Will Continental Withdraw From Russia?

Continental is having “big difficulties in Russia.“ According to German media sources the company’s joint venture with Moscow Tyre Plant (MTP) is both taking longer than envisaged and becoming considerably more expensive. Continental board member, Dr Hans-Joachim Nikolin, has been reported as saying the company is even “seriously” considering the implications of its worst-case scenario, withdrawing from the joint venture.

If Germany’s largest tyre manufacturer was to make that decision, the board believes that the depreciation of its fixed assets would be absorbed by other positive developments within the company.

In September 2002 Continental and the Moscow Tyre Plant (MTP) agreed upon the foundation of the joint venture, which the partners hoped would produce 3.4 million tyres by 2006. At the time Dr Nikolin suggested that Continental had succeeded in taking a “giant leap” by entering the emerging Russian tyre market. At the moment there is not so much to be delighted about.

“We are having difficulties with our schedule,” Dr Nikolin told the Frankfurter Allgemeine, a German daily newspaper. Dr Nikolin’s admission came despite the fact MTP is owned by the city of Moscow, something the tyre producer thought would ease administrative decisions. Continental itself owns 76 per cent of the venture.

When the joint venture was signed in 2002, the partners aimed to begin production by the end of 2003. Since then the revised deadline, the end of this summer, has also passed.

The adjustments in Continental’s schedule have put significant pressure on the profitability of the project. The tyre manufacturer had hoped to earn money in Moscow from 2005 onwards, something, which would be impossible now.

In addition the joint venture’s costs have exceeded every expectation. One reason for the spiralling cost of the project is the miscalculation of assets. The value of the real estate and machinery that MTP brought into the deal now appear to have been overestimated. Furthermore, machinery that has been shipped to Moscow from Continental, has also cost more than originally thought.

On top of this, the personnel bill is also becoming more and more expensive, mainly due to the continuing need for additional highly-skilled staff. All this means that the 30 million euro price tag that the company originally envisaged, has increased by a third to 40 million euros (£27.6 million).

The situation has been further complicated by the introduction of lower import tariffs, which have made imported tyres more competitive and put pressure on domestic market prices. This combination has the potential to endanger Continental’s turnover goals.

In view of this “multitude of risks” the board of the German tyre manufacturer has decided to put the joint venture plan on hold for the time being while it searches for a “reasonable solution”. Whatever happens in the future, Continental says it has no plans to withdraw completely from the emerging Russian market.