High Time for AvtoVAZ to Pick a Winner

When AvtoVAZ meets Friday to pick a strategic partner, it has a tough choice to make.

Among the Western firms bidding for a stake in Russia's largest automaker are its joint-venture partner of six years, General Motors, and Italy's Fiat, the carmaker whose clunky small-car designs gave Soviet-era AvtoVAZ its start 40 years ago.

GM and Fiat join a list of other possible investors, including France's Renault and Canada's Magna, looking to grab a slice of the country's booming auto market, which is set to become Europe's largest by 2011 by some estimates.

Friday's meeting will be chaired by Sergei Chemezov, a close ally of President Vladimir Putin's. As head of newly formed state corporation Russian Technologies, Chemezov controls AvtoVAZ, powerful state arms trader Rosoboronexport and VSMPO-Avisma, the world's largest titanium alloy producer, among other assets.

Two years ago, the Kremlin sent in a team of state officials to turn around the ailing Tolyatti-based carmaker, but progress so far has been painfully slow, with a series of proposed investor deals falling through.

This week's announcement by GM that it had placed a bid for a "significant stake" in AvtoVAZ could signal a turning point, industry analysts said Wednesday.

That AvtoVAZ is ready to sell a minority stake to a foreign company at all is a sharp turnaround from two years ago, when state managers said cooperation with foreigners would be limited to parts and equipment. Since then, hopes of a state-funded bailout of the carmaker have faded, and a series of senior executives have been replaced.

The carmaker's general director, Igor Yesipovsky, quit last year, and another senior official, Vladimir Artyakov, was earlier this year tapped by Putin to be governor of the Samara region. Then, in a September government reshuffle, Putin drafted in Federal Industry Agency chief Boris Alyoshin as the new CEO.

Analysts say AvtoVAZ, which uses outdated technology and equipment, has yet to come up with a clear survival strategy and continues to bleed market share. Somewhere along the line, it appears to have finally dawned on officials that the carmaker will not make it without a foreign partner, analysts said.

"This might be a turning point. This is the first time AvtoVAZ appears to be considering a significant investment by a large foreign carmaker," said Stanley Root, partner and automotive analyst with PricewaterhouseCoopers in Moscow.

GM's bid comes after months of possible suitors circling around the company. As well as talks with Renault, there are thought to have been talks with car parts maker Magna, which is 20 percent-owned by billionaire Oleg Deripaska.

Chemezov has also said AvtoVAZ could sell an additional 25 percent stake to a Russian metals company, which analysts have speculated could be aluminum giant United Company RusAl, which is majority-owned by Deripaska, or steelmaker Severstal, owned by oligarch Alexei Mordashov.

AvtoVAZ spokeswoman Natalya Sidoruk on Wednesday refused to comment on which suitor stood the best chance ahead of the board meeting.

Some believe Fiat to be the front-runner. The two carmakers' history goes back to 1966, when they teamed up to build a factory for AvtoVAZ, and its designs formed the basis of the first cars built in Tolyatti.

"There's an emotional connection with Fiat," said Tony Thompson, head of advisory at KPMG's Moscow office.

What's most important for AvtoVAZ is that Fiat offers better conditions than Renault, said an industry source, who added that he had seen the Fiat and Renault proposals but not GM's.

"It's a serious proposal and very interesting to consider," the source said, referring to the Fiat proposal.

Renault had originally offered to build cars under its own brand, the industry source said.

Fiat spokesman Giulio Bonazzola said Wednesday that cooperation with AvtoVAZ "could entail the sharing of platforms and engines to be used on vehicles which will bear their brand." He declined to comment further.

Others said AvtoVAZ was more likely to pick GM, which is increasingly looking to developing markets to boost profits. The two companies have been building Chevrolet Niva and Viva models at a joint venture in Tolyatti, but relations have been soured by a series of disputes.

"Despite its problems, GM has considerable and very valuable technological expertise, much of it in technologies that will become increasingly relevant over the next decade or so -- [such as] alternative fuels and alternative powertrain," said Paul Nieuwenhuis, director at the Center for Automotive Industry Research at the Cardiff Business School, in Wales.

AvtoVAZ is reportedly asking $2 billion -- at least double the market price -- for a stake of about 25 percent.

GM's announcing its bid goes against the grain for the U.S. company, as it tends to keep its cards hidden in such deals, analysts said.

"That sounds like somebody who is looking for credit for trying," said Jesse Snyder, executive editor of Automotive News Europe. "If GM really had a deal, would it be talking about it so publicly?"

AvtoVAZ appears to have negotiated the longest with Renault, but analysts were skeptical it would be chosen.

The Renault proposals have improved during the talks, the industry source said. "Initially, they were totally unacceptable," he said.

But whichever carmaker ends up being the purchaser of the stake, it will have to thoroughly overhaul the plant and deal with an opaque ownership structure and poor corporate governance, among other issues, analysts said.

"The key risk is that AvtoVAZ will become loss-making in two to three years, in light of ongoing ruble appreciation and rising competition with international carmakers," Kirill Chuiko, an analyst with UralSib, said in a note to clients.

PwC's Root was more optimistic. "The risks of investing in Russia are large, but the rewards are also large, almost in equal measure."