Renault's Ghosn Takes On a Russian Relic

The automaker likes to work with partners. It bought into AvtoVAZ to use its Soviet-era factory to make cheap cars based on the super-successful Logan

by Carol Matlack

(L to R) President of Avtovaz Boris Aleshin, Renault CEO Carlos Ghosn, and Sergei Chemezov, head of Russia's state-owned Rostekhnologi shake hands in Moscow on Feb. 29, 2008 after French carmaker Renault signed a deal to buy a stake in Avtovaz ALEXANDER NEMENOV/AFP/Getty Images

The AvtoVAZ (AVAZ.RTS) car factory in the central Russian city of Togliatti seems frozen in time. In a decrepit, mile-long building, boxy Lada sedans are turned out by 40-year-old production equipment—installed when Italy helped the Soviet Union build a carbon copy of a Fiat plant. On an icy February morning, one assembly line has shut down and others are operating fitfully because a snowstorm has disrupted shipments of needed components. Dozens of partially-built cars sit in a corner of the vast plant. "We'll finish them as soon as we get the parts," says Valery Shendyapin, a cheerful supervisor in a bright blue jacket.

It seems far-fetched that one of the world's top auto manufacturers would pin its hopes on such a place, but Renault-Nissan (RENA.PA) and its chief executive, Carlos Ghosn, are doing just that. On Feb. 29, Renault formally signed an agreement, first disclosed last December, (BusinessWeek.com, 12/10/07) to pay $1 billion for a 25% stake in AvtoVAZ. The deal should help the Russian carmaker modernize while opening up new markets for the Logan lineup Renault launched in 2004. The no-frills Logan, starting at $9,000, has become the world's most successful cheap car.

The plan is to use the Logan's design as the basis of an AvtoVAZ model sold under the Russian carmaker's Lada brand name. Adding AvtoVAZ's production to that of Renault and Nissan would create the world's No. 3 automaker, behind only Toyota (TM) and General Motors (GM). "It's a relationship whose time has definitely come," Ghosn said at a Moscow press conference.

High Volumes Make Up for Low Profits

If all goes as planned, the deal would cement Renault's position as the global leader in inexpensive autos—and bolster flagging operations elsewhere. While Renault sold nearly 368,000 Logans last year, up 48%, sales of Renault's pricier cars slipped by 4.1% in Western Europe, its biggest market. AvtoVAZ's capacity of more than 1 million vehicles a year could give Renault an edge over rivals such as To­yota and Volkswagen (VOWG.DE), both of which are planning their own low-cost offerings. High volumes are crucial in this race; analysts estimate profits on the Logan are no more than $400 per car. AvtoVAZ's network of dealerships across Russia's 11 time zones would help Renault in the race for the country's $53 billion auto market, which is expected to double within five years.

AvtoVAZ has hit a rough patch. Imports have soared, and automakers such as Ford (F) and GM have set up plants in Russia, while AvtoVAZ's market share has fallen to just 25%, down from 50% five years ago. The share of foreign-branded cars has surged to nearly 70%, from 10%, analysts estimate. A new management team, installed by the Kremlin after the government took control of AvtoVAZ in 2005, is eager to stem the decline. A key reason AvtoVAZ agreed to the deal with Renault was for "the modern technology and knowhow that the company will provide us," says Chairman Sergei Chemezov.