St Petersburg - the new Detroit

MOSCOW - Gone are the days of the Lada and the Yugo in Russia - the country's second city, St Petersburg, is driving ahead with its plan to become the "new Detroit" after clinching deals for Nissan, Ford and Toyota factories.

Low labour costs, generous tax breaks and proximity to Europe's markets have attracted the companies to the city - and feisty female Governor, Valentina Matvienko, a confidante of President Vladimir Putin, says she is in talks with another foreign firm for a fourth factory.

As factories in West Europe are wound down or shut because of high labour costs, production is moving east, and Russia, particularly St Petersburg, is hoping that Europe's loss will be its gain.

The US$200 million ($315 million) Nissan factory will be completed in 2009, initially creating 750 jobs and 50,000 cars a year.

Matvienko is thought to have persuaded Nissan to come to St Petersburg by offering tax breaks for up to five years, worth US$16 million, and a further US$16 million of investment in the factory's infrastructure.

The St Petersburg region is already home to a Ford assembly plant which turns out 36,000 Focus models a year, likely to rise to 100,000 once it is working at full capacity.

Meanwhile Toyota's St Petersburg plant is due to start producing its first Camrys next year. Initially it will produce just 20,000 a year, but the company says that number will gradually rise to 200,000.

St Petersburg, Putin's home city, is tired of languishing in the foreign investment shadow of Moscow, and sees attracting foreign car makers as its best chance of catching up. The city is well placed to tap into a growing demand for foreign cars.

Increasingly well-off, Russians are eager to trade their old Ladas for socially prestigious inomarki (foreign cars), and Russia's domestic car manufacturing industry has so far miserably failed to even begin to meet consumers' heightened expectations of quality and comfort. That is one reason last year sales of foreign cars outstripped Russian brands for the first time.

The Russian appetite for new cars is nowhere near being satisfied. With 167 cars per 1000 people, Russia lags far behind neighbouring eastern Europe, which has 323 vehicles per 1000 people, and car sales here are set to explode from 1.8 million a year now to 2.8 million annually by 2010.

Even then demand will outstrip supply, and it is estimated that only 50 per cent of inomarki bought in Russia in 2010 will be made in Russia, the rest being imported.

The Kremlin protects its enfeebled domestic industry by levying high tariffs on imported cars, but has slashed tariffs on imported auto parts in an attempt to get foreign manufacturers to relocate here.

The strategy has been reasonably successful. Renault has opened a factory in Moscow, Fiat is due to start assembling cars here with a local partner next year, and General Motors has a joint venture with Russia's AvtoVaz to build 4WD vehicles.

Germany's Volkswagen is also poised to build a US$400m factory in the Moscow area to build 115,000 Skoda and VW cars a year.

Meanwhile, Kaliningrad has emerged as an hub for assembling expensive foreign cars, popular with Russia's nouveau riche.

With oil prices at a record high, Russians' spending power looks set to increase, something that can only benefit car makers.

- INDEPENDENT