Why Renault's Latest Russia Deal Looks Smart

Renault’s partnership with struggling Russian automaker Avtovaz got a fresh infusion of cash on Nov. 27 – and happily for Renault, Russian taxpayers will foot most of the bill.

In a deal announced during a visit to Paris by Prime Minister Vladimir Putin, the Russian government said it would grant a $2.5 billion bailout to Avtovaz, while the government of the Samara region surrounding the company’s headquarters will pay the salaries of 14,600 AvtoVAZ employees who are being shifted to two new subsidiaries as part of a restructuring plan. Renault is to supply some $360 million worth of technology, equipment, and advice – but no cash — to support production of a Russian-made car based on the French automaker’s low-cost Logan model.

It sounds like a pretty good deal for Renault, which spent $1 billion to take a 25% stake in AvtoVAZ in 2008, only to watch the company pushed to the brink of bankruptcy after Russian auto sales plunged more than 50% this year. Renault had been under pressure to shell out more money to increase its stake.

Providing in-kind help, rather than cash, not only protects Renault from throwing good money after bad. It also increases the likelihood that Renault will reap added benefits from the partnership, says Christoph Stürmer, a Frankfurt-based auto analyst with Global Insight. “Renault is making sure that the joint venture will be using a lot of Renault technology and a lot of Renault-supplied parts,” rather than ceding that business to local Russian suppliers, Stürmer says.

In announcing the Nov. 27 agreement, Renault said that in addition to providing $360 million of in-kind support to produce a Logan-based car, it would “help Avtovaz develop a new entry-level vehicle to replace the Lada Classic and create new powertrain production capacity.” Renault and its alliance partner Nissan also plan to build vehicles for their own brands at AvtoVAZ’s factory in Tolyatti, the French company said.

Past tieups between foreign and Russian carmakers have tended to go badly. General Motors tried and failed to develop a new car with AvtoVAZ, based on the Opel Astra. A planned joint venture between Italy’s Fiat and Russian carmaker GAZ also collapsed. Renault, which already assembles some of its Megane sedans in a joint venture with a Moscow factory, “has learned a lot” from watching other companies’ struggles in Russia, Stürmer says. “They’ve learned that giving [Russian partners] money is not a good idea.”

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