The old, pre-bankruptcy General Motors (GM) wouldn’t have gotten its shorts in a knot over economic turmoil in Russia. The old GM would have absorbed its losses and taken a patient, long view of Vladimir Putin, falling oil prices and Ukranian tensions.
The new, reorganized GM is taking a much shorter view. That’s why it’s closing its massive St. Petersburg assembly plant and taking a $600 million write-off. GM is the first western automaker to call it quits in Russia, though it may not be the last. In the meantime, the RenaultNissan Alliance—the market leader—likely will benefit by grabbing at least a chunk of GM’s 9 percent market share.
The Detroit-based automaker that has lost at least $18 billion in Europe since the beginning of the century remains under close scrutiny by investors. Four hedge funds last month demanded a share buyback and a seat on the board. A truce between GM and the funds means the automaker will reduce its cash hoard by roughly $5 billion over the next two years and raise its dividend.
Cutting back on its “fortress balance sheet” wasn’t in GM’s plan—but investors such as Appaloosa’s David Tepper are insisting that capital be deployed profitably, or returned. Russia is a place that probably won’t produce returns for some time. “This decision avoids significant investment into a market that has very challenging long-term prospects,” said G.M.’s president, Daniel Ammann, in a statement.
GM doesn’t have a parts and components infrastructure in Russia. To build vehicles it must import from European suppliers, paying in rubles. Since the ruble has lost half its value, GM’s outlay has skyrocketed while overall demand for vehicles has dropped 40 percent—a recipe for financial disaster.
Carlos Ghosn, chief executive of the Renault Nissan Alliance, has been telling everyone who asks that his is a long-term view of Russia and that his company is staying. The difference is that Renault and Nissan have performed well for shareholders. (Nissan this month suspended production in Russia for 16 days, while Volkswagen said it will cut work shifts and lay off 150 workers to reduce production.)
What Ghosn and GM understand is that the Russian middle class will continue to grow, subject to intermittent economic and political turmoil. Like consumers all over the world, Russians want cell phones, cars, fashion and vacations abroad. As of 2014, Russia stood 57th in the world in terms of private cars—only 300 per 1,000 people, which is even less than countries like Croatia, Estonia and Hungary. (At last count the U.S. had 809 vehicles per 1,000 people.)
GM will continue to import Corvettes and big SUVs such as the Chevrolet Tahoe, which should sell in relatively small numbers to oligarchs and other wealthy Russians.
When the country settles down, GM can reassess. Perhaps it will return to local manufacturing. Until then, the automaker has much a bigger issue before it, one that’s existential: namely to prove with financial results that it deserved being saved by U.S. taxpayers.
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