Skoda to enter the booming Russian market

The Volkswagen Group, that owns the Czech carmaker Skoda, last week announced its decision to enter the booming Russian car market. The plan is to start assembling the Skoda Octavia in kit form. To avoid Russia's high duties on car imports, Skoda will make the cars in the Czech Republic, paint them, take them apart and then have them reassembled in Russia. Skoda says that this should all be up and running by the beginning of 2008. David Vaughan spoke to our auto-industry expert Lyle Frink to find out more.

"This is actually a three-step process of going into the Russian market. You start out by doing kits, which require limited assembly in the destination country, and then you move up the value scale by substituting components, adding local components, while you also build your manufacturing capacity, so you can make the complete car there."

And so there's something in this for the Russians, in that - in the second phase - they will be able to have more of their own components and own manufacturers involved in making the Octavia.

"Correct. In the second and third steps the Russian economy will benefit more, as local suppliers are added."

Why has the Volkswagen Group decided to start its "assault" on the Russian market with Skoda?

"Because the brand is known. They are already there, and I also think that Skoda is a little bit more nimble at stepping into Eastern European markets than the Volkswagen Group per se. You could call them the 'shock troops' for Volkswagen."

Russia is known to be a risky market. Is there a danger that Skoda - and the Volkswagen Group as a whole - will get their fingers burnt?

"Absolutely. The market is in quite a dynamic transition following the re-nationalization of Auto VAZ last summer. Now the dominant auto maker is managed by the country's arms exporter, which according to investment banks in the region has no automotive experience and no manufacturing experience. But they can sell you an anti-aircraft missile system."

So it's from Kalashnikovs to cars basically...

"Yes. It is not clear right now how the Russian government will support its local automotive industry, which means VAZ. They could do this by changing the customs regime, they could do this by direct financial aid to the company - it's just not sure. And you don't have many arms exporters that are managing car makers. So there is a big uncertainty over how the car market in Russia will develop. It's a growing market but an uncertain market."