AVTOVAZ Joint Stock Company

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AVTOVAZ Joint Stock Company

36 Yuzhnoe Shosse
445633 Togliatti
Samara Region
Russia
Telephone: +7 (8482) 73-71-71
Fax: +7 (8482) 73-82-43
Web site: http://www.vaz.ru

Public Company
Incorporated: 1993
Employees: 118,000
Sales: RUB 107 billion (2003 est.)
Stock Exchanges: RTS (Moscow) Frankfurt Berlin London
NAIC: 336111 Automobile Manufacturing; 333319 Other Commercial and Service Industry Machinery Manufacturing; 336399 All Other Motor Vehicle Parts Manufacturing; 423110 Automobile and Other Motor Vehicle Merchant Wholesalers

AVTOVAZ Joint Stock Company, or OAO AVTOVAZ (Avtovaz), manufactures nearly three-quarters of the light automobiles sold in Russia, producing around 700,000 cars a year. State economic planners founded the company in the late 1960s in order to provide an affordable car for the Soviet citizen, and the so-called "Zhigulis" soon became a familiar icon of life in the U.S.S.R. They were exported to European countries under the brand name "Lada." Even after the fall of the communist system, Avtovaz's cars have retained their market leadership due to their affordability, familiarity, and simplicity of design. The company's best-selling models are the new Lada 110 line and the updated version of the classic Zhiguli. Avtovaz also offers the Samara sedan and the rugged all-wheel drive Niva truck. Since privatization in 1993, Avtovaz has been struggling to improve production efficiency, develop newer models, and gain control of distribution. The company employs about one-sixth of the city of Togliatti. Recently, Avtovaz entered an alliance with General Motors to produce an updated version of the Niva truck at a new facility in Togliatti.

A Car for the Soviet People: 1966–85

The Five-Year Plan for economic development in the U.S.S.R. during 1966–70 called for the construction of a new automobile factory. This factory would provide for the first large-scale production of light cars in the U.S.S.R., producing an accessible consumer vehicle for the Soviet people and their neighbors in the Communist bloc. In July 1966 the Central Committee of the Communist Party passed a resolution calling for a plant at a site on the Volga River about 800 kilometers east of Moscow. A completely new settlement was to be built here, replacing an older village that had been flooded by a recently constructed dam. The new city was named Togliatti after Palmiro Togliatti, a longtime secretary of the Italian Communist Party. The car factory would be known as the Volga Automotive Plant, or AvtoVAZ. Viktor Nikolaevich Polyakov, the deputy minister of the automobile industry in the USSR, was appointed general director of the concern.

Avtovaz signed an agreement to work with Fiat, the Italian carmaker, on design of the car and the factory. In early 1967 ground was broken at the site, even as Fiat engineers were still working on final plans for the plant. Among the first buildings to be finished were a cafeteria and a housing development for workers. The Avtovaz project was promoted as a dynamic feat of collective socialist effort, and it brought together youth work brigades and technical specialists from a wide area. The first assembly line in the factory became operable in 1970. On April 19 of that year, the first car rolled off the production line in Togliatti. It was a four-door compact vehicle closely modeled after the Fiat 124. Officially, it was known as the VAZ-2101, but the automotive magazine Za rulyem sponsored a "Name the Car" contest for the vehicle. The winning name was "Zhiguli," after a nearby mountain range.

In 1972 Avtovaz began production of two additional models: the VAZ-2102, a hatchback, and the VAZ-2103, a speedier, more powerful version of the Zhiguli. That year the factory and its supporting enterprises already employed 43,000 people, and the number surpassed 100,000 a few years later. By the end of 1973 all three production lines were up to capacity, turning out 660,000 cars a year. As the only significant employer in Togliatti, Avtovaz also accepted much of the responsibility for making sure that general living amenities would be available to its workers, such as medical facilities, a school, a movie theater, and a cultural center.

