The smart money was on a Fiat-AvtoVAZ deal - but Carlos Ghosn pulled off a major coup for Renault instead - with a little help from his friends in high places. Mark Bursa reports.

How does Carlos Ghosn do it? The master of the big deal has already taken control of Nissan, Dacia and Samsung - and now he's added Russia's biggest automaker, AvtoVAZ, to the Renault stable.

In many ways, the AvtoVAZ deal is the most remarkable, simply because Renault faced very stiff competition from three major players for the deal - GM, Fiat and Magna - and early indications seemed to place Renault as the least likely to succeed of the four. After all, GM already has a long-standing agreement with the Russian company; Fiat has a 30-year history with it, and Magna, 20% owned by Russian oligarch Oleg Deripaska, announced an agreement to build new cars for AvtoVAZ just 12 months ago.

Meanwhile, Renault had indicated 12 months ago that it was out of the race for an involvement with AvtoVAZ, and while it continued to present its proposals, Russian sources described its initial pitch as "totally unacceptable".

Most believed the winning bidder would be Fiat. Despite Deripaska's influence in high Russian places, Magna opted out of any AvtoVAZ deal in early November. Clearly AvtoVAZ had indicated that this was a job for an established automaker, not a contract-manufacturing supplier.

US media, as ever, talked up GM's bid. But GM's decade-long relationship with AvtoVAZ has been far from smooth - indeed, difficulties dealing with former AvtoVAZ management forced GM into building its own plant near St Petersburg. GM still has a JV with AvtoVAZ at Togliatti, but it was hard to imaging the toothpaste being put back in the tube.

Fiat, meanwhile, believed it had a done deal. An announcement was prepared; it is claimed a letter of intent was even signed. It would have been an emotional return for Fiat - AvtoVAZ's massive plant was created with Fiat's investment in the 1960s, and the town where it is located was even renamed after the Italian communist politician who brokered the deal, Palmiro Togliatti. The plant started building Fiat 124s in 1970, and versions of this car, known locally as the Zhiguli, are still built.

Fiat CEO Sergio Marchionne has targeted emerging markets as a growth area - and according to reports he was prepared to sweeten a deal with AvtoVAZ by including other Fiat assets in a JV. Italian rumours suggest Fiat may even have offered its robotics divison, Comau, to the Russians as part of the deal.

In these circumstances it seems extraordinary that Ghosn should have been able to outbid Marchionne. Yet Sergei Chemezov, the head of AvtoVAZ's owner, state-controlled Russian Technologies, previously known as Rosoboronexport, said only that Renault paid "a fair price, close to the market price".

Renault chief financial officer Thierry Moulonguet said the market value of AvtoVAZ was USD5.7bn and that Renault was paying a reasonable multiple over earnings for its 25% stake. Bloomberg estimated the stake at USD1.36bn, based on the carmaker's market value of USD5.44bn Saturday evening. Certainly Fiat could have matched that, so maybe there was more to the bidding than suitcases full of cash?

Certainly Carlos Ghosn has friends in high places - much lobbying on Renault's behalf was done directly between the French president Nicolas Sarkozy and Russian president Vladimir Putin (named on Wednesday as Time magazine's Person of the Year). Indeed, with relations between Russia and the West as frosty as at any time since the Cold War, Sarkozy has seized his chance to cosy up to Putin, calling him "dear Vladimir" on a recent state visit to Moscow; saying France wanted to be Russia's "privileged partner"; and very publicly congratulating Putin on his landslide victory in the State Duma elections.

Whether there's a hidden price accompanying Sarkozy's brown-nosing remains to be seen. But it does look like Renault has secured a significant victory, especially at the expense of Fiat and GM, two of its main rivals in emerging markets, and arguably the other Western manufacturers with the best emerging markets strategies.

Certainly, Renault's negotiations were the longest - Renault had proposed a deal back in 2006, but this seemed to have been back-burnered at the time in favour of Magna. And sources close to the negotiations have said Renault had to make significant changes to its proposals, going so far as to describe the original pitch as "totally unacceptable" to AvtoVAZ. Back in February 2007, Ghosn's prognosis was pessimistic, telling analysts and journalists: "It is possible that the negotiations will give no result."

