General Motors and Russian carmaker AvtoVAZ have formed a joint venture to produce a redesigned Lada Niva sport-utility at a plant near Moscow. But both sides hope there will be more vehicles to come out of their alliance.
'Hope' is the operative word. For while both sides could benefit from working together, major obstacles remain.
The first stage of the joint venture is the replacement for the 25-year-old Niva. AvtoVAZ will produce 75,000 units a year at its plant in Togliatti, southwest of Moscow, starting in 2002. It will be priced below $8,000 (E8,825).
'The car will be called Chevrolet Niva inside and outside Russia,' said Vladimir V. Kadanikov, chairman of AvtoVAZ.
GM will provide production technology and some tooling in addition to its investment. AvtoVAZ had already completed the design and development work of the redesigned Niva, but it lacked the capital for tooling and upgrading production facilities at Togliatti, said Kadanikov.
'We had finished the design, but we didn't have enough money to install production facilities,' said Kadanikov. 'It would have taken us too long to earn the money to finance this cost.'
GM and AvtoVAZ each own 41.5 percent of the joint venture, with the remaining 17 percent owned by London-based European Bank for Reconstruction and Development.
The partners put up $332 million for tooling and the refurbishment of the production line.
Kadanikov is optimistic that the Niva will lead to further cooperation with GM. The partners are close to a decision on AvtoVAZ production of the Opel/Vauxhall Astra, he said.
Further into the future 'is a car that will be engineered jointly by GM and ourselves with a joint powertrain,' said Kadanikov.
The current thinking is that the engine would be supplied by Opel, said Kadanikov. 'But that could change because now there is the participation of Fiat to consider,' he added, referring to the year-old GM-Fiat joint agreement on purchasing and powertrain development in Europe and Latin America. 'It is too early to talk about details like this,' said Kadanikov.
AvtoVAZ has a long established relationship with Fiat. The Italian carmaker helped Soviet authorities develop the state-owned manufacturer that became AvtoVAZ.
But changing circumstances could complicate any further deals between AvtoVAZ and GM.
GM wants access to the potentially huge Russian automotive market. AvtoVAZ is the largest Russian manufacturer with production of 710,000 vehicles last year and an extensive distribution network.
AvtoVAZ needs new vehicle and production technology and is hampered by old designs and restrictive debt. It also has an enormous work force for the volume of vehicles it produces - Kadanikov puts AvtoVAZ employment at 210,000 overall, with 120,000 at Togliatti alone.
GM is choosing a Russian partner to enter the market, but rival Ford is building its own Russian production facility and dealership network. Ford recently announced it would launch production of the Focus at a plant near St. Petersburg in October.
But GM's backing could resolve a nagging debt issue for AvtoVAZ. The company owes the Russian government $120 million. The debt has been restructured for repayment over 10 years, but in doing so AvtoVAZ had to agree to repay the government before it can borrow more. That was the main reason why AvtoVAZ needed GM's help with tooling for the Niva.
'We are paying all our current taxes and about 60 million rubles [annually on the government debt],' said Kadanikov.
Sixty million rubles is about $2.1 million at current exchange rates.
GM and AvtoVAZ must also address dealer and supplier networks. AvtoVAZ currently works indirectly with dealers through what Kadanikov calls regional centers.
'We have 50 regional centers in Russia, and each one serves 20 to 45 dealers,' he said. 'Outside of Russia, we have 1,200 dealers around the world. The joint venture will choose Russian dealers [to sell the joint-venture Niva] from a list of the existing AvtoVAZ dealers.' New dealers could also be appointed.
AvtoVAZ currently has about 700 suppliers in Russia. Kadanikov hopes to reduce that number somewhat for the Niva, with a more comprehensive, company-wide supplier reduction taking place in 2006 or 2007.
Kadanikov is hopeful. He predicts AvtoVAZ production of 752,000 units this year, which would be up nearly 6 percent over 2000 levels. Longer term, he sees a bright future for the Russian auto industry as a component producer.
'We have much cheaper electric energy, much cheaper raw materials, and much cheaper labor than most other countries,' he said. 'If we attain a high level of quality, Russia could become a great supplier of components.'