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Inside the AvtoVAZ-Renault alliance

23 Sep '08
Svetlana Zabalueva, Senior Journalist

In May AvtoVAZ managed to completely get rid of a cross-shareholding system created by Boris Berezovsky almost two decades ago. Today, after the equity capital restructuring has been completed, AvtoVAZ is co-owned on a parity basis (25% + one share) by state-run corporation Rostekhnologii, Renault and Troika Dialog.

The most recent news from AvtoVAZ is that its shareholders have approved the purchase of licenses from one of its owners and partners - Renault. AvtoVAZ’s executives have not revealed the deal’s value. Market analysts, however, tend to believe that it may be around $319.1m.

Partnership in action
Armed with Renault’s license AvtoVAZ now plans to manufacture a five- to seven-seat passenger car under its Lada brand, based on the RF-90 platform. These plans were first announced by AvtoVAZ’s president Boris Alioshin at a press-conference held in Togliatti at the end of June. Then he said that AvtoVAZ was going to purchase a license to manufacture an extended passenger car on the RF-90 platform. Mr. Alioshin underlined that the prospective car “fitted very well into the company’s model range.”

The company president emphasized the idea that the deal with Renault would enable the manufacture of just one car model.

All in all, the car-builder’s 2009-2012 business plan envisions the introduction of four new car families: an economy-class car, B- and C-class cars, and a 4ő4 SUV, says Mr. Alioshin. AvtoVAZ also plans to start producing the Renault 1.4 and 1.6-litre engines.

A general framework for the future deal was outlined in a MoU signed in December of 2007. All legalities were formalized in agreements between the companies in February 2008.

In order to increase the design, competitiveness and quality of AvtoVAZ products, the two firms have agreed on exchange of technology and know-how, specifically in production and marketing.

Following provisions stipulated in the agreements, Renault has purchased 25% of AvtoVAZ equity capital. The deal’s value came in at $1bn, plus a deferred payment to be specified depending on AvtoVAZ 2008-2009 performance.

In May AvtoVAZ managed to completely get rid of a cross-shareholding system created by Boris Berezovsky almost two decades ago. Today, after the equity capital restructuring has been completed, AvtoVAZ is co-owned on a parity basis (25% + one share) by state-run corporation Rostekhnologii, Renault and Troika Dialog. Previously, however, the parties agreed on a follow-on public offering of the company’s shares that are currently owned by Troika Dialog. These shares are to be offered later in the fall. (Presently there is 7% of stock floating in the market.)

Market melt-down puts off IPO

But taking real action on this decision is being put off now. Boris Alioshin links delays with an unstable situation in the stock market. “We’ve decided to put the planned IPO on hold although interest in Troika’s shares is being shown,” said Alioshin.

Future plans also include the establishment of a new holding company where Renault and Rostekhnologii will have equal stakes in AvtoVAZ.

The above-mentioned strategic partnership has made AvtoVAZ a true partner of the Renault-Nissan alliance, the world’s fourth largest car manufacturer. “It’s a great honor for us to be cooperating with AvtoVAZ,” said Carlos Ghosn, head of the alliance, at a presentation of the Memorandum of Understanding. “I’m sure that in the near future the Russian automobile market will become one of the world’s largest, and AvtoVAZ will be its leading player. In this respect, we are going to perform a mutually beneficial exchange of ideas, technologies and best practices, as well as cooperate in the field of marketing and everything that concerns the Lada brand development.”

Doubling production by 2014

Boris Alioshin has pointed out more than once that the firm’s business plan was to boost its capacity to 1.2 million cars a year (in 2007 AvtoVAZ churned out 700,000 cars). The strategic agreement between AvtoVAZ and Renault envisions a further increase to 1.5 million cars a year by 2014.

In addition, under an agreement between AvtoVAZ and its shareholders, the company’s sales will be consolidated by Renault, making it a primary sales market for the French firm.

Not a bed of roses

Partnership relations between one of the world’s leading car manufacturers and Russia’s largest auto assembling company are the talk of the industry. Marina Irkli, an analyst of Veles Capital, said that if indeed AvtoVAZ managed to sell 1.2 million cars in 2010 it would be able to have a 33-percent share of the projected automobile market of Russia. (In 2007 AvtoVAZ lost 3% from its 2006’s 30-percent market share).

How plausible is this scenario? Marina Irkli thinks the company’s plans are too optimistic and therefore hard to fulfill as by that time the firm may face tough competition from foreign auto makers operating out of Russia. In fact, over 20 world-leading car manufacturers have signed agreements on car assembly in this country. Most of these factories will be launched by 2010.

Specialists from Veles Capital estimate that in 2010 between 1.2 and 1.3 million foreign cars will be assembled in Russia. Plus an ever-increasing number of imported cars (1.26 million in 2007). It’s very unlikely that the number will go down in the next two to three years, Marina Irkli said. According to her estimations, in 2010 as many as 1.8 million imported cars will be sold in Russia.
This leaves AvtoVAZ with just a 600,000-700,000 car niche in the market to fill. But with Renault and Nissan AvtoVAZ could exceed these numbers, she added.

“The main problem of AvtoVAZ is its product range and its medium-term and long-term attractiveness,” said Carlos Ghosn after he bought into the company. But it may so happen that Carlos Ghosn himself may become a problem for AvtoVAZ.

Will Togliatti lose 50% of its workforce?

Carlos Ghosn is well-known as a crisis manager. His major triumph was engineering the plan to rescue Renault and Nissan when they were in deep trouble. But his slash and burn cost-cutting tactics include large-scale layoffs and plant closings.

Some experts believe that AvtoVAZ is too fat and have made no secret that even if 50% of its current employees were laid off, there would be little damage to its production capacity. For a provincial town like Togliatti, however, this would mean social catastrophe. Currently the company employs as many as 140,000 individuals.

To protect their interests, it’s not by chance that the new board of directors will include Samara Governor Vladimir Artyakov and chairman of the company’s trade union Nikolay Karagin. The new board will also consist of three representatives of Renault (including Carlos Ghosn), Troika Dialog and Rostekhnologii (including the corporation’s CEO Sergey Chemezov who is also chairman of the board at AvtoVAZ) and the company’s president Boris Alioshin.

For reference:

AvtoVAZ is Russia’s largest car manufacturer. The company’s share capital exceeds $363m. The Renault-Nissan alliance plans to purchase the control stake in the company (50% + one share). In 2007 the company produced 735,897 vehicles. 2007 IFRS revenue came in at $7.4bn, EBITDA amounted to $664m, and net profit was $155m.
The Renault-Nissan alliance was founded in 1999 on a parity (50/50) basis. In the 2006 world rating the alliance ranked fourth with sales around 5.7 million vehicles. The alliance’s 2007 sales worldwide reached 6.16 million vehicles, and sales in Russia exceeded 220,000 vehicles.
Oleg Kouzbit, managing editor: “I’m glad you join us here and take The Bridge walk for Marchmont’s weekly review of the Russian regions’ innovative present and future. Stay close and you’ll find out more of how Russia is bridging the existing gap between its researchers and businesses.”
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