Russia automotive: Death of a Klassika

By bne IntelliNews March 1, 2006

Ben Aris -

The maker of Ladas, AvtoVAZ, has been losing the fight against the growing number of foreign car imports

The days of the classic Lada, the much-loved (and much maligned, until you drive one in the snow) Russian icon, are numbered. Since the Kremlin took direct control of Russia's biggest car producer in February, the new board of directors has introduced a sweeping new strategy that will discontinue this best known model.

The maker of Ladas, AvtoVAZ, has been losing the fight against the growing number of foreign car imports, which last year outsold Russian-made cars for the first time.

AvtoVAZ introduced a new strategy at a March 29 board meeting, which will axe three of the five models in an effort to put the company back into the game. Production of AvtoVAZ's SUV, the Niva, as well as the Klassika and Lada 110, will all be halted from 2007. Only the most recent introduction to the family, the low-cost Lada Kalina, and the sporty Lada Samara, will continue to be produced, though even the Samara will go after 2010.

Lada dominates Russia's under-$10,000 sales market segment, while foreign-produced cars take all of the market above this level. The Kalina was introduced last year to shore up the company's hold on the $4,500- $6000 sector of the market and the Kalina's production volume is supposed to rise from 60,000 in 2006 to 300,000 by 2009.

NEW MODEL

Another new model is in the works to make up the rest of the three quarters of a million cars that AvtoVAZ produces a year - the Lada Priora. But don't all rush at once, as it won't go into production until the end of this year. AvtoVAZ is looking to churn out 220,000 of these a year by 2008.

However, the Priora will only be made for five years and could be withdrawn from production as soon as 2011, says AvtoVAZ management - an incredibly fast turnover for the company given that the Klassika has been about since it was ripped off from the Fiat 124 over 25 years ago.

Priora’s cycle is not short by global standards, however, as foreign producers replace models regularly. It would make sense if AvtoVAZ was capable of keeping up the development and production pace of its Western competitors, but given that it takes Toyota 15 man-hours to make a car while AvtoVAZ takes some 450 man-hours to make a Lada, analysts' scepticism is understandable.

(And AvtoVAZ is by far the most efficient of the Russian producers). The plan seems slightly less silly once you realise the Priora is not really a new model at all, but facelift of the Lada 110.

CAR LOANS

But what worries analysts most is the withdrawal of the beloved Klassika - one of AvtoVAZ's cheapest models, retailing for about $6,000, which still enjoys strong demand: AvtoVAZ sold 180,000 Klassikas last year, exactly a quarter of its car sales.

The company has completely lost the more expensive market to the foreign carmakers.

If the average Russian can afford to go to $6,000, then with the advent of consumer financing in 2001, he or she can afford to spend a couple of thousand more to reach the cheapest foreign models like the Ford Focus.

All Russia's leading banks report that auto-financing is already their fastest growing retail lending business this year, after small consumer credits levelled out last year - everyone has the telly and toaster they always dreamed off and now are aiming for a new car.

“We expect the supply of foreign brands to increase in the cheap niche due to both growing imports, local assembly and AvtoVAZ's price competitiveness is deteriorating on the back of inflation and the strengthening ruble,” says Aton Capital. “It will become increasingly difficult for AvtoVAZ to protect its market share.”

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