Ford in Russia Ford and GM Entered

Ford in Russia

Ford and GM entered the Russian market seeking growth. Both companies have seen their market share erode over the course of the past decades as competition in the domestic market has increased significantly in that time. The Russian market is characterized by a relatively large size and a relative scarcity of strong players. For a time, Russia was the fastest-growing auto market in Europe, in part due to that country's economic resurgence following the turbulence of the 1990s (Kramer, 2007).

Ford entered Russia in 2002 with a wholly-owned production line outside of St. Petersburg. The company chose that time to enter for two key reasons. The first is that it gained first mover advantages. A number of European and Japanese auto companies such as Peugeot, Citroen, Suzuki and Volvo followed Ford into the Russian market (Kramer, 2007). The other reason why Ford chose this time to enter is that it corresponded with greater stability in the Russian market. In the decade that followed the fall of the Soviet Union, Russia's economy suffered from a high level of turbulence. The legal infrastructure was weak, making market entry difficult for foreign companies. In 1998, Russia endured a currency crisis and debt default. The ruble was devalued and the default extended to both public and private debt (Chiodo & Owyang, 2002). Entering the market earlier would have subjected Ford to significant country risk and as a result of the prevailing economic conditions at the time there was not significant opportunity to justify the risk. Four years later, the economy had stabilized and there was significant growth in the size of Russia's middle class.

There are two reasons why Ford did not wait until later to enter. The first is that Ford wanted to gain first mover advantages. Most major auto companies had targeted Russia for expansion, and Ford knew that if it was to establish itself as a major player, it needed first-mover advantage. In addition, Ford also understood that the source of growth in Russia's auto market over the coming decade or more was going to be based on economic improvement, rather than demographics. The Russian economy was set to improve in the wake of the crisis. The demographics, on the other hand, are weak for a long-run improvement in the Russian auto market. Russia's population at the time was aging rapidly and shrinking quickly, a trend that has only today begun to stabilize (Kim, 2010).

There are many reasons why Ford may have chosen to establish a wholly-owned subsidiary. Direct ownership gives Ford a high degree of control over the operations. This is something with which Ford is familiar, having large and highly integrated operations in the domestic market as well. In addition, the higher level of control was essential in a Russian market that at the time was still uncertain. There was a high level of political/legal risk for foreign firms entering Russia given the poor state of legal infrastructure. Firms that had entered joint ventures in the 1990s sometimes found themselves losing their investments just as payback was set to begin. Ford knew that if they were to avoid this risk, they needed to avoid joint ventures. They would be better able to control their investment and their assets with a wholly-owned subsidiary.

Licensing its technology to a Russian firm also came with other risks. In addition to having its intellectual and physical property expropriated, Ford also knew that most Russian manufacturing facilities were archaic and not able to produce quality vehicles efficiently. A new factory was going to be required anyway. The lowest risk way for Ford to set up a new factory was to go solo, without a domestic partner.

GM chose to establish a joint venture with AvtoVaz for a few reasons. The first is that it believed a joint venture would allow it better access to the Russian market than other methods of market entry. A joint venture typically gives the foreign firm access to established distribution channels, for example. In addition, GM felt that a joint venture would help it control production costs, as it could use cheap components through AvtoVaz (Bush, 2007). There are certain risks associated with this strategy. In Russia, there are legal risks such as expropriation by the local partner. There is also the risk that the local partner will not adhere to agreements or will underperform on expectations. There is the risk of culture clash between the organizations as well.