Renault Takes Russia's Lada for a Spin
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[12/10/2007] French automaker Renault just shifted its cheap-car strategy into overdrive. On Dec. 7, Chief Executive Carlos Ghosn inked a preliminary agreement to become the strategic partner of Russia's No. 1 automaker, Avtovaz, which produces the down-market Lada. Under the terms of the proposed agreement, Renault (RENA.PA) will take a 25% stake in Avtovaz and help modernize its outdated cars and manufacturing with technology and know-how. "The development of the Lada brand will be a priority," Ghosn said during the signing ceremony.
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French automaker Renault just shifted its cheap-car strategy into overdrive. On Dec. 7, Chief Executive Carlos Ghosn inked a preliminary agreement to become the strategic partner of Russia's No. 1 automaker, Avtovaz, which produces the down-market Lada. Under the terms of the proposed agreement, Renault (RENA.PA) will take a 25% stake in Avtovaz and help modernize its outdated cars and manufacturing with technology and know-how. "The development of the Lada brand will be a priority," Ghosn said during the signing ceremony.
At first glance, Avtovaz (AVAZ.RTS) hardly looks like a dream partner for Ghosn, who is also chief executive at Nissan Motor (NSANY). Modernizing the 40-year-old Togliatti plant (1,000 kilometers east of Moscow), which churns out 700,000 cars a year, will require a massive investment, and the poorly built Lada is rapidly losing market share to an onslaught of higher-quality imports, such as Hyundai, Chevy (GM), and Toyota (TM). Avtovaz's market share in Russia this year has fallen to 25%, down from about 32% a year ago and 80% in the early 1990s, analysts say.
But an unexpected surge in car sales has transformed Russia into the fastest-growing auto market worldwide, making Avtovaz, with all its problems, an alluring strategic partner. The country already is on track to become Europe's No. 2 car market behind Germany this year, and is expected to become Europe's largest single auto market by 2010 with sales of more than 3 million passenger cars. Russia's auto market growth of 26% this year even has eclipsed growth in China (19%) and India (12%).
"More Opportunity Than Risk"
Russians' auto-buying binge has triggered a slew of recent automotive investments by Western automakers (BusinessWeek.com, 2/15/07) in Russia, including Ford (F), Volkswagen (VOWG.DE), and Toyota, and put four suitors at Avtovaz's door: General Motors, Renault, Italy's Fiat (FIA.MI), and Canadian supplier Magna International (MGA). Renault's victory gives it a new competitive edge in Russia, even if Avtovaz's problems loom large.
"The alliance with Avtovaz provides more opportunity than risk for Renault," says Adam Jones, senior analyst at Morgan Stanley (MS) in London. "The most compelling factor is Renault's ability [now] to localize faster in Russia—it gives Renault a big head start" over the competition.
Some analysts were surprised Renault emerged as the victor. "Renault didn't really seem to need this deal as much as, say, General Motors," says Tony Thompson, head of corporate advisory for consultancy KPMG in Moscow. A spokesman for General Motors' European headquarters insisted the decision was not a defeat for GM and that GM would continue its six-year-old Avtovaz joint venture in Togliatti, which makes 40,000 Chevy Niva small SUVs a year (BusinessWeek.com, 2/7/07). GM is currently the No. 1 non-Russian-built auto group in Russia, with three production sites, five brands, and estimated sales this year of 250,000 cars, up 92% over 2006.
At first glance, Avtovaz (AVAZ.RTS) hardly looks like a dream partner for Ghosn, who is also chief executive at Nissan Motor (NSANY). Modernizing the 40-year-old Togliatti plant (1,000 kilometers east of Moscow), which churns out 700,000 cars a year, will require a massive investment, and the poorly built Lada is rapidly losing market share to an onslaught of higher-quality imports, such as Hyundai, Chevy (GM), and Toyota (TM). Avtovaz's market share in Russia this year has fallen to 25%, down from about 32% a year ago and 80% in the early 1990s, analysts say.
But an unexpected surge in car sales has transformed Russia into the fastest-growing auto market worldwide, making Avtovaz, with all its problems, an alluring strategic partner. The country already is on track to become Europe's No. 2 car market behind Germany this year, and is expected to become Europe's largest single auto market by 2010 with sales of more than 3 million passenger cars. Russia's auto market growth of 26% this year even has eclipsed growth in China (19%) and India (12%).
"More Opportunity Than Risk"
Russians' auto-buying binge has triggered a slew of recent automotive investments by Western automakers (BusinessWeek.com, 2/15/07) in Russia, including Ford (F), Volkswagen (VOWG.DE), and Toyota, and put four suitors at Avtovaz's door: General Motors, Renault, Italy's Fiat (FIA.MI), and Canadian supplier Magna International (MGA). Renault's victory gives it a new competitive edge in Russia, even if Avtovaz's problems loom large.
"The alliance with Avtovaz provides more opportunity than risk for Renault," says Adam Jones, senior analyst at Morgan Stanley (MS) in London. "The most compelling factor is Renault's ability [now] to localize faster in Russia—it gives Renault a big head start" over the competition.
Some analysts were surprised Renault emerged as the victor. "Renault didn't really seem to need this deal as much as, say, General Motors," says Tony Thompson, head of corporate advisory for consultancy KPMG in Moscow. A spokesman for General Motors' European headquarters insisted the decision was not a defeat for GM and that GM would continue its six-year-old Avtovaz joint venture in Togliatti, which makes 40,000 Chevy Niva small SUVs a year (BusinessWeek.com, 2/7/07). GM is currently the No. 1 non-Russian-built auto group in Russia, with three production sites, five brands, and estimated sales this year of 250,000 cars, up 92% over 2006.
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