In the fall of 2009, champagne corks popped in Kaluga, an industrial city about 190 kilometers south-west of Moscow. Martin Winterkorn, then CEO of Volkswagen, had invited to the party at the group’s local plant. Vladimir Putin also did the honors. He flew by helicopter and praised the “patriotic production” that the German automaker had started in the country, building models like the VW Tiguan and Škoda Octavia.
Almost a decade and a half later, there is nothing left of the growth prospects that were conjured up at the time. After Putin’s attack on Ukraine, the Wolfsburg-based company is looking for ways to cut Russian ties.
Shortly after the war began in February, VW stopped production and sales in Russia. The partnership with the Russian car manufacturer Gaz, which manufactured some VW models as a contract manufacturer in the small Nizhny Novgorod assembly plant east of Moscow, was terminated. In the much larger Kaluga plant, in which VW has invested more than one billion euros, there is also a standstill. In contrast to other Western companies, the Wolfsburg-based company has not yet formally separated from its factory, a status that is likely to change in the near future.
Sanctions and arbitrary authorities
According to information from the FAZ, Europe’s largest car manufacturer is looking for an investor who wants to take over the location. In view of the sanctions and the arbitrariness of the local authorities, the talks are like riding on a razor blade. But alternatives are hardly seen anymore. “With each escalation level, the probability that we will be able to produce there again in the foreseeable future decreases,” says a manager.
Apparently, the Supervisory Board has also come to the realization that under the given circumstances only a hard cut is possible. “There is a clear will that we withdraw completely from the country,” says the environment of the control panel. After the illegal attack on Ukraine, moral reasons play just as much a role as purely practical considerations and problems. Important components will not be available in Russia for the foreseeable future, not to mention the slump in local demand.
Many foreign companies have reacted more quickly, such as the home improvement chain Obi, which gave away its local stores to a Russian investor in April. The Dax group Siemens Energy recently confirmed the separation from a Russian gas turbine joint venture. Renault, the largest Western European car producer in Russia, sold its holdings in the country for the symbolic price of 1 euro, which resulted in write-downs of 2.2 billion euros.
Hesitant industry giants
Other industry giants are still hesitating, for example the automotive supplier Continental, which, like VW, runs a plant in Kaluga. After an initial production stop, the Hanover-based group resumed tire production there. They want to avert “criminal consequences” for employees on site, according to the reasoning. Conti sees himself being harassed by the Russian judiciary, which insists that local demand be served.
After VW had hesitated for a long time, the company is now confronted with the question of who is even a possible buyer for the Kaluga location. The first rumors are already circulating. The Russian media spoke of the Kazakh company Asia Auto. The Austrian entrepreneur Siegfried Wolf, former boss of the automobile company Magna Steyr and proven expert on Russia, has already been brought into play as a partner.
In the VW Group, Russian or Chinese companies are more likely to be expected, but the circle of potential buyers is apparently manageable. In view of the tense situation, these “are not exactly in line,” says one of those involved. Officially, VW only says that it is considering “various scenarios for the future of business operations” in Russia. “One of the options is to sell the assets of Volkswagen Group Rus to a third party.” A decision on this has not yet been made.
How important was the Russian market?
Simply closing the gates and withdrawing in a disorderly manner is out of the question from VW’s point of view. Reference is made to the responsibility for around 4,000 employees who last worked in the plant. In the Russian system of short-time work, they are currently receiving part of their wages, but the payments are falling over time, so that the Wolfsburg-based company cannot postpone a decision indefinitely.
Warranty claims by Russian customers are also an open flank. “We need someone to take over that,” says informed circles. The topic particularly affects the Traton commercial vehicle division. A few weeks ago, she decided to hand over her sales offices in the country to local sales organizations. The resulting book loss adds up to up to 550 million euros.
The VW Group had already opened its first representative offices in Russia in the early 1990s. In 2007, the foundation stone was laid for an assembly plant in Kaluga, in which kits from abroad were initially screwed together. Two years later, Winterkorn and Putin opened “full production” with body shop, press shop and paint shop. However, the market did not develop into a great success story for the Wolfsburg-based company, despite all the investments that came together over the years.
The VW Group sold almost 200,000 vehicles in Russia last year, around 2 percent of all deliveries around the world. From a business point of view, the withdrawal is easy for VW to cope with, even if write-downs will probably be unavoidable. One hopes for more than a symbolic award for the plant in Kaluga, says a company insider. But nobody is under any illusions. Large parts of the investments are likely to be lost.