The deal is fairly complicated. Renault's 25% stake will go into a JV with Russian Technologies that will control 50% of AvtoVAZ shares. A further 25% stake could be offered to a Russia company - possibly a steel or energy company.

State-owned arms trader Rosoboronexport was effectively put in charge of AvtoVAZ in late 2005 as part of a move by the Russia Government to end the messy ownership situation surrounding the company, involving exiled oligarch Boris Berezhovsky, now living in the UK, but who owned a significant stake in AvtoVAZ. The Government effectively renationalised AvtoVAZ, and tasked Rosoboronexport with turning it round.

Rosoboronexport quickly came to the conclusion that this was not possible without a foreign partner. The examples of Skoda (under VW) and especially Dacia (under Renault) must have loomed large in their thinking. If Dacia could be turned into a successful brand, why not Lada? Renault has reintroduced Dacia to most of Western Europe as a budget brand. Lada has maintained a foothold in many European markets, including France and Germany.

How to manage two East European brands will pose interesting issues for Renault. Announcing the deal, Ghosn said "development of the Lada brand will be a priority", and statements issued by Renault stated firmly that it wanted to develop the Lada brand "while respecting its identity, in order to maintain its leadership".

This means in Russia - where Dacia is not used; Logan models built at Renault's existing Russian plant, Avtoframos in Moscow, carry Renault badges. Renault says it will build Renault, Nissan and Lada models at AvtoVAZ, as well as engines and transmissions.

Avtoframos will continue - Renault has already committed to expanding it. Avtoframos is a JV with the Moscow city government, occupying the factory that once built Moskvich cars. In May 2007, the partners agreed to expand the operation to 160,000 cars a year, at a cost of USD150m. The plant will concentrate on building versions of the Logan, which is the best-selling foreign sedan in Russia.

Meanwhile Nissan is also building its own USD200m plant in St Petersburg, which is due to open in early 2009. At full capacity, the plant will produce around 50,000 vehicles a year and employ up to 750 people building two models - the large Japan-market Teana sedan and the X-Trail SUV.

Together with AvtoVAZ, Renault will have almost unlimited capacity in Russia. And according to Moulonguet, it's going to need it. He estimates the Russian market will reach 3.5m to 4m cars by 2015, up from 2.3 million in 2007, surpassing Germany to become Europe's largest. Ghosn said annual capacity at AvtoVAZ would be ramped up to 1.5m units in order to assemble Renault and Nissan cars alongside Lada models. In 2007, it should make around 600,000 units - well down on recent years, when annual output has been around 1m units.

AvtoVAZ should be able to rebuild its share once it has competitive products. The company's share has tumbled below 30%, but Moulonguet believes a 40% AvtoVAZ share of the Russian market is achievable. Central to achieving this is the Lada C-series, a Russian-designed car that was shown as a concept at the Geneva Show in March 2007, and as a production prototype at the Moscow Show in August. This is the car that Magna would have built, though it was styled in-house by AvtoVAZ in Russia. While Magna would have engineered the platform, it's now likely to end up with Logan or Megane running gear.

The Lada C is an aggressive-looking C-segment three-door hatch, which will spawn a family of cars, including a sedan, a five-door hatch, a compact MPV and a crossover, Lada spokesman Denis Metalnikov said at Geneva. Chemezov said Renault and AvtoVAZ would continue to develop the C platform, and cars based on it should cost from USD12,000 to USD15,000. It would take around USD900m to upgrade the Togliatti plant and develop the C platform, he said.

The C will replace the 20-year-old 110 series, a car designed before the fall of the Soviet Union but not marketed until the early 1990s. This has recently had a facelift and is now called Priora, but it is uncompetitive against the likes of the Logan and the Ford Focus, which has become a hot seller in Russia as it is now built in St Petersburg. The success of Focus is likely to make Megane a priority product for local build too.

Whether Renault will want to develop Lada as a brand outside Russia and CEE markets is another matter. AvtoVAZ officials had certainly been eyeing Western Europe with the Lada C, and this model is suitably different to Dacia, so Renault may simply allow both brands to carve out their own niches with different distribution channels.

Mark Bursa

'Coolbear'

See also:

RUSSIA: AvtoVAZ selects Renault as strategic partner

ANALYSIS: AvtoVAZ - how do you transform a giant?