News analysis: Renault faces costs, now and later, in an exit from Russia

PARIS -- Renault Group's decision to suspend activities in Russia – possibly leading to a permanent exit from its second-largest market – following the invasion of Ukraine carries both short- and long-term costs. 
 
The immediate impact is likely to be around 2 billion euros ($2.2 billion) in charges from a write-off of Renault's plant in Moscow and its stake in the AvtoVAZ joint venture and reduced cash flow that will sap momentum from CEO Luca de Meo's budding turnaround plan for Renault.  
 
The group has struggled since the November 2018 arrest of Carlos Ghosn, who was both CEO of Renault and chairman of the group's alliance with Nissan. The ensuing management turmoil came just as COVID-19 brought auto sales and production to a near-halt. 
 
In the coming years, a full exit would quash de Meo's plans to build synergies between Dacia, the low-cost brand based in Romania, and Lada, which occupies a similar niche in Russia. 

Last week, Renault said it would halt activities at its factory in Moscow, which builds three models based on the Dacia Duster platform for the domestic market, and "assess" the future of its controlling stake in AvtoVAZ, which builds Lada, the Russian market leader. 
 
Renault has cut its profit forecast by one full percentage point, to 3 percent from 4 percent, and plans to take 2.2 billion euros in charges related to the move in the first half of this year. 
 
Of that amount, around 800 million euros is likely the value of Renault's 68 percent share in AvtoVAZ (the remainder is held by Rostec, which is under sanctions), according to Philippe Houchois, analyst at Jefferies. The remaining charges are the value of Renault's fully owned Moscow factory, which operates under the name Avtoframos. 
 
De Meo and outgoing CFO Clotilde Delbos had succeeding in halting the flow of red ink at Renault, going from a record 7.29 billion loss in the first half of 2020 to a small profit of 1.66 billion euros in 2021, for a 3.6 percent operating margin.
 
But outside of AvtoVAZ, Renault's automotive operations made a profit of just 260 million euros, or 0.6 percent of revenues. AvtoVAZ contributed a disproportionate amount of Renault's automotive profits: 247 million euros, for an operating margin of 8.7 percent. Of Renault's approximately 2.7 million sales, Lada accounted for 385,000, or about 14 percent. 
 
While the potential loss of AvtoVAZ is a short-term blow, it's useful to remember that the Russian venture was a money-loser for years, partly because of wild swings in the country's resource-dependent economy, as well as deeply entrenched inefficiencies dating to Soviet times.  

Renault first acquired a 25 percent share in 2008 at a cost of more than $1 billion and gradually increased its stake, fully consolidating AvtoVAZ into its balance sheet on Jan. 1, 2017. It invested heavily to modernize the vast Togliatti factory and update Lada's bare-bones models. 
 
AvtoVAZ reached breakeven in 2018, but even in 2017 losses were $171 million. That followed net losses of $762 million in 2016 and $857 million in 2015, with the automaker dipping perilously close to insolvency. 
 
In the larger context of Renault's recovery, then, the loss of AvtoVAZ is not necessarily fatal. De Meo is focusing on increasing profits by selling more-expensive, higher-margin cars in Western Europe such as the new Renault Austral compact SUV, rather than a volume-first strategy tied to low-cost cars in emerging economies, as Ghosn did. 
 
For historical perspective, other companies have taken huge production hits and survived. PSA Group gave up some 445,000 units of production in Iran in 2018 after the U.S. exited the nuclear agreement and reimposed sanctions. Those vehicles, too, were primarily low-margin, low-cost cars. (Renault had planned a heavy investment at the time to bring its Iran production capacity to 500,000 units.) 
 
PSA also faced the near-collapse of its sales in China from more than 734,000 in 2014 – making it the group's largest single market – to just 117,000 in 2019. Carlos Tavares, the CEO of PSA at the time and now head of Stellantis, had pushed to lower the group's breakeven point and was able to absorb the drop in production without much effect on margins.  
 
In reporting its 2021 financial results in February, Renault said its reduced its cash breakeven point by 40 percent, two year ahead the target set by the Renaulution plan.

Although he is focusing on compact cars mostly built on Renault-Nissan Alliance's CMF-C/D platform (as well as electric vehicles on CMF-BEV), de Meo has outlined ambitious plans for a range of smaller cars built on the CMF-B platform that would be shared between Dacia and Lada. 

One of de Meo's first moves as CEO was to combine Dacia and Lada into a single unit that would share development and parts, with veteran Renault-Nissan executive Denis Le Vot in charge.
 
As an example, the P13X project includes the next-generation small Dacia Duster, the compact-size Dacia Bigster, two Niva models for Lada, and a Renault variant. Combined the models would have an annual production of 1 million units, with 85 percent parts carryover, de Meo told Automotive News Europe in an interview in February 2021.

By 2025, all Dacia and Lada models were to be on versions of the CMF-B platform (there are five platforms now between the two brands), with hybrid models introducing electrification. Body styles would be reduced to 11 from 18. Crucially, the potential profit pool for the two brands was expected to rise to 5 billion euros in 2025 from 3 billion euros in 2020. 
 
Nonetheless, any potential profits from the linkup of the brands are still speculative, Houchois said in a note to investors. "Despite the recent combination of Dacia and Lada brands into a new business unit, the extent of existing or expected synergies remains unclear," he said.  
 
Instead, Houchois argued, the loss of Russia operations could "accelerate a strategic rethink" at Renault. 

"Recent developments should revive concerns about the relevance of Renault in the transformation of the auto industry and how to make better use of existing or new alliances," he said, including tie-ups with Nissan and a nascent cooperation with Geely in South Korea.