Just a decade ago, Russia's second largest automaker was close to collapse. Now it's making bold international acquisitions and emerging as a global force. What's changed? Mark Bursa investigates.

There's a new breed of automaker in the Emerging Markets. Established companies with a strong local presence and plenty of financial muscle. And a very different approach to growing a global presence.

Rather than building a brand from scratch, these companies are prepared to use their fiscal clout to buy up struggling automakers, or at least the bits that the established car companies don't want.

We're talking Tata of India, with its audacious acquisition of Jaguar and Land-Rover. We're talking Shanghai Automotive of China, now in charge of MG, and starting to make real progress with the Korean SsangYong brand. And perhaps most of all, we're talking about GAZ.

GAZ may be smaller than AvtoVAZ in the league table of Russian automakers, but with AvtoVAZ tieing its future in with Renault, GAZ's acquisitive approach could see it become the leading global Russian independent automaker. That's not something anybody would have predicted a decade ago.

GAZ struggled after the fall of Communism. The market for its core products - the old Volga sedans beloved of KGB Aparatchiks - had largely disappeared. An ambitious bid to build a Fiat plant, backed by mountains of European Bank for Reconstruction and Development (EBRD) cash, foundered in the late-'90s Russian economic crash. Only a strong-selling range of rugged vans and trucks kept GAZ afloat.

And then the serious money arrived. Rather like Chelsea Football Club, the English Premier League also-rans that hit the big time when Roman Abramovich wanted something to spend his billions on, GAZ snared the backing of a Russian Oligarch.

It's a close call as to who's the richer of Abramovich or Oleg Deripaska, the man who bought GAZ. This April, Forbes magazine estimated he was worth around $28.6 billion - $11bn more than in 2007. Like Abramovich, he was a manager of a privatised commodity provider - as president of Sibirsky Aluminium Investment Industrial Group from 1997, he was a substantial supplier to GAZ, which at the time was on the ropes. If GAZ had collapsed, Sibirsky Aluminium would have lost a major customer - so to safeguard his own business, Deripaska simply acquired his customer.

A period of reorganisation followed, with a new holding company, OAO GAZ, taking control of various automakers that had been consolidated under the RusPromAvto group. Meanwhile production lines were upgraded and new, efficient Japanese-style manufacturing techniques introduced. By 2006, GAZ was ready to grow.

Since then, GAZ has pursued an aggressive and opportunistic series of international acquisitions, starting with the purchase of failed UK van maker LDV, which had run out of steam following a successful MBO in the early 1990s. LDV did have a decent product range - its Maxus vans were a lot more advanced than GAZ's own Sobol and Gazelle models - basically, crude Soviet copies of the 1980s Ford Transit.

Now GAZ is launching production in Russia of the Maxus. A Russian production line will be opened in 2010, and this is expected to produce around 45,000 vehicles per year - all destined for CIS markets. The UK plant at Washwood Heath in Birmingham will continue to serve non-CIS markets, as taxes and duties mean exporting from Russia is prohibitively expensive.

In fact, UK production will grow next year from around 11,000 vans this year to 15,000 in 2009 as LDV - which will be rebranded Maxus in the near future - starts selling vehicles in new markets. The vans are now sold in France, Spain, Benelux countries and Turkey, with Poland and the Czech Republic starting before the end of the year. A further ten markets will be opened next year. This will mean the UK plant will for the first time export the majority of its production - around 60% of 2009 output is scheduled for overseas sales.

As a result, 218 new jobs have been created at Birmingham, the plant has expanded its customisation facility building specialist bodies on to chassis-cab Maxus models, and a CKD export facility has also opened to ship vans to a new assembly operation in Malaysia - a type of operation GAZ is keen to expand.

A pattern began to emerge. GAZ is in a hurry, and rather than develop capabilities in-house, Deripaska simply writes out a cheque and buys a suitable business. A more advanced sedan was needed so GAZ could offer something more modern than the old Volga. The solution? GAZ bought the production line of the old-model Chrysler Sebring/Dodge Stratus from Chrysler, shipped it to Russia and now builds the car as the GAZ Siber. Now it's sold as a car with Western quality - but built at Russian costs.

Likewise, LDV and GAZ needed new diesel engines. Simple. Go and buy Penske Corporation's 50 percent stake in Italy's VM Motori. So not only does GAZ have access to current-tech Euro 5-compliant engines, it's also now a partner of General Motors in the VM business.

A Russian diesel engine plant will be built in the next two to three years, to build the VM engines for Russian-built GAZ and Maxus vans at a rate of 200,000 to 300,000 units a year. The new engine facility will be built either at the main Nizhny Novgorod plant or in Yaroslavl, where the group already has an engine plant, according to reports.

The acquisition spree won't end here. LDV wants to add more models to its range, particularly a smaller van to plug the gap left by the Cub model, a rebadged Nissan Vanette that was sold from 1996 to 2002. LDV maketing director Guy Jones said the company could sell "100,000 at least" car-derived vans, an additional volume not to be sniffed at in credit-crunch times.

To get this volume, GAZ has several options. It could simply source vans from an existing plant, as it did with Nissan on the Cub. It could do a similar deal to the Chrysler Sebring deal with a foreign van maker, buying the jigs and tools to build a recently-withdrawn model. It could acquire an existing plant, or a stake in an existing plant.

This option looks the most likely. With western European van volumes feeling the pinch, any number of manufacturers might be glad of a wealthy partner that wants to take 100,000 units of production. Given existing links via the VM deal, GM must look a likely candidate. GM has a suitable van - the Combo, made in Zaragoza, Spain - which falls outside its JV with Renault on larger panel vans. Combo would be ideal for LDV's requirements - indeed, it could offer a convenient way for GM to reduce its exposure at Zaragoza.

Jones isn't saying what the deal will be. But he confirmed talks with a number of potential partners were under way. "We have several options on the table," he said.

There's a lot of logic to these deals for GAZ. Not only does it allow a rapid expansion of the product offering, it also allows GAZ to upgrade its 11 Russian facilities. Like many East European automakers, it has a high level of vertical integration, right down to casting and forging plants, much of which could do with upgrading.

With the West in the grip of the credit crunch, the timing could work out very well for GAZ - there will be bargains as companies go to the wall, or look to shed subsidiaries or non-core businesses. We know that some substantial car brands are on the market - Volvo, Hummer, even, for the right price, Chrysler itself.

Indeed, perhaps the only problem for Oleg Deripaska is that there are other companies - such as Tata, SAIC or Mahindra - that share his ambitions, which might force up the price of those bargains. It could come down to who has the deepest pockets.
 
Mark 'Coolbear' Bursa