Avtovaz: Soviet era giant teeters on the brink

22nd October 2009, Comments 0 comments

Prime Minister Vladimir Putin has vowed he will not allow the maker of the famed Lada car to collapse, a situation which could provoke a social catastrophe in Avtovaz's home region where it currently employs 100,000.

Moscow -- Chronically overstaffed, billions of dollars in debt and unfashionable -- the economic crisis cruelly exposed the deficiencies of Avtovaz and left Russia struggling to save its biggest carmaker without throwing money away.

Prime Minister Vladimir Putin has vowed he will not allow the maker of the famed Lada car to collapse, a situation which could provoke a social catastrophe in Avtovaz's home region where it currently employs 100,000.

The government has already handed Avtovaz 25 billion rubles (800 million dollars, 540 million euros) in aid but analysts and even officials say the carmaker needs radical restructuring and tens of thousands of job cuts to secure its future.

Handing more state help to Avtovaz "without solving the problems of restructuring its production capacities, debts and creating an effective product strategy... will put into doubt the possibility of the company continuing its production activity," Deputy Industry and Trade Minister Andrei Dementiev warned last week.

In a stark assessment of the carmaker's problems posted on the ministry website, he said at the start of next year Avtovaz would have 76.3 billion rubles of debt, excluding 9.8 billion rubles owed to suppliers.

Avtovaz's history goes back to 1966 when it was founded as a joint venture between the Soviet Union and Italian car giant Fiat to build an adapted version of the Fiat car for the Soviet and other European markets.

The first cars then rolled off the production line in 1970.

Known as the Zhiguli in the Soviet Union but marketed as the Lada abroad, the vehicle was sneered at by some but won admiration and success even in the West for its low price and practicality.

Between 1970-2002, the company churned out an astonishing 21 million cars, according to its official history. It accounts for one percent of Russia's gross domestic product (GDP).

Its factory, designed by Fiat, stretches over 600 acres on the banks of the Volga River in the city of Tolyatti -- named after an Italian communist leader. Hundreds of thousands of other jobs at suppliers depend on the factory.

In 2007, hoping to reap the benefits of what had become Europe's fastest growing car market, Renault bought a 25 percent stake in the company for one billion dollars in a deal personally backed by Putin.

But then demand slumped dramatically for cars in Russia as consumers cut back amid the economic crisis and those who could afford to buy a new vehicle opted for more fashionable foreign brands.

The company said in late September it would cut 27,600 jobs -- a third of its workforce -- and Putin warned Renault it would have to help the company or risk seeing its stake diluted.

"The announcement about sacking 27,000 people was a red line for the government which has led to real moves towards reconstruction that will change the situation in Avtovaz and in the city," said Sergei Udalov, deputy director of the Avtostat analytics agency.

"The government can't admit that 30,000 or 50,000 people are going to lose their jobs, that would cause a social explosion."

In a sign of the angry mood in Tolyatti, hundreds of workers took to the streets Saturday for an officially-sanctioned but rare protest against the mass lay-offs.

Avtovaz's current staffing is geared to producing over 600,000 cars a year but in 2009 it will only produce half that figure, said its deputy chief executive Grigory Khvorostianov quoted by the RIA Novosti news agency.

Sales of its cars will only reach 128,000 units in 2009, said Dementiev.

In his extraordinarily frank assessment of the company's prospects, Dementiev warned that the company's strategy on models was "risky" and that the partnership with Renault had not corresponded to its needs.

"Now we see that they are becoming more realistic towards Avtovaz," said Mikhail Pak, an auto analyst at the Aton investment firm.

"They have acknowledged -- at least informally -- that the company should be restructured, otherwise it doesn't matter how much money you put into it, it will still be no use."

Acknowledging that in the current market conditions a restructuring of Avtovaz's debts is "impossible,” Dementiev said the only option for the firm was to issue 60 billion rubles worth of bonds to be bought up by state bank VEB.

But VEB believes this should only take place as a last resort action, he warned.
In an embarrassing leak for the government, the press also quoted a memo from Dementiev saying that Avtovaz currently carried "all the signs envisaged under the legislation for bankruptcy."

The government rapidly emphasised that had it been written two weeks ago and the ministry had since changed its position.

Along with Renault, the other shareholders in Avtovaz are the state through the Russian Technologies corporation and the Trioka Dialog brokerage.


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