The Major Facelift

Vladimir Volkov

The legacy Russian passenger car maker AVTOVAZ is undergoing a major facelift. Not only will it help the LADA brand stand on par with other quality international mass car brands, regaining domestic market share and expanding internationally, but it will also prepare the company for the longer-term Industry 4.o challenges. Nicolas Maure, who took office as president of AVTOVAZ just in April, explains how the company is going to meet these goals in an exclusive interview with BRICS Business Magazine.

Tonight, it’s just one day after the data from the Association of European Business (AEB) were released, showing that Russian car sales recorded their first monthly rise in almost two years in November year-to-year, with LADA far ahead of the broader market. Does that mean the Russian car market as a whole and AVTOVAZ in particular have turned a corner, or is it just a kind of dead cat bounce?

Right, the new car sales in Russia in November rose 0.6% year-on-year to roughly 132.3 units – although, in January to November, they were still 12% below the same period of 2015. As for AVTOVAZ, we sold over 25,500 LADAs in November, which translates into an 18.2% rise year-on-year. In terms of 11 months cumulative sales volume in Russia, we are only 2.8% behind our own 2015, with 238,666 cars sold.

If we go back to 2012, 2.8 million passenger cars were sold in Russia. In 2016, we expect the total market will be 1.3-1.35 million passenger vehicles. I believe this is really a bottom point, provided the state support measures like the fleet renewal program, scrapping subsidy to continue in 2017, which is especially important for LADA, where the latter program contributes to around 50% of the total sales. If done, this will help the market to be at least stable. Maybe we will see a small growth in H1. And, to me, it is very encouraging to see we are continuously keeping 20% market share of the Russian passenger car market. I would like to even improve it a bit, but this is still to be done. I am challenging teams for this.

By the way, AVTOVAZ seems to have been particularly hurt by the slump. So, for example, LADA Granta lost its best-selling car status in Russia in H1 2016. The company itself posted a 27.2 billion ruble ($445.1 million) loss in the first six months of 2016, which was on top of the huge 74 billion ruble ($1.2 billion) loss in 2015. What is the reason for such a dramatic loss?

Speaking about the financial loss, it is necessary to mention the big impairments that were mainly due to the freezing of assets we did in books until the market recovers. It is IFRS accounting rules that we implement on them. So it’s not really an operation loss, but it is what we call a paper loss. But if we look at pure operating profit impairment and provisions, you may see that every quarter of 2016 compared to every quarter of 2015 shows improvement. It’s especially true in Q3, embracing July, August, and September, where the losses were reduced by two-thirds.

How did you achieve that?

It is a combination both of a revenue side and a cost side. On the revenue side, it is the volume effect linked to our long-term investment, mainly. Also, it is due to the right price positioning of the new cars having raised moderately, so I believe we are now at normal levels. Then we started some harsh programs to optimize the cost of cars. So, we bet more on local content and localized suppliers in Russia, as well as did some trim optimization. The key focus was on Vesta, and today, the profit situation with this car is becoming, let’s say, acceptable.

Apart from the product side on the costs, we also stopped all the consulting expenses that were very significant in previous times.

We also have seen positive effects from a four-days-a-week working regime in Togliatti, which started in February and was restarted in mid-August. This does not include the lines and activities where we need people to work for five days, such as the LADA Izhevsk plant, where the top-selling LADA Vesta is produced, and the BО-line, which produces LADA Largus, LADA XRAY, Renault Logan, Renault Sandero, and Nissan Almera. Both LADA Izhevsk and the BO-line in Togliatti work five days, plus, some teams of engineering involved in our new projects such as LADA Vesta SW. All the measures have had a significant impact on costs, although people have not been hurt much by the measures. That is why we haven’t seen any serious social issues in the plant.

Why?

It’s mainly thanks to support provided on the state’s side. So when people work four days, we pay them for four days; the state and the region contribute to the fifth day for people who would like to do social works. So this was a good combination for us to reduce the costs and for the people not impacted by reduction of revenues.

BOUNCING BACK

What goals were imposed upon you by the shareholders? Have they been supportive in improving the situation at AVTOVAZ since your appointment in April?