Avtovaz sold its first car in Great Britain in 1973 and soon thereafter began making models with right-side steering wheels for the European market. Exported cars were sold under the name "Lada." The cars sold reasonably well abroad because of their low price. Foreign markets included Germany, France, Belgium, Hungary, and Turkey. Domestically, the car sold well because it faced practically no competition. But the Zhiguli developed a reputation for mechanical unreliability. According to the Economist, Russians joked that a new Zhiguli would run just fine once you took it apart and replaced any missing parts. The condition of the car depended on the whim of the workers on the assembly line. Nevertheless, the cars were easy to repair and spare parts were abundant.

In 1975 General Director Polyakov departed to be the minister of the automobile industry and was replaced by A.A. Zhitkov. Zhitkov oversaw the production of several new models in the late 1970s. The VAZ-2106, referred to as the "Six," was introduced in 1976 as a modernized version of the luxury 2103 Zhiguli. In 1977 the VAZ-2121, called the "Niva," began full-scale production in a newly built facility. This was the first car fully developed by Avtovaz engineers. The Niva was a four-wheel drive vehicle with off-road capabilities. It developed a far-flung following due to its proven ability to stand up in conditions ranging from the Arctic to the desert. Decades later, an Australian fan club was still organizing periodical Niva races through the Outback. In 1979 the classic Zhiguli was updated with the introduction of the VAZ-2105 model, followed by the VAZ-2107 rear-wheel drive sedan in 1982 and the VAZ-2104, an updated version of the hatchback model, in 1984.

Avtovaz also introduced its first front-wheel drive vehicle in 1984, the VAZ-2108 three-door hatchback. This was the first member of the "Samara" family of Western-style sedans. In 1987 the Samara line was enhanced with a five-door version, the VAZ-2109. A new complex was constructed for the Samara line, but the classic Zhiguli still accounted for most sales of Avtovaz vehicles.

Economic Experimentation in the Late 1980s

By the mid-1980s seven production divisions had been established to provide for all stages of automobile production, including foundry, sub-assembly, small press, final assembly, machine building, and precision tooling. Avtovaz was a very profitable enterprise, since the Zhiguli was practically the only car available to the average Soviet citizen. But Avtovaz's production lines were now 15 years out of date and its vehicle models had not changed much since the first Zhiguli in 1970. As the reformist doctrines of perestroika and glasnost were being formulated, Avtovaz became the site for experimentation in a more flexible form of socialist enterprise. Starting with the 12th Five-Year Plan of 1986–90, Avtovaz was to be run according to the "three pillars" of independence, paying its own way, and economic accountability. The paper stream of dictation from above was to be reduced, giving onsite managers more decision-making authority. Percentage deductions from profits were also set several years ahead of time, allowing for more stability in planning. Workers could receive bonuses for exceptional work. In return, Avtovaz would introduce new models on a regular schedule, pay for all development from its own profits, and begin replacing its production lines in order to improve efficiency and export competitiveness.

But it was difficult to reform one piece of the economy without restructuring the whole system. Avtovaz had the money to pay for development, but it could not secure the supplies it needed because its subcontractors still operated the old way, waiting for government approval before moving ahead with anything. For the first time ever, Avtovaz had to take cars off the production lines in early 1986 because of a lack of required components. The company was as entangled as ever with government regulators, trying to get the bureaucrats to approve needed projects at Avtovaz subcontractors. In April 1986 A. Yasinsky, Avtovaz's director of economics and planning, wrote in Pravda that "ministries and departments are still burdened by past rules and procedures that are hampering the experiment's effectiveness."

Turbulent Transition to a Market Economy: 1991–98

In the early 1990s the economic experiments of the late 1980s were subsumed by the complete collapse of the Soviet system. Avtovaz was better prepared than some enterprises to compete in a free market since it was experienced in carrying on an export business in consumer goods. But its production lines were as inefficient as ever, its workforce was bloated, and its vehicles were outdated compared to the competition. It took about 450 man-hours to make a Lada, compared to 15 hours for a Toyota. A typical capitalist firm would lay off many employees, but for Avtovaz to do so would cause unacceptable devastation and unrest in Togliatti since the firm employed about one-quarter of the workforce. Avtovaz's costs were particularly high because the company was a major provider of social services in Togliatti, such as housing, medical care, and retirement pensions.

