Management Faulted for AvtoVAZ Woes

The Audit Chamber has concluded that AvtoVAZ's previous management is to blame for the plight of the automaker, which began asking for state money in the first months of the crisis and only then began developing a program to cut costs.

Late last year, the Audit Chamber concluded its check into how effectively AvtoVAZ used 25 billion rubles ($850 million) in state aid, which the plant received in June through one of its largest shareholders, Russian Technologies.

Within a few weeks, the money was spent on payments to banks and suppliers. The check into AvtoVAZ's work for 2008 and 2009 was conducted in October and November, and the Audit Chamber's board approved the report, a copy of which was obtained by Vedomosti, on Dec. 18.

AvtoVAZ only saw its sales start to fall in November 2008. But a month earlier, on Oct. 11, 2008, then-AvtoVAZ president Boris Alyoshin and the chairman of its board of directors, Russian Technologies chief Sergei Chemezov, wrote to Prime Minister Vladimir Putin requesting 26 billion rubles, according to the report.

That "corresponds to the company's two-month turnover," the auditors wrote. The money was meant to "clear overdue payments to suppliers, redeem bonds and promissory notes" and also to "partially cover losses of 1 billion rubles from downtime in January and February 2009."

On March 30, 2008, the government agreed to provide 25 billion rubles in state aid to AvtoVAZ. A day later, the company's board approved an anti-crisis plan, the report said. The document covered three main priorities: regaining liquidity, becoming profitable and developing a strategy for AvtoVAZ's long-term development.

The state aid would have allowed AvtoVAZ to maintain its "operating capital and funds to develop production, which could have been used to preserve its market share (even as overall demand fell), and also to avoid mass layoffs" by the company and its suppliers, the report said.

At the time, the Industry and Trade Ministry had forecast that the cash injection and general measures to support the auto sector would allow AvtoVAZ to sell an additional 250,000 cars. But that didn't happen, the auditors wrote.

AvtoVAZ management was apparently in no hurry to carry out its anti-crisis measures. They were late to cut back on production, which led to a glut of cars. The surplus in storage rose from 17,000 cars at the start of 2008 to 102,000 at the start of 2009, the report said.

A mistake was also made in choosing the base scenario for AvtoVAZ's 2009 development. In March, the company believed that it would sell 669,000 cars (a 22 percent drop from 2008), but by the end of the year it was clear that sales would drop at least 40 percent below the previous year's level.

The company's need for operating capital rose sharply — by 19 billion rubles in 2008 and by 5.1 billion rubles in the first three quarters of 2009. AvtoVAZ began borrowing to make up the difference, sending its debt from 24.7 billion rubles at the start of 2008 to 62.7 billion rubles as of Oct. 1, 2009 (including the 25 billion rubles in state aid), the Audit Chamber report said.

But the March anti-crisis program turned out to be ineffective. For example, the company sought to partially reduce inventory by stopping the plant in January and August, rather than trying to stimulate sales. The downtime cost AvtoVAZ 7.7 billion rubles, the report said.

The wager on trying to win markets in the Urals, Siberia and the Far East also didn't pay off. AvtoVAZ believed that prohibitive import tariffs on used cars would make residents in those regions more inclined to buy its production. But sales in those regions fell even further in the first three quarters of 2009 than on average — by 51 percent, compared with 44 percent across Russia.

Hopes for more state orders also fell through, with the state ordering 14,059 Lada cars in 2009, down 64 percent from a year earlier; likewise, corporate sales failed to increase (no data were available, the report said).

The inflated sales forecast fouled up AvtoVAZ's other financial indicators. The company's base scenario saw 2009 revenue of 136 billion rubles. After raising prices for Ladas by 8 percent or offering a variable markup to stimulate dealers, the figure would increase to 159 billion rubles, with expenses rising from 151 billion rubles to 154 billion rubles.

In reality, revenue for January through September was just 61 billion rubles, while expenses were 66 billion rubles. The board conceded in September that a number of the proposed anti-crisis measures could not be carried out, including raising prices on cars.

As a result, all of the planned measures were either not fulfilled or did not have any significant effect, and the attempt to return the plant to profitability was a failure, the Audit Chamber report concluded.

AvtoVAZ's long-term development plan is also in question.

The anti-crisis program proposed investments of 115 billion rubles over four years, with its biggest project — costing 24 billion rubles — being the development and launch of a C-Class automobile. The second biggest expenditure — for 13 billion rubles — would be launching production of cars on the RF-90 platform, which AvtoVAZ purchased from Renault.

In July, however, the investment program was reduced to 80 billion rubles, and in September it was cut to 33.9 billion rubles. The money was supposed to come from external sources, which were not identified in the report, the Audit Chamber said. By the end of 2009, almost no investment spending was taking place, it said.

The Audit Chamber also discovered that the license purchased from Renault came with a significant limitation: Even if AvtoVAZ paid to improve the cars produced under the license, the rights to those improvements would belong to the French carmaker.

Spokespeople for AvtoVAZ and Renault were unable to comment on why that was done.

AvtoVAZ started working on its long-term plans too late, only in September 2009, when the company was already in crisis and had received the state aid.

For example, the new management only began working on improving quality in October, even though the number of defects uncovered in the first three months of use was 306 for the Lada Priora and 268 for the Lada Kalina — compared with 20 for the best cars in that class, the report said.

In the fall, the government approved plans to reduce staff at the plant to 72,000, from 94,000.

AvtoVAZ communications director Igor Burenkov and spokespeople for Russian Technologies and Alyoshin declined to comment on the results of the check.

A Finance Ministry official told Vedomosti that the government considered AvtoVAZ's anti-crisis program but that it had virtually no weight in the decision to offer aid. "It was a political decision. The plant just needed to be helped," he said.

Dmitry Peskov, Putin's press secretary, declined to comment on the check in December and he could not be reached for comment Monday.

AvtoVAZ management's biggest mistake was not cutting production, even after sales began to fall in the fourth quarter of 2008, said Yelena Sakhnova, an analyst at VTB Capital. As a result, its warehouses were swamped and its debt to banks and suppliers rose sharply.

She also noted the ruble devaluation in the first quarter of 2009, which management probably thought would give AvtoVAZ a hand up over foreign competitors. But the ruble soon began to strengthen and foreign carmakers were still selling cars imported in 2008 during the first half of 2009, she said.

Sakhnova said AvtoVAZ's second big mistake was poor sales work. The company's dealers began to go bankrupt because they were not receiving enough help, including Inkom-Avto and Eleks-Polyus, which essentially meant AvtoVAZ lost its largest market — Moscow.

If the dealers had survived, AvtoVAZ could have sold another 100,000 Ladas, she said.