinion. Conclusion and recommendations

Chapter one Introduction

This topic is talking about the joint venture between GM-AVTOVAZ in the Russian market. Firstly joint venture is an agreement in the work that the parties agree to develop a limited period, a new entity and assets through contributing new equity. Exercised control over projects and, consequently, the share of revenues and expenditures and assets. In this paper there is a history about the company, and what is joint venture and pros of joint venture, also there is the goals of GM joint venture, and the hedging strategy and the kit-assembly approach then the conclusion about GM observation and decisions in the agreement.

Objective of the research

The aim of the study is to know whether to accept the agreement of the joint venture or buy the company.

The study will be divided into qualitative and quantitative study for the objective . at first, regarding the qualitative analysis, a literature review will be conducted to assess the success of the joint venture. Second to determine the pros and cons of joint venture.

In this research the hypothesis is divided into two Null Null 1 Is the joint venture is successful or not? Null 2 Is the joint venture will be more costly than buying a company?

Scope and limitations

The research scopes on the car industry in Russia and any other industry will be excluded from the research because the joint venture between GM-Avtovaz include only Russian cars and this because GM have made other joint ventures with different companies in different countries. Significant of the research This paper provides the reader with full information about the joint venture between GMAVTOVAZ in the Russian market and from he importance of the research is to know whether to take risk in the Russian market or not and provide the reader with information abut buying the company or make the JV agreement.

y History about GM-Avtovaz

GM-AvtoVaz was founded in 1971, First Niva was produced in 1977. Before joint venture Russian auto industry was undeveloped because there was no direct competition due to few producers. The Russian auto maker and western auto maker were pushing towards the joint venture. General Motors started the AVTOVAZ since ,its presence from 27 June 2001, when it was the signing of the General Framework Agreement by the representatives of General Motors Corporation AVTOVAZ and the European Bank for Reconstruction and Development. Set up a joint company in the meeting on the basis of 30 July 2001 was registered in Russia's justice ministry on August 2 in 2001.The appointment of staff was first on 27 august 2001 and enriched the work of the fossils in the site began in October. The joint venture was recorded in Russian ministry on august 2nd 2001; later employees were hired in 27th of august 2001 but they actually started working in October.GM-AVTOVAZ became very popular on September 2002since Chevrolet NIVA was established and was described to be comfortable and safe .Later in 2004 they created the Chevrolet VIVA; then they were rewarded after establishing NIVA GLX on 2006. Chevrolet NIVA was improved, renewed and updated in 2009; then in 2010 they also improved the VIVA. GM-AVTOVAZ main concern is to be able to cooperate with agencies such as Togliatti and other agencies to help in selecting employees and hiring them. In January 2011 the company had 1400 employees, Some of GM-AVTOVAZ polices are to prevent pollution and use as much natural resources as possible. Some Goals of the JV are to

become very popular in the Russian market by producing and creating cars that have high quality with good affordable prices.1 The shareholders contributed capital is $238.2 million:
y y

General Motors $99.1 million by cash and equipment, 41,61%; AVTOVAZ $99.1 million by intellectual property (patents and trade mark on Niva 2121), buildings, etc., 41,61%;

European Bank for Reconstruction and Development (EBRD) $40 million in cash, 16,78%, and loan facility for $100 million

Investment The total amount of investment into the project scheduled for $338.2 million. It includes:
y y y y

82.3 million cash, 63.6 million intellectual property, 92.3 million equipment, 100 million EBRD loan

Avtovazproduces about 800000 Lada car in the year. The company owns a joint project of the value of 330 million dollars with General Motors Corp. -- GM. flagship -- to manufacture cars four-wheel-drive Chevrolet Neiva, cars and Chevy FIFA) had been the production of more than 55000 in 2007 ). flagship and General Motors for each share of 41.5% in the project, while the European Bank for Reconstruction and Development possesses 17% remaining.2

About General Motors and AvtoVAZ of Russia

In June 2001, arrived David Herman, Russian President General Motors (GM), and his team in Togliatti, Russia, to negotiate a joint project between General Motors and AVTOVAZ , the largest car producer in Russia. General Motors has signed and AVTOVAZ have signed a Memorandum of Understanding (MOU), which is in non-binding commitment on March 3,



