AvtoVAZ, the Russian automotive leader, has been restored to the government control. By that it was acknowledged that private business had failed in the key economic sector. Or rather the control model of this sector turned out to be ineffectual.
It was built on protectionism, artificial restriction of competition and disregard to users’ interests. For a decade and a half that had passed since the privatization of VAZ, the biggest national automaker failed to produce a car meeting the up-to-date requirements. Because of that it started to rapidly lose its position. Whereas in 2002 its share in the home market was 63.1 % now it fell to 48.9 %.
Specified measures had to be taken in order to prevent the breakdown of the enterprise with a subsequent chain reaction in associated industries and mass unemployment in the large industrial area.
The most powerful but the most backward
Having studied the indicators of all European auto plants PwC Consulting announced AvtoVAZ to be the biggest of them. This is how this auto giant looks like in their records published. The site is 1,720 hectares. The operating personnel numbers 349,300 people in 68 shops, 4,322 white-collar workers deal with new model designing using 1,060 computers. The total conveyer length is 14.1 km. The total weight of the equipment installed is over 3,000,000 t. The electric power consumed per day amounts to 512 MW. Another interesting fact is that the administration building is 29-storeyed, three storeys more than the headquarters of BMW.
“This is a fabulous enterprise!”, exclaimed PwC Consulting Vice President Jack Cooper having noted that AvtoVAZ was well in advance of Volkswagen, Ford, Opel, Renault in any point, except, of course, just one – cars of its make are not capable to compete with the enlisted car makes as well as with the products of other European, Japanese, Korean companies. The only competitive advantage of the Russians that promoted success in the national market was a relatively low price. However, lately Chinese makes are as much at hand in price and quite appealing in design, completeness and better meet modern public fancy.
A low-down trick was played on AvtoVAZ because of its successful lobbyists who had won in imposing protective duties on second-hand foreign cars. The Russian leader did not take this advantage in the competitive struggle. No promised improvement of assembly quality and radical updating of a model series took place. Instead prices for old makes were repeatedly raised until they reached the limit of price competitiveness.
Soon the “punishment” followed. For the last two years overstocking of plant’s storage and dealers’ premises occurred regularly, the main assembly conveyer was stopped several times and even the prices were lowered.
Changes were required. And they began. In October, 2005 Vladimir Kadannikov who managed AvtoVAZ for 17 years filed resignation. An extraordinary shareholders’ meeting introduced changes in the management, and the plant was actually handed over to government structures. The new Board of Directors included Head of Federal Agency of Industry (Rosprom) Boris Alyeshin, Deputy of General Director of Rosoboronexport Federal State Enterprise Vladimir Artyakov and Head of Department of this enterprise Igor Yesipovsky who was appointed General Director of AvtoVAZ JSC.
The new management immediately made far-reaching declarations. Igor Yesipovsky specified a priority – to widen a lineup – and proposed to put into production 12 new makes during five years ahead. Their assembly will be made at a new plant and will reach 450,000 cars per year. As Chairman of the Board of Directors Vladimir Artyakov announced the investment in this project can amount to “several billion dollars” to be attracted as credits against a state guarantee. The target is to occupy a position in the family of world makers. The existing potential and the proposed program of AvtoVAZ will permit this target to be reached, as the state managers believe.
The last of the automobile story
The situation at the other Russian automakers is even worse than at AvtoVAZ.
The first to break was the plant stationed in Moscow, the producer of Moskvich make cars, which had been the most popular Russian car before AvtoVAZ. Despite a direct support by Moscow Major Yuri Luzhkov, this plant failed to complete technical renovation and be adapted for market. The conveyer was stopped in 2001. In February this year the arbitration court dropped the curtain in the history of the plant. Moskvich JSC was declared bankrupt with a gigantic credit debt figure of around US$1bn. A little earlier the last Moskvich make named Oda which was small-lot produced at the IzhAvto Plant (the town of Izhevsk) was removed from production.
