General Motors Corp could decide this week whether to approve an innovative project, repeatedly postponed, to make cars in Russia with AO AvtoVAZ and European Bank for Reconstruction and Development (EBRD), sources told

GM’s highest-ranking body of executives, a 20-member automotive strategy board, recently recommended the company’s board of directors (BoD) should vote for the plan during two days of meetings that start today, insiders said.

AvtoVAZ-GM Venture
NAME undecided
LOCATION Togliatti (1,000km southeast of Moscow)
40% General Motors
20% EBRD
OUTPUT CAPACITY 75,000 units per year in 2 shifts
OUTPUT TARGET 35,000 in first full year; 75,000 in 2006
PRODUCTS Lada Niva 2123
badge: Chevrolet & possibly Lada
WORKFORCE 1,200 in 2 shifts at capacity


Approval not guaranteed

The BoD is expected to authorise the deal, though verdicts anticipated on 3 October 2000 and 5 December 2000 were postponed, and the venture has faced opposition from key officials, apparently including GM Europe president Michael J Burns. Media have implied a majority of the board may not be behind the project yet: at least five of 14 BoD members support it, AvtoVAZ chair Vladimir V Kadannikov reportedly told daily newspaper Izvestia of Moscow, according to a dispatch there from Dow Jones News on 1 February 2001. [Editor’s Note: the BoD has 16 (not 14) members, 13 not GM employees.]

David J Herman

Importantly, however, the plan is led by David J Herman, a GM vice president and former chair and managing director of the US automaker’s biggest foreign subsidiary Adam Opel AG of Germany. Influential and respected, he is understood to enjoy backing from GM leaders on the BoD: G Richard Wagoner Jr (chief executive and president), John F Smith Jr (chair) and Harry J Pearce Jr (vice chair). In December 2000, Wagoner wrote a letter to Kadannikov underscoring his commitment.

In the past six months, parameters of the project have changed repeatedly and significantly. The investment target was $500m-$600m in August 2000, roughly $400m in October 2000 and $170m in December 2000. According to informed parties, the sum remains in flux, but the provisional total now is $332m: $101m from AvtoVAZ, $99m from GM and $132m from EBRD (partly in loans).

The venture, still unnamed, would build an upgraded version of AvtoVAZ’s new small sport-utility vehicle (SUV): Lada Niva 2123. The model would don the US automaker’s brand Chevrolet in Russia and elsewhere. Higher-specification versions would run on Opel engines and transmissions.

Lada Niva 2123

In a breakdown of investment, AvtoVAZ would contribute $65m in the value of the vehicle (including rights to intellectual property and trademark) and $36m in facilities and land. The US manufacturer would supply $97m in cash and $2m in equipment.

[According to Dow Jones News, the project would total $400m-$500m. The extra funds could reflect later stages for a second vehicle. Until October 2000, the venture was to build Niva plus Opel Astra (T3000), but the German model was dropped over concerns it would cost too much for most consumers.]

Opel Astra dropped from GM plans in Russia

Name game

The badging issue is thorny – and partly undecided.

The simplest solution would dub all vehicles Chevrolet, and GM is considering this option, but it hopes for annual exports of 25,000 Niva to Europe (East and West), where Chevrolet has negligible representation. The creation of dealers for the brand is infeasible – sales volumes are too low, costs to develop a retail network are too high. Yet some in the US automaker are against distributing the vehicle via outlets for Opel (Vauxhall in the UK). GM has been investing heavily to sharpen the German brand’s identity, and it may be averse to risking improvements in Opel’s image by asking car showrooms to divert resources and space for a Russian vehicle with a different marque. (No sources have suggested Opel could be a brand possibility for the 2123.)… Consequently, Niva could remain a Lada in the continent’s main markets, since AvtoVAZ has commercial operations there, though this presence has been deteriorating since the mid-1990s. This approach lacks popularity because exports are critical to the venture’s profitability, and the vehicle can command higher prices under Chevrolet than under Lada. It is especially unpalatable to GM, because most sales likely would feature Opel engines… An option gaining favour is hypothetical: if GM would buy Daewoo Motor Co Ltd, the badge from South Korea could be used. Daewoo has established professional retailers throughout Europe, and its marque could be an attractive compromise… “We are still wrestling with this issue,” a GM official said.