1999, to follow up a joint project in Russia. Now, nearly two years later, Herman was recently received the approval of GM for the Negotiation of a detailed structure of the Joint Venture (JV) with AVTOVAZ to produce and sell Chevrolet in the Russian market. It was expected that the auto market Russian to account for a large share of global growth over the next decade. He expressed Herman increasingly convinced that if GM move decisively soon, would be lost market opportunity other automakers. Ford, for example, was to move forward in a joint project in Russia was scheduled to start the production (Ford Focus, in late 2002, was already the import of the requirements of the car). However, Herman also knows that the practice of business in Russia has made many challenges. The Russian economy, despite the fact that is recovering from the collapse of the year 1998, is still weak, uncertain, confusing tax laws and rules are subject to Government. It seems that the auto industry Russian tomorrow from one crisis to another. It was the second largest car producer, gas, was a victim of hostile takeover unexpected only three months earlier. Trouble has contributed GAZ GM fears over the ownership of actual for AVTOVAZ itself. Further complicating the situation and the lack of consensus within the different regions of the Joint Venture GM on Russian. The headquarters of General Motors in Detroit said Herman to find a third party for risk sharing and investment in a joint project Russian. Meanwhile, Adam Opel, and the Division of General Motors in Europe, there were questions on the scope and timing. Before becoming vice-president of General Motors of the former Soviet Union, Hermann was the head of Opel Adam.3

General Motors Corporation

Earlier, General Motors Corp. (United States), founded in 1908, the largest automaker in the world. General Motors used more than 388,000 people, 260 branches and its subsidiaries and joint ventures, the Department of Operations in more than 50 countries, and closed in the year 2000 with 160 billion dollars in sales, and 4.4 billion dollars in profits. It was the appointment of John P "Jack" Smith, chairman of the Council of the Department of General Motors in January 1996, after he spent five years in the past the post of chairman and chief executive. Jack Smith, speaking for the post of the President of the Republic

International Business,2003

and the Executive Chairman Richard JI, "Rick" Wagner, Jr., by the director of strategic and operational command of General Motors. General Motors operations has been divided into the world in Europe General Motors, General Motors Asia and the Pacific, GM Latin America, Africa and the Middle East. Despite the fact that the largest automaker in the world, the share of General Motors in the market had diminished. By the end of 2000, the share of General Motors in the world market (Unit) 13.6 percent, with the group of Ford to close quickly with the share of 11.9 percent, Volkswagen 1, 3 closes in on 11.5 percent. Emerging markets, like Russia, the representative of the so-called "white areas", which is still unknown and markets certain automakers traditional Western.4

The Russian Automobile Industry

The auto industry has lagged behind Russian behind much of the countries of Western Europe, North America, or Japanese industries. Despite the fact that the Russian government has made it clear priority to help in modernizing industry and development, inadequate capital, poor infrastructure, and roots deep led mismanagement and corruption in cars outside dated, unreliable, and unsafe. However, considered and promising industry in view of the continuing gap between demand and supply in the Russian market because of the future growth is expected in the request. As indicated in table 1, between 1991 and 1993 to buy cars in Russia grew significantly. But this growth has been at the expense of local producers, as happened on the imports of most of the increase in sales, largely because of lower tariffs on imports in the vehicles. With the re-impose customs duties on imports in 1994, returned the import quota of the Russian market to a level of about 7 to 10 percent. Domestic production began to grow again, which has been exported less Russian-made cars. Unfortunately, the financial crisis for the year 1998 as local producers about return to the early 1990s production levels, Russian and the economy, auto


industry in a state of chaos. The local production of cars fell nearly 15 percent in the year 1998. Auto sales dropped in Russia as a whole 8 percent. Russian auto industry very focused, with flagship held its market share 65 percent in 2000, followed by GAZ with 13 percent, and a variety of what could be called "producers boutique" 1, despite the fact that foreign producers represent less than 2 percent of all the auto industry in Russia in 2000, and estimates of the flow of foreign-made cars used was up to more than 350000 Unit in 2000 alone. Although much has changed in Russia in 1990s, there was still too much the same thing. In the auto market, Russian and surpassed the demand for the supply greatly. Russians were without the right to political contacts to wait years for their cars. The cars are still scarce, and spare parts are still difficult found, and rampant crime remains. He was still it is unusual to remove the windshield of areas of cars parked for the keeping of in the streets of the main city.5

