A Hummer H3 on the assembly line in 2006 in the Kaliningrad factory of the company AvtoTor.
Photo: Архивное фото
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AvtoTor's "Screwdriver" Being Taken Away
// Company Must Expand Operations by 2009 or Face Tax Consequences
The Russian Economic Development Ministry has come to an agreement with the Ministry of Industry and Energy regarding to transfer of the company AvtoTor from a "screwdriver" assembly regime to a full assembly regime, i.e., from an assembly line that only screws together auto body parts to one that includes welding and painting the assembled car body. The new regime is scheduled to be in place by 2008 or 2009, when several auto assembly plants in Russia belonging to foreign auto companies will be up and running at full capacity. This will place AvtoTor in direct competition with foreign automakers in Russia.
Yesterday First Deputy Prime Minister Alexander Zhukov presided over a meeting of representatives from the Ministry of Trade and Economic Development and the Ministry of Industry and Energy. Participants in the meeting have declined to comment on the proceedings. However, Kommersant's sources in the ministries confirm that the company under discussion was AvtoTor, which assembles cars for BMW, Chevrolet, Cadillac, Kia, and several Chinese models. According to Kommersant's sources, the government officials decided unanimously to transfer AvtoTor from a "screwdriver" regime, or simple assembly, to a new assembly regime that will include welding and painting the assembled car body. The only question left unanswered was the time period to be set aside for the transfer to be accomplished. The Trade and Economic Development Ministry (MERT) proposed that AvtoTor be given 30 months to reach full capacity in welding and painting, while the Ministry of Industry and Energy (MPE) advocated a shorter time frame.
The final decision will be made at the next meeting between the ministries, which will take place on December 13. In the opinion of Kommersant's sources, a compromise option, according to which the transfer period for AvtoTor will be 18 months rather than 30, is likely to be agreed upon. After that, the ministries will send a document outlining the decision concerning the new work regime for AvtoTor to the government for signature. The document could be signed before the end of the year.
AvtoTor's work regime is being changed by a separate government decree because an amendment to the Russian legal code lists so-called simple assembly operations for which Kaliningrad companies receive a tax exemption. As a company registered in Kaliningrad Oblast, AvtoTor currently has the right to import car components for assembly without paying customs duties. In other words, companies that perform work that does not significantly alter the state of whatever goods were imported are exempted from paying customs duties on the imported goods. The "screwdriver" auto assembly regime currently falls into that category. The ministries intend to remove that regime from the list of exemptions, thus depriving AvtoTor of its tax-exempt status and prodding the company towards including the additional steps of welding and painting in its assembly line. According to the degree, after the agreed-upon period of time, AvtoTor will be able to retain its exemption from customs duties only by including welding and painting in its operations.
Kommersant's sources in the ministries say that the government decree cannot oblige the factory to undertake welding and painting; it can only stipulate that 18 months from the moment the document is signed, the more basic "screwdriver" assembly regime will no longer be granted an exemption from customs duties.
The choice of 2009 as the year by which AvtoTor will have to make the change was not chosen at random by the ministries: it is expected that assembly plants in Russia belonging to several foreign automakers, including Toyota, Nissan, General Motors, and Volkswagen, will reach full operating capacity in 2009. All of these plants will operate on the full assembly cycle (i.e., they will include welding and painting the car body). "We want AvtoTor to reach a similar capacity by that time, rather than continuing to basically import cars for free, which is what the "screwdriver" regime amounts to," said one federal official.
Officials at AvtoTor, however, have always stressed that the process of expanding the assembly regime should be on economic grounds, not because it was dictated by government officials. On Monday, AvtoTor itself signed a memorandum with GM concerning the expansion of the assembly regime for an array of Chevrolet models (Lacetti, Aveo, Rezzo, and Evanda) with large production quotas (close to 20,000 cars for 2006). If the company is obliged to embark on the expanded assembly regime, it will have to cut ties with premium brands that do their own welding and painting, such as BMW and Hummer, which would deprive the company of 10% of its profits.
Dmitry Belikov
All the Article in Russian as of Dec. 07, 2006
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