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VedomostiHistorical similarities link Renault and AvtoVAZ, but are the future interests of both heading in the same direction?

Russia remains a highly attractive market for car manufacturers, but a case study of developments in relations between the French firm Renault and Russia's AvtoVAZ highlights how common origins and ideologies can cause contention or provide a source for reconciliation.

Last October, the long-friendly Franco-Russian relations among AvtoVAZ shareholders suddenly deteriorated. Russia began to speak the language of ukazy: The French manufacturer Renault was ordered to increase its stake by half a billion dollars, under threat of its capital share being greatly reduced, while Renault's president, Carlos Ghosn, clearly signalled a point of no return by refusing to meet Russian Prime Minister Vladimir Putin at the November Franco-Russian summit in Rambouillet.

However, true friendship ignores the vagaries of the material world. As proof, in March Putin proposed to break the ice by working with Renault's ally, Nissan, in co-financing the construction of a plant in Russia's Far East.

The invitation was part of the government's revitalization of a region where a fading car market and shrinking distribution networks have become a major problem. Was this a mark of trust, showing that reliable foreign partners are needed to stimulate local production, a test, or simply business dealings? Regardless, Christian Esteve, the current general director of the Renault-Moscow government joint venture Avtoframos, had already indicated in mid-January that Renault was considering the possibility of establishing an SKD, or semi-knocked-down, auto-assembly plant in the region.

Meanwhile, Renault's moves at the other end of the country show that in friendship, as in love, feelings are often reciprocal. At the beginning of March, during his visit to Moscow, Ghosn announced Renault's ambition to become "the leader on the Russian market, with an overall market share of 40 percent — including the company's partnership with Nissan and AvtoVAZ." The company intends to do this by pursuing a direct implantation strategy and increasing the local integration rate from 44 percent to 75 percent within two years.

Businesses that have chosen to stay in this potentially huge market despite the crisis point to a recovery that will come sooner or later.

The new Avtoframos facilities Ghosn came to open in Moscow marked another step for Renault in Russia, with production capacity doubling from 80,000 to 160,000 units per year. It is possible, though, that this is a sidestep rather than both partners stepping forward together.

The move is a response to the partnership stalling and the problems encountered at all levels in Tolyatti, from management methods to work practices to technology, said Igor Tverdunov, deputy director of the publication Za Rulyom. "At Avtoframos, Renault can do whatever it wants as it wants."

Not everyone agrees, however. Alexander Pikulenko, a commentator on the auto sector for Ekho Moskvy, sees more of a complementary tactic in a market segment that does not overlap with the Lada or the low-end Logan, both produced in Tolyatti.

As for the project itself, the two commentators consider it realistic. "The sales target of 160,000 vehicles from Renault can be achieved," Pikulenko said. "At Avtoframos in Moscow, Renault continues to manufacture small cars at affordable prices. The French decision makers have thus retained the company's original ideology, consciously or not. And that should help them succeed."

In 2009 Renault achieved a sales volume of over 53,000 units for the Logan, a decline of only 27 percent from 2008, which places it ahead of the Ford Focus in the economy car segment, comprising cars from 300,000 to 500,000 rubles. The basic Sandero model retails at 319,000 rubles ($10,000).

With Renault at the head of this potentially huge market, businesses that have chosen to stay in Russia, despite the crisis, point to a recovery that will come sooner or later. Their strategy is to occupy a strong position in the market today. There is no doubt that this choice carries great promise for the future in terms of market share. With a motorization rate of 230 vehicles per 1,000 inhabitants, compared to 600 in Western Europe, the Russians are a priori good potential consumers. Looking at the estimates for overall sales volumes in 2014 for the Russian market — from either the most optimistic, three million by JATO Dynamics, or the most pessimistic, 2.1 million by AT Kearney — Renault's forecast is modest.

The question remains, however: What is to be AvtoVAZ'z role?

"Carlos Ghosn has accumulated more losses than gains so far, and his image as the world's best anti-crisis manager is rather tarnished," Pikulenko said. As for the Russian government, it is "aware that the acquisition by Renault is the only chance of rescue." But for Renault, "AvtoVAZ is likely to become the weight that will sink the buoy," Pikulenko said.

The problem may be more fundamental. "The interests of both companies do not coincide," Tverdunov said. However, if the fate of both companies is, for better or worse, common, it is because "they share the same ideology, are a national heritage for their respective countries of origin and both have spending that is not always justified," said Tverdunov.

The fact that the privatization of Renault began over 15 years ago, while AvtoVAZ is still under state control  and remains "a company more Soviet than Russian," is a fundamental cause of the incompatibility of their decision-making systems, said Tverdunov. Where he prefers to talk of the state of relations in 2010, Pikulenko is inclined to look to the companies' histories. "The link with state support is the same on both sides," he said. "Peugeot and Citroen may leak, but if things go wrong, Renault would be re-nationalized. Add to that the presence of strong unions."

"I have known Renault since the construction of the first joint Moskvich factory in Moscow," said Pikulenko. "The PCF [French communist party] and the CGT [a French labor movement] were all-powerful, and infatuated with the Soviet Union's Communist Party. French workers came to train Soviet workers."

"Today, as before, the same internal ideology reigns in both firms, and although the highest levels of decision making work differently, they make decisions based on the same ideological content," continued Pikulenko. "Even on the question of bonuses, the top executives of AvtoVAZ and Carlos Ghosn and his advisers agree."

Given this, one wonders at the explanation behind why stakeholders have been unable to reach agreement on the rescue plan since the beginning of the crisis. "At the lower level, between engineers, all is fine," Pikulenko said. "It is at that [the higher] level the situation is blocked and there is no need to go very far in search of a reason. All conflicts can be reduced to money problems, and the only real question is: 'Who will pay the bill?'"    

Simon Roblin is a journalist with Le Courrier de Russie, where this article appeared.

Russia - France 2010
Russia - France 2010
To coincide with President Sarkozy of France's visit to the St. Petersburg International Economic Forum, The Moscow Times is publishing a special edition of its Partnership XXI Century guides. Russia-France is dedicated to business relations between the two countries.
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