#18 - JRL 7027
BBC
21 January 2003
Falling out of love with the Lada
By James Schofield
In Moscow

From the boulevards of Moscow to the highways of Eastern Siberia, there is one breed of car that rules the road.

It may not boast the sleek curves of an Alfa Romeo or the smooth traction of a Volvo estate, but a combination of simple engineering and Soviet grit has made it Russia's car of choice.

The classic Zhiguli - better known in Europe as the much maligned Lada - still vastly outnumbers other cars across the country.

Russian car giant Avtovaz produces around 750,000 vehicles each year, and access to servicing and spare parts is widely available.

But recently the Lada's unassailable lead has taken a knock, with falling sales and a rise in costs.

Anti-crisis

Chased by a growing tide of second-hand foreign imports in its slipstream, the Lada faces a worrying future.

In recent months, a new "anti-crisis" production schedule has been imposed at the gigantic Togliatti car plant in Southern Russia, which will slash the number of vehicles produced by 44%.

The cuts are a warning sign for both the car industry and Russian manufacturing of the need to improve the quality of production or face losing out to foreign imports.

Russian cars have always been known for their low-quality and clunky design, but proved a great seller because they were cheap.

A basic model used to cost the equivalent of just £1,700. But over the past 20 months, costs have rocketed by 30% and prices almost doubled.

Consumers have voted with their wallets and demand for similarly priced second-hand cars from abroad has soared.

"The quality of Russian cars is lower, that's for sure," says Boris Novochesky, who has just bought a new Russian car at the Lada Favorit showroom in Moscow.

"If there was no problem with spare parts I would prefer to buy a foreign car."

End of a heyday

Russian manufacturers have enjoyed four years of strong growth since the 1998 devaluation of the rouble priced imported goods out of the market.

But the benefits of devaluation have all but disappeared and manufacturers are now facing tough competition from abroad once again.

"It is clear that the free lunch is over," says Peter Westin, chief economist at Aton Brokerage in Moscow.

"Growth now has to be generated from improved production as well as structural and institutional reforms but we are not likely to see the benefits of those for a couple of years."

Time to invest

Compared with its peers, Lada-maker Avtovaz is well-placed to handle the downturn.

It spent $83m on research and development last year, the highest in the sector.

It also recently opened a joint venture with US automaker General Motors which should help transfer skills and improve quality.

Furthermore the glut of foreign models is thought to be a temporary problem - the result of people rushing to buy European cars in advance of stiff protective tariffs imposed by the government last autumn.

But there's no room for complacency. Wages in Russia grew by a hefty 14% over the past year and inflation is expected to top 15% this year, pushing the cost of domestic goods still higher.

"Although Avtovaz has taken some steps to address the problems it can't rest easy," says Ovanes Oganisian, an analyst at Renaissance Capital in Moscow.

"Quality levels have stayed the same while the price of cars has shot up. They need to do much more to improve production."

Quality concerns

As prices converge, consumers are set to focus more on quality when choosing what to buy.

Those manufacturers that have failed to take advantage of the good years to invest in production, will find it increasingly difficult to compete.

"Very few companies have actually improved quality over the last few years," says Peter Westin.

"About 80% of companies have not been able to make much needed investments due to lack of financing."

Trying to turn around the manufacturing industry will take time and a lot of money.

And with negotiations to join the World Trade Organisation looming on the horizon, competition is only likely to get tougher.

The appetite for second-hand imports is a wake-up call showing consumers will punish homegrown producers that fail to keep up.