INTERVIEW: Avtovaz's last stand

By bne IntelliNews April 26, 2012

Ben Aris in Moscow -

Avtovaz based in the Volga basin city of Togliatti, named in honour of the Italian communist who set up Russia's biggest car plant, is the archetypal Soviet dinosaur. The ubiquitous Lada is a knock-off of the Fiat 124 that was fashionable in 1980 and has been losing ground to the flood of foreign brands that are increasingly being assembled in Russia. Igor Komarov took over as president Avtovaz in 2009 and has made dramatic progress in dragging the plant-cum-city into the modern world. But observers worry he is fighting a losing battle, as the automaker will never be able to keeps its head above the rising tide of competition, even with a soon-to-be-concluded deal to sell a controlling stake to Renault-Nissan.

The youthful and ebullient Komarov replaced Vladimir Kadannikov, the chain smoking and stolid boss who'd worked at the company since 1967, and set about modernising the company's mindset. Komarov called in the consultants and drew up a plan of action two years ago that he hopes will capitalise on the advantages that Avtovaz still enjoys. "Russia has a huge potential. The number of cars on the road is huge, while the number of sales is very low: if you take the ratio of these two numbers, then Russia is well behind the rest of Europe," Komarov told bne in an exclusive interview held at the Adam Smith annual Automotive Russia conference, the industry's premier event.

With a per-capita ownership of some 200 cars per 1,000 people, Russia is half to a third of the European average and even further behind markets like the US. At the same time, the cars still on the road need replacing. "The car fleet is getting very old. More than half of the cars on the road are more than 10 years old and most don't meet any kind of ecological standard. As the clean air regulations get tougher, sales will increase," says Komarov in good English.

The Kremlin renegotiated its investment deals with five major international manufacturers who have all committed to significantly increase their production capacity over the next few years. With credit increasingly available, the iconic Lada has been struggling to hold its own and is no longer as ubiquitous on Russia's streets as it once was.

With its fixed investment depreciated away decades ago, Avtovaz will keep its cost advantage over the newly built foreign-owned plants for a while longer, but to survive in the longer run the company needs to introduce new models - and regularly - to stay competitive.

Avtovaz has not been sitting on its hands and brought out two new models in the last year, including the Granta in December, which has already sold out. A new version of the Niva SUV is also in the works. But a company like Nissan brings out at least 10 new models a year, so Komarov is grasping the bull by the horns. "We want to bring out a new model every six months or so - that's the goal."

But new models by themselves are not enough. Avtovaz has the workforce and the plants; what it misses is the money to invest in developing popular new designs.

Changing perceptions

The key to the company's turnaround is improving the quality of its production - and surprisingly it has already made inroads using nothing more than its Soviet-era machinery.

The kneejerk reaction of most observers is to blame Avtovaz's clapped-out factories. But this is a misconception, as most Russian factories already make use of production robots and the technology needed to operate both the assembly line and the paint shop is not so complicated. "The main problem we face is to overcome the illusion: by installing new equipment, you can solve all your problems overnight. Maybe it is part of the Russian mentality. We think someone else can fix these things and make life easier. We have to learn from the French and Japanese experience, and become efficient using the existing equipment, because if we don't, we won't get anywhere," says Komarov amidst the hubbub of the conference, his main competitors swirling around him in the crowd.

Here, the company's partnerships come into their own. Avtovaz set up a joint venture with the US' General Motors in 2001, but more recently has thrown its hat in with the French and Japanese companies Renault and Nissan. Nissan has already been advising Avtovaz managers on work practises and without spending an extra kopeck on capital goods, productivity has already increased by about a third. "We have already decreased the defect ratio in the supplies by 37% in the last six months and the productivity has increased 34%, without changing a thing. We also measure our performance to benchmarks set by factories around the world and we are already on a par with the factories in places like Romania and Bulgaria, while we have been closing the gap on Europe. One day, we hope to reach the same level as the Japanese," says Komarov, who believes that about 80% of the poor quality and productivity results are simply down to bad management.

But there is more to getting the time-and-motion people in; to create a really successful car company, you have to build something that customers want to buy. Many industry experts believe that the company's demise is already a fait accompli, as no matter how much reform it manages it cannot match the experience and resources the multinational carmakers have built up over a century or more. "Our position now is very risky and it will be a huge job to become competitive with the other carmakers. However, we have been working on this the last two years and the progress we have already made is dramatic," says Komarov. "The main attraction of our cars is the price, but once you get to a price tag of $15,000, more than half of all Russians are ready to buy a car. We want to move up to higher price brackets, but it's like school - you can't just jump over years. We have no illusions: it will be hard work."

Despite all the progress that Komarov has made, it seems the Kremlin has buckled to the inevitable and conceded the dream of rebuilding a purely Russian car industry is dead. A deal to sell a controlling stake to Renault-Nissan is all but done. "I understand the shareholders - Troika and [state agency] Rostekhnologii - have hammered out most of the details and are due to sign off on the deal in the nearest future," says Komarov.

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