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. Last Updated: 07/27/2016

AvtoVAZ Plans Nationwide Trade-In Program

In an attempt to rev up slumping sales, major carmaker AvtoVAZ announced it will set up Russia's first nationwide trade-in program, allowing owners to exchange used Ladas and Zhigulis for new ones.

The program will aim to create a second-hand market for AvtoVAZ cars by offering the deal at the more than a thousand independent and affiliated dealerships across Russia, AvtoVAZ said.

The plans are based on a similar program implemented in Europe three years ago and the company is confident that that project's success can be replicated in Russia, an AvtoVAZ spokesman said last week.

Further details about the swap were unavailable as they were still being worked out, the spokesman said.

Auto experts, including rival Moskvich, applauded the plan as an ambitious and progressive step for Russia's auto market.

"One can only be proud of them. Way to go," said Oksana Prityko, a spokesman for Moskvich.

"Good for them if they have an opportunity to do this, somebody has to start," Prityko said, adding that Moskvich had also considered a trade-in scheme but decided it would lose money.

"This is quite a radical step [for Russia]," said independent auto consultant Viktor Frumkin. "AvtoVAZ officials must be getting worried about future demand, and they are showing that the plant's management is not as inflexible as it used to be."

Analysts warned, however, that the carmaker faces daunting problems, the main one being the plant's cumbersome and opaque distribution network.

The plant has been trying for several years to consolidate the network by limiting it to several hundred primary dealers that it could control. So far, however, most vehicles are still sold through the thousand or so dealerships that are either unaffiliated or loosely linked with the company.

If AvtoVAZ fails to gain control of all the dealerships, it won't be able to introduce a uniform Western-style trade-in system, said Alexei Vasilyev, head of company information at the Skate financial agency.

The alternative of enlisting a select group of dealers to participate in the program would generate fierce resistance from the others, he added.

The AvtoVAZ spokesman said one way the company was considering garnering dealer support was by offering special discounts to those that participated in the trade-in scheme.

Although AvtoVAZ would be breaking ground by setting up a centralized trade-in system, some car dealerships have been using similar schemes for several years.

The Inzhiniring company, founded by major AvtoVAZ dealer LogoVAZ but now independent, runs a second-hand car store near Moscow that allows customers to trade used cars for new or newer second-hand vehicles on the spot.

The program has proven profitable, boosting the sales of new cars to a level that offsets even the expense of storing some of the old cars for a long time, Inzhiniring deputy director Andrei Chernykh said.

He added, however, that the company has recently started to limit trade-ins to keep its warehouse from overloading with old cars as demand for them slumps.

Most dealerships, though, have rejected the trade-in idea, saying the cost of repairing used cars and the time it takes to sell them do not justify the program.

Boris Linyov, director of one of the stores run by dealership Lada Inzhiniring, said the company briefly used the scheme last summer but had to abandon it as loss-making.

"It didn't work, we used the scheme at a loss to the company" because owners of second-hand cars usually demanded price tags not much lower than that of a new car, he said.

Many cars need significant repairs, which makes the deal "very unprofitable" at the current level of demand, Linyov added.

"It is difficult to sell a used car now, new ones are too cheap," agreed Yury Itin, director general of LogoVAZ-Avto, a LogoVAZ subsidiary.

If AvtoVAZ's plans work out, however, the program could become a major source of financing for the company since its consumer loan programs through Avtobank and Sberbank have been derailed by the crisis, Frumkin said.

AvtoVAZ is in dire financial straits. While the dealerships are turning a profit, the debt-laden plant itself has been operating at a loss.

To restructure its estimated debt of several hundred million dollars, AvtoVAZ has handed over a controlling stake to the government for 10 years.

AvtoVAZ has also been plagued by allegations of tax evasion and fund misuse.