Renault’s Russian dilemma

October 7, 2009

It’s a year and a half since French carmaker Renault made a landmark foreign investment in Russia, buying 25 percent of Russia’s largest carmaker, AvtoVAZ, for $1 billion. But you wonder whether Renault would have made the same decision, had it realised what was in store. Devastated by the economic crisis, AvtoVAZ has seen sales of its Lada cars plunge by 40 percent this year, and is on the brink of bankruptcy. Renault’s stake has lost 80 percent of its value.

And there’s further bad news for the French. Russia now expects them to pump yet more investment into the ailing enterprise.

Prime Minister Vladimir Putin says he wants to raise an additional 70 billion roubles ($2.35 billion) for AvtoVAZ, which will be used to pay off its debts and finance investment. He has made clear that the existing shareholders don’t wish to participate, the government will foot the bill, gaining a stake in AvtoVAZ. (The stake would most likely to be held by Vnesheconombank, a state-owned bank).

Unless Renault coughs up a quarter of that amount ($587 million), proportionate to its shareholding, Renault may see that shareholding diluted. With AvtoVAZ’s present capitalization of $844 million, Renault would be left with just 6 percent of the company if it puts up no additional cash.

It’s easy to see Putin’s point. For months, AvtoVAZ has been kept afloat through generous government assistance, to the benefit of shareholders. (As well as Renault, they include Russian Technologies, a state-backed conglomerate with 25.1 percent, and Troika Dialog, a Russian investment bank, with 25.64 percent). Now he wants them to chip in. The other two main shareholders have yet to announce their intentions. In theory
any of them could block the plan, but it’s improbable they would wish to oppose Putin.

Nevertheless, Putin’s demand comes at an unwelcome time for Renault. The French carmaker has enough financial problems of its own. It has some 7 billion euros in debts, and has recently received 3 billion euros in aid from the French government.

True, Renault has the money to put into AvtoVAZ. The big question is whether it really wants to. Investing abroad is unlikely to make it popular with the Sarkozy government. And having already lost heavily on its first investment, it does not want to chuck good money after bad.

Analysts are far from confident of AvtoVAZ’s ability to become profitable in future. The company — a giant, Soviet-era behemoth with outdated technology and a bloated workforce — has fundamental problems that long preceded the financial crisis. Its market share has plunged from 70 percent in 2001 to 24 percent today, as Russians switch to more modern foreign cars. Outdated management practices mean that costs have spiralled.

Nevertheless, Renault will almost certainly cough up, and on balance it is probably wise to do so. Notwithstanding the present slump in demand, the Russian car market continues to offer attractive long-term growth potential. Car ownership, at around 225 cars per 1,000 people, is just half the European average.

For all its problems, AvtoVAZ still offers good exposure to that market. Lada remains the best-selling car brand in Russia, helped by low prices and the largest distribution network in the country. The hope is that by sprucing up the next generation of Ladas with Renault platforms and components, Russians will be persuaded to keep buying them.

And if Renault didn’t agree to Putin’s request, the Russians would most likely conclude that Renault wasn’t a serious partner, greatly damaging Renault’s influence to protect its existing investment.

So it’s not too surprising that Renault has already responded positively to Putin’s summons. To avoid domestic political flak, it is trying to limit its contribution as much as possible and also to avoid handing over too much cash. It is looking to contribute technology (which the Russians say they would also welcome).

For example, AvtoVAZ wishes to receive the licence to use the Logan sedan platform, which analysts reckon would be worth around 200 million euros. The company has already paid Renault 220 million euros for licences to use the Logan R90 van platform and two Renault engines.

The French should strive to limit their cash exposure because the risks to AvtoVAZ remain formidable. That’s despite tentative signs that AvtoVAZ may finally be changing its inefficient ways. It recently announced plans to shed 27,600 workers — around a quarter of the workforce — and has also appointed a new chief executive, Igor Komarov, with a background in finance.

But these changes are little more than a first step. A major concern for the French will be how much say they have over how AvtoVAZ is managed. Although there are several Renault executives occupying management positions at AvtoVAZ, their influence appears limited in practice.

In practice the Russian government will continue to take many of the key decisions, which is rarely a good recipe for commercial success. Without more drastic reforms, AvtoVAZ will continue struggling, even after the immediate crisis has past. And Renault may yet wish that it had baled out when it still had the chance.

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