Page last updated at 17:05 GMT, Sunday, 7 March 2010

What will save the Russian car industry?

By Konstantin Rozhnov
Business reporter, BBC News

Avtovaz production line
Avtovaz's Lada cars struggle to compete with foreign rivals on quality

Russia has decided to follow in the footsteps of some European countries and the US by introducing a car scrappage scheme in an attempt to save the country's automotive industry.

Companies which make or assemble cars in Russia, such as Avtovaz, by far Russia's largest carmaker, are hoping that the scheme will bring a turnaround in sales and business fortunes in the short-term.

But experts are sure that the scheme alone will not be enough to truly revive and modernise the Russian car industry.

There are a lot of additional factors which make the process of reforming the Russian car industry much more complicated than in many other countries - among them, the misuse of budget funds and lack of a tradition of creating truly competitive cars.

Also, one of the biggest problems is that too many people are employed by crisis-hit companies, but the carmakers can't fire enough people.

Avtovaz, for example, has one of its plants in Togliatti, which is a typical "monograd" - one-factory town depending on the wellbeing of a single company.

Huge job cuts would unavoidably lead to social unrests, which the Russian government have so eagerly been trying to avoid in any form since Vladimir Putin came to power 10 years ago.

Price-quality ratio

For several years the Russian car market was the fastest growing in Europe.

Lada Classic
The old Lada models are renowned for being easy and cheap to repair

In 2008 most experts were sure that by the end of the year it would overtake Germany to become the largest on the continent.

However, the global financial crisis led to a slump in demand, and in 2009 the Russian car market shrank by half.

At the beginning of 2010 sales continued falling, while serious worries persisted about the future of the whole industry, in particular ailing Avtovaz, which makes Lada cars.

The market share of Avtovaz in Russia was about 70% just 10 years ago.

But after the period of rapid economic growth and the country's car market expansion the company was hit by a collapse in Lada's popularity among Russians.

The firm's market share dived to about 20%.

Foreign cars became much more affordable, as many leading global brands had opened assembly plants in Russia.

Price-quality ratio, which used to be Russian carmakers' main advantage for decades, has evaporated almost completely.

Consumers are increasingly interested in cost-saving cars which offer style, quality and affordability, says Steve Fowler, editor of What Car? magazine.

However, the whole idea of creating Avtovaz was based mostly on affordability alone. The carmaker was set up with Fiat's help in the 1960s.

Investment bank Renaissance Capital pointed out in its research note, published by Vedomosti business daily at the beginning of February, that Russian carmakers were able to compete with foreign companies in price only but not in quality or reliability of their cars, "which means their market share will be shrinking gradually".

Nikolay Kachurin, Top Gear Russia's editor-in-chief, says that Russian cars are many years behind an average European passenger car.

To some extent, though, this is an advantage for Avtovaz's relatively cheap and really dated Lada Classic models - it is much easier and cheaper to conduct repair works on them in your own backyard in comparison with more modern cars.

Matter of reputation

One of the questions debated by industry analysts is whether Russia really needs to have its own car brands.

Lada 2170 at last year's Leipzig motor show
Lada does have a range of more modern models

Mr Fowler believes that there is nothing wrong when a country does not have its own models.

"But I'm British," he adds, meaning that in the UK the situation has been like that for many years. All mass production car plants in the country are owned by foreign companies.

However, Nikolay Kachurin, Top Gear Russia's editor-in-chief disagrees.

In his opinion, a country as big as Russia, with its huge industrial potential, needs its own cars.

"If the country can make really good tanks, why can't they make quite a competitive car?" he says.

"It is a matter of reputation, but Russia needs it."

New reality

Interestingly, for decades Russia's carmakers have been showing lots of concept cars at different industry events, but many years later only several of them were turned into models being sold to consumers.

Prime Minister Vladimir Putin and his Lada Niva
Mr Putin has been keen to avoid the unrest that unemployment can bring

A lack of investment has been the main problem for the companies.

"They had no funds to turn their concept cars into mass-production models. They are still implementing five-10 year-old plans," says Dmitry Belkin, an automotive industries expert from the Prime-Tass news agency.

Meanwhile, as Mr Fowler points out, "it is becoming increasingly fast to make a concept car", and there are about 480 models available now in the UK.

Mr Kachurin believes that there are enough good Russian engineers and designers in the car industry.

But, he adds, the lack of money does not let the engineering projects be turned into mass-production models, causing the best Russian designers to flee to foreign companies in order to see their ideas brought to life.

As Mr Fowler says: "Developing a car from scratch costs billions of dollars."

Besides, it seems Avtovaz does not have a lot of time to modernise its model list, because its foreign competitors have already been developing new cheaper budget cars amid the recent economic crisis and new environmental principles.

Global partnerships

Experts agree that the Russian car market remains attractive in the long-term for both current and potential investors, as the number of cars per person in the country is much lower than in the West.

Most analysts believe that a combination of well-controlled government investment and the working scrappage scheme might help revive the market.

There is also a wide consensus that the best way for the Russian companies to move forward is to use know-how provided by their foreign partners.

One of the best and recent examples of successful global partnerships is Dacia Logan, a car made by Renault and its Romanian subsidiary Dacia.

Last autumn, the French carmaker agreed to expand its involvement in Avtovaz. Among other steps, Renault is likely to provide its budget model as the platform to change Lada's fortunes.

To some extent, this development might please those who want Russian companies to produce their own branded cars.

At the same time, it is in line with the global business trend of joining forces.

"At the end of the day that is exactly what has been happening [in the Russian market]," says Mr Belkin.

"We are getting to the place where the whole world has already go to."

As Mr Fowler points out, even BMW and Mercedes have been trying to work together on some projects - something impossible just several years ago.

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