In 1996, General Motors and Yelabuga Auto Plant (ELAZ) created a joint Russian-American enterprise in the small oil town of Yelabuga, Tatarstan in Russia. The starting capital was $250 million, with GM taking a 25 percent share and ELAZ taking 75 percent. The Russian partner had no money. Its contribution was buildings, infrastructure, land, tax exemptions—everything but actual financial investment.
GM would contribute state-of-the-art auto-making technology and money. GM would have to finance the equipment purchases. The American automaker was also seeking to value its own technology as high as possible and provide as little real money for equipment purchases as it could.
Relations between American and Russian experts grew tense from the earliest days of work on the joint enterprise. The Americans were always emphasizing their superiority. They disregarded the opinions of their Russian colleagues and neither understood nor wanted to consider the specifics of the Russian market. Gradually, this led to mutual distrust and disrespect between the sides.
The First Project
Their first project was an auto-body paint shop. Painting equipment is the most expensive part of an auto plant. According to the terms of the agreement, GM was supposed to finance the project. But they didn’t want to pay. After tough negotiations, the sides agreed that, just this once, ELAZ would finance the project.
In January of 1998, GM opened bidding to supply equipment for the paint shop in Russia. Experts in Germany were given authority to oversee this process. The world’s leading companies in the field were to bid: Dürr and Eisenmann from Germany, Air Industry from France, ABB from Sweden and Haden from the US.
GM provided the technical requirements and declared that the winning bidder would be the company that fulfilled two primary conditions: deliver the equipment in complete accordance with GM’s technological processes and offer the lowest price for the stated equipment.
The Partner’s Opinion Doesn’t Mean Anything
The bidders came to the organizing conference in Frankfurt. It was led by GM’s Project Director. He declared that GM would decide all technical and financial issues on its own. The Russians understood nothing about automotive painting, and their opinion didn’t mean anything. His company would choose the equipment supplier for Russia.
The schedule for developing a proposal was exhausting. We had to finish the work in a month. In March 1998, they would hold the bidding. Then the contract would be signed and work begun in four months. Equipment would be assembled within a year and launched into service within a year and a half of signing.
After a month, the bidders submitted their proposals. GM’s expert commission acknowledged that the best proposal came from Eisenmann ($62 million) with Haden ($58 million) only slightly behind, followed by ABB ($65 million) and Dürr ($64 million). The worst offer came from Air Industry ($54 million). It was incomplete and did not meet the demands of the task. The joint enterprise partners were supposed to choose two finalists from among the bidders for the next round: those who met the technical specs and offered the best price. The two best were Eisenmann and Haden. But for tactical reasons, the expert commission recommended bringing in a third company for the final negotiations—Air Industry, the bidder with the lowest price.
The Balance of Power
By that time, it was already clear what was going on behind the scenes. The German representatives of GM who were conducting the bidding didn’t even hide the fact that they favored the German company Eisenmann. The leadership at ELAZ supported Haden’s bid. Each side made its points in favor. GM thought it had the right to make the decision and ELAZ was supposed to abide by it.
ELAZ acknowledged the technological authority of GM and followed its recommendations in that regard. But they thought the right to make financial decisions should belong to the one paying the contract. When GM paid, the Americans could decide what equipment to buy. In this case, ELAZ was paying for the equipment. What’s more, only a quarter of the joint enterprise belonged to GM, and the rest, 75 percent, belonged to the Russians. So GM shouldn’t have been making serous financial decisions without its Russian partner.
Why was ELAZ supporting Haden? Because our company had been working successfully in Russia. Why did GM object to Haden? Because they wanted to undermine their Russian partner’s independence from the very start.
Many years later, one of the parties to these events admitted to me that GM was against Haden for no other reason than that the Russians supported us too strongly. It was a matter of principle, and the automotive giant wanted to show its Russian partner who would be making the decisions in the joint enterprise.