The roadmap is to bring AVTOVAZ back to operating profit within two years. This is very clear. But, of course, my first steps were a kind of emergency actions, like cutting all consulting costs or like returning Vesta to profitability, which I did.

Shareholders have been supportive, although, of course, there is a clear difference between Alliance Renault-Nissan and Rostec. On the Renault side, they have been supportive in providing new people to the team. So, for example, our new executive VP for Sales & Marketing is Jan Ptacek, Czech by origin, and our executive VP for Manufacturing & Supply Chain, Slovenian Ales Bratoz, came from Renault-Nissan. They both speak Russian, as I try to bring in those who can work well in the Russian environment, although this is a quite limited number of people. In this context, I should mention the new Export director, Max Missana, an Italian, whose main focus will be the CIS markets but who would also be responsible for the re-launching of further export markets.

So Renault has helped – and still helps – us by providing the key people that we were lacking, as well as providing methodologies and information systems that we can implement at AVTOVAZ. We have a monthly meeting with the Renault top management to review all the activities. Renault has also been instrumental in providing short-term financing on top of bank loans.

And Rostec is very supportive in government relations, so we spoke with the state of support measures and also the five-day payments that I mentioned. Rostec is also helping us discuss with Sberbank the creation of a call-center in Togliatti. There will be a three-party scheme that involves AVTOVAZ providing a building to Sberbank, Samara Governor Nikolay Merkushkin offering support for refitting the building, and Sberbank installing the call-center for more than 1,000 people starting in 2017.


Why do you need this Sberbank facility on your site?

For sure these projects, and projects of its kind, will help diversify the economy of the city of Togliatti and the Samara region, which are excessively dependent on AVTOVAZ. It will also remove some pressure from the plant as we have to optimize our workforce. So this is a good opportunity to propose to Sberbank the hiring AVTOVAZ employees. I am sure that for AVTOVAZ employees, there will be possibilities to also consider job and activity opportunities in other companies based in Togliatti, like Sberbank and our suppliers, of course.

It sounds like you are sticking to a more moderate approach to increasing the efficiency of AVTOVAZ compared to your predecessor, Mr. Bo Andersson. It’s not a secret that he was criticized for pressing on with cutting the workforce, weeding out shoddy component suppliers in Russia, and buying parts heavily from abroad, thereby adding to social insecurity and bringing extra pressure on the bottom-line of AVTOVAZ.

On principle, I will not comment on my predecessor. What is for sure is that, as I mentioned above, AVTOVAZ’s recovery will come from both the cost and revenue sides. Among other things, this embraces higher sales volumes and higher average selling prices corresponding to new cars accepted by the public in Russia but also in export markets. And the other portion will be cost optimization. This goes through higher localization with both Russian suppliers in Russia but also with international suppliers in Russia on both Tier 1 and Tier N levels.

What is very obvious is that, first, when we buy locally, we have no currency risk exposure. So, in terms of risk minimization, it is much better. And then, when the suppliers are close to the production site, it is much more efficient to solve quality or delivery issues without having huge delivery times.

And this is not only the policy of AVTOVAZ. It is also the policy of the Alliance Renault-Nissan, that its suppliers, when possible, should be close to the plants. This is what we are doing.

For sure there are still imported parts that we need to further reduce in number, especially for Vesta and XRAY. And we have roadmaps to increase localization by about 10 points within three years. And when doing so, every supplier has the opportunity to be a supplier to AVTOVAZ. We make absolutely no distinction between pure Russian suppliers and global suppliers in Russia, but the condition is that they must be located in Russia and be competitive in terms of cost, quality, delivery, and so on.

Literally one day before our meeting, the AVTOVAZ Board gave the go-ahead to the plan aiming to raise a total of 25 billion rubles ($410 million) from issuing additional shares. Why do you need this money?

This will help us have a more robust balance sheet and also to reduce the interest expense burden. We need to improve our debt-to-equity ratio, so together with our shareholders, we discussed how to increase the equity of AVTOVAZ. The first step will be that share capital increase, which is ongoing in December 2016. Yesterday, we also disclosed the price of the shares, which is nine rubles per share. I will not tell you more because this is more of shareholders’ responsibility. So this financing is very much welcomed.

