In March, reporters who gathered for the announcement of a new vehicle at a factory in central Vladivostok, Russia, feasted their eyes on the Actyon, an SUV from South Korean maker Ssangyong Motor Co.
Unlike vehicles the maker builds in South Korea, the Actyon bears a shiny bird emblem used only in Russia.
It's built by Sollers Far East, a local corporation run by Sollers, a Russian automobile manufacturer based in Moscow, whose factory in Vladivostok is at the head of Zolotoy Rog Bay. The orange-and-blue exterior contrasts markedly with the old structures on former shipbuilding sites nearby.
The Actyon's price tag ranges between 715,000 and 945,000 rubles (around 1.89 million to 2.5 million yen, or $23,700 to $31,300), putting it within reach of the factory's workers if they can get a loan. Alexander Korneychuk, general director of Sollers Far East, predicted, "This model for the Russian market will sharply boost our sales."
South Korea an "example of success"
Sollers set up a local corporation in Vladivostok, close to Russia's borders with China and North Korea, at the end of 2009. With a 1.8 billion ruble investment, the company built "the Far East's first" automobile assembly plant and began producing automobiles for its partner Ssangyong Motor. Last year the factory put out roughly 25,000 vehicles for five models. The Trans-Siberian Railway carries finished automobiles to be sold in Moscow and elsewhere.
The plant's production lines are well-organized. On the walls is the slogan "KAIZEN," a Japanese word meaning "improvement" that has become part of the global parlance, to encourage workers to engage in kaizen in the mold of Toyota Motor Corp., a company that has mastered efficiency. Parts arrive via container ships from Korea to the site's pier and finished vehicles are loaded from a branch line onto freight trains.
"We originally wanted to attract a Japanese company," said a Sollers publicist. "But Japanese companies are cautious. First we'll show them an example of success (Ssangyong) and then try to connect that to luring Japanese firms."
Russia's Far East has been left behind, its industry undeveloped as the country's economy has grown. The Russian government is looking toward help from its neighbors as it tries to mend the situation.
Rail transport costs covered
In 2005, Sollers began assembling Ssangyong vehicles in the Republic of Tatarstan in western Russia, near Moscow, the country's largest consumer market. Sollers moved its base to the Far East, close to South Korea, when the government began offering an incentive to cover rail transport costs for finished vehicles. Prime Minister Vladimir Putin attended the ceremony to commemorate the first automobile produced at the Sollers Far East plant. He said, "This factory is only the first step for the Far East's automotive industry."
Just as Putin said, Japanese companies started to take action once production for Ssangyong took off. Mitsui & Co. and Sollers have formed a joint venture in Vladivostok. Operations will begin between the end of the year and February 2013, when the company will assemble the Land Cruiser Prado, a Toyota SUV.
Ships will carry parts from a factory in Aichi Prefecture to Vladivostok and trains will transport finished vehicles to Moscow and elsewhere. According to Mitsui & Co., the company has concluded a contract with Russia's economic development ministry to receive reduced duties on imported parts.
A taxi driver in a used Japanese-made car reached out from the window to the parking ticket dispenser at a hotel parking entrance and took a ticket. Afterward came a left-hand drive Russian car. The driver got out and walked around to the right side where the dispenser was.
Ninety percent of the cars driven in Vladivostok are used vehicles imported from Japan. Even though they drive on the right side of the road in Russia, many of the city's facilities are designed with right-hand drive cars in mind, contrary to the rest of the country.
The factory assembling Toyotas under the Sollers/Mitsui & Co. joint venture, which will be next door to the plant putting together new cars for South Korean automaker Ssangyong Motor, will produce vehicles with local left-hand drive configurations. A person working for a company that is closely involved in the plant's opening says it stands as proof that Putin, who became president in May, had acted.
"Mr. Putin thought that used Japanese cars don't add any value to the local economy. That's why he very much wanted Toyota to build a plant for assembling new cars to expand the industry's base."
The source also said that the company was able to secure the land for the factory quickly with the prime minister's intervention.
The Russian government is promoting the machinery industry as a pillar of the Far East's development and is growing parts manufacturing and other automotive-related industries. Putin made the shift to local production by foreign makers after shutting out used cars.
His ambitions have expanded to government incentives for companies getting into the business. In the case of Ssangyong vehicle production by Sollers Far East, the government is holding import duties on parts down to between zero and 15 percent for a set period of time and making the cost of rail transport free. The vehicles' retail price in Moscow is several thousand dollars lower than finished vehicles imported from abroad.