A real shock for auto enthusiasts was a decision announced by Ruspromavto as a managing company to cancel production of Volga. In due time it had been a masterpiece of the Russian automotive industry. The first Volga make was M-21 developed at the GAZ plant half a century ago, once a remarkable popular car and a dream of many collectors as yet. One of such cars belongs to President Putin who is proud to demonstrate it. By the way, during his visit to Russia George Bush was invited to drive this legend of the Russian automotive industry and made a tour over the residency of his counterpart.
In these later days Volga also had admirers. The ample parlor and presentable appearance, an adequate rated power engine – everything reminded a business class car and a very cheap one. However, low assembly quality, evidently obsolete technical solutions of main units involved permanent repair – just after the purchase and during further service. Rusavtoprom that failed to turn Volga into Mercedes thought it an advantage to abandon this project.
The production of Oka baby car set up already in the market era ended in failure. The cars were produced at three sites – at Serpukhov in the Moscow Region, at the KamAZ Truck Plant (Naberezhnye Chelny) and at the Elabuga Plant belonging to AvtoVAZ. An apparent advantage of Oka was its accessibility for a lot of people due to a low price. The maker flirted with an idea to develop the concept supposing to set up a modern city car or a young family car. But Oka hung on to be a car for the poor until it lost the market niche.
Evidently all the above misfortunes resulted from not only ineffectual activities of the plants’ managers but also the general trend: the Russian automotive industry non-competitive in principle could not match the world leaders and catch the fast-moving car fashion under the conditions of open market. Its story was approaching an inevitable end and AvtoVAZ could well become the final of this drama. But here the government “salvage service” interfered.
In 2005 Russia made 1,050,000 cars, 100,000 below the predicted figure and 105,000 less than in 2004. And that was in the conditions of a boosting demand! In order to stop the fall not only rehabilitation programs for individual plants but fundamental changes in the entire sector are needed.
Head of Rosprom State Agency Boris Alyeshin initiated an idea to establish a highly-capitalized national automotive corporation which would make a full line of automobiles – cars, trucks, buses – and could hold at least a half of the Russian market along with one of the first positions in the world rating. As Alyeshin believes, three automakers – AvtoVAZ, KamAZ and GAZ – shall form the corporation. “These companies are not competitors, they occupy different niches and complement one another”, he clarified.
To all appearance, the head of Rosprom kept in mind both world trends and the successful practice of another sector consolidation under the aegis of the state – aircraft industry. The latter had been in a severe crisis and nowadays got an actual prospect of growth. An important thing is that the President of Russia himself pushed the establishment of the aircraft super-corporation. However this time Putin did not choose to press. “An amalgamation of GAZ, AvtoVAZ and KamAZ is probable but the owners of the companies themselves must decide on it with the state support. We will not impose any decision”, stressed the President.
At this date the government policy in this sector is based on the Strategy of Automotive Industry Development before 2010. The document was elaborated by the Ministry of Industry and Power Engineering of Russia. When presenting it to the government Minister Viktor Khristenko singled out a set-up of assembly operations in Russia as priority. He claimed that investors of such projects or potential analogs need a wider range of goods items to be imported to Russia. On this presumption substantial changes in the Russian customs regulations were introduced. They included zero duties on import of auto components, parts and bought-out items whose analogs are not made in Russia. All the above changes cover more than 300 goods items.
The new procedure deals with only plants for commercial assembly of automobiles in Russia. Supplies at reduced duties will be strictly in line with the quantity of auto components claimed for assembly and in no way will affect the production of bought-out items at Russian plants.
The government regulation valid since February, 2006 reduces duties to zero on various types of process equipment, in particular, electroplating facilities, robotic devices, belt elevators, soldering and welding machines. As Alexey Kaulbars, Director of Customs Department of Ministry of Economy, noted, “the commissioning of equipment will ensure new jobs and it will bring about much more profit to the budget than a lumpsum payment of customs duty”.
