Business

Renault-Nissan sets Russian AvtoVAZ expansion

May 04, 2012

MOSCOW, May 4 — Renault and Japanese partner Nissan moved to expand in the growing Russian car market yesterday with a US$750-million (RM2.2 billion) deal that would give the French manufacturer effective control of Lada maker OAO AvtoVAZ.

The tentative agreement to double the alliance’s 25-per cent stake via a joint venture with a Moscow state entity ups the ante for Renault-Nissan boss Carlos Ghosn’s four-year-old bet on the Russian market, though some analysts said the deal looked dear — valuing AvtoVAZ at nearly treble its US$1.2-billion market capitalisation — and was prone to legal and political vagaries.

Renault shares ended up 0.83 per cent at €34.12. AvtoVAZ stock lost 7.09 per cent after the parties signed a long-awaited framework agreement in Paris.

The purchase will be finalised only later this year and not implemented until 2014, according to a statement from the firms.

Agreed payments, notably to Moscow bank Troika Dialog , put a US$3-billion value on AvtoVAZ, maker of the boxy — and newly discontinued — Soviet-era icon, the Lada Classic.

“The deal appears quite expensive,” said Vladimir Bespalov, auto analyst at Russia’s VTB bank, who also voiced surprise at Renault choosing to buy in via a joint venture. But, he added, it offers Renault-Nissan a strategic hold in a fast-growing market which promises to soon overtake Germany in volume terms.

“We won’t see much growth in Europe, but the Russian auto market is growing quite well,” he said, forecasting the Lada name would remain as a low-cost brand while the alliance could expand by having AvtoVAZ also make Renault and Nissan marques.

The Russian state will also give AvtoVAZ an extension on US$1.56 billion in interest-free loans after it sells assets to repay US$238 million. A source familiar with the deal said repayments due by 2019 would now stretch at least until 2032.

Though by no means alone among Western carmakers in seeking expansion inside Russia’s daunting tariff fortress at a time when markets in Europe are sluggish and labour costs in Russia relatively low, Ghosn has taken a lead in boosting manufacturing there and in sourcing parts locally to sidestep import duties.

“Today’s memorandum is the latest step in an expanding collaboration that helps modernise the leader of Russia’s auto industry,” Ghosn said in the statement.

Russian gamble

With his original US$1-billion acquisition of a 25-per cent AvtoVAZ stake in 2008, Ghosn was gambling that he could transform the struggling firm into a profitable volume manufacturer by injecting modern, low-cost vehicle technology developed for Renault’s Dacia Logan vehicle family.

His plan hit a big bump when the economic crisis of the following year halved total Russian car sales and prompted a Russian government bailout. AvtoVAZ is only now introducing the first new Lada models based on the Renault vehicle platform.

Under the agreement, Renault-Nissan would buy out Troika Dialog’s stake in AvtoVAZ to hold 67.13 per cent of a joint venture with state-owned Russian Technologies which, in turn, controls the automaker through a 74.5 per cent stake.

So, for US$300 million, Renault would be swapping its current 25-per cent direct stake in AvtoVAZ for an indirect 35-per cent holding. Nissan would pay a further US$450 million for an effective 15 per cent stake. Renault owns 43.4 per cent of Nissan, which for its part holds 15 per cent of the French carmaker.

Western corporate investment in strategic Russian industries has been beset by complexities ranging from difficulties in exercising full shareholder control to outright political interference and allegations of official corruption. Analysts will watch closely how Ghosn is able to ensure his executives’ influence over strategy at AvtoVAZ’s headquarters on the Volga.

Questions of corporate governance, including how much say Renault-Nissan will have in appointing the chief executive of the joint venture, were unclear. One source familiar with the deal would say only that it remained a “sensitive issue”.

While the tentative accord is a “solid step” towards the partnership’s control of AvtoVAZ, “it should by no means be taken for granted that the deal will progress smoothly to its conclusion”, IHS Automotive analyst Tim Urquhart said.

“There’s little doubt that the relationship between Renault and AvtoVAZ has been fraught with management, financial and legal difficulties,” he added.

The return of Vladimir Putin to the Kremlin on Monday after a four-year hiatus as prime minister to his protege, outgoing president Dmitry Medvedev, has also left many investors, though tempted by its oil-fuelled consumer growth, uncertain that Russia will break with a chequered past as a place to do business.

Among high-profile problems was the falling out between BP and its Russian joint venture partners that cost the British oil firm a major Arctic project last year with state-owned Rosneft.

New strategies

But the temptations of the Russian market remain powerful: car registrations are expected to rise by six per cent this year and to reach four million vehicles by 2015 on increasing household incomes and consumer spending, surpassing the region’s biggest market Germany as western European sales stagnate.

Russia is already the third-biggest market for the Franco-Japanese alliance including AvtoVAZ, and the three aim to increase their combined market share to 40 per cent from the current 33 per cent.

While the debt restructuring will give AvtoVAZ a “strong balance sheet with no liquidity constraints”, the alliance will accelerate technology transfer to the Russian automaker, the companies said in their statement. AvtoVAZ sales will not be consolidated into Renault’s before 2014 at the earliest.

Renault-Nissan’s rivals have also been investing in Russia, with manufacturing expansions recently announced by Volkswagen, Ford and General Motors and their local partners.

Italy’s Fiat — on whose 124 sedan the Lada Classic was based in the 1960s when AvtoVAZ’s main Togliatti plant was built — is close to finalising plans to build a factory in St Petersburg.

But the scale of Ghosn’s investment dwarfs others’, adding annual production capacity of one million vehicles to existing Renault and Nissan facilities in Moscow and St Petersburg.

Moscow’s planned accession to the World Trade Organisation this year should continue to mean cuts in import duty on new cars — a reduction from 32 per cent is planned. But investors still see benefits to foreign manufacturers in local production due to excise duty perks for firms which invest in Russia.

Russian motorists, relieved of the constraints of the Cold War, have turned increasingly to foreign brands as incomes have increased. Lada sales have fallen 15 per cent in the first quarter of this year and may not be helped by a recall last week of nearly 100,000 new Ladas due to a fault.

It is seeking to build a new reputation for affordable modernity, however, and is halting production of the Classic this year to favour newer designs to accompany its most recent, compact, offerings the Kalina and the Granta. — Reuters

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