The Favorite Must Win
Three companies remained in the final negotiations: Air Industry, Haden and Eisenmann. Each was asked for a discount on the contract price. All the potential suppliers made a small price concession. Air Industry went down to $53 million, Haden to $57 million and Eisenmann to $60 million. Air Industry’s presence at this stage of negotiations was unusual. Their price didn’t mean anything because their equipment package was incomplete and didn’t meet the demands of the bidding.
The time came to remove two of the finalists and conduct the financial negotiations. Logically, the bidding should have weeded out all but the two companies that had presented the best technical proposals, Eisenmann and Haden. The winner between the two should have been the project with the lower cost. But as the finalists faced off, GM lost control of the situation. The decision-making process became an open competition. In a fair fight, Haden would have won. Our price was $3 million lower.
GM and ELAZ had a difference of opinion. Eisenmann was GM’s favorite, and they didn’t want to lower the price of their offer. They thought victory was guaranteed. ELAZ supported Haden, so we were the Russian company’s favorite. It was a stalemate. The bidding had hit a dead end and was put on hold. Months went by. The project schedule was off track.
Here something unexpected happened. Eisenmann received a major contract in Europe and lost interest in the Russian deal. They withdrew their bid. You might have thought that would settle it. Haden should have been the winner. But for GM, that would have meant conceding to the Russians. They couldn’t accept that.
Pride Over All
The German representatives of GM decided to make Dürr the winning bidder. GM extended the bidding to May 12th. Again, the companies made their proposals: Air Industry—$53 million, Dürr—$56 million and Haden—$57 million.
It was clear what tactic GM was using here. They wanted to bring Air Industry and Dürr, two unequal companies, into the final two. Then the French would take the fall because their proposal didn’t meet the project’s technical requirements.
If Dürr and Haden went face to face, the result of the fight would be more unpredictable. The competitors might have gone significantly lower on price. That’s just the situation ELAZ wanted to create. They wanted two real competitors in the final who would fight to offer them the lowest price.
Each Company Supports its Favorite
GM and ELAZ were now openly violating the rules of the bidding. They were providing their favorites with insider information. Dürr and Haden immediately learned about each other’s every move.
Haden was in the loop about everything that was going on, and so, two days before the decision, we sent in a new commercial offer—$52.5 million. The packet with the offer inside was delivered by courier to the GM office. Now Haden’s price was lower than those of its competitors. With the lowest price, we should have gone through to the final bidding. But that didn’t suit GM. They pretended that they hadn’t received Haden’s lower-price offer.
On May 12th, at the official conclusion of the semifinal, GM named Haden’s old price of $57 million. ELAZ’s representative, seeing this, declared that he had a copy of Haden’s new offer of $52.5 million, dated May 10th. GM responded that they did not have the offer. ELAZ said that was impossible, since Haden had official notification of GM’s receipt of the offer on May 10th.
GM said it was possible in the instance that Haden’s offer had been lost. The Russian side proposed including the new price for assessment and showed its own copy of the $52.5 million offer. GM objected. A decision was made to end discussion and request a confirmation of the price from Haden.
In June, a conference of the joint enterprise executives was held in order to make a final decision. A GM representative reported on the results of the bidding and, based on the old numbers, proposed naming Air Industry and Dürr as the two finalists. The president of ELAZ contradicted him. He restated Haden’s $52.5 million price and proposed entering Dürr and Haden as finalists.
GM refused to acknowledge Haden’s new lower-price offer on the grounds that they’d allegedly received it only the day after the deadline for submission of bidding proposals. ELAZ President Zaripov declared that bidding deadlines had been pushed back several times, bidding had now continued for over a year and that one day didn’t mean anything. ELAZ was interested in a low price for state-of-the-art equipment, not bureaucratic formalities.
GM had chosen the best suppliers and submitted their proposals to technical expertise. Until recently, by technical criteria, Eisenmann had been in first place and Haden in second. Now, after Eisenmann’s exit from bidding, Haden had the best technology, and furthermore, the lowest price.
