Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Crime Sinks the Lada As Car Market Grows

The centrally planned economy is gone, but AvtoVAZ is dying hard. Nobody can say for sure now whether it is the end of the road for the country's biggest car maker, or whether it will manage to cope with its serious problems and rise reborn from the ashes of its Soviet past.

Even Vladimir Kadannikov, the company's long-time head and the newly appointed first deputy prime minister, is not sure about its future.

"I can never tell whether we just managed to prevent total collapse a little bit longer than other factories," he said in 1994. "Or whether we have really found the way to survive."

Just a quick glance at the company's financial situation suggests that the first alternative is more probable. It seems that the only reason the factory keeps working is that 114,000 employees are toiling away for free.

No one has been paid since November and the grime-encrusted men and women wearily tuning engines on the two-kilometer conveyor belt are unsure when they will ever get paid.

"It's a nightmare," said Oleg, a young engineer with a wife and a baby to support. "We borrow off each other, ask our parents to help out, but basically no one's got any money anymore."

In 1996 AvtoVAZ plans to increase production of cars by 50,000. However, recent events raise strong doubts about the chance of fulfilling these ambitious plans.

According to the company's finance director, Erkin Norkin, a "nightmare" started in September last year when the company did not get approximately 100 billion rubles ($20 million) in pre-payment for ordered cars, money that is customarily used to pay wages.

To survive, the company issued bonds worth around 41 billion rubles and stopped paying interest to state-owned Sberbank on loans.

This raised 50 billion rubles to pay workers but did not make the company's overall financial state any better. The situation repeated itself in October and November.

The company owes several hundred million dollars to creditors and the taxman. At the same time, according to Alexander Zibirev, marketing and trade director of the company, receivable debts to the company exceed 5 trillion rubles. Alexei Nikolayev, Kadannikov's replacement, has recently admitted that he could not even imagine where the company could get enough money to pay its debts to workers.

Industry experts attribute the present financial situation to a totally ineffective system of distribution. The old system of distribution through VAZ's technical centers located throughout the country collapsed, and the management became unable to resist mafia outfits that had been trying to control distribution. These days, in apparent connivance with certain managers, they get the cars, but they often do not give over the money to pay for them.

The company's relations with LogoVAZ -- its major distribution company, which was set up three years ago to market Ladas in the Moscow region and has registered large profits, while AvtoVAZ has sunk into the red -- are also dubious.

The financial crises at VAZ, among the few big Russian industrial companies that has managed to keep production at a relatively stable level, give grounds for allegations that AvtoVAZ itself is having revenues siphoned off by the mafia.

"The company's distribution system is highly criminalized and is the main reason for its awful financial situation," said Viktor Komidenkov, an automobile expert from the Rinako-Plus investment company. "The company should clear up its relations with its dealers; otherwise, all efforts to stabilize production will result in nothing."

Kadannikov's rebuttal of such allegations was hardly ringing; the reports were "somewhat exaggerated," he said at a recent press conference.

No matter how "exaggerated" the problem is, the company set a special armed detachment to track down debts, and all senior managers dealing with distribution and finance have personal bodyguards. But the unpaid bills still total 5 trillion rubles.

The reason for VAZ's present difficulties lies not only in Russian financial chaos -- it derives too from its 30-year history.

The plant was built in Tatarstan on the Volga river 800 kilometers from Moscow in 1968 by the Italian Fiat company; it was named after Palmiro Togliatti, a long-standing secretary of the Italian Communist Party. Fiat's participation was the result of the Soviet nuclear superpower's inability to build a car of its own that worked.

The small Fiat 124 became the basic model for what was to become the most successful Soviet car. During some years, the company produced around a million cars a year, and, according to official statistics, accounted for at least 80 percent of the country's car production.

The country's leaders satisfied their vanity, and people got a vehicle much better than any other of domestic design. Zhigulis seemed to live forever, together with the Soviet Union, the eastern bloc and the centrally planned economy.

VAZ even managed to organize export of its cars. Its major markets became Germany, France, Belgium, Hungary, Turkey and Great Britain. Marketed under the Lada tag, they became the butt of many jokes, but, cheaply priced, they sold in reasonable numbers.

However, the Fiat license was bought without any far-reaching cooperative plans for the future with the Italian giant and without clear answer to the major question: What would the company do when it had to change the model?

The Soviet government in fact did not plan to make any changes. The state was doing a very profitable business; the production cost of a Zhiguli in the Soviet era was around one-sixth of its price. Besides, there was the traditional Soviet negligence toward everything not to be delivered to the military.

"The Zhiguli was a people's car," said Viktor Komidenkov from the Rinako-Plus investment company. "But there was no tradition of taking care of people's comfort."

As a result, during the 30 years since they first spluttered off the two-kilometer production line in the late '60s, Zhigulis have not changed either technologically or visually.

