IHS Global Insight Perspective | |
Significance | Renault is expected to sign a deal with the Russian government to secure the future of ailing AvtoVAZ. |
Implications | Despite entreaties from Russian Prime Minister Vladimir Putin Renault looks likely to resist calls for direct cash investment. Instead it is likely to offer 240 million euro in R&D and engineering support according to reports. |
Outlook | There is no doubt that the various stakeholders involved in AvtoVAZ are working hard to find a solution to the company's problems. However, a positive future is dependent on new models coming quickly to market and a rapid recovery in the Russian automotive market. |
Renault will today sign a memorandum of understanding (MoU) with the Russian government, represented by Prime Minister Vladimir Putin and other stakeholders, to safeguard the future of Russia's largest carmaker AvtoVAZ. The signing will take place in Paris during Putin's visit to the country where he has had discussions with the French government over trade relations between the two companies, with AvtoVAZ being high on the agenda. However, it looks like Renault's management has resisted repeated calls from Putin for a direct cash investment in AvtoVAZ in addition to the 1.17 billion euro the company paid for its 25% stake in the company in March 2008, which is now technically worthless given the slump in sales as a result of the 51% decline in the Russian passenger car market in the first ten months of the year and the company's enormous level of debt (see Russia: 12 October 2009: AvtoVAZ to Spend 42 bil. Roubles on New Model; Posts 19.4-bil.-Rouble H1 Loss). Renault will offer AvtoVAZ 240 million euro in non-cash aid in the form of engineering, research and development (R&D) support to help develop a new range of passenger cars.
The Russian government has already pumped 25 billion roubles of additional cash into AvtoVAZ this year, which has helped alleviate supplier debt. However, AvtoVAZ still has significant bank debt, with short terms loans totalling 2.08 billion euro and this needs to be addressed somehow before the company can move forward rapidly with much-needed new model plans. Without the support of the Russian government and its affiliate state investment arm Russian technologies and bank Troika Dialog, AvtoVAZ would undoubtedly be in bankruptcy. These parties will now sign a deal with Renault which will provide a structure to underpin AvtoVAZ's finances and Renault provides the into to develop a range of new models. A Renault spokesperson confirmed that Christian Esteve, leader of Renault's Eurasia management committee, would sign the agreement with AvtoVAZ's Russian stakeholders today. According to the Financial Times a Renault spokesperson said, "We have been studying the possibility of producing Renault and Nissan cars at Togliatti, which would provide them with added production volume, and for us, added cars to be sold in Russia."
Outlook and Implications
Renault's chief executive Carlos Ghosn has made it clear that he has absolutely no intention of injecting additional funding into AvtoVAZ especially as its 25% stake in it is now effectively worthless. This was even after Putin threatened to dilute Renault's shareholding in the company with a new rights issue. Renault booked a 182-million-euro loss from its investment in AvtoVAZ for the first half of the year and this figure is likely to rise when the financial results for the second half of the year are published. Ghosn has made conserving cash a priority during the industry's current deep downturn, which saw Renault itself forced to take a 3-billion-euro French government bail-out loan agreed in February. As a result throwing more money at AvtoVAZ is likely to be politically unjustifiable in France.
The crux of any agreement between Renault, the Russian government and the other AvtoVAZ shareholders will be how will the company be funded as Renault works with AvtoVAZ to develop a new range of vehicles, which are unlikely to be launched before 2012, although a Lada MPV based on the Logan MCV is scheduled to arrive before then The company's debt is simply unsustainable without a substantial injection of funds or guarantees from the Russian government and its debtor banks as Renault has consistently made it clear that it can offer no further cash injections. Renault was reported earlier this week to have been offered full control of AvtoVAZ by Vladimir Putin although it is unlikely to take that offer up at this stage (see Russia: November 23 2009: Renault Offered Full Control of AvtoVAZ). The report also stated that Renault would reconsider the decision not to increase its stake in AvtoVAZ, but not in the short term, while there is an outside possibility a deal may be completed by 2013–14.
AvtoVAZ has announced preliminary model development plans involving Renault, with the French OEM and its alliance partner Nissan expected to provide new technology for a modern passenger car design based on the Logan platform. In addition to the Logan-based model, AvtoVAZ is also expected to assemble a Nissan-based model. IHS Global Insight's current production forecast sees production of three Renault models and two Ladas based on the Renault platforms by 2012, with the company also producing the new budget version of the Kalina, which will probably go under the 2190 nameplate By then all the current old "classic" models such as the Samara and Riva will no longer be produced. Renault has said the 2190 is the immediate product priority but none of this will be able to happen without a proper business plan and financing and this is what the various stakeholders need to finalise and sign up to.