As of now Sollers Far East is only assembling finished vehicles, but if the company can shift some processes such as welding into Russia and increase the share of locally supplied parts, then the government will extend the preferential import duties. It is a policy to make as many of the production processes as possible locally.
However, Russia's accession to the World Trade Organization (WTO) will bring down import duties on finished vehicles. Some think that it is "unclear whether local assembly will benefit Toyota or not." One informed insider said, "The Japanese thought about what working in the Far East and Russia will be like in the future, and they decided to fulfill Mr. Putin's requests."
A lifestyle abounding with foreign-made goods
One cannot live in Russia's Far East without foreign products and services. The majority of TVs and computers in large electronics stores are made in South Korea. Chinese-made products have conquered clothing and miscellaneous sundries. In the cities, one can see vending machines from Japanese beverage makers that still have coin slots for Japanese yen. Even the drink labels are in Japanese.
The reason is slow efforts to build up manufacturing. Price levels are inevitably high because of duties on imported goods and the cost of the alternative: transporting other goods from Moscow.
Gregory Stepanov, 35, who works for an auto repair company, has a monthly household income of roughly 63,000 rubles. Although considered a middle-class income, it is only barely enough to get by. Two years ago he lived in Beijing, where he could reside in a furnished three-bedroom apartment with a living room, dining room and kitchen in the suburbs off of the 15,000 or so rubles he earned from renting out his one-bedroom Vladivostok apartment with a dining room and kitchen. Stepanov's food expenses were half those in Russia.
"There's nothing left in Vladivostok, so saving and travel are out of the question," he said. There is even spreading drug and alcohol abuse in the schools. Stepanov said that he moved his family back because his oldest daughter could not adjust to life in China, but they will emigrate again after she finishes school.
Russia's gross domestic product enjoyed a continuous rise from 1998 until the collapse of the U.S. investment bank Lehman Brothers in 2008, but the gross regional product of the Far East Federal District fell from accounting for 6.67 percent of GDP in 1997 to only 3.8 percent in 2008. Other than Sakhalin Oblast, which had natural gas development projects, the Far East was left out of Russia's growth in the 2000s.
Director Mikhail Tersky of Vladivostok's Pacific Center for Strategic Research said, "The population density is low, so infrastructure maintenance is inefficient, which hinders technical and capital investment." The development plans put out went up in smoke.
But the development plan drafted in 2008 when the national budget became fatter has been comparatively well implemented. The area will receive a roughly $20 billion investment for infrastructure maintenance alone for the Asia-Pacific Economic Cooperation (APEC) summit scheduled for September.
Tersky, however, is pessimistic. "Can we really collect it?"
Cooperation in creating business opportunities and training workers
How can the money be sustainably invested in development? Putin has drawn up a plan to supplement these funds with investments from neighboring countries that will lead to stable development.
Korean firms have been active. And with the won cheap, they have been on a tear in mobile phones, cosmetics and more.
In July 2010, not long after Sollers Far East began assembly for Ssangyong Motor, Daewoo Shipbuilding spent $1 billion to establish a joint venture with United Shipbuilding Corp. (OSK) of Russia and build a new dockyard at the port of Bolshoy Kamen near Vladivostok. Putin visited the port at the end of 2009, where he reportedly asked for Daewoo's cooperation.
Former Primorsky Krai Vice Governor Viktor Gorchakov expects that the capital investments for hosting the APEC summit and the entry of foreign manufacturers will stem the population exodus and instigate the accumulation of an industrial culture.
Japanese companies have also switched from a "wait-and-see" attitude to moving on developing concrete business projects. Major construction machinery maker Komatsu Ltd. has been engaged in local production in Yaroslavl, north of Moscow, since 2010, but the Far East and Siberia have risen in importance as demand for construction machinery increases for building pipelines, resource exploration, public works and other projects.
The lack of technicians to operate construction machinery is a problem. Komatsu has partnered with Pacific National University in Khabarovsk, a city in the Far East, to train technicians by holding special lectures and providing machinery. Komatsu says it will become more deeply involved in the Far East's development by training technicians.
(Ryosuke Ishibashi and Daisuke Nishimura reported from Vladivostok. Masami Ono reported from Moscow.)
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