What did change, finally, was the market. The collapse of the Soviet Union and new economic rules brought a new element to the system: choice. Foreign cars vied for public favor, and from the beginning of this decade have become a real threat to the old-fashioned Ladas.

The company's desperate attempt to make up lost ground, by introducing its own more Western model, the Samara, has essentially failed. According to company statistics, in 1993, or seven years after the production of Samara was initiated, these vehicles amounted to only 15 percent of total production.

Output started to fall at the end of the '80s, whereas production costs jumped dramatically. In 1989, the company produced 733,700 cars, but just 586,000 in 1995, according to the Troika Dialog investment company. Exports also fell over the same period, from 4.1 percent to 2.6 in 1995.

The company was privatized in 1993, with the state keeping a 15.5 percent block of shares. The employees hold 35 percent and the company's management 5 percent. Among the major shareholders are Avtomobilny Vserossiisky Alyans (AVVA) -- a company that tried unsuccessfully to assemble Opel Corsas -- with 13.5 percent. A second major private shareholder is MMM-invest, with 8.2 percent.

However, as with many other major industrial companies, privatization did not improve the situation. Compared with some other Eastern European producers, VAZ production is far from efficient. The plant produced 5.1 cars per worker per year, half as many as at Skoda in the Czech Republic, where for 16,800 workers the index is 12.4.

Experts say that VAZ should lay off 15 percent of its work force. But the prospect of several dozen thousand unemployed workers with nowhere to turn in a one-company town such as Togliatti, with only 400,000 residents, is too much for the management to contemplate.

The company has also tried to find a foreign partner. However, negotiations with Daewoo and General Motors have not proved fruitful.

Trying to save VAZ, the government in 1993 introduced punitive import tariffs for foreign cars. At 3-5 ecu per cubic centimeter of engine capacity, the original price of many vehicles is thus doubled.

For a while, this measure, together with regular increases in the sale price of Zhigulis, allowed the Russian car giant to maintain production and, until September of last year, to make ends meet.

VAZ's problems are the problems of the entire Russian automobile industry, experts say. But some say it still has a chance.

Unlike much of former Soviet industry, the carmakers have inherited a substantial market with high growth potential. Automobile output has fallen much less than output in most other sectors, says the Rinako-Plus investment company.

"With a qualified work force and a tradition of skilled engineering , the industry is in a relatively strong position to adapt sooner than other sectors to the market economy," its report says.

The Russian car-making sector, in addition to AvtoVAZ, includes four other major plants: AZLK in Moscow, producing Moskvich hatchbacks; GAZ in Nizhny Novgorod -- Volgas; Izhmash in Izhevsk -- pick-up trucks; and UAZ in Ulyanovsk -- jeeps.

According to some analysts, the Russian market has already reached its nadir and will soon start to rise. Sales, including imported second-hand cars, could reach one million cars per year by 2000.

Major Western producers have started to show interest. General Motors late last year signed an agreement with the government of Tatarstan to produce Chevrolet Blazers at the Yelabuga plant, not so far from Togliatti. Renault has signed an agreement with the Taganrog combine plant to assemble 4,000 Renault 19s. Skoda has also recently announced its plans to start production in Russia.

Experts from the DRI/McGraw-Hill consultancy consider that by 2000 the demand for the new cars will increase by 50 percent. The market share of foreign cars should rise, it believes, from 3 percent in 1994 to 10 percent. This still leaves 90 percent of the market to Russian producers.

VAZ still has the best chances to get the lion's share. DRI/McGraw-Hill estimates VAZ will continue to account for 62 percent of all Russian auto production by the end of the century.

"It so happened historically that VAZ does not have competitors inside the country," said Sergei Suverov, an automobile expert from the United Financial Group.

Kadannikov's appointment to the government gives VAZ advantages that no other company also has. The government has already decided to cut sales tax on cars from 25 to 5 percent. Some sources say that the next move could be direct support for the ailing car-maker.

Analysts say that, relatively speaking, the technology and production organization at VAZ are better than at other auto factories in the country. In addition, Russians traditionally prefer Ladas and Samaras to any other domestically produced car.

VAZ has also managed to pull itself together sufficiently to indulge in the previously unknown phenomenon of product modernization, both of the Samara family and the four-wheel-drive Niva. Also, a substantially new model, a four-door sedan, is slated for production this year.

But this new model will cost over $14,000, more than higher-quality Western rivals. In truth, the company is still relying on the venerable Zhiguli, which now costs from $7,000 and is expected to account for more than half the 600,000 cars the company plans to produce in 1996.

"We should keep up production at any cost," said a VAZ official. "And in this sense our old models are more suitable."

-- Carey Scott of The Sunday Times contributed to this article from Togliatti.