The Development of the Russian Car Industry

The automobile industry, in the industrialized economies, the lead in the industry of machine building; this sector has a direct impact on stability in economic operations and political development of society. The analysis of the automobile industry shows beyond any doubt that pays the development of other industries, and provides a large share of employment opportunities. The auto sector is closely linked to metallurgical, petrochemical, machine tools and electricity industries, for allegedly being the largest consumer of products. In the same time, launched economic reforms in Russia, and auto industry has developed in full. This industry emerged and developed in isolation from the world auto industrial processes, in the circumstances of the planned economy and distribution. Each occupied the position of the institution of its own without competition with other domestic auto producers. It was tightly protected this industry from imports. The focus of the production of components of big cars and complexes in the intention was to meet their domestic needs. The largest auto industry companies -- gas, possesses Zell, VAZ KAMAZ every kind of production facilities -- from foundries of kilometers long as the assembly line. Even today Russian auto industry is still a


model structure vertically integrated. Large manufacturers are still producing up to 70 percent of components. This approach has made possible the application of flexible and expeditious techniques for the implementation of the re-tools, spare of costs, and the provision of new models during periods of very short time. The work done in and set up assembly plants to obtain the maximum 35-45% of the costs of production. By 1987, was the production of cars in the Union of Soviet Socialist Republics had reached the highest levels at 2.3 million units with about 2000000 produced in Russia. However, he was satisfied with the local demand for cars in the Mediterranean 45 percent. Under these circumstances there might be incentives for companies to make new models to reduce costs, and to ensure high quality products. In the late 1980s and 1990s early, and the events in the political and economic life of the country produced a radical change in the industry. As one of the most important sector for the economy, it could not be only to be affected directly by the disintegration of the Soviet Union, which led to break economic ties, and the liberalization of foreign trade, privatization, non payments the crisis, and relations with natural monopolies, for 1998 financial collapse.6


Chapter two
Why joint venture?
Because the JV is the only way appropriate for investment in the Russian market, with the partner "appropriate" in the place, the company to benefit from the understanding of the cultural aspects, and distribution channels, and institutions in the local environment, access to support local and federal governments, and investment less than the amount of capital, and perhaps inherit the distribution network. A further argument for the establishment of production in the country in return for exporting normal, the barrier was high customs in the sector, which represents nearly 100 percent of retail price of the car importers in the late 1990s. In other words, General motors wanted to enter the Russian market and thought the best way to enter is with local Russian partner to be more successful and the joint venture will make a readily available cheap cost, GM will access to 65% market share of avtovaz in Russia . this also will help GM to low the corporate taxes in Europe there would be earning of the recognition of Niva and the rights of GM would be equal to Avtovaz ,thus equalizing the risk of joint venture. According to the JV agreement General Motors got the opportunity to gain a large share in the market, consumer understanding of trends and retailing, and the use of equipment production and employment, and to make use of large distribution network. On the other hand, brought GM technology and managerial expertise. General Motors entered the market in the Partnership (41.5% (with AVTOVAZ(41.5%) and the European bank restructuring and development (17% (with a plan to build a plant 340 million dollars. Provided AVTOVAZ land, employment, and the rights of the world Niva in 2123, four-wheel-drive cars and newly designed (" for the auto industry and trade "). And many believe that even with car

manufacturers in the world on its way to Russia, companies and local auto industry is likely to continue to provide most of the vehicles to consumers the Russians. Currently, General Motors to benefit from the opportunities available in the market and seeks vertical integration. For example, Lear Ccorporation is to build the station to provide car seats to GM. AVTOVAZ Company " Lear. Investment in General Motors in a joint project with AVTOVAZ one of the largest capital flows to the country's economy, auto industry, especially since the financial crisis in 1998. The project is expected to have an enormous impact on industry in terms of

modernization and higher standards and job creation. Generic and benefit as well. Centres already established a joint project, a merchant, 20 in the country.7 Goals of JV of GM_AVTOVAZ JV of GM AVTOVAZ had achieved several goals from this agreement; it was considered that the Market growth is one of the main reasons for the JV to increase the demand and sales by selling their old cars and creating new ones. The agreement had also made a huge renaissance in the Russian market , the income had increased in Russia to help the customer to finance the cars, according to the success of the joint venture the demand on new cars had increased. After studying the market from GM goals that it was expected to produce 75000 units a year. In the future, and will be a strategy GM to develop itself as an exporter of Western and Central Europe, Mexico, as well as serve as Russian market. Currently, AVTOVAZ exports to 70 countries) "from Russia with love: foreign automakers...). In accordance with the Ministry of Economy the car market offers the best opportunities in the field of modern production of components and accessories, processing and assembly plants, after-sale also strong. Growth was in this sector has long restricted the cash economy in the country. Also it was concluded that Russian VAZ NIVA model was certainly an appropriate step strategy, which targeted the families of the middle class, which represents the bulk buyers. Furthermore, as well as the group of medium the appropriate rate, this car also belonging to a category four-wheel-drive cars, which has been the growing popularity for several years now. General Motors started flagship joint venture producing Chevrolet Niva, a copy of the model developed Russian wheel in Togliatti in September in 2002. The project aims at producing 75000 units annually, and expects to reach full capacity by the year 2004.8