The German company Dürr had limited experience in Russia. Air Industry had no experience in the country at all. Just the previous year, Haden had built the largest and most advanced paint shop in Russia at the Gorky Auto Plant. What else could they need? Why was GM always coming out against our company?
All’s Fair When Pride is at Stake
The critical moment arrived. GM was forced to explain its position. Greg DeYonker, GM’s director for Russia, stood up and publicly declared that he opposed a deal with Haden because the suppliers’ equipment did not meet the required quality standards for painting GM cars. GM had strict requirements for the quality of painting. As an example, he told the story of an unsuccessful Haden project in India. After this declaration, the Russians stopped insisting on Haden. Dürr was recognized as the winner.
In his speech, GM’s director for Russia had told a falsehood. Haden’s project in India was successfully completed two years before the events described. The equipment had been put into use and was working impeccably. What’s more, a month before the events described, GM had signed a contract with Haden to supply equipment for the paint shop at a GM plant in Portugal at a cost of $80 million. This was direct proof that Haden equipment met GM quality standards. Otherwise, that contract would never had been signed.
A month later, with representatives of the Russian government and German industry looking on, the contract between ELAZ and Dürr was signed. At the moment of contract signing, the two sides had still not agreed to the cost of the work.
A day before contract signing, ELAZ asked Dürr for an additional price discount of $5 million. Dürr refused to grant that big a break. Negotiations continued before and after signing without result. Dürr offered a smaller discount, but ELAZ didn’t back down. Without having reached a final arrangement, Dürr’s vice president headed towards the airport for his return flight to Germany. ELAZ representatives met him one more time thirty minutes before takeoff, and they agreed to a discount of $3 million.
Our Favorite or No One
After contract signing, Dürr began active work on the project, designing the equipment and placing orders for its assembly. They sent invoices to the client, but never received any payments. After expenses reached $2 million, Dürr began insisting on payment for work already completed. But there were no payments. Financing for the contract had not even been opened. Contract work never resumed.
Later on, ELAZ executives would tell me that if Haden had won, they would have opened financing, and the paint shop project would have gone through. But since their opinion had been ignored, and GM had imposed its own supplier on them, they didn’t want to finance the Dürr contract. ELAZ figured that if GM wanted Dürr to finish the work, they could pay for it themselves.
I took part in the project as a representative of Haden. A few years later, I went over to work for Dürr and became their General Director in Russia. I got the unique opportunity to compare offers between the main bidding contenders and read the correspondence with GM. I was ashamed of GM. The company’s representatives behaved incorrectly and unprofessionally. They were governed by their egos to the detriment of the interests of their joint venture in Russia. Obviously, they were unsuited for their jobs.
You Can’t Always Put It on Someone Else’s Tab
So the joint venture between GM and ELAZ never came to productive fruition. It remained a small automotive assembly workshop. They tacked on the lights, bumpers, rearview mirrors and other small bits to fully assembled cars. After four years, they’d completed six thousand automobiles, or an average of five per day. Of these, two thousand cars were never sold. The price was too high, and there was little demand.
The GM team was made up of random employees with big egos. Random people who were often incapable, either by qualification or experience, of solving the tasks before them. They did not understand the specifics of business in Russia and made no attempt to learn them. The decisions they made were ineffective. They played an unconstructive role, violating the cultural norms and folkways of the country where they were.
GM did not provide money to improve production. They thought they could make decisions which their Russian partner would pay to implement. GM put all the risks and expenses on the Russian side and ignored its business interests.
The partners in the joint venture were always fighting with each other. Over five years of working together, they were never able to find common ground. Not one project for organizing production went through. The bidding for the automotive paint shop equipment brought them into open conflict, and the project remained unfinished. It was the first and last project of the joint enterprise. Such a business could have no future in Russia. In 2001, the GM- ELAZ joint venture was liquidated.