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RUSSIA: Oka cars drive into a cash economy
Decision to stop barter and switch to money begins to pay off, says Andrew Jack
They may not be much to look at alongside the sleek Mercedes and other foreign vehicles that clog the streets of Moscow, but Russia's own squat, box-like Oka cars contain some useful lessons to offer to the country's struggling economy.
Just a few years ago, the Oka was little more than a distracting sideline for Tatarstan-based Kamaz, which claimed to be the world's largest truck manufacturer in Soviet times. Today, the car has become the factory's salvation, and proof that managers may be able to break out of the damaging pattern of barter that dominates so many businesses.
A large majority of Russian companies have adopted barter as a means of paying suppliers as an alternative to cash. This is partly a legacy of the Soviet era, in which state enterprises widely exchanged goods in an economy in which cash was all but irrelevant. This has been made worse by the recent financial crisis.
"I honestly believe that barter is the biggest problem in Russia," says Ravil Muratov, Tatarstan's deputy prime minister and chairman of Kamaz, who helped launch a campaign to switch the factory to cash trading. "There should be legislation to deal with it."
With just 2,000 employees - out of a total workforce of 40,000 at Kamaz - the assembly lines of the Oka subsidiary are producing over 2,200 cars a month, or almost twice the number of trucks. But while the vast Kamaz plant continues to limp along with heavy losses and huge debts, Oka claims to have been profitable since last year.
Much of the success is the result of the sharp devaluation of the rouble during the financial crisis last August. As the price of foreign cars shot up, the Oka - currently priced at under $1,300 - became relatively more affordable for Russians, and ever more tempting in absolute terms for consumers elsewhere.
"Oka was always in the shadow of Kamaz," says Vasil Kayumov, managing director of the car plant, who recently returned from negotiations with potential Turkish partners. "But last year, we had a profit margin of 1 per cent, and this year we are aiming for 4 to 7 per cent. It's a very attractive car for export. Our labour force is still very cheap."
In the past, strong sales did little to help the Oka business itself, however. Mr Kayumov says that until the middle of last year, 90 per cent of the factory's output went in barter transactions. The principal reason was not that it accepted payment from customers in kind - but that it paid its own suppliers with cars.
Struggling to gather enough cash as working capital to finance its own expanding production, let alone pay the dozens of companies that supplied it, Oka was forced to offer ever more cars in exchange. It used them both to pay for inputs and to compensate them for agreeing to more generous credit terms.
The company's reliance on barter instead of cash was inefficient, adding up to 15 per cent to its costs. But more importantly - in a pattern that applies to so many other Russian factories sucked into barter trades - Oka undercut its own potential profits in the process.
The company was forced to offer cars at a substantial discount to its suppliers, which in turn re-sold them still considerably below the retail price. Oka would offer its cars to suppliers at about Rbs21,000 ($850). They would re-sell them to unofficial "grey" dealers at Rbs22,000, who would sell them to customers for Rbs28,000 - compared with the price through official Oka dealers of Rbs31,000.
"It killed the market," says one consultant who has worked with the company on the problem. "You could find Okas on sale in Moscow more cheaply than at their official retail price in dealerships next to the factory."
As part of a range of restructuring measures to try to make Kamaz profitable, Mr Muratov issued a blunt edict last year: managers across the different divisions would either implement a rapid shift from barter to cash, or they would be fired.
Consultants were hired to help, with funding provided by the World Bank. Bringing about change was not easy. The suppliers had no interest in accepting cash, since they often had stakes in the grey dealerships and benefited financially from the barter transactions.
There were fears that some intermediaries were associated with the mafia, adding an element of fear to any attempt to end the process of barter.
Oka's own managers were reluctant to change, arguing it would prove too difficult. And one of its largest suppliers has proved most resistant to change - the rival car manufacturer Avtovaz, which owns the design of the Oka, supplies its engines for assembly, and owns a stake in Seaz, another producer of the car.
But gradually, Oka is making progress. Fear of mafia involvement turns out to be have been largely groundless, and even with a higher retail price, dealers are still able to make a profit. By early this year, the company's cash sales had risen to over a third of the total. The shift away from barter is beginning to pay off.
