26.03.09

Far from all flagships of the domestic automotive industry will sail safely across the troubled seas of the ongoing crisis. Some, like AvtoVAZ, will get a lifeline from the government, while others, such as GAZ, will have to brace for the worse.

AvtoVAZ has persuaded the state it deserves special treatment in its current disastrous position. According to the company's president, Boris Alyoshin, the concern's debt to banks and lenders is 44 billion rubles, and last year's net losses, 6.2 billion rubles.

The government will possibly agree to give money to the carmaker - for instance, by acquiring an extra share issue. At a meeting of the government commission for maintaining economic stability under deputy prime minister Igor Shuvalov on Tuesday several support options were considered, such as a credit against the security of state guarantees, or an extra share issue.

"A decision in favor of state support has not been made yet. It is to be expected within two weeks' time," Alyoshin said.

Option one, he argues, is no good for AvtoVAZ - the maximum sum of government support it may count on is ten billion rubles, while the company needs 26 billion. The net effect of the commission's meeting, he believes, is the government's awareness AvtoVAZ needs an exclusive support program, because the standard option of rescheduling the debt against state guarantees will not help.

Also, AvtoVAZ hopes for assistance from another shareholder - Renault. 'The Russian bank and the French bank may agree to offer a seven year postponement," Alyoshin said.

AvtoVAZ is one of the largest car manufacturers in Eastern Europe. The state corporation Rostekhnologii, the French concern Renault, and the Troika Dialog investment company control 25 percent plus one share each. In 2008 the enterprise' s car sales fell by six percent on the year. It sold 728,000 vehicles. This year the main assembly line of AvtoVAZ was stopped several times - due to overproduction and problems with getting parts and components from the SOK group.

Health and Social Development Minister Tatyana Golikova last week said the employment situation at AvtoVAZ was grave. According to her sources, although the plant resumed operation in February, 12,500 workers remain idle, and another 3,200 are about to be dismissed.

As far as AvtoVAZ is concerned, the state looks determined to try to keep it afloat to the bitter end, but Russia's second largest automotive giant, GAZ, may not survive the crisis, experts at the investment company Troika Dialog believe, according the company's report published by DP money.ru.

"GAZ is experiencing the worst liquidity crisis over the past ten years, and in the end it may go insolvent," Troika Dailog says in its analytical survey. The investment company withdraws its recommendation to keep GAZ shares.

GAZ has declared default on ruble-denominated bonds and is in talks with banks and bondholders on rescheduling its financial liabilities. The manufacturer has no loose funds to service its 1.24 billion dollar debt. Most of the liabilities are short-term ones.

Over a period of less than twelve months GAZ shares lost 98 percent of their value. In 2007 sales of commercial vehicles accounted for about a third of the company's revenues. This year sales in this segment have dwindled by 19 percent from that of a year ago, and in January 2009, by 75 percent. Troika Dialog suspects that at the end of 2009 sales will be down by 35 percent. A return to the 2007 level may happen no earlier than in several years' time. Or never.

The production of cars will most probably be canceled, the investment company says. In 2008 the sales of older models of the Volga sedan slumped by 47 percent, and in 2009 they will plummet by another 60 percent. The new model, Volga Siber, has failed to rise to the expectations. Instead of the expected 20,000 a tiny several hundred were sold last year. Most probably, this vehicle will stop to be produced already this year.

Britain's carmaker LDV Maxus, which belongs to GAZ, will most probably be sold, analysts say. However, in that case GAZ will have no chance of offering any new product to replace the quickly aging Gazelle family. In the meantime, it is in this segment of the market where the automobile maker should look for rescue.

GAZ is Russia's sole independent automotive producer having no foreign partners. The moment for establishing such a partnership has been missed. All world producers of motor vehicles are in trouble today.

On the whole, the sales of cars and light commercial vehicles in Russia fell by 36 percent in January-February 2009 as compared with the same period last year - to 252,314 pieces, the Autonews.ru website quotes the Automobile Producers Committee of the Association of European Business as saying.

The top five best selling makes in January-February were AvtoVAZ - 58,454 pieces (less 37 percent), GM Group - 29,357 vehicles (less 40 percent), Ford Group - 28,101 vehicles (less 21 percent) Volkswagen Group - less 16,236 percent, and Hyundai - 15,139 vehicles (less 49 percent).

The government has been doing its best to keep the national automobile industry afloat. It has raised import taxes on used foreign makes and volunteered to fund financial incentives to those who buy Russia-made cars. The program for subsidizing the buyers of Russian cars is applicable to vehicles in the price segment of under 350,000 rubles (roughly 10,000 dollars).

The buyer who takes a loan is expected to pay an initial contribution of 30 percent of the car's price. The rest is to be paid out by installments over a three-year period. On the condition the CBR's discount rate is 13 percent the government will compensate for up to 42,460 rubles under each purchase contract.

On the list of cars to which the state subsidies apply are the most mass-produced models in Russia - 30 titles all in all from AvtoVAZ, UAZ, the joint enterprise of the Renault concern and the Moscow city's government Avtoframos, the Izhevsk car plant, the Ford plant in Vsevolzhsk, and Volkswagen's plant in the Kaluga Region. According to the Ministry of Industry and Trade, estimated car sales this year will total 150,000 vehicles. In that case the government will spend 6.4 billion rubles on subsidies.

And still, all of the government's attempts to persuade fellow citizens to turn their backs on foreign cars and opt for domestic manufacturers' products have failed. According to an opinion poll by the national public opinion studies center VCIOM, ever fewer people prefer Russian cars to foreign made ones, or foreign makes assembled inside Russia.

Whereas in 2006, when the pollster conducted a similar poll, most respondents (54 percent) said they would buy a Russian car, while 34 percent preferred foreign makes, this year the picture is very different. Of those who plan to buy a car within a year or two 49 percent said they would have a foreign car, and 22 percent remained committed to domestic products.

VCIOM specialists say that even in the low-income brackets group - those who regard their material status as "bad" or "very bad" - potential buyers eager to have a foreign make constitute a plurality - 31 percent.

According to the opinion poll, "the optimal buy" for Russians is a foreign-manufactured used car - 29 percent said they would be prepared to spend on a car 6,000 to 10,000 dollars.

The Russian automobile market is to see a slump - by 30 percent this year according to Industry and Trade Ministry forecasts.

And analysts at the Ernst&Young company predict the most significant fall of the Russian market in the second half of 2009, when the entire model range of 2008 will be sold up.

Read More about Services from Alinga Consulting Group

Source: Itar-Tass