General Motors will slash production in Russia and pull the mass-market Opel brand completely in the face of plummeting sales in the economically troubled country.
Mainstream GM brands have been among the biggest losers as Russia’s auto market shrinks, with sales of Chevrolet down 74 percent year-on-year in February and those of Opel plunging 86 percent.
Opel will leave the Russian market by December, with Chevrolet production cut back significantly to focus on top-end products such as the Corvette sports car and Tahoe SUV, which are imported into Russia from the U.S.
The move is likely to result in around $600 million in one-off losses, around a third of which will be non-cash expenses, GM said.
“This change in our business model in Russia is part of our global strategy to ensure long-term sustainability in markets where we operate,” GM president Dan Ammann said in a statement. “This decision avoids significant investment into a market that has very challenging long-term prospects.”
GM’s factory in St. Petersburg, which employs 1,000, will “halt production by the middle of 2015,” the company said. It is too early to say how many jobs will be lost.
The St. Petersburg assembly plant is GM’s only fully owned production facility in Russia and opened in late 2008 amid much fanfare at a time when foreign automakers were crowding into a booming market. The plant cost $300 million and has a capacity of 70,000 cars a year.
Production of Chevrolets under license by Russian firm GAZ will also end this year, while GM’s joint venture with Russia’s Avtovaz producing the Chevrolet Niva basic SUV will continue.
The Russian pullback is designed to preserve GM’s strong cash position by avoiding another drain on its capital. The company made a $2.8 billion net profit last year despite an expensive string of recalls and $1.4 billion in pretax losses in its European unit.
At the end of the year, GM was sitting on $25.2 billion in cash, but earlier this month the company agreed to a $5 billion stock buyback.
It faces cash drains later this year including a potential civil penalty from the U.S. Justice Department for concealing a deadly ignition switch problem and what could be an expensive contract settlement with the United Auto Workers union.
With Russia predicted to slide into recession this year on the back of low oil prices and international sanctions, the luxury car market has held up better than mass-market sales.
GM said it would focus on growing the Cadillac brand in Russia, whose sales are currently far behind those of premium European rivals such as BMW and Audi.
Just 72 Cadillacs were sold in Russia in January and February this year, according to Russia’s Association of European Businesses. That is less than half as many as a year before, and below 1 percent of the sales reported for Mercedes-Benz.
Russia’s central bank predicts the economy will contract by between 3.5 and 4 percent this year.
Car sales were down 38 percent in February year-on-year as Russian consumers shied away from regular price rises caused by the weak ruble, which has lost almost half of its value against the dollar since the start of last year.
The weak ruble affects not only cars imported into Russia, but also those made there, since most use a large number of imported components.
GM’s American rival Ford has also seen Russian sales plummet, down 78 percent in February year-on-year.
By contrast, Korean sister brands Hyundai and Kia have kept prices mostly stable, as a result avoiding large drops in sales and vastly increasing their share of the shrinking Russian market.