Avtovaz to face major overhaul

Despite controlling Russia's largest carmaker, Avtovaz, since late 2005, Rosoboronexport has only on Thursday acquired its first direct shareholding in the company – taking an 8.4% stake from Vnesheconombank for an undisclosed sum.

Rosoboronexport currently manages Avtovaz, but didn't previously have a direct stake in the company which is owned by a complex share ownership scheme. This sees the company effectively owning itself through its subsidiaries.

But the Rosoboronexport purchase is the first of a series which will see the structure unwound in the second half of 2008, with the current structure inefficient and the company needing to attract investment.

Analysts say Russia's largest automaker will need to do more however.

“It is suffering a lot from competition, especially competition from foreign players that are now either already operating in Russia or are building facilities in Russia. Some of those foreign companies have announced their plans to introduce low-cost models into Russian market,” says Elena Sakhnova, Deutsche Bank Senior Analyst.

Renault was one of the first foreign automakers to come to the Russian market with its low-cost model Logan. Others have followed or are in the process of following, triggering concern that Avtovaz may collapse under a wave of international competition.

Currently Avtovaz is considering joint ventures as a way out of its predicament. It has one with General Motors producing Chevrolet Nivas, and has recently signed up for another with Magna. Another with Italy's Fiat to produce car engines is also under discussion, according to Avtovaz President Vladimir Artyakov. And to add to that the company is also discussing partnerships with Peugeot-Citroen, Porsche and Renault.

The sheer range of projects, however, is another area of concern

“The problem is that their projects do not seem very well thought of – even the project with Magna. They're claiming they'll be able to create a C-class model below $US 10,000. That's not clear – it would be difficult to construct such a model in Russia from very new component base,” Ms Sakhnova believes.

According to a PwC report released on Thursday, sales of foreign cars have jumped 60% in the first half of this year with sales of locally made international brands also rising.  But sales of Russian models have slumped 23% – the most dramatic fall in history.

With the increased competitiveness of the domestic car market, and increased spending capacity of Russian car buyers, the moves to breathe new life into Avtovaz haven’t come a moment too soon. But the concern for those watching developments, is that unless there is a dramatic turnaround in the companies fortunes, it may all be too late.