Russian carmaking plan under discussion as Avtovaz noise gets louder

A government meeting on Tuesday will discuss a rescue plan for Russia’s beleaguered domestic carmaking industry, with a Boston Consulting Group report saying it needs foreign partners, import protection and $22 billion.

Boston Consulting Group says partnering with global car giants is the best way to modernize Russia’s automotive industry. But the sector will still need $22 billion in investment – while import duties on foreign-made cars will have to rise to at least 40%. VTB Analyst Elena Sakhnova says the decision now facing the government stems from past policy failures.

“Either you are supporting the domestic industry, or you supporting foreign assembly. So what now Russian government is trying to do is they’re trying to support both. So they allowed domestic assembly, which of course, created huge competition to the domestic industry, and now the domestic industry is dying. So now they are trying, with additional money, to support the domestic industry. But it’s not easy, because not only are they in competition with the assembly plants which have been created, but also with imports.”

The failure is nowhere more obvious than at the country’s largest domestic car manufacturer, Avtrovaz. The maker of a range widely seen as outdated by critics and unreliable by the car buying public, it has haemorrhaged money while seeing its market share carved up by foreign automakers who have set up leaner modern assembly lines in Russia at Kaluga and St Petersburg. Based in the city of Tolyatti, where it is the largest single employer, and the major contributor to regional revenues, it is too big to fail, but at the same time too large to restructure without creating major economic problems for the city, complicating the politics of trying to turn the behemoth around.

It is due to receive a further $1.7 billion in state help – on top of the one billion it's received so far – and Stanley Root, Automotive Leader at PricewaterhouseCoopers says losing Avtovaz would be politically unpalatable.

“Having a local manufacturing ability is really important economically for a country. The automotive sector, anywhere in the world, is generally a motor of the economy. Losing a section of that productive capacity is clearly a big risk to any government and they’re not going to want to do that.”

Renault purchased a 25% stake in the company in February 2008, ten years after successfully rescuing Japanese automaker, Nissan, in which it retains a 44% stake. It has rejected proposals that it increase its share in Avtovaz, saying it will provide technology to help modernization.

It's share of Avtovaz could go up from 25%, to a controlling stake – according to state corporation that owns the Russian carmaker. Vladimir Putin’s visit to Paris on Friday is expected to see further discussion about the linkup despite Renault’s reticence.