Renault Surprises Everyone and Wins AvtoVAZ Stake

By Brendan Moore

12.10.2007

Tolyatti, Russia was the place where Renault and Russian Technologies, the parent company of AvtoVAZ, signed an agreement a couple of days ago for Renault to purchase 25% of AvtoVAZ for an estimated $1.36 billion USD.

Just about everyone was surprised that Renault beat out the other heavyweight bidders for the 25% stake in AvtoVAZ, the maker of Lada. I count myself in that number. I thought it would go to Magna International or General Motors, frankly.

Now that the dust has settled, it seems fairly obvious that it wasn’t just about money for Russian Technologies and AvtoVAZ. The negotiations between Renault and AvtoVAZ have been going on for a little over two years, which is the longest time period any of the bidders put in, and the terms of a potential agreement changed many times. And it certainly could not have hurt that Renault finally promised to bring back the Lada brand, once the pride of Russia, with wonderful, modern cars. After all, Russian Technologies is state-owned and “The State” usually does what President Vladimir Putin tells it to do these days, and Mr. Putin is very, very interested in promoting Russian nationalism.

2006 Lada 110

And you know something, the warm personal relationship that exists between the aforementioned Mr. Putin and new French premier Nicolas Sarkozy probably helped as well. October saw the recently elected Sarkozy’s arrival in Moscow, where he called Putin “dear Vladimir” and stated with a smile that France wanted to be Russia’s “privileged partner.” Sarkozy was also virtually the only European leader who congratulated Putin on United Russia’s landslide victory in the Dec. 2 State Duma elections.

From Anna Smolchenko at The Moscow Times:

On Saturday, Renault president and CEO Carlos Ghosn and Sergei Chemezov, head of new state holding Russian Technologies, which includes AvtoVAZ, signed a memorandum of understanding in Tolyatti, agreeing to help revive the Lada brand and share technological expertise.

Renault beat out a number of competitors, and the move came as a surprise as many analysts expected companies like Italy’s Fiat or Canadian car parts giant Magna to be the front-runners.

Renault’s negotiations with AvtoVAZ lasted the longest of all the bidders and the conditions of the deal changed repeatedly, said one industry source familiar with the negotiations, who spoke on condition of anonymity because he did not have permission to discuss the deal with the media. That Renault finally emerged the winner may also be a sign that lobbying by French President Nicolas Sarkozy with President Vladimir Putin might have helped the French firm get the inside track.

“A major task, which we’ve been working on for two years, since Rosoboronexport assumed control of AvtoVAZ, is finally completed,” Chemezov said, Interfax reported Friday. “We have now decided with which company we are going to develop the auto industry.”

In 2005, the Kremlin handed officials at state arms trader Rosoboronexport, which has since been folded into Russian Technologies, the job of turning the company around. Initially, the company said cooperation with foreign partners would be limited to parts and equipment, but it later realized that AvtoVAZ, with its 40-year-old equipment and outdated designs, could not make it on its own.

The companies declined over the weekend to specify the price Renault will pay for the 25 percent stake, but Chemezov said the French carmaker beat out U.S. General Motors, Italy’s Fiat, Canada’s Magna and Germany’s Volkswagen by offering a “fair price, close to market price” and technological expertise.

Renault chief financial officer Thierry Moulonguet said in a conference call Saturday that the market value of AvtoVAZ was $5.7 billion and that his company paid “reasonable multiples” for the stake, Reuters reported. Bloomberg estimated the stake at $1.36 billion, based on the carmaker’s market value of $5.44 billion Saturday evening.

Russian Technologies will form a joint venture with Renault to own 50 percent of AvtoVAZ, Renault said in a statement.

Under the agreement, the companies will share manufacturing and marketing expertise and technology, carry out exchanges of executives and cooperate on engines and gearboxes to equip cars made by both companies, the statement said.

The French carmaker stressed that it would help develop the Lada brand “while respecting its identity, in order to maintain its leadership.”

The intention to boost the Lada brand, which boasts clunky small-car designs it inherited from Fiat 40 years ago, appears to be a sharp turnaround from the start of the talks, when Renault initially proposed to use AvtoVAZ facilities to produce vehicles under the Renault brand, the industry source said. AvtoVAZ initially termed the conditions “unacceptable,” but later agreed, the source said last week.

So what does this mean, really? Well, it means that Renault has stolen a march on every other automaker in Russia. And this is important because Russia’s auto market is just blazing hot, with huge sales increases happening every year. The demographics of Russia combined with ever-rising incomes fueled by the energy sector promise tremendous market growth for years to come. Russia should easily overtake Germany in terms of vehicle sales in a few years and hit 4 million units annually by 2015. Russia is a very desirable market for any auto manufacturer to be in, and Renault has just gotten the upper hand in it. It is worth remembering at this point that Renault has Nissan as a global partner, so it’s a beautiful thing for Nissan sales as well. Renault’s Ghosn essentially said as much when he proclaimed after the signing that AvtoVAZ would be building both Renaults and Nissans at some point.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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7 Comments

  1. I don’t think it’s going to be that big an advantage. Everyone has the ability to increase capacity in Russia, and they will. Now, if Russian authorities make it more difficult for other companies to expand or to sell their products, that’s a different story.

  2. Also, I wonder what could be Renault’s next move? We know then Ghosn still interested for a US automaker (also mentionned at Autosavant), let’s see between GM, Ford or Chrysler, now who’ll be the “lucky” winner (although then I already mentionned Chrysler, something unexpected could happen).

    On a off-topic side, I spotted a French article from late Setptember who mentionned an idea from Paul Betts, editorialist for the Financial Times of a “alliance” between
    Peugeot-Citroen and Renault will his idea could work better then the idea of “3rd partner”?

  3. Maybe Fiat and GM should have sent Putin a Christmas card or a gift basket.

  4. the warm personal relationship that exists between the aforementioned Mr. Putin and new French premier Nicolas Sarkozy probably helped as well

    This is the understatement of the year. This deal was approved at the highest level of government in Russia and that means Putin.

  5. Definitely, definitely see the hand of Putin in this all the way. It’s right up his political alley and fits in nicely with Russia reclaiming its past grandeur.

  6. So Renault-Nissan gets, what, 40% of the Russian market handed to them with this deal? Pretty sweet.

  7. I’m reall kind of surprised Fiat didn’t get this deal. They sold their old tooling to the former Soviet states for years and have a good relationship with Russia.

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