Roaring Ahead On Russia's Roads

In cars and light trucks, GAZ makes money in bumpy times

Sitting beneath a banner showing a leaping stag, the symbol of Russia's GAZ auto plant, company President Nikolai Pugin waves his arm toward the balcony. "Come on down," he tells dissident shareholders, who are shouting down every measure proposed at GAZ's third annual meeting. "Sit in the front rows if you have something to say." But when one malcontent asks him to confirm whether middle managers earn 13 times as much as assembly-line workers, Pugin ducks. "That's not a serious question," he replies.

At GAZ, a privatized factory started in 1929 with help from Henry Ford, some managers do earn lots more than assembly-line workers--and shareholders are exercising their new rights to vote on important issues. But at the annual meeting on Apr. 27 in Nizhny Novgorod, Pugin succeeded in pushing through everything on his agenda, including a new corporate charter that increases his powers. Despite GAZ's three years as a public company, it's clear there's still only one person in control: Pugin.

BLOATED. That's good news for the giant carmaker. Pugin, 55, has increased output and turned a profit during a period of widespread economic collapse. While other Russian auto makers slashed production and begged for government subsidies, GAZ cut costs, introduced new models, and lined up private financing. Says Sergei Suverov, a securities analyst at Moscow's United Financial Group: "It's the only carmaker in Russia that was able to adapt to market principles and restructure production." The payoff was a $314 million profit on revenues of $1.8 billion last year.

GAZ still faces rocky stretches in the road ahead, from rising costs of raw materials to the drag on productivity from a bloated workforce. But Pugin has carved out a unique slice of the market for GAZ. The key to its turnaround is the 1.5-ton GAZelle, the first light truck ever made by a Russian company. It's a runabout for the thousands of small businesses that emerged after the collapse of the state-run Soviet economy. This year, GAZ hopes to turn out at least 75,000 GAZelles, up from 60,000 sold last year with sticker prices from $7,000 to $14,000.

Its private-business customers are able to pay cash for their vehicles, something the Russian Army and most farms and factories can no longer do. While rival Zil kept delivering midsize and heavy trucks to insolvent buyers on credit, Pugin cut off such customers and slashed production of medium trucks. Instead, he launched the GAZelle in August, 1994. He also boosted the bottom line by upping sales of the midsize Volga passenger car.

MONEY-HUNGRY. Pugin's financial savvy helps make GAZ one of the best-managed industrial enterprises in Russia. Although he is a former Soviet transport minister with close ties to President Boris Yeltsin, Pugin did not try to get government credits and subsidies after taking the helm in February, 1994. Instead, he raised $20 million by issuing debt securities. Recently, the European Bank for Reconstruction & Development announced it would lend GAZ $25 million.

Despite last year's profits, GAZ needs money. Its working capital is squeezed, with customers owing it $100 million. It barters one-third of its output for parts and equipment. With 110,000 workers making 250,000 vehicles a year, it is inefficient by Western standards. Rising steel and energy costs make GAZ less able to compete on price with imported cars--many of them stolen.

To become a global player, GAZ would have to hook up with a foreign partner, as many Eastern European counterparts have done. Despite his talks with most major carmakers, Pugin so far seems reluctant to sign away any of GAZ's independence. He has pressured workers, who own 65% of GAZ, to sell their shares back to the company, not to outsiders, if they decide to cash in.

GAZ still has one important advantage: The company is the most efficient producer in a car market protected by high tariffs, which auto makers persuaded Yeltsin's government to slap on imports. That's one reason why shares in GAZ are sparking interest among Western investors. If Pugin can keep on turning the company around, GAZ could carve out a niche not only on Russia's roads but also in Western emerging-market portfolios.

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