Substantial capital investment would be needed to ensure Avtovaz's long-term survival. For this reason, Avtovaz management promoted the idea of finding a foreign investor during discussions on how to privatize the company. Shortly before Communism collapsed in 1991, the company had hired the U.S. firms Bear Stearns and Deloitte Touche to value the company and produce accounts that a Westerner could understand. Meanwhile, Avtovaz was negotiating with Fiat to buy a 30 percent stake in the company. But this initial attempt to produce Westernized accounts was never completed.

Company Perspectives:

Our mission is to consolidate AVTOVAZ's position as market leader in the Russian automotive industry for the long term, providing quality vehicles to Russian people at prices they can afford.

Avtovaz employees voted to turn the company into a joint stock company effective January 1, 1993. The enterprises of the Volga Automotive Plant Association became known as AO "AVTOVAZ," or AVTOVAZ Joint Stock Company (later changed to OAO "AVTOVAZ"). Under the original privatization plan, employees would get 51 percent of the capital—onequarter would be auctioned off to Russian citizens and most of the remainder would go to corporate investors. Yet by the mid-1990s, after the confused whirlwind of Soviet privatization, most of the company seemed to be held by entities controlled by Avtovaz management and by the government, although the exact ownership was unclear. Vladimir V. Kadannikov, the head of Avtovaz since 1988, became general director and chairman of the board of directors of the new company. He had several decades of experience at Avtovaz, having started out as a shop floor apprentice in his youth.

Kadannikov had been abroad for training in the automotive industry, but he asserted that his foreign experience was of little use in the chaotic Russian economy of the early 1990s. "If an executive who has worked under market conditions all his life were brought to our factory, he would commit hara-kiri on the third day," he told the Moscow News in 1992. Many Russian firms were stuck in the habits of the Soviet era. They were used to shipping goods according to government plan, without regard for payment, which led to a complex network of mutual debt. Some firms started demanding prepayment for goods, which caused cash flow problems at Avtovaz since it could not demand prepayment on automobile sales. Occasionally, parts for the production line had to be flown in by helicopter at the last minute. Kadannikov summed up the advantages and disadvantages of the new situation for the Moscow News: "The old Kadannikov had to waste time and rack his brains in order to make central authorities believe he was following their instructions exactly. In actual fact, they were followed only insofar as was necessary to avoid harm to the factory. At the same time I always knew Avtovaz would get everything: funds, equipment, supplies. Now in order to get components from our former suppliers, we have to give away 190,000 cars a year for barter."

Avtovaz continued the search for a foreign investor and in 1993 hired PricewaterhouseCoopers to prepare financial accounts to international standards. It was estimated that there were only 76 cars for every 1,000 Russians, which meant that Avtovaz had a lot of room to grow and provide returns on investment. But Fiat soon announced that it had lost interest in buying a stake in the Russian company. As a result, Russian automobile moguls set up the All-Russian Automobile Alliance (AVVA) in 1993 as a consortium with ambitious plans to collect funds and build a new factory in Togliatti. Boris Berezovsky, one of the most notorious "oligarchs" of early Russian capitalism, was a leader of the alliance. The alliance collected funds from many small investors but never raised enough to fund a factory; instead it invested in development of new vehicles. AVVA became both a subsidiary of and a major shareholder in Avtovaz. Berezovsky, meanwhile, founded LogoVAZ to distribute Avtovaz vehicles in the Moscow area and made a fortune in the mid-1990s with a string of dealerships.

Early in 1994 Avtovaz had to stop production and send more than 100,000 workers on leave due to a shortage of raw materials. Eventually it used revenue from exports to supply the needed goods. But cash flow was in very short supply; like many Russian firms, Avtovaz fell months behind in paying its workers. This led to a strike in the fall of 1994. Because of these difficulties, production fell to a low of about 500,000 vehicles in 1994 and 1995. Imports of used foreign cars also were challenging Avtovaz. High import tariffs protected Zhiguli sales to some degree. Imports were also officially capped but many vehicles were being imported illegally. In early 1996 Kadannikov was named first deputy prime minister in charge of economics under President Boris Yeltsin. He was at the position for less than a year, but the connections he developed in the Kremlin were advantageous to Avtovaz. During his tenure, for example, the tax on cars was reduced from 25 to 5 percent.

