Wednesday, Oct 21, 2009
Gulf News
The announcement came as a shock for the residents of Togliatti, Russia's car town dubbed the "Detroit of the East".
The city, built in the 1960s, was entirely planned to accommodate workers of the huge Lada factory of Russia's biggest carmaker, Avtovaz. Some 124,000 people are currently employed in the factory, almost a fourth of Togliatti's inhabitants. Now, Avtovaz wants wants to hive off one-third of the workforce in a desperate move to avoid looming bankruptcy.
Togliatti is Russia's biggest car factory. It spreads over 600 hectares, it has its own power plant, and approximately one million people in the region are dependent on it — counting the workers, their families, suppliers and all the related services that come along with such a big community.
The town was built in accordance with the industrial planning scheme of the Soviet Union. Completely new, large towns were built around industrial complexes, many of them colonised with workers from all over the country. There are hundreds of so-called mono-industrial towns spread all over Russia, and almost all of them feel the pressure of the current financial crisis.
But Togliatti — named in honour of the leader of Italy's Communist Party in the 1960s, Palmiro Togliatti — is not just another one of these countless developments born on the drawing tables of the Soviet Union's planning committees. It has ever been the symbol for Lada, one of the most successful commercial exports of the Soviet Union at its height.
Up to 2004, Lada enjoyed a market share of close to 60 per cent in the Russian market. Today, its share stands at 40 per cent with a rather bearish tendency. Japanese and Korean imports are offering stiff competition for Lada, and Chinese models are also streaming in.
Ferdinand Dudenhoeffer, one of Germany's most renowed auto business experts, says, "It is too early to give up on Lada". But he is quick to add that the carmaker urgently needs a model that also sells in Western markets to improve its credibility. Lada is trying to jazz up its latest model, the Priora, a largely reshaped version of the notorious Lada 110, which was launched in 2007 after a two-year delay and is slowly drawing attention in Western markets as an ultra-cheap family car — if it were not for the constant quality issues.
Low-cost strategy
How a low-cost strategy works with ex-Eastern European car brands was exemplified by Renault. The French automobile group purchased the bankrupt Romanian car manufacturer Dacia a few years ago and developed a model marketed as the "cheapest car worldwide" at that time, based on Western knowhow, lean manufacturing in Romania and a very simple line-up. But it worked. The new Dacia models turned out to be a success. A few years earlier, Volkswagen managed to revive the Czech Skoda brand in a similar way.
Lada had earlier failed, despite repeated attempts, to develop a car that would be accepted by customers in the West as well as in its country of origin. The basic reason has always been the inability of Lada's management to cooperate with Western investors in an efficient way.
One Russian expatriate in Dubai with ties to the car industry in his home country told Gulf News that he was present when a General Motors management delegation first came to Togliatti in the 1990s to inspect the factory which always has been a takeover target for the Americans — for business reasons as well as a "psychological" move to grab Russia's industrial "pride".
"When the Americans flew in by helicopter from Samara [the neighbouring town along the Volga river] to Togliatti, they saw a huge, dilapidated factory from above," says Evgueni Lichako.
"By accident they arrived exactly during the change of shifts in the Avtovaz factory. Do you know what change of shift means in Togliatti? 30,000 workers leave the factory and another 30,000 arrive for work."
The bewildered Americans looked dispirited as they stepped out of their helicopter, Lichako recalls, and wanted to turn back straightaway. After a short discussion, they finally were convinced to stay and reluctantly met the Lada management.
Going to pieces
"One has to see that Avtovaz is already dead, no matter how much more money is injected," Lichako says. "But nobody dares to declare it dead, and so it continues to vegetate there as an industrial zombie dinosaur."
Inside the factory, there are a couple of assembly lines, each of them 1.5 kilometres long. When the lines stop — this happens frequently without any apparent reason — the workers sometimes use them as tracks for athletic competitions.
Again, the assembling process is mostly done by hand, and the outcome is rather inconsistent in terms of quality due to underdeveloped post-manufacturing quality control.
The Russian government has announced that it will shed 27,600 of 124,000 jobs at the Lada plant, which is a risky move given its potential to spark protests or even anti-government demonstrations which Russia's Prime Pinister, Vladimir Putin, would want to avoid at all costs.
Avtovaz has already received a state loan of 20 billion roubles (Dh2.5 billion), but this may cut its debts only by a third and leaves no money for an urgently needed modernisation. "The company currently is unable to work in an effective and profitable manner," the Avtovaz management said in an unusually downright statement recently.
Moscow is currently resting its hopes on Renault's minority share in Avtovaz. The two companies signed a partnership in 2008. Renault invested $1.2 billion for a 25 per cent blocking minority and promised to modernise the plant. But apparently the Russian government expected quicker action from the French side and Putin threatened to dilute Renault's stake in Avtovaz if the French did not show a willingness to inject more money into Avtovaz. At the moment, the situation is tense, and Renault has already withdrawn some of its top executives from Togliatti.
Avtovaz recently announced that its half-year loss has jumped "drastically" to 19.4 billion roubles, a ten-fold increase compared to the same period last year. Revenue fell from 98.5 billion roubles to 53.5 billion roubles.
But even if the French inject more money into Avtovaz under duress, it will be to no avail, Russian deputy industry minister Andrei Dementev recently told business daily Kommersant. "The factory will not be producing models that are needed for efficient and profitable manufacturing in Togliatti," he said. The factory would go bankrupt anyway, except in a scenario where it could shed at least 50,000 of its workforce, he added, which would be politically infeasible.
Avtovaz-Lada is not the only car company in Russia with massive problems.
The second biggest manufacturer, Gaz, based in Nizhny Novgorod, has announced that it will cut 14,000 of a total of 50,000 jobs by the end of the year. Many hopes are resting on a planned industrial partnership with Opel/Magna, but a lot of issues remain unresolved.
Gaz has seen a partnership going sour in the past. It was US carbuilder Chrysler that wanted to secure a share of the booming Russian car market in 2006 — when nobody in the car industry expected the massive slump caused by the financial crisis — by building a localised version of its outdated Sebring model at the Gaz factory. The Americans transferred an old production line from Michigan along with $150 million to Nizhny Novgorod and started building the Volga Siber, basically a Sebring with a Russian badge.
The public reaction was terrible, to say the least. Potential customers realised that Chrysler was trying to recycle an old model line and offering it under the Wolga brand. "The Siber never should have been sold under the Wolga brand," a former Gaz manager said.
"Wolga has always and, even in Russia, been associated with bad quality."
Chrysler had expected to sell some 100,000 Siber models annually. Currently, amid the crisis, the factory is producing not more than 4,000 cars each year.
Prior to the financial crisis, it looked like that Russia would go on to become Europe's largest auto market. Since the crisis broke out, however, sales have plunged dramatically, This summer alone, sales are down 54 per cent. Expected sales for this year are 1.4 million — after 3.2 million in 2008. The car industry is obviously cruising along a blind lane.
By Arno Maierbrugger, Deputy Business Editor
Gulf News 2009. All rights reserved.
