Russia’s leading carmaker is trying to clean up its confusing shareholding – so it can finalise a deal to build new cars in partnership with MagnaSteyr, writes Mark Bursa.

A quiet revolution is taking place at AvtoVAZ, Russia’s leading automaker. Rosoboronexport, the state-owned Russian armaments company that put in control of the carmaker in 2005, has now moved to sort out AvtoVAZ’s confusing share ownership strategy, a legacy of the influence of Russian oligarch Boris Berezhovsky.

The new arrangement will see shares in AvtoVAZ held by the All-Russian Vehicle Alliance (AVVA) annulled and a simplified ownership structure put in place. This should leave the way clear for AvtoVAZ to sign a strategic cooperation deal – or deals – with western companies.

AVVA was set up by Berezhovsky and Alexander Voloshin, who served as Russian President Vladimir Putin’s chief of staff from 1999 to 2003, but the identity of its shareholders is shrouded in mystery. It was designed to take over AvtoVAZ, and acquired a 38.4% voting stake, which it still holds. But as the Russian financial rollercoaster careered off the rails in the 1990s, AvtoVAZ ended up owning 85% of AVVA – effectively owning its own shareholder.

No wonder Rosoboronexport wants to clear this up. A consortium of investors, controlled by Rosoboronexport and investment company Troika Capital Partners, is setting about buying up shares held by AVVA and other investors, in order to create a new structure where the consortium owns 75% plus one share of AvtoVAZ.

However, the vague nature of the AVVA share ownership may make this a tough task – so far only 4% of AVVA’s stock has been bought. But the voting rights will be cancelled – if the shareholders come forward, AvtoVAZ will have to compensate them in other ways.

Consolidation of the shares is important, as AvtoVAZ needs to have a transparent share ownership if it is to offer shares to a potential partner. Or partners. AvtoVAZ already has a troubled JV with General Motors, building the Lada-developed Niva SUV and SKD versions of the new Chevrolet Captiva. And AvtoVAZ has been in slow negotiations with Renault for many months.

But quietly, at the end of 2006, AvtoVAZ, agreed an outline plan to build a new plant in partnership with Magna International, the Canadian-owned supplier whose MagnaSteyr division undertakes contract manufacturing for automakers, principally DaimlerChrysler. The final deal is due to be finalised within the next few weeks, according to Russian press reports.

This will see a new family of cars brought to market to replace the ageing 110 series range, and a new 450,000-unit factory set up at Togliatti. But this is not an exclusive deal – there is so much spare land and buildings at the sprawling site that if a deal with Renault were to come to fruition, it could be accommodated too. And there would not be a need to end the GM deal, though this looks likely as GM is building its own new plant in St Petersburg.

At the Geneva show, AvtoVAZ showed a new concept car, the Lada C, which is the first evidence of the cars it plans to make with MagnaSteyr. The Lada C is an aggressive-looking C-segment three-door hot hatch, powered by a 2-litre gasoline engine. Based on a new platform, it will spawn a family of cars, including a sedan, a five-door hatch, a compact MPV and a crossover, according to Lada spokesman Denis Metalnikov.

MagnaSteyr has designed the platform, but AvtoVAZ’s own Russian designers have styled the Lada C, he added. All the vehicles will comply with stringent European emissions and safety regulations.

The project could cost up to US$2bn – and it’s still not clear where this money will come from. But construction of the new plant is likely to begin in 2008, with completion in 2010, according to Russian media reports. It will transform AvtoVAZ’s production capabilities, as MagnaSteyr will bring flexibility to the production process.

AvtoVAZ is adamant that the AvtoVAZ-MagnaSteyr project will not stop AvtoVAZ doing a deal with Renault. Talks are continuing, despite pessimistic pronouncements from Renault President Carlos Ghosn, who told analysts and journalists in February: “It is possible that the negotiations will give no result.”

But with MagnaSteyr on board, AvtoVAZ doesn’t need Renault – and Renault has the option of growing at its existing Russian JV, Avtoframos. So a Renault-AvtoVAZ deal remains desirable, but not essential for either partner.

Strong sales in Russia have kept AvtoVAZ alive – the company still builds around 700,000 cars a year. And despite growth of around 8% last year, AvtoVAZ is losing ground in the rapidly-expanding Russian market, which rose more than 20% in 2006.

The Russian Federal Agency for Industry (Rosprom) estimates AvtoVAZ’s share fell from 39% in 2005 to 33.5% in 2006, while German investment bank Deutsche UFG, believes it will fall to only 28% by 2010.

More importantly, AvtoVAZ needs new models. The current Lada 110 series has been on sale since the mid-1990s, but it was developed during the Communist era. However, AvtoVAZ couldn’t afford to build it in the 1980s – so it was already a 10-year-old design by the time it went into production. The newer Kalina small car range has proved unreliable, though it is now being sold in left-hand drive markets in western Europe. At Geneva new variants of the Kalina were unveiled, including a 1.6-litre GHTI version and a new estate body.

But increasingly these models are becoming hard to sell in Russia as buyers turn to secondhand car imports or newer locally-made models – such as Renault’s low-cost Logan. The more up-market Lada C range would give AvtoVAZ a serious rival to the C-segment cars being built in Russia by other competitors such as Ford, whose St Petersburg-built Focus has proved to be a major success.

These cars, priced at around US$10,000, are more profitable than the cheap AvtoVAZ models – the old 1960s Fiat 124-based Zhiguli, which retails for around US$3,000, still accounts for a sizeable chunk of AvtoVAZ’s sales.

Meanwhile MagnaSteyr’s Russian links are not limited to AvtoVAZ. It’s also doing a deal with GAZ, Russia’s second-largest producer, to build Chrysler Sebring and Dodge Stratus models at GAZ’s Nizhny Novgorod plant. – Magna Steyr has long been assembling Mercedes, Jeep and Chrysler models for DaimlerChrysler, notably at Graz in Austria.

“We are proud that we are in such contact with the two major Russian carmakers,” Magna co-CEO Siegfried Wolf said. The Magna-GAZ venture will adapt Chrysler cars for the Russian market, with many parts made locally. GAZ last year acquired UK-based van-maker LDV, and has hired former Ford of Europe boss Martin Leach to run this operation and develop new business for GAZ – and the MagnaSteyr deal is part of this.

There are a lot of elements to these deals – Chrysler, AvtoVAZ, GAZ are all in some degree of managerial change. But whatever happens, it looks like MagnaSteyr will emerge as a pivotal player.

Mark Bursa