AIB-SE (USA) 2004 Annual Meeting, Knoxville, TN http://www.itar-tass.com/en/c36/189601.html

Moving forward
After the state of art analysis General Motors were able to estimate accurately the market trends. As a matter of fact, inalienable and income in Russia in increasing the Gross Domestic Product grow and to further the Russians, middle class, and it is expected that auto loans to reach 1.4 billion dollars in 2007, while interest rates will continue to decline from the current scale of 5% -10%, and a preference for the shift to high-quality cars. Provided General Motors advanced a step, the first gain the advantage of the hand, experience and borrowing from the pioneering company in the market, to mitigate the risks, as a result, competitive position itself for growth in the long term. In fact, the company saw three consecutive years of growth and profitability solid double. In 2003 the company announced the auto industry of net income of 21.8 million dollars, according to estimates of my country, about 4 percent margin, which do not compare the profitability in the United States. In August 2004, provided GM priory the new model will be produced in the period 2006-2007, and it is likely to replace VAZ. 2110. Customs duties will be reduced on auto components from 10% to 3%, which could intensify competition in the market. AVTOVAZ seeks to partnership with General Motors to launch Chevrolet. ($ 10,000 -- 13,000 $8,584,604), the company will be able to have access to modern technologies and to promote production of higher value-added cars. It is expected that the auto market to reach 18 billion dollars by 2010 on the basis of Russian government officials (" briefing executive: Russia, "). Perhaps, in the near future will seek other opportunities such as General Motors subsidiary fire funding, and seeks strongly geographical expansion, and the development of auto spare parts and General Motors Corp. from sources outside Russia, and increasing exports to Western Europe. The use of the Internet as a channel of distribution of cars directly through a model represents an opportunity extremely profitable.9

Automobile Industry and Trade Emerging Markets Economy, August 2004

Pros of joint venture

In the case of GM-AVTOVAZ the pros of the JV agreement that general motors will expand in the Russian market easier than any other country , after doing analysis and studies it was determined that General motors will make the full capacity at the end of year 2011 as it produces 75000 cars annually. From the joint venture pros:        Government support for increasing employment Friendly management who have paralleled interests with GM GM manager at the top of the venture (J.Milonas) Absence of tariffs Lower Exchange Risk since all production is made and sold in Roubles

 And all that for just $63 million!!!10 Why not buy a company
It was considered impossible due to 50% local ownership regulation for key industrial units. And if GM bought AVTOVAZ , so there would be a cultural shock with workers who have different mentality, it causes a total exposure in the economic risk in 1998 , GM wouldn`t prefer to open a wholly owned plant since is stillquite unstable for foreigners and cause a possible renationalization.


AIB-SE (USA) 2004 Annual Meeting, Knoxville, TN OP.CIT,P.189

The original agreement of the JV balance-out strategic needs versus financial needs for the two JV partners then the two parties had agreed to make the JV itself as profitable as possible, meaning that all inputs and other product and service transfers made by either party to the JV would be as low as possible to position the profits in the JV, not in the parent companies. Financially, GM was investing a relatively minor amount, $100 million, compared to its other investments around the globe (GM had invested more than $1.5 billion in China). It had only modest expectations for the profitability of the JV it was there more to gain a foothold and learn more about the Russian market. AvtoVAZ needed capital and profits, which it hoped to achieve through the JV. Strategically, there was a significant divergence between the two main partners GM and AvtoVAZ , General Motors was looking for a local partner with an existing automobile and automotive manufacturing capability to serve as a host for its beach-head strategy of entering the Russian market, AvtoVAZ already dominated the Russian market, and needed a Western partners manufacturing and quality knowledge to help it remain competitive at home and to be a potentially credible competitor in the export market. In my point of view that this was a good agreement because GM hopes and made a good market study in order to get high profits and shares to achieve the JV.11