Avtovaz was teetering on insolvency by the second half of the 1990s. The company supposedly owed more than $500 million in tax arrears. When the International Monetary Fund suspended payments to Russia in 1996 because of the government's poor record in tax collection, the Kremlin pressured Avtovaz to either get serious about finding a foreign investor or transfer a block of shares to the state. In 1997 the firm reached an agreement to transfer a majority stake to the government as collateral on a plan to pay off tax debt over the next ten years. The stake was apparently given back to Avtovaz in 2001 even though the debt had not been eliminated. Another serious problem, according to reports in the Economist and the Moscow Times, was that the mafia controlled most of the distribution of Avtovaz vehicles. After the Soviet distribution network collapsed, organized crime fostered connections with some senior managers at Avtovaz. The mafia was reportedly able to receive some vehicles without even paying for them, so that it profited while Avtovaz suffered.

Key Dates:

1966:: A government decree calls for the creation of an automobile factory.
1970:: The first "Zhiguli" sedan is produced at the Avtovaz plant.
1977:: The "Niva" truck is introduced.
1986:: A new form of socialist enterprise is tried to give Avtovaz managers more flexibility.
1993:: Avtovaz is transformed into a joint stock company.
1998:: The devaluation of the ruble and a crackdown on criminal activity improve sales at Avtovaz.
2001:: Avtovaz signs a joint venture agreement with General Motors.

Improved Stability After the 1998 Crisis

Ironically, the fiscal crisis that shook Russia in August 1998 breathed new life into Avtovaz. Because the ruble was sharply devalued, Avtovaz paid less for production inputs. Its rubledenominated cars now cost about one-quarter of what an import cost. In addition, the firm had introduced some new models just before the crisis hit. The VAZ-2110, or "Lada 110," was a modernized four-door sedan introduced in 1996. The "Lada-211," a larger five-door hatchback, was introduced in 1998. Avtovaz also cracked down on criminal distribution activities in late 1998. In the September "Cyclone" operation, state police forcibly occupied the factory in order to stop mafia agents from absconding with cars. Anti-mafia members of the Avtovaz management were constantly attended by bodyguards. After 1999 the Russian government began a general offensive against the "oligarchs": Berezovsky had already fled the country in the face of criminal charges, and charges also were filed against some Avtovaz managers alleging embezzlement and tax evasion.

In 1999 Avtovaz had improved control of distribution and replaced the barter system with cash payment for all inputs. The days of trading cars for raw steel were over. Pricewaterhouse-Coopers was finishing up the preparation of accounts and Avtovaz was talking to General Motors, with whom it had signed an initial memorandum of understanding back in 1994 that later fizzled. In February 2001 a deal with the foreign investor was finally clinched. In a joint venture worth $332 million, General Motors would make an updated version of the Niva sports utility vehicle at a new plant to be constructed next to the existing Avtovaz facility. The vehicle would be known as the Chevrolet-Niva. The first model rolled off the assembly line in September 2002.

As the Russian economy grew during the postcrisis period, Avtovaz posted gradually increasing profits after 1999. Still, operations were far from settled. A glut of unsold vehicles in 2002 and 2003, due in part to the increased availability of secondhand imports, led the company to operate on reduced shifts for short periods. Cash flow was still a problem and the company had trouble securing capital from domestic banks. In 2003 Avtovaz had a dispute with shareholders when it tried to pass a new charter that removed the requirement for a 10 percent payout to preferred shareholders. But production was back to normal levels above 700,000 vehicles annually and Ladas still accounted for about three-quarters of car sales. In 2004 Avtovaz was discussing the construction of a $1 billion engine factory with General Motors and was introducing the "Kalina" line of its most up-to-date models. The firm had survived the chaos of the 1990s and was still the dominant car manufacturer in Russia.

Principal Subsidiaries

OAO DAAZ; OAO SAAZ; OAO AvtoVAZtrans; OAO TEVIS; OAO SeAZ; OAO Elektroset; OAO AvtoVAZstroi; Lada International Ltd. (Cyprus); OAO AVVA (85%); Oy Konela Ab (Finland; 70%); ZAO CB AFC (58.5%); ZAO IFC (51%); OOO Eleks-Polyus (51%).