Russia’s largest car manufacturer AvtoVAZ, supported by the French-Japanese alliance of two automobile companies Renault and Nissan, has announced its intention to take over Russian auto maker IzhAvto and buy into Kazakhstan-based automobile company Azia-Avto. The two deals may have a price tag of almost $650m. Analysts are divided in their opinions regarding an impact these may have on AvtoVAZ’s medium-term plans. While most agree that the Kazakh deal will give the company access to Siberian and Far Eastern sales markets, the IzhAvto takeover is far more complicated. What will happen to IzhAvto’s former partner, S. Korea’s KIA Motors, whose Spectra and Sorrento models are currently assembled there? Will AvtoVAZ re-invest or milk IzhAvto’s production facilities to churn out cheap Lada’s enabling it to use its Togliatti plant to make pricey new Renaults?
The IzhAvto deal
In March this year a delegation featuring pivotal figures from three auto giants – Renault, Nissan and AvtoVAZ – paid an official visit to IzhAvto. According to reports, the reason for the visit was to see if IzhAvto could be used as a main production site to build 220,000 cars per year with a further increase to 350,000 cars per year. (According to the National Association of Auto Component Manufacturers, last year, the plant only produced 70,000 cars a year). If production could be ramped up, the visitors explained, it could lay the groundwork for the creation of a comprehensive auto cluster in the region geared towards production of hi-tech auto components.
At the Moscow International Motor Show-2008 later this year AvtoVAZ President Boris Alioshin broke the news—his company had decided to buy IzhAvto. Mr. Alioshin, however, wasn’t talking about the price.
All he told Reuters was that “the deal will be finalized before October.” The seller, the SOK group of companies, also declined to tell reporters the deal’s value.
SOK and AvtoVAZ first entered negotiations with IzhAvto back in 2006. At that time the factory’s market value was assessed by KPMG. Based on this assessment AvtoVAZ was told that the deal was worth $550m.
But AvtoVAZ experts came back with a different valuation--$350m to $400m. Although the actual price AvtoVAZ paid has not yet been made public, sources claim IzhAvto stuck to its guns and got its $550m.
A reversal of roles
An intriguing aspect of the deal is just three years earlier the situation was completely the opposite--SOK that was doing its best to gain control over AvtoVAZ. Success was just one step ahead when the federal government intervened.
Vladimir Kadannikov, then the president of AvtoVAZ, suddenly resigned, and the company immediately put new faces on its board from state-run agencies Rosprom (supervises industrial production) and Rosoboronexport (supervises the defense sector). The president’s post was first offered to Vladimir Artyakov (now he is the governor of Samara Region) and then to Boris Alioshin.
Long-term value
There are certain doubts in the expert community about the long-term value of the announced deal. Most analysts share the opinion that the only possibility for AvtoVAZ to increase its sales and prices is to make significant improvements in the quality of its cars. But the IzhAvto factory was build in the 1970s and its Izh brand is not exactly known for its quality.
Sevastian Kozitsin of Brokercreditservis doesn’t see AvtoVAZ’s investment in IzhAvto as an opportunity for development and feels they are unlikely to invest in any upgrade.
To his mind, AvtoVAZ will just use the company’s production facilities to shift production of its Lada models to free up capacity at its Togliatti plant so it can start assembling Renaults. “This deal is only about expanding production facilities,” Kozitsin concludes.
Is KIA Motors being shown the door?
Sources in IzhAvto acknowledge that apart from AvtoVAZ there were three other potential buyers, namely China’s Chery Automobile Ño., Ukrainian passenger car and bus manufacturer Bogdan and IzhAvto’s current investor KIA Motors (South Korea).
Presently IzhAvto produces Kia, Izh and Lada-branded cars. Sources in the National Association of Auto Component Manufacturers report that IzhAvto has been scrambling for a reliable partner since the 1990s with futile attempts to merge with Ford or start assembling Hyundai and Skoda cars.
In 1999 IzhAvto was still stuck producing old AvtoVAZ brands. But the sales slump that followed forced IzhAvto to start looking for partners again. S. Korea’s KIA Motors gave it a helping hand, and the company started assembling Korean cars. KIA upgraded facilities, but there was a price to be paid: making KIA’s required fewer people and mass lay-offs were announced.