AVTOVAZ has modernized its lineup and manufacturing processes and significantly improved product quality, Carlos Ghosn, the CEO of Renault and Nissan, was quoted as saying in March. Are there still plans to press on further modernization?

At the board meeting. we presented a mid-term plan of the company, which is in fact a long-term plan because it is up to 2026. Among other things. it includes investments in our plant, both for vehicle lineup plus modernization of the production in Togliatti and Izhevsk.

Regarding the lineup, we have already disclosed that we will already be launching a Vesta station wagon in H2 2017. This is already on track. I cannot disclose everything, but we also said is that within the 10 years to come, we will launch eight new models and do eight separate facelifts. This is a very significant plan. So, at the end of 2026, the whole LADA lineup will be totally renewed. That will be to address the Russian market, which itself is moving with demand, shifting from sedans to crossovers and SUVs. It will also address export opportunities that we put in the plan.

But, in addition to this, we will for sure keep investing heavily in the plant in Togliatti. You know it is 50 years old in 2016, so in 2026 it will be 60. It means we also need to modernize the plant to make sure that working, safety, and environmental conditions, and, of course, the productivity conditions are there.

BRAND IS KEY

Given the quality of the product is key, what about the brand image?

The product is key, and the brand is also key. Brand image, what we call a brand platform, is a very important challenge for us. We are working on it. We have KPIs by third-party market survey companies providing data to us, so we know that we are still far from Western companies like Renault, Hyundai, and KIA in terms of brand image. We have set up a roadmap of targets we would like to get close to.

Will you expand on this prospective brand platform?

The brand platform will give features of the brand we want to promote like ‘good value for money’, ‘robust’, and ‘fitted to Russian conditions’. But this is too early to tell you, because it is not finalized yet. We are going to do it before the end of 2016.

Once this is done, for sure the new vehicles will support our brand image. But we also have to work with the dealership network. Today, about 10% of our dealers are at the right level, but the others need to invest and improve.

Of course, we have to work on communication. All messages we need to convey must be in line with the brand platform. So, at the end of the day, the customers should believe that, when buying a LADA Vesta, it is at least not worse but as good as Ford Focus or VW Polo. This is, for the moment, a kind of challenge. But we believe we can do it within the years to come.

Also, we want to regain market shares in export markets, which is also related to the brand image.

How are you going to market LADAs abroad given the brand image looks to be even worse than in Russia? What are your export plans based on?

I cannot agree. For example, I, a French citizen, can tell you that LADA’s image in the 1970s, 1980s was not too bad. Especially for LADA Niva, which was perceived as a very good value for quality vehicle to go off-road. You will probaby be surprised to know that the largest export market today for LADA 4x4s is Germany. So it is a kind of iconic vehicle, and we need to build up on the image for export markets.

But, of course, to achieve this, we have to strongly improve the brand image. However, I can tell you that it’s possible from my experience in Romania at Dacia. This is a much smaller country, but we got the same situation with the brand, which was 80% of the market like LADA’s 70% 15 years ago. Then, after the Romanian revolution in 1989, the Dacia market share went down like crazy. However, due to the new cars we launched, like the Logan, the Duster, and the full retrofit of dealerships, nowadays Dacia’s market share is 33%. The brand image is number two in the country behind VW, ahead of Renault. And Romanian citizens are very proud of their domestic brand. Because it’s a really good value for money. They can also see the car is being exported in Western Europe.

The game is really to achieve the same with LADA so that Russian citizens also be proud of the new LADA. The LADA is keeping the DNA of older good times but also showing up-to-date cars, up-to-date dealerships, up-to-date communications, and also significant exports.

What export markets are you targeting?

This may not be so much Europe because of regulation and, let’s say, extreme competition. Of course, it is CIS countries, and we believe that we will find new export countries in other regions of the world. In this respect, we look at the Middle East, Africa, and Central and South America. We may consider some collaboration with Alliance Renault-Nissan for exports also.