Decision to stop barter and switch to money begins to pay off, says Andrew Jack
They may not be much to look at alongside the sleek Mercedes and other foreign vehicles that clog the streets of Moscow, but Russia's own squat, box-like Oka cars contain some useful lessons to offer to the country's struggling economy.
Just a few years ago, the Oka was little more than a distracting sideline for Tatarstan-based Kamaz, which claimed to be the world's largest truck manufacturer in Soviet times. Today, the car has become the factory's salvation, and proof that managers may be able to break out of the damaging pattern of barter that dominates so many businesses.
A large majority of Russian companies have adopted barter as a means of paying suppliers as an alternative to cash. This is partly a legacy of the Soviet era, in which state enterprises widely exchanged goods in an economy in which cash was all but irrelevant. This has been made worse by the recent financial crisis.
"I honestly believe that barter is the biggest problem in Russia," says Ravil Muratov, Tatarstan's deputy prime minister and chairman of Kamaz, who helped launch a campaign to switch the factory to cash trading. "There should be legislation to deal with it."
With just 2,000 employees - out of a total workforce of 40,000 at Kamaz - the assembly lines of the Oka subsidiary are producing over 2,200 cars a month, or almost twice the number of trucks. But while the vast Kamaz plant continues to limp along with heavy losses and huge debts, Oka claims to have been profitable since last year.
Much of the success is the result of the sharp devaluation of the rouble during the financial crisis last August. As the price of foreign cars shot up, the Oka - currently priced at under $1,300 - became relatively more affordable for Russians, and ever more tempting in absolute terms for consumers elsewhere.
"Oka was always in the shadow of Kamaz," says Vasil Kayumov, managing director of the car plant, who recently returned from negotiations with potential Turkish partners. "But last year, we had a profit margin of 1 per cent, and this year we are aiming for 4 to 7 per cent. It's a very attractive car for export. Our labour force is still very cheap."
In the past, strong sales did little to help the Oka business itself, however. Mr Kayumov says that until the middle of last year, 90 per cent of the factory's output went in barter transactions. The principal reason was not that it accepted payment from customers in kind - but that it paid its own suppliers with cars.
Struggling to gather enough cash as working capital to finance its own expanding production, let alone pay the dozens of companies that supplied it, Oka was forced to offer ever more cars in exchange. It used them both to pay for inputs and to compensate them for agreeing to more generous credit terms.
The company's reliance on barter instead of cash was inefficient, adding up to 15 per cent to its costs. But more importantly - in a pattern that applies to so many other Russian factories sucked into barter trades - Oka undercut its own potential profits in the process.
The company was forced to offer cars at a substantial discount to its suppliers, which in turn re-sold them still considerably below the retail price. Oka would offer its cars to suppliers at about Rbs21,000 ($850). They would re-sell them to unofficial "grey" dealers at Rbs22,000, who would sell them to customers for Rbs28,000 - compared with the price through official Oka dealers of Rbs31,000.
"It killed the market," says one consultant who has worked with the company on the problem. "You could find Okas on sale in Moscow more cheaply than at their official retail price in dealerships next to the factory."
As part of a range of restructuring measures to try to make Kamaz profitable, Mr Muratov issued a blunt edict last year: managers across the different divisions would either implement a rapid shift from barter to cash, or they would be fired.
Consultants were hired to help, with funding provided by the World Bank. Bringing about change was not easy. The suppliers had no interest in accepting cash, since they often had stakes in the grey dealerships and benefited financially from the barter transactions.
There were fears that some intermediaries were associated with the mafia, adding an element of fear to any attempt to end the process of barter.
Oka's own managers were reluctant to change, arguing it would prove too difficult. And one of its largest suppliers has proved most resistant to change - the rival car manufacturer Avtovaz, which owns the design of the Oka, supplies its engines for assembly, and owns a stake in Seaz, another producer of the car.
But gradually, Oka is making progress. Fear of mafia involvement turns out to be have been largely groundless, and even with a higher retail price, dealers are still able to make a profit. By early this year, the company's cash sales had risen to over a third of the total. The shift away from barter is beginning to pay off.
"Financial Times", May 8, 1999