KIA Motors, IzhAvto CEO Michael Dobindo said that KIA currently makes two models--the Kia Spectra, which is to be phased out before December 31, 2009 in favor of its hot-selling Kia Sorrento, which he hoped will stay in production until 2012. The official SOK website says the firm plans to invest over $13m in large-scale manufacture of the Kia Sorrento.
But when AvtoVAZ’s boss Boris Alioshin was asked to comment on the future of Kia cars at IzhAvto, he was quoted by RIA Novosti saying that further cooperation with the Koreans as “very complicated.” “They can’t expect us to be assembling their vehicles in large quantities,” he said.
Which models will be now assembled at IzhAvto? Will cooperation with KIA Motors continue? The answers to these questions remain unclear. There’re some indications that AvtoVAZ’s partners from Renault and Nissan are far from happy about seeing Korean cars roll out of their new production facilities.
It now seems almost certain that concerns about its Sorrento caused KIA Motors to make its own bid to buy IzhAvto earlier this year.
It’s no secret that the Koreans plan to turn out 100,000 cars in Russia short-term, 80,000 of which were planned to roll off the Izhevsk assembly line. If AvtoVAZ pulls the plug, KIA Motors will have to scale down dramatically.
The Kazakhstan connection
As reported by Ê2kapital, AvtoVAZ President also informed journalists in August that the company planned to buy into Kazakhstan’s only car manufacturer Azia-Avto before the yearend.
It is a small local manufacturer with a capacity of just around 45,000 cars a year. Mr. Alioshin said AvtoVAZ would use Azia-Avto to facilitate expansion into Siberia and the Far East where AvtoVAZ’s market share is still neglible.
Currently Azia-Avto operates way below its projected capacity. In 2007 the factory manufactured only 4,400 cars including Lada, Skoda and Chevrolet models.
If a deal is struck with AvtoVAZ, Azia-Avto will start producing the Lada, Renault and Nissan brands of passenger cars. The $70-80m agreement is expected to be carried out in two stages.
AvtoVAZ will first purchase 25% of Azia-Avto and then buy more of the company within the next 12 to 18 months to acquire the control stake. Then an additional $100m will be invested by AvtoVAZ to increase the company’s capacity to 120,000 vehicles a year, Avtostat reports.
Economics as continuation of politics
The deal is to be closed later this month or in October during an official visit of Russia’s President Dmitry Medvedev to Kazakhstan. AvtoVAZ’s executives will also be part of Russia’s delegation.
President Medvedev is expected to suggest to Kazakhstan’s leaders that their country should levy higher customs duties on used cars, which sell much better in Kazakhstan than new cars. If Kazakhstan agrees, AvtoVAZ will announce the deal right then and there.
Bank of Moscow’s Michael Lyamin thinks the idea of assembling Lada cars alongside Renault and Nissan vehicles at one factory is a perfect way for AvtoVAZ to reduce its assembly costs.
Additionally Azia-Avto’s market value and the amount of investment needed for expansion make this project much less costly than alternative plans to expand AvtoVAZ’s factory back home in Samara Region’s Togliatti.
The higher customs duties on used foreign cars would also reduce project risks at inception and are expected to open up a guaranteed sales market there for AvtoVAZ, which will be a great advantage, Mr. Lyamin believes.
For reference:
AvtoVAZ is Russia’s largest car manufacturer. The company’s share capital exceeds $363m. The Renault-Nissan alliance plans to purchase the control stake in the company (50% + one share). In 2007 the company produced 735,897 vehicles. 2007 IFRS revenue came in at $7.4bn, EBITDA amounted to $664m, and net profit was $155m.
The Renault-Nissan alliance was founded in 1999 on a parity (50/50) basis. In the 2006 world rating the alliance ranked fourth with sales around 5.7 million vehicles. The alliance’s 2007 sales worldwide reached 6.16 million vehicles, and sales in Russia exceeded 220,000 vehicles.
SOK is one of the largest private companies in Russia that incorporates a dozen industrial businesses working in various sectors of the national economy. It supplies AvtoVAZ with 50% of all spare parts for the conveyor and has the lion’s share of car and auto component sales.
IzhAvto is registered in Izhevsk, Udmurtia. The factory was designed in the 1970’s with participation of Renault. At the time of posting this article SOK owned a 98-percent stake in the factory. In 2007 IzhAvto manufactured 78,802 Kia, Lada and Izh branded cars. Sales last year came in at $873m, up 69% from 2006.
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