Renault and AvtoVAZ Prepare to Sign Partnership Deal

Renault and AvtoVAZ will seal their partnership deal on 29 February, as the former concludes the purchase of 25% of the Russian giant. The cost of the stake is still expected to be in the region of US$1.3 million, with AvtoVAZ looking to launch an initial public offering (IPO) later in the year for another 25% of the company. According to a statement released today, AvtoVAZ has agreed to consolidate its sales with those of the Renault-Nissan alliance, thus creating the world's third-largest auto-making group after General Motors (GM) and Toyota, with aggregate annual sales of more than 7 million vehicles.

Renault and AvtoVAZ announced a memorandum of understanding (MoU) back in December, when the French carmaker beat GM, Fiat, and Magna in its bid to obtain 25% of the Russian manufacturer; Renault has been carrying out due diligence since then. Renault has said that it intends to rejuvenate the Lada brand by providing AvtoVAZ with new vehicle platforms and powertrains.

The structure of the partnership will see Renault-Nissan Chief Executive Officer (CEO) Carlos Ghosn join the board of AvtoVAZ. Ghosn will be joined by five other key managers nominated by Renault, including the company's chief operating officer (COO), financial director, chief engineer, and other executives under the preliminary agreement, with AvtoVAZ having the power to confirm or reject the nominees (see Russia: 8 February 2008: Renault to Nominate Senior Positions on AvtoVAZ Board—Report). Renault managers will hold key positions in the technology and cost-cutting areas of the business, while Russian Technologies officials will remain in key positions to represent the controlling shareholder.

Outlook and Implications

The deal to create the Renault-Nissan-AvtoVAZ alliance now looks set to conclude next week, creating the third-largest auto-making group in the world. Although details of the purchase price have still not been confirmed, the collaboration of the Russian and French parties appears to be gathering pace as AvtoVAZ has agreed to consolidate its sales figures. Although Renault will have much control over the engineering, product planning, and technology aspects of the business, with plans to transfer much of its production know-how and technology to the Russian company, AvtoVAZ will remain in overall control of its business. There are many natural synergies for the companies to exploit, and Renault’s expertise in passenger cars, coupled with Nissan's 4x4 experience and AvtoVAZ’s scale as a mass manufacturer, means that the partnership has great potential.

It is also apparent that Renault and Nissan will accelerate the rejuvenation of the Lada brand in Russia, rather than using their new partner as a launch-pad for their own products, although the scale and spread of costs will naturally benefit the French-Japanese alliance. Initial projects are expected to include a Lada-badged version of the South American-developed Sandero model, based on the Logan platform, which is likely to enter into production at the Togliati plant soon, in line with Ghosn's statement that the company would launch a new Lada model under US$10,000 within a year. We also assume that Togliati will begin gearing up for eventual production of the Mégane model, which could also begin within a year.

This deal will not end Renault’s collaboration with AvtoFramos though, which is expected to continue assembly of the Logan. Indeed, local content in the model is expected to increase and production almost double this year.

It is our assumption that the agreement will put an end to AvtoVAZ's deal with Canadian supplier Magna (see Russia: 4 February 2008: Renault Deal Could Jeopardise AvtoVAZ/Magna JV—Report). Thus the future Lada Project-C will probably be transferred to a Renault platform as a successor to the Priora from 2012 (price of US$15,000). The vehicle has not been developed by Magna—it has only supported Lada with the development of the platform.

This new alliance holds great potential for Renault-Nissan and AvtoVAZ, but it also contains significant risks. Thus far the negotiations over the structure of the company and tone of the announcements have been convivial and supportive, as is often the case during the honeymoon period after two large companies become financially involved and agree to collaborate on products. However, differences in corporate culture and working practices can often throw up obstacles when it comes down to actually working together. AvtoVAZ has had a fractious relationship with GM under their joint venture (JV); indeed it got so bad that production was halted at one stage.

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