This regulation is favored by automakers. Head of Customs Cargo Declaration of AvtoVAZ Valery Rodionov believes that a zero rate of customs duty on imported auto components will equal chances of Russian and European companies as today one has to purchase imported bought-out items at much higher prices because a duty amount is included into them. A positive effect of a reduced cost of modern process equipment is also quite evident. For a new model lineup, AvtoVAZ itself needs new casting and forging units, machine-tools and unattended machines, hydraulic presses, robotic machines, welding and painting units, control computers, testers.
Minister Viktor Khristenko stresses that preferences were adopted especially for investors, and not only foreign but Russian as well. As an example he cited two Russian companies which are ready to take part in the “commercial assembly” practice with their own investments – Severstal-Avto and SOK. In his opinion, the business is being adapted to the new practice rather actively and the target specified in the Concept – to produce one million Russian automobiles plus one million assembled cars in 2010 – seems to be quite achievable.
No need to invent an auto
The Russian auto market is considered to be one of the most promising in the world. According to the record of PriceWaterhouseCoopers, in 2005 the Russians spent 18.3m Euro on cars, 22 % more than in 2004. None the less, this market is far from being saturated. Hence an interest of foreign companies in it is well-formed. Today Russia occupies the third place in Europe in direct foreign investments in the automotive industry. For the last three years the share of foreign companies in the sales volume in the home market went up from 0.7 to 8.7 %. Evidently this is the line of the automobile business that becomes the most preferred.
Minister of Industry Viktor Khristenko counts that by 2010 at least ten world auto leaders will arrange their production operations in Russia. Several projects of this line are given below.
Volkswagen plans to start the construction of a plant near Moscow in the town of Stupino. The discussions on this project have been carried on for several years. But the drastic reduction of import duties on auto components pushed the German concern to take a positive decision. As Volkswagen Group's Chairman Dr. Bernd Pischetsrieder claimed, it is planned to assemble 250,000 cars per year at the plant and due to it the share of VW in the Russian car market will rise from 2 to 10 % by 2010. The main model will be the European version of VW Gol. Further on, the cars assembled in Stupino are intended to be exported to Europe.
Volkswagen is not the first German automotive concern that decided to invest in Russia. BMW already assembles 3,000 cars of series 3, 5 and 7 per year in Kaliningrad. Owing to relatively low labor costs, the production of one BMW car in Russia is approximately 10 % less expensive that in Germany.
Having built a plant near St-Petersburg, Ford ascertained that the demand outpaces the design capacity. It intends to double the production volume of the Focus model as well as offer new modifications.
Toyota (Japan) is also building a car assembly plant in St.Petersburg.
Renault, Hyundai and Kia work in the Russia market as well.
The projects where Russian companies participate are also promising. A new event was an agreement signed between FIAT and Severstal-Avto on the assembly of FIAT Palio and Albea. They will be assembled in Naberezhnye Chelny at a mini car plant where the assembly of Ssang Yong off-road vehicles has already been tuned. The modernization of the conveyer is to be completed this year and $17.9m have been allocated for it. Here 30,000 Palio and Albea cars will be made in 2007. According to Director of Severstal-Avto Vadim Shvetsov, the key objective of the project is to considerably lower prices for FIAT models that are sold in Russia now. In his opinion, they will cost maximum $10,000 each which will make them competitive in the most popular market niche where up to now only Russian or second-hand foreign cars are available.
This project is symbolic for FIAT as it will again bring the Italians to the Russian market. If to go back one will remember that it was the company which built AvtoVAZ in 1970 and conveyorized its own model!
It is noteworthy that all serious investors which implement their projects of commercial assembly in Russia plan to use auto components of Russian make. And it is a natural business decision dictated by competition and the logic of a businessman interested in the continuous reduction of costs. Therefore we face a substantial increase in demand for machine-building products, steel sheet, fabricated rubber products, a variety of other materials and bought-out items required for automobiles. And here it is tough to share the apprehensions of the “patriots” who think that the exit of Moskvich, Volga, Lada, other Russian models means a catastrophe of the entire Russian automobile industry and a transition to colonial dependence. Why, the road of borrowing readymade models and technologies was once followed by today’s leaders – Japan and Korea – and now China drives it smartly. Probably there is no sense for Russia as well to invent a bike, that is, an automobile.