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. Last Updated: 07/27/2016

AvtoVAZ Pledges Billions for Revamp

TOLYATTI, Samara Region -- The country's largest carmaker, AvtoVAZ, said Thursday that it would invest billions of dollars in production facilities and new models in coming years, in a bid to stave off foreign competition.

Outlining his vision for the company just weeks after taking charge, Igor Yesipovsky told reporters that the Lada maker planned to introduce as many as 12 new models in the next five years, as well as roughly doubling production capacity.

"This is practically an unfeasible task, but we are taking it on," Yesipovsky, the company's new general director, said at a news conference in Tolyatti.

The bulk of the investment will come from the state, which could receive a stake in the carmaker in return for putting up the cash, one official said.

"That's the way it works," Boris Alyoshin, an AvtoVAZ board member and head of the Federal Industry Agency, said without being more specific. Alyoshin's agency is part of the Industry and Energy Ministry. Alyoshin reiterated that the state might assume the company's debt, which analysts say stands at $150 million to $180 million.

The investment into new facilities, as well as into the aging plant it currently operates, will be in the form of direct financing and state-backed loans.

"We are talking about a rather big investment," said board chairman Vladimir Artyakov. Asked if the amount might be $5 billion, he simply nodded.

The proposed investment sum is realistic, said Gairat Salimov, manufacturing sector analyst at Troika Dialog.

"I think that $5 billion would be enough for this project," Salimov said. "Ford built a 25,000-car-per-year plant for $150 million."

In an attempt to jazz up its image, AvtoVAZ plans to update its range to include sports coupes and SUV-based crossovers aimed at the more mature and affluent buyer, with first-time buyers accounting for most of the company's business at the moment, it said.

"We would like our customers to remain with us," said said Maxim Nagaitsev, the company's vice president for technology, adding that roughly one-third of the company's range would be designed with the average Russian consumer in mind.

In developing the new models, AvtoVAZ said it would rely partly on local expertise. But given its ambitious lead-in time for its more modern range, Yesipovsky said he planned to cooperate with foreign companies on parts and equipment.

AvtoVAZ declined to say which foreign firms it was in talks with. "By the end of March we should be able to know exactly who our partners will be," said Nagaitsev.

The disclosure of the company's plans comes after weeks of speculation over the future of the carmaker, sparked initially by the appointment of two officials -- Yesipovsky and Artyakov -- from state arms dealer Rosoboronexport to the head of AvtoVAZ at the end of last year.

Rosoboronexport's involvement has raised concerns about increased state control of the sector.

Speaking in Tolyatti on Thursday, AvtoVAZ board chairman Vladimir Artyakov said the plans were motivated not by patriotism but by good business sense. AvtoVAZ is the country's eighth-largest taxpayer and employs about 5 million people, according to company executives.

Moreover, with the Federal Industry Agency expecting the Russian car market's value to grow to $30 billion by 2010, it is just too lucrative a market to give away to foreigners, the management said. Foreign carmakers have typically enjoyed buoyant sales in recent years, while AvtoVAZ sales have stagnated. The carmaker sold around 650,000 models in Russia last year, little changed on the previous year.

AvtoVAZ's first new models will be developed and launched within just three years, the company said, which most analysts agreed was possible but ambitious.

It could take up to five years for certain models, including a luxury E-class model, Nagaitsev said.

To help facilitate the proposed range, AvtoVAZ plans to build a new plant with an annual production capacity of 450,000 vehicles. The plant should begin production in three years, the company said.

Building a completely new plant, which will be located next to current production lines, was the only way to keep up with the competition, Yesipovsky said.

In time, two of AvtoVAZ's older models, the so-called 2105 and 2107 models, which together account for about 250,000 cars per year, will be phased out, he said.

AvtoVAZ currently operates three main production lines, each with an annual capacity of around 220,000 cars. An additional, more modern line of similar capacity is dedicated to the production of the Kalina model, launched in 2004.

Old lines will also get an overhaul under the company's plans, said Yesipovsky. The production lines that reporters were given access to on Wednesday were in a state of extreme neglect, with equipment dating back to the early 1970s, when the plant first went into production.

Kirill Chuiko, an automotive analyst with brokerage UralSib, was skeptical about the plan.

"I highly doubt that the project will bring a return on investment in the short term," he said. The appreciation of the ruble plays against AvtoVAZ because foreign makes become more affordable to Russian consumers.

Of the $22 billion Russians spent on cars last year, more than $10 billion was spent on new foreign cars, according to estimates from PricewaterhouseCoopers.

Separately, Alyoshin declined to comment on the possible merger of AvtoVAZ with automotive peers KamAZ and GAZ, as has been speculated in media reports.Apparently overwhelmed by the flurry of press attention recently, Alyoshin said only that future consolidation of the auto industry was unavoidable.

Commenting on the future of AvtoVAZ's joint venture with General Motors, Yesipovsky said the venture itself was profitable but that AvtoVAZ was losing money through it.

The new team will make a decision on the joint venture in February, he said. "We can't work at a loss indefinitely," he said.

Valeria Korchagina contributed to this report from Moscow.