AvtoVAZ and GM have agreed to offer the 2123 as Chevrolet in Latin America, where the US brand is entrenched… In Russia, the badge’s reputation is undeveloped, and an attempt to establish it in the mid-1990s floundered. GM sought to produce 50,000 Chevrolet Blazer a year in Elabuga in the autonomous republic of Tatarstan, but the operation never progressed beyond superficial assembly because the vehicles were too expensive: under 4,000 units were made 1996-1998, and hundreds remain unsold. Nevertheless, Niva will appear in its home market with a foreign marque because the automakers feel they can charge a premium for the vehicle as a Chevrolet. Plus GM believes the brand will be central to its long-term success in Russia: like Marlboro cigarettes, Chevrolet evokes the independent spirit of rugged cowboys on America’s frontier – enduring images with proven appeal in marketing products to consumers across Eastern Europe.

“Niva is unique in character and exotic lure”

Production start: September 2002

Niva would be made at a new plant, nearly 1,000km southeast of Moscow at AvtoVAZ headquarters in Tolyatti. The city, home to 721,000 people, was founded in 1737 as Stavropol, then renamed in 1964 to honour Palmiro Togliatti, co-founder and leader of Italy’s Communist Party 1944-1964. Fiat SpA provided the turnkey factory for AvtoVAZ to start building cars under brands Lada and Zhiguli in 1970.

Earlier, the AvtoVAZ-GM plant was slated for annual capacity to make 90,000 vehicles in two shifts, but it now may begin with space for only 50,000-75,000. [Output, expected to start within two years of GM ratifying the project, still could be launched as early as September 2002. The production target for 2003 is roughly 35,000 (20,000 for Russia, 15,000 for export). Eventually, annual domestic demand would absorb a projected 28,000-32,000.]

According to Dow Jones News, each automaker would own 40% of the venture, while EBRD would hold 20%. Parties to the deal confirmed this structure today, adding the US company would have management control. But some insiders said GM’s stake may start low, then evolve: on one scenario, it would rise from 22% in 2001 to 41% in 2003 and 50% ultimately.

“(AvtoVAZ’s) current liabilities exceed its current assets…”
– PricewaterhouseCoopers

(When the operation is launched, investment in the project is expected to stand at $147m. The gap between this and $332m suggests EBRD may disperse its credit in instalments, while GM may stagger its cash outlay of $97m over time, a possibility consistent with views the US company’s equity would grow through the years.)

Causes of GM’s delay in approving the venture have seemed complex.

Workers of the world unite

Burgeoning turmoil within the US automaker has not helped. As GM seeks to restructure operations in North America and Western Europe, it is rethinking objectives for emerging markets, especially ones renowned for instability and risk like Russia… The overhaul, including plans to sack an estimated 5,000 people in Europe, will require cooperation from labour unions. Yet an announcement to invest in the ex-USSR, thereby creating employment, could taunt existing workers, already on edge. (On 25 January 2001, thousands of GM factory hands in Europe protested anticipated job losses, downing tools temporarily or staying home.)… Pressure for the company to boost shareholder value has dampened enthusiasm for initiatives expected in the short-term to lose money, not make it. “We cannot count on profits from Russia for a long time,” a GM executive said… The US automaker may balk at backing any new project outside the developed world, until it sorts out the messy prospects in buying all or part of Daewoo. This may be particularly true with undertakings in the former Soviet Union, where the bankrupt firm from South Korea has ties to three auto producers – in Russia, Ukraine and Uzbekistan.

East is east

Other problems originate in Russia.

Demand for new foreign models has been slow to recover from the country’s economic collapse of August 1998, and no plan to mass-produce an international marque in post-Soviet Russia has succeeded. Among the five main projects now, the only one to operate last year was OAO Avtoframos, a 50/50 venture between Renault SA and the Moscow municipality. But output barely reached 1,000 cars… Over 85% of new auto sales in Russia were for models priced below $5,000 in 1999, so global players like GM plus Fiat and Volkswagen‘s Skoda Auto AS have hesitated to launch assembly there, afraid they cannot turn out vehicles cheaply enough for customers. [A Russified version of Astra was pegged to start selling at $10,000.]

Foreign Ventures for Car Production in Russia







Q3 1999




Q3 2002




Q2 2002

Bankirsky Dom



Q3 2001





Moscow city



Q2 1999






AvtoVAZ, the biggest automaker in Eastern Europe with annual capacity to make 750,000 vehicles, faces financial difficulties that may affect its prospects with GM. According to notes in the Lada maker’s 1999 annual report by ZAO PricewaterhouseCoopers Audit: “…the Group’s current liabilities exceed its current assets…, and the Group’s operating income is at a level of break-even,… (raising) doubts as to whether the Group is able to continue as a going concern… The Group’s assets could be at risk if there are any further significant adverse changes in the political and business environment. Management is unable to predict what effect those uncertainties might have on the future financial position of the Group.” ( obtained the report only in December 2000.)