Pearson practice hall , the GM AVtovaz joint venture

Chapter three
The role of kit-assembly approach
After studying it was determined that the kit-assembly approach was not successful in Russia It was a joint production of auto industry, the distribution of the strategy used in many emerging markets in the world, but did not work in Russia, complete knockout kits (CKDs) and groups of semi-knockout kits (SKDs) are the methods used by some major global auto industry companies such as General Motors when the intervention of the smallest emerging markets, the kits utilize the use of local groups low-cost labor in many of the final assembly of, and capital injection little must be already in the country to start production , The Russian market, however, was not a small market (more than 1 million new cars sold there in 2000 alone) the market were actually hit 2 million new cars in 2007) , General Motors had tried to bring in the past groups Chevy jacket, but he has committed a big mistake in cultural groups that had been building actual in Brazil, it is a country with the reputation of a terrible quality products in Russia and And groups be effective only if there is limited by the end of the options for consumers average , but high-quality periodically used cars flooded the Russian market -- resulting in high-quality at competitive prices and low for several sectors of the market.12 Would the two parties consider the JV successful? This is the question that General Motors in difficult and perhaps not to publicly admit that the alliance was not successful, although the Administration announced AVTOVAZ in periodic JV failure as a result of the manner in which drafted and operated , Rosboronexport, the director of new AVTOVAZ said which took power in November 2005, which had been in force flagship had supported the joint project for many years by providing most of spare parts and components at lower cost.13

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Financial drivers and expectations

According to exports the Chevrolet NIVA was highly competitive in European market , its price is reasonable . However it needed bigger engine for safety. Although The older Chevrolet NIVA was cheaper but its sales decreased. Exports Neiva Chevy could be highly competitive in a number of European markets, it was believed that the proposal of the price, a very promising value could be priced these exports at prices higher than that in Russia, which would generate significant revenues there will be a need for the largest engine as well as to improve controls and compliance with safety emissions Depreciation ruble Both GM and AVTOVAZ that over the medium-term and long-term ruble Russian will continue to decline in value against the dollar and euro this would enhance the export sales alike, and to prevent other auto industry companies from outside Russia to compete effectively in bringing the product from outside the country14



Chapter four
Hedging strategy
Hedging Companies usually hedge better than individuals, they do so to decrease the transaction costs and to provide for future investment needs and evaluate the companys operations and profit by comparing it with foreign subsidiary. GM Hedging GM feign exchange hedging policy has three main goals which are to decrease cash flow and risk, GM wanted to diminish time and costs related to the FX (foreign exchange market) Management ; also GM uses passive management process to minimize the investing money . and the final objective is to adjust the firms soul automotive business . This passive management policy used by GM hedges fifty percent foreign exchange exposures in all sectional GM companies around the world for example in GM north America ,Europe , etc.. Each section should use and follow specific guidelines and procedures. Forward contract hedge 50% of the exposures for months one through six, options to hedge 50% of the exposures for months seven through twelve, and In general, at least 25% of the combined hedge on a particular currency is to be taken in options in order to make sure of its flexibility. There are some foreign exchange exposures to GM, such as , CAD (canadian dollar) Transactional and translational exposures , Argentina peso (Argentina currency) How to deal with the widely-anticipated evaluation of the peso, and Yen( Japanese currency )Operating exposure. Should GM hedge on a worldwide or regional basis? Advantages: GM operates in so many countries, so the exposures of different subsidiaries would save costs.

Disadvantages: each GMs subsidiary has its own opinion15

Why this JV is interesting.

GM-AVTOVAZ JV is considered very interesting because its one of the few JV that worked, and the stock price increased immediately, both cultures adapted together fast, this leads to a successful future for this JV.16

General motors decisions.

Many Western automakers had unsuccessful operations in Russia. This JV is risky for GM in order to eliminate this risk GM can cover all transactions with forward contracts. So GM started to develop new technologies in case to reduce costs and get higher rate of return.17

Observation on GM-Avtovaz JV
GM considers the JV to be successful ,however AVTOVAZ see that the JV is less successful because the sales are not as expected to be. But in my point of view that the JV was successful because the GM had made a full capacity of the market in 2004.18

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Pearson practice hall , the GM AVtovaz joint venture OP.CIT. 17 IBID 18 IBID

On the basis of experience General Motors ", and success in Russia is difficult but possible if it is the key elements in place: understanding macroeconomic factors and implications at risk, it has developed a strategy, and commitment to achieve the significant success and the leader of a prominent believes in the project and is ready to implement the plan. And it is concluded that the JV agreement have made a success in the Russian market , and the GM have manufacture about 75000 annually.

Recent developments in Russia, such as a series of terrorist attacks and attempts to Putin, as a central government, indicating that Russia in the future the political and economic situation was not entirely clear. Perhaps, for some Russian companies will remain "enigma wrapped in mystery inside a riddle" for a long time, however, these companies who are ready to take risks, and allows a jump the faith, and has a sound strategy, and it is likely to get the key. (Churchill, Winston).