EMERGING MARKETS ANALYSIS: Where now for the AvtoVAZ bidders?
Renault may have won the battle for a stake in AvtoVAZ, but where does the deal leave the losing bidders for Russia's largest automaker? General Motors, Fiat and Magna all tabled bids for the Lada-maker, signalling their intent to raise their game in Russia. But with AvtoVAZ out of the frame, what are the options? Mark Bursa investigates
Renault emerged as the unlikely choice as AvtoVAZ's partner, but the deal has led to considerable manoeuvring from Russia's other, smaller automakers. Three major auto companies missed out, and the other Russian independents are hoping that some of the money that might have been pumped into AvtoVAZ might now come their way.
Despite a recent move by foreign automakers toward stand-alone, new-build factories, joint ventures with existing Russian automakers remain attractive, as they offer faster start-up as modernising an existing plant is a quicker job than building a new plant, and they offer easier market access via established distribution chains.
And the options are not mutually exclusive. General Motors is building its own new plant at Shushary, near St Petersburg, in tandem with its existing JV with AvtoVAZ, and its proposed extension of this deal. Now the situation has changed - in truth, it's hard to see how GM can remain with AvtoVAZ given Renault's new role in the company, together with the rather fraught history of the JV.
Also, the cars produced by GM-AvtoVAZ don't really fit with the GM product plan. The Chevrolet Viva is a four-door sedan version of the previous-generation Opel Astra, built at Togliatti since 2004, while the Chevrolet Niva is an AvtoVAZ-developed SUV with GM engines, and sold only in Russia.
The Niva is a 10-year-old design developed by AvtoVAZ to replace its old, 1970s-vintage Niva before the GM deal was established in 2001. But since then, GM has developed its own compact SUV, the Captiva, designed and built in Korea by GM-Daewoo. This car has been launched in Russia and is earmarked for production at Shushary. Meanwhile AvtoVAZ still builds and sells the old Niva - and could easily reclaim the newer version from the GM JV and sell it under the Lada brand.
The Viva is pitched into the competitive mid-sized sector, where Ford offers its current-generation Focus. But GM is likely to build the GM-Daewoo designed Chevrolet Lacetti at Shushary as well, giving it a more modern, and cheaper to build, rival to the Focus.
Another nail in the GM-AvtoVAZ coffin is likely to come from the revelation by GM CEO Rick Wagoner that he is talking to the second-largest Russia automaker, GAZ, with a view to taking a stake. "We've talked to them from time to time and we're going to keep our eyes on options which help us get a better position in Russia," Wagoner told reporters last month.
While the Shushary plant will produce Chevrolet models, GM is keen to exploit the increasingly more up-market Opel brand in Russia - and that could be the objective of talks with GAZ. GM Chief Financial Officer Fritz Henderson told Reuters before Christmas that sales of imported Opels in Russia were ahead of expectations, though high transport costs and import duties of up to 25% were an obstacle to profitability. "We're doing more volume in Russia, particularly with Opel product than we initially anticipated, so we're looking at the options that we have to get more localised more quickly with Opel product in Russia," he said.
GAZ has intriguing links with all the failed AvtoVAZ bidders. A decade ago, the company almost got into bed with Fiat. In September 1997, GAZ announced a plan to set up a plant to build 150,000 Fiat Palio/Siena Project 178 world cars a year. This was a large-scale plan, with investments valued at $850 million and backed by the European Bank for Reconstruction and Development, which planned to invest $240m in the project. But the Russian economy collapsed in 1998, putting an end to the plan.
Fiat has since forged links with another of Russia's smaller automakers, Severstal Avto, agreeing to build the new Linea sedan in Yelabuga, Tatarstan alongside the Ducato light commercial vehicle. Fiat announced the plan to create a 50:50 JV last September. Ducato productions started on December 21, 2007, and Linea production will start in the first quarter of 2008, Severstal general director Vladimir Shvetsov said.
A second plant will be built at Yelabuga, upping capacity to 55,000 vehicles per year, and Shvetsov also said Severstal Auto would build 90,000 Fiat diesel engines a year for Ducato at its Zavolzhsky Motor Plant. Fiat group CEO Sergio Marchionne said: "Severstal Auto's knowledge of the Russian market will reinforce Fiat's investment and efforts in the region."
Missing out on AvtoVAZ - the company founded in the 1960s using Fiat technology - has hurt the Italian company, and Marchionne is already upping the pace of development at Severstal, which also started assembling Fiat Doblo vans and Albea (Siena) sedans from Turkish-sourced CKD kits in 2007. These are assembled at Severstal's plant at Naberejniye Chelni, near Kazan in the Volga region.
It looks like Fiat will focus on Seversrtal as its partner - there seems no suggestion that the GAZ deal could be resurrected. Indeed, GAZ has since concentrated largely on its successful commercial vehicles business, and since coming under the control of Russia billionaire Oleg Deripaska in 2000 it has become more active globally, buying collapsed UK van maker LDV in 2006 and installing former Ford of Europe CEO Martin Leach at the helm.
Last month GAZ announced a plan to build a new $400m, 80,000-units-a-year diesel engine plant in Yaroslavl, with technology developed by Austrian powerplant specialist AVL. Intriguingly, Deripaska is believed to have invested in GM shares - though this does not necessarily mean he will favour GM's overtures.
This is because Deripaska, the second-richest Russian oligarch after Roman Abramovich, spent $1.5bn last May on a 42% stake in a holding company that controls Magna International, the so-called "Tier 0.5 supplier" that operates contract manufacturing services for automakers including BMW and Chrysler, and will provide manufacturing know-how for GAZ. And through Magna's links, the newly-independent Chrysler increasingly looks the most likely JV partner for GAZ.
GAZ already builds Chrysler cars. Last year it bought the old Chrysler Sebring production line, and is producing, with help from Magna, the sedan in Russia as the GAZ Ciber - allowing it to offer a more modern, up-market alternative to the ageing Volga sedans that GAZ has produced since the Communist era. Chrysler has no financial involvement in this deal - but the US automaker wants a slice of the Russian market too, and like GM, it has been talking to GAZ about a bigger deal.
Last month, the Financial Times quoted Leonid Dolgov, chief executive of GAZ's car division, as saying it was "no secret" that GAZ was in the talks with Chrysler, while the newspaper also said a Chrysler spokesman confirmed the company's "ongoing relationship" with GAZ. This information followed earlier reports in Russian newspaper Kommersant that Magna International was in talks with Chrysler to build an assembly plant in Russia to produce subcompact and compact cars. Given Deripaska's role in both Magna and GAZ, it's safe to assume that this is the same deal.
According to Kommersant, Magna and Chrysler were planning to invest $500m in the factory. Magna has not confirmed the talks, but co-CEO Don Walker was quoted as saying Magna "remains excited about the growth opportunities in Russia". Of course, this could refer to Magna's role as a supplier - Walker said Magna was quoting for business with many of the foreign automakers that have set up shop in Russia, including Ford, GM, Nissan, Renault and Volkswagen.
Given Deripaska's vast wealth, and ambitions to invest in the car industry, his ongoing relationship with Chrysler could be seen as a way to build stronger ties with the company, currently owned by private venture capital firm Cerberus. Magna expressed an interest in taking over Chrysler when Daimler opted to sell the company, and while Daimler chose Cerberus instead, the private venture firm will surely eventually look for an exit route. Might allowing Deripaska to back his automotive interests into Chrysler provide this?
Pure speculation of course, but Oleg Deripaska is in an increasingly powerful position in Russia's auto industry.