Contributing factors

Key terms of the AvtoVAZ-GM deal also may remain unsettled.

One is the valuation of contributions from the Russian partner. AvtoVAZ, once assessing the worth of Niva above $200m, has been paring this sum to accommodate GM’s subdued investment targets. But the Lada maker apparently would like it to be a minimum of $120m – effectively $55m above the current structure for cooperation. (The venture is conceived for the automakers to hold equal equity stakes. So, when the US company has reduced plans for capital outlays, the Russians have been expected to downgrade similarly the evaluation of their in-kind support.)

The gap between AvtoVAZ’s wishes and the deal’s present terms may help explain a manoeuvre by the Russian company. After agreeing to supply the venture with kits of the 2123 for $4,000 per unit, the Lada maker apparently sought to up the fee to $5,000 in December 2000. Some observers argued the price shift showed AvtoVAZ to be an unreliable negotiator and partner. Other watchers said the change reflected an effort to scotch the deal by a faction in the company opposing ties with GM. But any bid to secure an extra $1,000 may have been an attempt by the Lada maker to redress the shrinking appraisal of its participation in the venture.

Car Market by Price in Russia

Below $5,000

Below $10,000

Below $15,000

Above $15,000


SOURCE General Motors

The kit rate still seems unfixed, but a raise could impact the project’s viability, given the local market’s price sensitivity. The $4,000 fee would let the base version of Niva (with Lada powertrain) retail in Russia for $7,500. But the AvtoVAZ-GM venture is on a tight budget, and a $5,000 levy could jack the vehicle to $8,500. “If a kit is $5,000, we have to re-evaluate all of our plans,” a GM official said.

Suzuki Grand Vitara 3-door

In exports of the 2123, the kit cost may be less troubling because the model would be priced higher, though shipments to mature markets would have Opel powertrain. The venture could deliver 20,000-25,000 cars a year to Western Europe to retail for roughly $12,000-$15,000. (If the model is badged Lada, not Chevrolet, the cost could be considerably lower.) Similar prices may be tagged onto several thousand units earmarked annually for Latin America and the Middle East. (Sales to Mexico are forecast to hit 5,000 a year.) But an increased fee for kits could start to strain dealer margins, and the venture may have to be wary of prices creeping toward the cost of compact SUVs from Suzuki Motor Corp (owned 20.1% by GM). A three-door Suzuki Grand Vitara, only 5mm shorter than Niva (3.9m long, always five doors), sells for $15,300-$17,400 in Belgium and $17,400-$20,750 in Germany. Though special in character and exotic lure, the 2123 may lose appeal outside Russia, if similar-sized models with Japanese quality are available for merely a few thousand dollars more.

Niva only a Chevy in name?

On badging Niva a Chevrolet, GM still seems to harbour disagreement over the merits. Many executives are excited about marrying an all-American brand with an iconic product designed and developed in the Soviet Union, but some worry perceptions and realities about the quality of Russian vehicles could tarnish Chevrolet’s brand equity. (Informed observers said many of AvtoVAZ’s suppliers lack certification for international quality standards.) GM would upgrade Niva, but over 60% of the car’s parts would come from its predecessor – Lada Niva 2121 (born 1977). “Why would we badge the vehicle a Chevrolet when we are not providing a majority of the content?” one GM executive asked. “Russian customers will not be easily tricked.”

“Nothing can kill Chevrolet, and nothing can kill Niva. They suit each other well”

[Many buyers in Russia may snub the 2123 under any badge, as long as the 2121 remains in production, because old Niva still retails below $3,800, half the forecast price for base versions of new Niva. GM aims for annual sales of roughly 30,000 new Niva in Russia, anticipating the original model will be discontinued within two years of the launch of the 2123. But some observers feel the 2121 could stay in production 10 more years: the old model enjoys resilient demand, and consumers may see little reason to pay double for the new edition, especially when it shares over half the parts of old Niva… If the US automaker would pressure AvtoVAZ to drop the 2121 to channel demand to the 2123, the Lada maker may resist, citing GM’s practice of making two generations of one model simultaneously in Europe with Astra (T3000) and Astra Classic (T2700), even though the latter is sold only in select markets.]

Lada Niva 2121 – Production

























SOURCE General Motors

California dreaming

One GM watcher said concerns about Niva quality are spurious: “Chevrolet has sold models with poorer reputations, yet its name has survived, even strengthened. Niva is hardly the ultimate in sophistication and technology, but it is unique… Nothing can kill Chevrolet, and nothing can kill Niva. They suit each other well, and I can see the vehicle gaining cult status across America with a variety of people. California surfers come immediately to mind.”

