AvtoVAZ' dominance faces a serious threat as foreign car plants spring up in Russia

IT MARKS THE END OF AN ERA— and has sparked intense specula­tion about the future of one of Rus­sia's most important companies. On Oct. 27, Vladimir Kadannikov, 64, chairman of Russian carmaker AvtoVAZ, retired after leading the company for 17 years. His departure comes at a time when Russia's car indus­try is struggling to compete against a wave of foreign-made cars.

Nothing symbolizes the challenges facing the industry more than AvtoVAZ. With 145 kilometers of production lines, 100, 000 workers, and production of around 700, 000 Lada cars a year—some 70% of all Russian car production—its Toliatti-based plant in southern Russia is one of the largest car factories in the world. Despite their reputation for some­what shaky reliability, Ladas are still pop­ular in Russia, where they retail for as little as $4, 000. AvtoVAZ retains a 40% market share in its home market, and last year the company turned a profit of $147 million on revenues of $5.57 billion.

The bad news is that unless the compa­ny can somehow modernize to face an influx of foreign competition, Avto­VAZ will find it ever harder to stay afloat. " If AvtoVAZ fails to attract a foreign partner who will bring new technology or a new model, I don't see a future for this company, " says Natalia Zagvozdina, analyst at Moscow invest­ment bank Renais­sance Capital. Despite booming demand for cars, pro­duction of Russian-designed models this year is expected to slump, thanks to Russ­ian consumers' growing love affair with foreign designs. According to Moscow investment bank United Finan­cial Group, AvtoVAZ' production will drop 4% this year, with profits falling 34%. In years to come, AvtoVAZ is set to face ever greater competition from for­eign producers, who are increasingly set­ting up manufacturing plants within Russia itself. Since 2002, Ford, General Motors, and Renault have established facto­ries in Russia, and Toyota, Volkswagen, and DaimlerChrysler are expected to follow in the coming months.

The Russian gov­ernment is keen to encourage them. After years of protecting the local car indus­try through prohibi­tive tariffs, it has recently slashed the tariff on imported сomponents from be­tween 5% and 10% to between zero and 3%. By 2010 foreign manufacturers are forecast to produce 900, 000 cars in Rus­sia, up from 165, 000 last year.

True, AvtoVAZ is doing its best to fight back. This year saw the launch of the compact Lada Kalina, which includes fea­tures such as antilock brakes, power steering, and air conditioning, all rarities in previous Russian models. AvtoVAZ even built an entirely new factory, equipped with state-of-the-art facilities and employing all new staff to build the Kalina. " Our company is doing every­thing possible to increase the competi­tiveness of our products, " says marketing director Alexander Bredikhin.