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AvtoVAZ mulls in-house production to halt parts monopolies, graft
August 29, 2014 / 5:50 PM / 3 years ago

AvtoVAZ mulls in-house production to halt parts monopolies, graft

TOGLIATTI, Russia, Aug 29 (Reuters) - AvtoVAZ, the Russian carmaker controlled by Renault-Nissan, may bring some parts production in-house as it struggles to get more competitive pricing and stamp out corruption in its local supply chain, senior executives said.

The maker of Lada cars is studying plans to invest in the manufacturing of components including seats and smaller metal body parts currently bought from suppliers, Chief Financial Officer Evgeny Belinin told reporters.

“We have the buildings and in some cases the equipment,” he said. “So it’s not like we’re starting from scratch.”

Under Renault, which bought 25 percent of AvtoVAZ in 2008 and took control this year with Japanese partner Nissan , Lada is rolling out new models in a bid to reverse losses and lift its dwindling share of a Russian market blighted by the Ukraine crisis.

New AvtoVAZ Chief Executive Bo Andersson is seeking to trim purchasing costs by 2 percent this year despite rising inflation, the company said in a presentation on Thursday at its headquarters in Togliatti, east of Moscow.

AvtoVAZ purchasing totals about 140 billion roubles ($3.78 billion) annually, or 56 percent of revenue. Andersson aims to bring in more Renault-Nissan global suppliers and cost benchmarks to make savings.

The company now demands “100-percent cost transparency” from its Russian suppliers, the CEO said in Moscow on Wednesday. “Some of them give it to me, some of them don‘t.”

He added: “The best suppliers are saying, ‘Thank you very much Mr Andersson, we’ll be competitive’, and the worst are saying, ‘We don’t really know if we want to do this’.”

New parts production would be a change of direction for Russia’s largest vehicle manufacturer, which made many of its own components in Soviet times but has since largely halted these activities under successive restructurings.

RIGGED BIDDING

Soon after buying into AvtoVAZ, Renault had vowed to clean up the murky Togliatti supplier network, where organised crime was rife - if more discreet than in its 1990s heyday, which saw gang warfare and shootings in and around the sprawling plant.

Today the situation is much improved, Belinin said, but some 15-20 percent of purchasing is still not competitively tendered. Even when it is, the bidding is sometimes rigged by contenders who turn out to be acting in concert or under common ownership.

“If you ask the company auditor for a brief check of how a tender is done, everything looks OK,” Belinin said.

“You have a few bids, everything is fine, but when you go deeper you understand that all three bidders belong to one man.”

Besides such irregularities, executives said, other major contracts are priced uncompetitively where only one supplier exists, leading AvtoVAZ to pay as much as double the international going rate for key parts.

Monopolistic relationships allow suppliers to use the threat of disruption as a bargaining chip to win better terms when contracts are renegotiated, said Fujui Hosaka, seconded from Nissan as an adviser.

“If we’re missing the parts we cannot build the cars,” Hosaka said. “Those suppliers will use this tool as a game. So we must get rid of this.”

The problems are most acute on the older assembly lines, Hosaka said, which make models including the Lada Kalina and the On-Do sedan recently launched for Nissan’s Datsun brand. The nearby line modernised by Renault-Nissan is less affected.

With financial goals under pressure, however, some insiders are sceptical about the scope for in-house parts manufacturing. “I think it would be a tall order and no small investment,” said another alliance executive who asked not to be identified.

If the Russian market slumps below 2 million annual car registrations, AvtoVAZ may have to review up to a third of its 2.2 billion euros of planned investments over the next three years, CFO Belinin acknowledged.

Forecaster LMC Automotive currently expects the market to shrink 16 percent to 2.19 million car registrations this year.

1 US dollar = 0.7608 euro Editing by Pravin Char

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