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. Last Updated: 07/27/2016

AvtoVAZ Plans Two-Week Shutdown

Itar-TassAvtoVAZ will stop production of its popular Lada model to cope with unsold inventory.
With foreign automakers eroding its market share, AvtoVAZ on Friday announced plans to stop production to cope with growing stockpiles of its best-selling Lada and Niva models.

"Of the 75,000 to 77,000 automobiles that are ready for sale -- about 28 days' worth of production -- there is a risk that 25,000 to 30,000 cannot be sold," the nation's flagship automaker said on its web site www.vaz.ru.

AvtoVAZ could not be reached for comment Sunday, but Kommersant reported in its Saturday edition that the company's production chief, Anatoly Melnikov, said the factory would shut down for two weeks from Oct. 26. The paper said company president Vitaly Vilchik would officially give the order on Sunday.

Dealers have become increasingly alarmed as AvtoVAZ's unsold inventory has been steadily growing since the end of summer. Last month, dealers asked the auto giant to cut production because warehouses around the country were nearing capacity, with 50,000 units already in storage.

AvtoVAZ produces 68 percent of all the cars on Russia's roads. It sold 517,000 of the 570,000 cars it produced in the first 9 months of 2001 and has produced nearly 575,000 units this year.

Melnikov told Kommersant that most of AvtoVAZ's tens of thousands of employees would be sent on a two week "holiday."

Production of the new Chevy Niva, which AvtoVAZ produces together with U.S. giant General Motors at AvtoVAZ's complex in Tolyatti, will not be affected by the shutdown.

In the statement it posted on its web site, AvtoVAZ blamed its problems on a variety of factors, including the record flooding that plagued southern Russia and Europe for weeks this summer, and government foot-dragging on implementing a restrictive import tariff on used foreign cars, AvtoVAZ's main competition.

Earlier this month, a 35 percent import tariff hike was introduced on cars more than seven years old in an effort to bolster prices and demand on increasingly unwanted Russian cars.

Industry watchers say consumers are more often finding post-purchase services, such as warranties and maintenance, offered by foreign brands more attractive than what domestic producers -- especially AvtoVAZ -- can offer. This, together with rising incomes and the emergence of more financing options, is encouraging Russians to opt for more expensive foreign cars, whose share of the market has risen to 36 percent from 26 percent last year.

Investment bank analysts, however, have widely divergent views on AvtoVAZ's fiscal health.

Brunswick UBS Warburg last week downgraded the company's stock to sell. "[The company's] cash generation will decline, and therefore ... the company will be unable to finance its massive [capital expenditure] program internally, giving rise to mounting debt," the brokerage said in a research note. "Our valuation suggests a significant potential downside, despite the value we expect GM-AvtoVAZ to add."

Earlier in the week, Aton, another prominent investment bank, told investors to buy AvtoVAZ shares, saying it had "transformed into a financially stable, profitable producer, whose product line will soon be filled by new models." It added that the company's "corporate governance has improved significantly."

Aton's target share price for AvtoVAZ is $46.5 compared to Brunswick's $20.9. The company's stock traded at around $29 on the RTS on Friday.