BMW decided to stay in Russia
Production of BMW cars at Kaliningrad’s Avtotor will continue “in accordance with the development priorities of the Russian car industry,” a representative of Avtotor told Vedomosti. This involves the transition from screwdriver assembly of premium foreign cars to full-cycle production, which includes welding, painting and assembly of machines.
The assembly of BMW at Avtotor started in 1999. Since 2012, the parties have been negotiating the construction of a separate BMW plant on the site of the Kaliningrad holding. But the economic crisis at the end of 2014 and the subsequent decline in car sales in Russia put negotiations on hold. They returned to the active stage only at the turn of 2016-2017.
The signed agreement will allow the companies to continue working to increase the added value of cars made in Russia, the representative of “Autotor” added. According to him, the agreement is expected to localize the production of BMW X5, BMW X6, BMW X7 and BMW 5 Series passenger cars in Kaliningrad. Vedomosti sent a request to a BMW representative.
By 2019, the government has formed three possible options for the presence of the German automaker in Russia. BMW had to either build its own plant in Russia, similar to what Mercedes did in the Moscow region, or integrate into Avtotor’s special investment contract (SPIC) and increase localization, or close the screwdriver assembly in the Kaliningrad region and switch to direct imports. The German company was given two years to make a decision. In 2020, the then president of the BMW Group in Russia, Stefan Toichert, said that creating its own production in Russia within a separate SPIC does not make economic sense for the company.
Avtotor concluded a SPIC with the Ministry of Industry and Trade and the government of the Kaliningrad region in mid-2019 on the wave of signing such versions of such contracts with automakers. Then the company undertook to invest at least 12 billion rubles. in the localization of production, the creation of engineering, training and IT center. SPIC is a framework tool that guarantees companies that their business conditions will not deteriorate for the duration of the contract and tax benefits in exchange for localization obligations. It is the main criterion for confirming that the products are made in Russia. The SPIKs of the first version are valid for 10 years, in the second version they were extended to 15-20 years depending on the volume of investments.
To fulfill its obligations, Avtotor has built a new universal plant with a capacity of 50,000 machines per year. It was designed by the German company Durr. It was assumed that the production of some already released models would be transferred there when their updated versions appeared. According to Alexander Sorokin, CEO of Avtotor Holding, these may be cars of the company’s main partners – German BMW or Korean brands Hyundai and Kia (Vedomosti wrote about this on July 25, 2019). As a result, this site will become a new production complex of BMW cars in Russia, explained the representative of “Autotor”.
At the end of 2021, Avtotor signed an additional agreement with the Ministry of Industry and Trade of the Russian Federation and the government of the Kaliningrad region to its special investment contract. According to him, the company undertook to establish the production of electric vehicles and components for them, as well as increase the localization of its already produced cars with internal combustion engines. The estimated volume of additional investments of the holding will be 20 billion rubles, a total of at least 32 billion rubles according to SPIK.
“Taking into account these obligations and on the basis of the signed bilateral agreement on production and supply until 2028, the continuation of cooperation between Avtotor and BMW involves the implementation of a project to produce German-made cars in the full cycle – welding, painting, assembly,” he told Vedomosti. representative of the Russian holding. He did not comment on Avtotor’s investment in the BMW project. An employee of a Russian automaker estimated for Vedomosti the cost of building a full-cycle car plant with a capacity of 50,000 cars at 250 million euros (21.3 billion rubles at current exchange rates), of which at least 60 million euros – painting equipment, more than 30 million euro – welding line.
According to the Association of European Business, BMW cars are the most popular in the Russian premium segment. Their sales in 2021 increased by 10% to 46,802 cars. About two-thirds of them were imported last year, despite having an assembly on Avtotor.
From the point of view of controllability of the production process, BMW would prefer to build its own plant, rather than having it on Avtotor, believes Sergei Burgazliev, an independent consultant for the automotive industry. At the same time, Avtotor’s negotiating position is not as strong as it used to be: there are fewer customers, capacity is underutilized, the expert points out. This allowed the Germans to bargain for the conditions that suit them, because they were not ready to invest about 300 million euros in their own plant, like Mercedes, Burgazliev told Vedomosti.