CHALLENGED BY Industry 4.0

Speaking of a longer-term perspective for AVTOVAZ, I have to put you in the context of the Fourth Industrial Revolution, or Industry 4.0. It is going to be a huge challenge to the whole global automotive industry. Car sharing, electric, AI-guided vehicles, and other services are quickly gaining traction and market share, so only efficient, digital, technologically well-fitted and R&D-capable players will survive. Is AVTOVAZ preparing for the Industry 4.0 challenge?

Actually, there are many things behind Industry 4.0. We are starting from design of a car, which is totally digital and computerized today. Now, the manufacturing itself will increasingly be digitally controlled. On the distribution side, an increasing number of our customers are now buying the cars by Internet. And when in the car, new LADAs are now fitted with the Era-Glonass accident emergency response system, which opens a door to web-connected services like LADA Connect. So engineering, manufacturing, and usage of a car, and the car itself will become digitalized. And, of course, we have to be prepared for this.

Regarding your point on car sharing, it is not yet a clear trend in Russia today and even in other markets. I know this very well, because even in Paris the car-sharing service called Autolib has some limits. It is not that easy for such companies to operate. So it may come one day, especially in large cities where there are some parking issues, but it will take some time.

But what about the mental shift that is already there? Thus, for example, how are you going to persuade young people to buy and own a car instead of sharing it?

Frankly speaking, we have to separate large cities from the rest of the country. I believe the latter will remain as it is. I mean the full ownership, because you need a car to organize your work, your family, and so on. Let’s say medium and small cities will be more or less sticking to the same pattern. But for the large cities, it is true, because such issues as traffic congestion or serious lack of parking space will likely to remain incremental. Then, it is more interesting from a user’s view point to have a 60-70% utilization of a car instead of five percent to 10%, which is the case today, as we use a car mostly to move from home to work and back. This is obviously a kind of limited utilization of a vehicle.

However, we have to think about the digital systems behind infrastructure in order to put this new Industry 4.0 in place. Yes, it may also be linked to electric vehicles, which will come one day. But the question is how quickly this will really happen. So, even in my native country, I see possible trends, but it will take time for them to gain a really strong foothold.

Is there any plan to invest tangibly in increasing your in-house engineering, R&D competences and capabilities, as they are crucial in addressing the Industry 4.0 challenge?

A quick answer is yes. Over the next three years, we will be recruiting 250 engineers, which is already decided. And most of these people will be related to new technologies. So it is going to touch the product, such as LADA Connect. There will be many evolutions of the system. It will also embrace manufacturing, including the installation of paper-less processes in the plant.

For the sake of this, we are looking for young people with good vision, deeply connected guys. And for sure we will need people skilled in communication technologies, including those with strong capabilities in social media marketing, which we don’t have today. We will probably also recruit people in the mobile telephone and computer industries. We know it is a changing world, and we are preparing for it.

And our parent companies Renault and Nissan are doing the same. Its starts with connected vehicles, and then it will end with maybe one day even the autonomous vehicles.

Are the Alliance members going to undertake a kind of concerted action on this Industry 4.0 challenge? How deeply involved are Renault and Nissan in the technological uplift effort of AVTOVAZ and probably vice-versa?

On the technical side, increased Renault involvement in AVTOVAZ is already in place, and it has opened the door for more cooperation and synchronization in R&D and technical developments. For sure there are some technological breaks that we will take from the Alliance as they are. But the Alliance can also be interested in our engineering and developing cheap, quick, and efficient solutions for, let’s say, a budget or entry-level car segment. An example for it is what we did with Era-Glonass and are doing with LADA Connect. And the Alliance has invested in the good skills of Russian engineers to develop this kind of system. I have no doubt that more and more significant exchanges with Renault and also Nissan partners will be there.

We are also considering people exchange with Renault. I mean sending people from Renault to AVTOVAZ and vice versa in order to develop links to get them much closer than they are. Linked to this, we are going to start a huge English training program at the AVTOVAZ University so that everybody can capture the right level of English language.

For sure this will lay a good base for AVTOVAZ as an integral part of the Alliance to be prepared for challenges of the longer-term future. But, as I said before, at the moment, we have to cope with the shorter-term market trends. Thus, we have our 2026 plan, which is aiming at keeping at least 20% market share in Russia, even though the market itself will change a lot. I am sure we are in a very good position to fulfill this.

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