Lada Can Hear Its Rivals Gaining

AvtoVAZ' dominance faces a serious threat as foreign car plants spring up in Russia

It marks the end of an era -- and has sparked intense speculation about the future of one of Russia's most important companies. On Oct. 27, Vladimir Kadannikov, 64, chairman of Russian carmaker AvtoVAZ, retired after leading the company for 17 years. His departure comes at a time when Russia's car industry is struggling to compete against a wave of foreign-made cars.

Nothing symbolizes the challenges facing the industry more than AvtoVAZ. With 145 kilometers of production lines, 100,000 workers, and production of around 700,000 Lada cars a year -- some 70% of all Russian car production -- its Togliatti-based plant in southern Russia is one of the largest car factories in the world. Despite their reputation for somewhat shaky reliability, Ladas are still popular in Russia, where they retail for as little as $4,000. AvtoVAZ retains a 40% market share in its home market, and last year the company turned a profit of $147 million on revenues of $5.57 billion.

The bad news is that unless the company can somehow modernize to face an influx of foreign competition, AvtoVAZ will find it ever harder to stay afloat. "If AvtoVAZ fails to attract a foreign partner who will bring new technology or a new model, I don't see a future for this company," says Natalia Zagvozdina, analyst at Moscow investment bank Renaissance Capital.

Despite booming demand for cars, production of Russian-designed models this year is expected to slump, thanks to Russian consumers' growing love affair with foreign designs. According to Moscow investment bank United Financial Group, AvtoVAZ' production will drop 4% this year, with profits falling 34%. In years to come, AvtoVAZ is set to face ever greater competition from foreign producers, who are increasingly setting up manufacturing plants within Russia itself. Since 2002, Ford (F ), General Motors (GM ), and Renault have established factories in Russia, and Toyota (TM ), Volkswagen, and DaimlerChrysler (DCX ) are expected to follow in the coming months.

The Russian government is keen to encourage them. After years of protecting the local car industry through prohibitive tariffs, it has recently slashed the tariff on imported components from between 5% and 10% to between zero and 3%. By 2010 foreign manufacturers are forecast to produce 900,000 cars in Russia, up from 165,000 last year.

True, AvtoVAZ is doing its best to fight back. This year saw the launch of the compact Lada Kalina, which includes features such as antilock brakes, power steering, and air conditioning, all rarities in previous Russian models. AvtoVAZ even built an entirely new factory, equipped with state-of-the-art facilities and employing all new staff to build the Kalina. "Our company is doing everything possible to increase the competitiveness of our products," says marketing director Alexander Bredikhin.

SLOW OFF THE MARK

So far the Kalina, which retails for around $8,000, is finding buyers. But many industry experts are skeptical. "Alas, the quality still leaves a lot to be desired," says Leonid Golovanov from Avtoreview, a Russian automotive magazine. "The problem is that the car is still built on the basis of an old platform, with an old engine, gearbox, and so on."

Analysts say that AvtoVAZ is hamstrung by an inability to bring new designs to market in time. The Kalina was originally designed in the early nineties, but its launch was repeatedly delayed because of production difficulties. Some analysts say AvtoVAZ should be thinking about assembling foreign-designed autos, an idea that is anathema to patriotic managers of the old school, who are proud of Russia's tradition of locally designed cars.

It's an open question whether the departure of Kadannikov will cause AvtoVAZ to shift gears. The company won't appoint a new chairman until a December 22 board meeting. Analysts say the company's management is split between traditionalists of the Kadannikov mold, and younger, more aggressive types. "They should cut personnel by 50%, let a lot of management go, and really look hard for a foreign partner to produce something in demand," says Zagvozdina. That may be a lot to ask. But without a bold new vision, the clock is ticking for Russia's proud carmaker.

By Jason Bush

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