This view may be over-optimistic, but observers agree the 2123 creates important opportunities for GM, filling a void in its product range with a compact off-roader affordable in emerging markets, a type of car that automakers worldwide have been seeking. “Niva is a good little vehicle,” one said. “Many manufacturers would love it in their portfolio, and GM would enjoy a competitive edge for years. The Americans may experience problems in the short-term, but the strategic value of the 2123 could be significant.”

In an interview with at his office in Moscow in August 2000, Herman said GM’s top executives already saw advantages in making Niva: “They want the new Niva, an all-wheel-drive off-road vehicle with a steel frame that can be sold for … $7,500. No one in the world besides AvtoVAZ can offer this. Some econo-boxes purport to be off-roaders, but they are not four-wheel drive, and they cannot compete with the 2123, once they leave the Tarmac. Opel engineers say this. This is a really good vehicle off road. On road, it needs work because it is not quiet enough or refined enough, but it is perfect for Russia. You see them all over here – people love them… The new Niva has promise in export. It could be sold in Western Europe plus established markets for the old Niva in Africa, Asia, Latin America and Middle East… In the big picture, GM realizes eight high-growth markets will be crucial to maintaining its global leadership. One is Russia, alongside China and India. As Russia is the country selling the most new vehicles under $8,000, the 2123 could be a key to our success here.”

Industrial synergy

Indeed, the plan to bring together Chevrolet and Niva may be one of the brightest ideas for industrial synergy in Eastern Europe since the end of Communism. GM would gain an enviable foundation for building a powerful presence in Russia, the world’s biggest country in landmass with 150m people. Meanwhile, the US automaker could help the Lada producer improve its competence in all aspects of the car industry.

“AvtoVAZ wants us as a strategic partner, so it can learn modern approaches to the auto business that we have cultivated over decades of global competition,” Herman said in the interview. “Manufacturing, marketing and sales now involve sophisticated systems that automakers like GM possess. AvtoVAZ needs to access this knowledge and technology, and we would not object to sharing it in a natural way through our cooperation. AvtoVAZ would contribute managers and workers to the venture – some may remain employees of the joint project, but others likely would return to AvtoVAZ over different periods of time to disseminate their experience. As this would happen, AvtoVAZ would replenish the venture with others in its ranks. Over the years, this rotation of staff would enable AvtoVAZ to glean much about our approach to the auto industry.”

But sceptics at GM fear the US automaker may transfer too much technology to AvtoVAZ too soon. They are leery this could build overconfidence in the Russian company about its prospects for independent survival: they see the US automaker eventually taking over the Lada producer, and strong support for AvtoVAZ from GM now may make the Russian company dearer and harder to buy later… These critics find parallels in the evolution of the US automaker’s ties with Daewoo: the South Koreans began building GM-licensed vehicles in the 1970s, then abruptly decided to end the arrangement in 1992 to develop cars in competition with the US automaker. GM is now looking to buy Daewoo. “We were naively generous with Daewoo,” an executive from the US automaker said. “Will we repeat this mistake with AvtoVAZ?”

Now or never?

As uncertainties may continue to govern business and economics in Russia, the case for an AvtoVAZ-GM venture may never be flawless, but the time to close a deal may never be better. Herman, highly regarded throughout Russia’s auto industry, hatched the idea for Chevrolet Niva, and he may be the best hope for GM to secure clear and fair terms with the Lada maker. If a deal fails to materialise before his tour ends in Moscow (perhaps later this year), the US company may struggle to hold together the opportunities that Herman has forged.

Already, AvtoVAZ is losing patience with GM, and it is preparing to build the 2123 alone. It has bought new tools, and it plans to roll out 2,000 Niva in 2001. (Roughly 200 were made in 2000.) If no deal is agreed by mid-2001, the Lada producer said it would start regular output without the US automaker, a move that could compromise efforts to finalise a venture.

“AvtoVAZ can do whatever it wants,” one insider said. “But it knows it would benefit immeasurably by making Niva with GM.”

Contact Ryan James Tutak, associate editor of for Eastern Europe:
F +36-1 / 317-7257
T +36-1 / 266-2693

Read an interview with David J Herman below:-
Exclusive Interview: David Herman on GM’s Strategy for Russia

Read a feature on takeover threats to AvtoVAZ below:-
DOMINO THEORY: AvtoVAZ following GAZ falling to new owner?

For more information on GM, have a look at our in-depth strategic review on the company:-

General Motors Strategic Review