Russia Tries to Save Avtovaz, Again

The Kremlin is scrambling to save Russia's largest carmaker, which has been slammed by a steep fall in domestic auto sales

By Aleksandr Kolesnichenko

Yury Zavarzin bought a Lada Kaliana two years ago. With the $10,000 he paid for the front-wheel drive sedan he could have gotten a foreign car, but the credit and down payment terms for the Lada were easier.

"This is a fast car; it can go up to 160 kilometers an hour, [has] electric power steering. It's really easy to turn the wheel," Zavarzin said.

But he said the windshield wipers and the heater broke down the day after he bought the car. They were repaired under warranty. A year later, the engine began to shut off while he was driving. When mechanics at the warranty service center failed to fix the problem, technicians at another garage replaced the faulty fuel injection computer.

Zavarzin, who lives in the city of Krasnogorsk near Moscow, said he has had no other problems with the car, but notes that he has back pain while driving. He said he used to drive a Ford and never had backaches.

Zavarzin is one of the nearly 14 million Russians who own Ladas, the most popular vehicles in the country.

Still Avtovaz (AVAZ.RTS), the company that makes the Lada, has seen its fortunes rise and fall in the past year. In a matter of months in 2008, it went from reporting record output in order to satisfy apparently rising demand to cutting jobs and wages. By the end of last year, it was deep in debt and saddled with tens of thousands of unsold cars.

The story is repeated throughout Russia's ravaged car industry. Hyundai production at a TagAZ plant northeast of Moscow has plummeted by 76 percent, while GAZ, a Russian automaker, assembled only 187 Volga Sibers in three months, according to ASM-Holding, an analytical and consulting firm. A Kia assembly plant halted production, cutting 5,000 of its 5,500 jobs.

In all, production of vehicles in Russia plunged by about 65 percent year on year to 139,000 in the period from January to March, according to ASM-Holding. The automakers committee of the Association of European Businesses forecasted a decrease in Russia's annual output to about 1 million vehicles from 1.8 million in 2008.

In a report this year, analyst Stanley Root of PricewaterhouseCoopers predicted the Russian car market would decline by 25 percent to 50 percent in 2009, dragged down by tight credit, rising unemployment, falling wages, and the devaluation of the ruble.

The pain is industry wide, but Avtovaz, which accounted for more than half the vehicles assembled in Russia last year and which holds a quarter of the new-car market, is special. This year the government launched its fourth attempt to make the company competitive since the breakup of the Soviet Union.

Built in 1971, the Avtovaz factory in Tolyatti, just outside Samara, employs about 15 percent of Tolyatti's 705,000 residents. The factory puts out seven vehicles per worker per year, while the world's leading automakers manufacture 30 to 40 vehicles per worker. In a bid to boost efficiency, Soviet leader Mikhail Gorbachev launched the construction of a design bureau at the factory in 1986, stressing that "Avtovaz should be a trendsetter in the global automotive industry." Ten years later, President Boris Yeltsin approved a $3.3 billion subsidy to the carmaker.

Avtovaz saw its output rise from 500,000 cars in the mid-1990s to 700,000-750,000 after the ruble plunged in 1998. But only a year later, the government stepped in with $700 million in aid to the automaker and another $800 million in 2002.

France's Renault acquired a 25 percent stake in 2007. Rossiyskiye Tekhnologii, a state-owned company, and investment company Troika Dialog each hold a 25 percent interest. The remaining stake is up for sale. In 2008, Avtovaz reported a record output of 801,000 cars.

The factory continues to assemble rear-wheel drive sedans, clones of the Fiat 124, manufactured in Italy in the 1960s. Although Ladas are inexpensive, with most models priced at $5,000 to $8,000, they are often noisy, uncomfortable, and unreliable. Safety experts call these cars "killers" because a collision at a speed of 60 kilometers per hour leaves the driver no chance of surviving.

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