Suave Lada out to woo Russians
Olga Sorokina, a child psychologist from a city near Moscow, doesn't want to own a Lada any more and, unlike past generations of Russians, she has plenty of options.
After having to fix "almost everything" from the transmission to the mirrors on her 2006 Samara sedan, the 26-year-old from Krasnogorsk says she is considering an Opel Corsa from General Motors.
Deepening co-operation between Lada's parent, AvtoVAZ, and France's Renault hasn't won her over.
"I am a bit sceptical," says Sorokina. She would consider a car made by the Togliatti-based manufacturer only after "positive feedback", even if it's sold as a Renault, she says.
Lada, which has been the dominant brand in Russia for decades, is under pressure to defend its lead as major car makers push into the market. With Ford and Volkswagen expanding and AvtoVAZ having phased out models such as the 2105, which dates from Leonid Brezhnev's era, Lada's share of Russian car sales is projected to drop to 20 per cent next year from 29 per cent in 2010, according to IHS Automotive data.
The wandering loyalties of Russian consumers threaten Renault's growth plans, which rely on control of AvtoVAZ to dominate a market poised to become Europe's largest by 2014.
Automobile demand in the country will probably surpass Germany as incomes rise, making car ownership more affordable.
Fewer than two out of every 100 Russians bought a car last year, about half the rate in Germany.
"It's just about the only white spot on the world map that's left for Renault to grow," says Erich Hauser, an analyst with Credit Suisse in London.
"They're buying the biggest guy in the room, but there are a lot of uncertainties in the deal. In the meantime, competition isn't getting any easier."
Renault is seeking to expand in emerging markets, with European car demand set to decline for the fifth straight year in 2012. In the first quarter, revenue fell 9 per cent to € 9.54 billion (NZ$15b), while sales at Volkswagen, which is expanding in China, the United States and Latin America, surged 26 per cent to € 47.3b (NZ$474.5b).
Renault and its alliance partner, Nissan, signed a tentative agreement with Russian Technologies Corp on May 3 to invest €585m (NZ$922m) in a joint venture that will own 74.5 per cent of AvtoVAZ. The deal, which follows Renault's purchase of a 25 per cent stake in the Russian car maker in 2008, is targeted for completion by 2014.
Ford, which has annual capacity to produce 125,000 Focus and Mondeo vehicles at its factory in St Petersburg, last year created a joint venture with Sollers, Russia's third-largest car maker, that will assemble Explorer sport-utility vehicles and other models.
Volkswagen, Europe's biggest car maker, opened a plant in Kaluga, about 170 kilometres southwest of Moscow, in 2007 to produce 150,000 cars a year.
The Wolfsburg, Germany-based car maker agreed last year to build as many as 110,000 Volkswagen and Skoda vehicles annually with billionaire Oleg Deripaska's GAZ.
The deal follows GAZ's agreement to build Chevrolet Aveos for General Motors, which has a factory in St Petersburg and partners with AvtoVAZ to make the Chevrolet Niva.
AvtoVAZ was set up with the help of Fiat in the 1960s, as the Soviet Union sought to create its own "people's car" for the Eastern Bloc.
In its heyday, East German buyers had to wait as long as 17 years to get a Lada. After the dissolution of the Soviet Union in 1991, the company survived with the help of government loans and by trading finished cars for parts from suppliers or for food and clothing for workers.
Lada, which is replacing Soviet-era vehicles, such as the 2105 and 2104, with new models, has stumbled in its efforts to overhaul its product lineup.
Last month, a fault with the fuel system caused it to recall 24,000 Granta sedans, representing almost the entire production run of its first new model since 2007. The defect also affected 70,000 Kalina compacts.
Lada's sales are forecast to decline 2 per cent to 566,900 vehicles this year, according to IHS.
Renault believes it can lure customers back as reliability improves and more new vehicles hit the market.
"You don't buy a big brand in order to kill it," says Bruno Ancelin, Renault's managing director for Russia.
"If you ask Russian customers if they want to buy a Lada today, they would probably say no, because of quality issues. But if you ask again if they would be ready to buy the same car with an improved quality, 90 per cent of them say yes. It's a brand they're very attached to, because of a strong nationalist feeling."
For customers such as Piotr Fomin, 50, of Voronezh, no other car makers are worth considering. The low cost of the vehicles and a service network that blankets the country make Lada "the most reliable vehicle for Russia".
AvtoVAZ plans to maintain its market share by improving quality, expanding the lineup and keeping prices and service costs low by using locally made parts, chief executive officer Igor Komarov says. The company will also rely on having more than twice as many sales outlets as Chevrolet and Hyundai.
Backed by models such as the Granta, which starts at 229,000 roubles (NZ$9030), compared with 400,000 roubles (NZ$15,780) for the Hyundai Solaris, the group intends to boost the combined market share of Lada, Renault and Nissan to 40 per cent by 2015 from 33 per cent last year. IHS projects Lada's market share recovering to 21 per cent in 2014. The Russian car market is forecast to rise 28 per cent to 3.4 million vehicles in 2014, according to the country's industry ministry.
"Renault-Nissan and AvtoVAZ are doing the right thing, keeping the Lada brand in the low-cost segment," says Vladimir Bespalov, an analyst with VTB Capital in Moscow. "That's their major competitive advantage."
AvtoVAZ also has high-profile supporters. President Vladimir Putin attended a ceremony in April to introduce the Lada Largus, the brand's first model based on Renault technology.
In August 2010, he drove a yellow Kalina Sport 2165km to inspect a new road in Russia's Far East. His regime lent AvtoVAZ 75 billion roubles (NZ$2.96b) during the financial crisis in 2009.
"We have excellent relationships with Russian authorities," says Ancelin.
"I sleep perfectly well at night."