Renault, Nissan Shake Up Russian Market

Russia’s auto industry is on the verge of big changes due to the recent acquisition of a controlling stake in AvtoVAZ, Russia's flagship auto maker, by equity partners Renault and Nissan.

The transition to foreign control of the last state-owned auto maker (which for many years was a symbol of the Soviet and later Russian auto industry) has touched off numerous rumors about the possible termination of Lada, AvtoVAZ’s major brand, and its replacement by the Renault-Nissan Alliance’s budget models in the near future.

During the Soviet era, Togliatti-based AvtoVAZ was a source of national pride. Its cars accounted for 50% of total domestic vehicle production, and by the 1980s the auto maker exported about 40% of its total output.

The collapse of the Union of Soviet Socialist Republics has not resulted in a significant decline of Lada sales in Russia, due to existing restrictions on imports of foreign-made cars and local consumers’ anemic purchasing power.

Ladas continued to be in demand until recent years, when leading foreign auto makers established their own production capacity in Russia and the global recession left the cars uncompetitive in the domestic market, despite government support.

A lengthy, fruitless series of capital investments had made AvtoVAZ a bottomless pit for the Russian government. Measures of support included high import duties on foreign cars and the introduction of a vehicle-scrappage program.

However, the end of the incentives program and Russia’s recent admission into the World Trade Organization – which led to reduced duties on used foreign cars imported into the country – resulted in falling sales and shareholder value.

Russian President Vladimir Putin stood ready to spend billions to save AvtoVAZ and avoid massive layoffs of its workers. But the government still was forced to sell the auto maker’s assets to foreigners to avoid bankruptcy.

The Russian government hopes the arrival of foreign investors will improve AvtoVAZ’s situation and maintain Lada production, although slow sales this year have forced the auto maker to stop manufacturing its iconic Lada 7 model.

AvtoVAZ spokesman Igor Burenkov reports only 34,000 Lada 7 units were sold between January and March, 71% below like-2011. Overall Lada deliveries for the same period declined 15% year-over-year and continue their downward spiral this year.

Despite the drop in sales, sources close to Renault-Nissan say the alliance has no plans to discontinue Lada manufacturing. Production of Lada’s new Kalina and Granta flagship models most likely will continue, with the model range possibly expanded by some new Renault-based AvtoVAZ models.

To implement these plans, Renault-Nissan will invest RR25 billion ($750 million) in AvtoVAZ development over the next several years. The money is expected to be invested not only in the launch of new models but also in salvaging AvtoVAZ’s undeveloped distribution network, with many official dealers on the verge of bankruptcy.

The alliance also may seek to revive the Lada brand by lowering prices. At present a huge number of Russian consumers cannot afford to buy cars costing priced from RR131,000-RR164,000 ($4,000-$,5000).

Despite Renault-Nissan’s plans to continue AvtoVAZ development, most Russian analysts believe Lada production in coming years will be reduced due to the brand’s low competitiveness in both domestic and foreign markets.

"The Renault-Nissan alliance is primarily interested in Russia as a market for the sales of its own cars,” Sergei Udalov, executive director of AUTOSTAT, one of Russia’s largest auto-marketing analytical agencies, tells WardsAuto.

“Russia still provides big possibilities for selling of a large number of budget cars. In addition, the country provides certain benefits for existing plants owned by foreign auto makers, which means that the production of cars here is still cheaper than importing.”

Udalov believes that, in addition to the local market, most of the cars Renault-Nissan will produce in Russia will be sold in the Commonwealth of Independent States countries and China.

The alliance’s hopes for success in Russia are based on factors including the large number of first-time car buyers and further expansion into the vast, nearly untapped market of Siberia, where analysts say growth of the local vehicle market is significantly greater than the countrywide average.