This recent announcement by Avtovaz demonstrates a lack of understanding of the channels of distribution that exist in marketing a product and the number of intermediaries that exist between the factory and the ultimate customer, each of whom must cover the expenses of the services they provide in creating a market for the product.

> *** Avtovaz, the Russian automaker, will stop sending > cars to its British dealers, since they are not paying what > the cars are worth, Avtovaz Board Chairman Vladimir Kadannikov > said at a press conference Tuesday. He said there was a > significant gap between the wholesale price paid by Motor > Vehicle Imports, the general importer in Britain, and the > retail price paid by the consumer. Kadannikov said he was > distressed by Motor Vehicle Imports' policy. He also said a > similar situation was taking shape in Canada and warned that > the problem would be handled in the same way.

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AN OPEN LETTER TO MR. KADANNIKOV AT AVTOVAZ, THE RUSSIAN AUTOMAKER

by M. Douglas Keene

Dear Mr. Kadannikov, Avtovaz Board Chairman,

I must say that I am very disappointed to read recently that you have stopped shipping your fine automobiles to your British importers, Motor Vehicle Imports, Ltd.. It has been reported that your reason for doing this was that the dealers were not paying your company "what the autos were worth". It was further reported that your perception of the true worth was based on the observation that "there was a significant gap between the wholesale price paid by Motor Vehicle Imports, the general importer in Britain, and the retail price paid by the consumer".

The reason I am disappointed is that this event reminds me once again of the ongoing serious misunderstanding in Russia of the operation of an economic system that is based on a free market. It further emphasizes the misunderstanding of a what is needed to sell products in a competitive free marketplace.

You see, Mr. Kadannikov, the value of a product is very simply the price that your customer is willing to pay. It is not the price that you would like to sell the product for. When you sell to a person who will eventually retail the product, the eventual retail price has no bearing whatsoever on your selling price, except that your customer can only pay a price that is profitable to him after all the expenses of his selling the product are paid.

Of course you have the right to sell or not sell to anyone at any time, but a prudent businessman will only turn down a sale if he cannot be profitable at the price the customer is willing to pay. I must make the assumption that when you made your initial agreement with the British company that your skilled accountants made sure that the selling price was profitable for Avtovaz. Of course your customer is going to try to make a profit also, because without a profit in a free market, there will soon be no company at all. A profit is not some unfair gain by a customer, it is a necessity. Also, profits are rarely excessive, because high profits always create competitors who quickly bring excessive profits down to a reasonable level by offering lower prices and taking away business.

Now you say that the customer's profit is excessive. What is excessive? Have you considered the expenses of the British company, the tremendous expenditure of cash that is necessary to support a sales network for automobile sales? Have you considered the price of advertising, sales personnel, dealership facilities, service facilities, maintaining inventories of replacement parts, taxes, interest on loans, duties, rent, communication expenses, sales commissions, employee benefits, regulatory approvals, import costs, transportation and the expense of any distributorships or other agents that might be involved when you evaluated the "excessiveness" of the company's so called profits? Do you also understand that most buyers of automobiles do not pay the "listed price", but negotiate sometimes significantly lower sales prices before a deal is closed?

The automobile industry in the West is a very low profit margin business, it is extremely competitive, and no businessman can afford to sell any automobile or truck at an inflated price. The market will simply not allow it. Anyone who tries is simply on his way to failure.

You see, Mr. Kadannikov, by cutting off the supply of automobiles to the British company you have done nothing but damage your own company. The British company will simply find another supplier, probably in another country, to fill its needs for a low cost automobile for its market. There are plenty of competitors to choose from. The British company is in the business of selling cars, any cars, not just promoting the business of Avtovaz. In the free market, when one supplier is no longer appropriate, for any reason, you simply find another supplier who will normally be more than happy to take away your business and do so at a price better than you are offering. Once this is done, rarely will a buyer come back to you again. You have become a risk, and no businessman can afford risks.

When you cut off the supply of cars to Britain, did you consider what effect this would have on your own business? When the shipments cease, the payments cease, and this must have an impact on the health of your business. It could result in the loss of jobs, it certainly will reduce your revenue, your profits, and thus it will reduce the tax you pay. It likely will give your company a "black mark" when you try to seek other foreign customers in the future. It has already caused great alarm among other businesses planning on opening up business relationships with Russian companies. Certainly this is not healthy for your company or for your country's economy or reputation.

So my hope, for Russia, is that you change your position and restore your shipments of autos to the British company and that you do not expand this mistaken policy to Canada or elsewhere. Offer an apology for the misunderstanding. This business is good for your company, for your employees, and for the citizens of Russian in general. Pay some attention to the image of your company in the world marketplace, because acts like the one mentioned above may spoil this image and drive away all of your potential future foreign customers because of the increased risk that it represents. You have a good product, and as long as you keep your prices as low as possible while still making a reasonable profit, you should have foreign customers. Treat those customers with respect and they will remain your customers for a very long time.

[Mr. Keene is an independent manufacturing consultant who specializes in the Russian export market. He has spent time working with Russian factories to improve their businesses, and to increase their customer's satisfaction with their products and thus improve sales. He resides in Rancho La Costa, California, USA]

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