The future of General Motors' joint venture with Russia's AvtoVAZ looks decidedly shaky following the takeover of AvtoVAZ by state-owned defence agency Rosoboronexport, writes Mark Bursa.

The new management has set about restructuring the company, backed by $5 billion of Government funds, and that could mean the writing is on the wall for GM's involvement with the business.

GM-AvtoVAZ had a slow and difficult birth. It was founded in 2001 after years of discussions by General Motors and AvtoVAZ, which both hold 41.5% stakes in the venture, and the European Bank for Reconstruction and Development (EBRD), which has a 17% stake. GM invested $100m in the venture, which makes cars in a separate facility alongside the main AvtoVAZ plant.

It builds the AvtoVAZ-developed but GM-engined Niva small SUV, and a saloon version of the previous-generation Astra, called the Viva. Both are sold under the Chevrolet brand in Russia, a move that pre-dates GM's global rebranding of Daewoo as Chevrolet.

Output at GM-AvtoVAZ has tumbled this year as a result of a dispute over parts prices, which halted production at the Togliatti plant. Production in the first quarter fell 28.3% year-on-year to 9,661 cars. Last year GM-AvtoVAZ made 51,810 vehicles, down from 57,737 in 2004.

The dispute over parts pricing came in the immediate aftermath of the Rosoboronexport deal. It is believed to have been triggered by a demand for the joint venture to start immediately paying higher prices to AvtoVAZ for components. While an agreement was reached that restarted the lines after a week, this is seen as a short-term fix, and negotiations are ongoing.

The venture's problems are deep-rooted. The Viva competes directly with the Ford Focus, which Ford builds at its wholly-owned plant in St Petersburg. But while the Viva is based on the old T3000 Astra, the Ford plant builds the latest generation Focus, which puts the GM product at a serious disadvantage in the sector, where demand for more expensive cars is growing.
Also the venture is likely to be given a low priority by Rosoboronexport, a state arms agency run by a close friend of President Vladimir Putin. It is planning, with Putin's approval, to turn it into a stand-alone "national champion" carmaker. Rosoboronexport has announced plans for a $5bn shake-up of AvtoVAZ involving a new factory and several new models, and AvtoVAZ executives said they were reviewing the future of the joint venture.

Such a shake-up is overdue. AvtoVAZ employs 100,000 workers - it will almost certainly need to slim this down if it is to become profitable. Crucially, the market has finally caught up with AvtoVAZ, which has continued churning out the old Communist-era Ladas and Zhigulis, based on the 1965 Fiat 124. For years, these crude, boxy cars were all that Russian car buyers could afford. But as Russian society becomes more entrepreneurial, wealthy and fashion-conscious, these cars are increasingly being shunned in favour of foreign designs and used car imports.

AvtoVAZ's new owners want to make the company self-sufficient, making a range of more attractive, modern models, including a hatchback, minivan, station wagon and SUV-based crossover on top of the current Niva sport-utility model. AvtoVAZ seems to be copying the Koreans and Chinese, talking with a number of overseas design studios, including Pininfarina, Bertone and ItalDesign.

AvtoVAZ plans future annual production targets of 150,000 hatchbacks, 90,000 minivans, 60,000 station wagons and 40,000 SUV-based crossovers, according to Russian press reports - short of the 700,000 old models the company used to build, but sufficient to guarantee its survival.

First recipient of new investment is the Kalina small car range, unveiled five years ago, which will receive a major boost with production being ramped up to 300,000 in 2009. Certainly there is plenty of pent-up demand in Russia. Car ownership is one-third of the west, with just one in ten citizens owning a car. And the average age of cars on the roads is almost twice that of the west - 18 years. An awful lot of old Ladas and Moskviches will have to come off the roads in the coming years, and something is needed to replace them.

And the Russians want those to be Russian cars. GM is already making alternative plans - it is exploring a number of options, including CKD assembly with Kaliningrad-based assembler Avtotor; imports from Ukraine via a deal with AvtoZAZ; or even copying Ford and building its own wholly-owned Russian plant. All of which makes it look like GM-AvtoVAZ's days are numbered.

Mark Bursa