AvtoVAZ board chairman Vladimir Kadannikov talks to Vladimir Kozlov about the company’s partnership with GM, exports and the industry.

Vladimir Kadannikov is chairman of the board of Russia's leading car manufacturer, AvtoVAZ. He joined the company in 1967 and was appointed chairman of the board in 1998. For eight months in 1996, he was first deputy prime minister of the Russian government, after which he returned to his previous position.

Kadannikov talked to The Russia Journal about exporting AvtoVAZ cars to the international market, the company's newly signed deal with the U.S. automotive giant General Motors and the prospects of the Russian automotive industry.

The Russia Journal: This year, AvtoVAZ is planning to export about 130,000 cars. What new countries will be added to the traditional buyers of your cars, such as Germany, France or Hungary?

Vladimir Kadannikov: We recently completed negotiations [on exports of cars] with South Africa. Now, our cars are already selling and selling well in that country, but it took us quite a long time to enter that market. The next country will be Uruguay, where we're planning to launch a car assembly plant.

RJ: How many cars are you planning to annually produce in Uruguay?

VK: About 10,000 for the initial period.

RJ: What about the C.I.S.?

VK: As far as C.I.S states are concerned, we're planning to invest in the construction of a car assembly plant in Kazakstan. The Kazak government promised to support the project.

RJ: Some news media have recently quoted you as saying that an automotive holding company could be formed with the participation of AvtoVAZ.

VK: I never said that. We're not supporters of that idea and have never considered any holding-company project. The formation of a holding company would mean [a merger of several companies into] one legal entity and a redivision of their ownership structures. We've never proposed a holding company but we've always suggested that an association of car producers be formed. Technical cooperation and better contacts with suppliers would be a basis for such an association.

RJ: So, you're talking about closer cooperation with suppliers?

VK: Not only suppliers, but also other car producers. We have a research and development center, which is arguably the biggest in Europe, and it could annually develop a new car family. We're ready to develop car families for other manufacturers because we understand that today most cars produced in Russia belong to the same class of car [and there is a lack of other classes of car]. We're ready to do that, but for adequate fees, not on altruistic grounds.

RJ: AvtoVAZ recently signed a joint-venture deal with GM to mass produce an updated version of the Niva sports utility car. But what's the situation with another model developed by AvtoVAZ, the Kalina?

VK: According to our plans, mass production of the Kalina should begin in 2004. But we still lack the financial resources to launch that vehicle. In technical terms, this date is realistic, and we're continuing to produce the necessary equipment. But of the $850 million we need to launch the new model, we only have $350 million. So, we need to attract another $500 million in investment. Taking a loan from a Russian bank at the current interest rate would not work for a long-term project. So, we're looking for other ways to resolve this problem.

RJ: Is it possible that another joint venture will be formed to produce the Kalina?

VK: So far, there has been no offer of this kind, although it could be made, and we would consider it.

RJ: How important was the AvtoVAZ-GM deal for your company and for the overall automotive industry in this country?

VK: Our partners from GM say that they are interested in strategic cooperation with our company. Thus, the joint venture deal is only the first step toward full-fledged cooperation with GM. The signing of an agreement on technical cooperation, which is expected in the nearest future, would be the next step.

Under the agreement, there will be a professional exchange between the two companies' engineers. We have already begun some research and development work for GM, which will be stepped up. The next step will be mass production by the joint venture of a car developed by GM, after which a car jointly developed by the two companies would be manufactured. At the same time, we're considering production of a jointly developed car engine. But of these plans, only the technical-cooperation agreement has been worked out in detail so far.

RJ: Do you think further development of the Russian automotive industry is possible only in cooperation with foreign manufacturers?

VK: The globalization processes that are currently under way in the world could result in only five or six transnational [automotive] companies being left by, say, 2006. They would produce millions of cars based on the same chassis. And Russia cannot remain isolated from these processes for a long time.

Our strategic cooperation with GM is a step in that direction. But Russia can enter the globalization processes on the automotive market more quickly by producing car parts. Currently, that would be profitable because of low labor costs here. I expect that after GM's entering this market, its suppliers will also enter it. They will bring investment if AvtoVAZ and GM guarantee that we will buy their products. In that case, the scale of production would be substantial, resulting in economy of scale.

RJ: What are the chances of the international automotive giants who are now setting up production facilities in Russia succeeding in this market?

VK: If we talk about just finalizing partially assembled cars, I think their chances are zero. If they make cars here, with the proportion of domestically made components standing at least 50 percent, then their chances are much better. The annual demand for cars in Russia is bigger than supply – by about 300,000 vehicles – and the gap is likely to widen in the next few years.