AvtoVAZ aims to win back market share to return to profit, CEO Andersson says

Bo Andersson is cutting costs at Lada by reducing management layers and implementing production efficiency measures.
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MOSCOW (Bloomberg) -- AvtoVAZ, Russia's biggest carmaker, plans to return to profit by cutting costs and rolling out new models to claw back market share that has been slipping away from the producer of Lada vehicles since the end of the Soviet Union.

AvtoVAZ has a target of breaking even by the end of this year after cutting jobs and eliminating layers of management, CEO Bo Andersson said today in an interview at the Moscow auto show.

Ending losses is part of an effort to generate operating profit equivalent to 6 percent of revenue by 2016. To reach this goal, AvtoVAZ will upgrade its lineup with vehicles such as the Lada Vesta sedan next year and lower spending by using more parts from partners Renault and Nissan.

"We will make maximum use of the benefits of the alliance," said Andersson, the one-time purchasing chief for General Motors, adding that he's working seven days a week on the turnaround. "We must be much more competitive."

The strategy hinges on Lada regaining customers who have left for rivals as Russia's auto market shrinks.

Andersson said that AvtoVAZ targets 17 percent of auto sales in the country this year. That would mean regaining ground after it accounted for 15.7 percent of Russian deliveries in the first seven months of 2014, down from 16.9 percent a year earlier, as its sales fell 16 percent.

Target lowered

Lada's fading fortunes prompted Renault and Nissan, AvtoVAZ's controlling investors, to scale back Lada's 2016 sales target. Russia's biggest brand is now going for 20 percent of sales, compared with 25 percent previously, Bruno Ancelin, head of Renault's Russian business, said today.

The group still targets lifting its total market share to 40 percent share in two years from 30.4 percent in 2013 as the Renault and Nissan brands grow, he said.

Andersson said today that he reduced the number of management layers to five from nine, while standardizing processes and other efficiency measures led to a 30 percent cut in production costs. In June, the company outlined plans to eliminate 12,800 jobs, or 19 percent of its workforce, by the end of this year, mostly through voluntary departures.

'Lean' structure

"We're making the management lean, the overall structure lean," Andersson said. "We need to cut unnecessary bureaucracy."

Andersson, a Swedish national, joined AvtoVAZ at the end of December from Russian truckmaker GAZ Group. He is AvtoVAZ's first foreign-born chief since its founding five decades ago in the Soviet era.

"There's so much negativity over AvtoVAZ, but over time it might turn out to be a pretty good asset," said Arndt Ellinghorst, a London-based analyst at Evercore ISI Institutional Equities. "Andersson is leaving no stone unturned. He's probably one of the toughest turnaround managers in the industry."

Government aid

Lada's turnaround effort is confronting its own ties to the Soviet economy as well as a market that has failed to live up to growth expectations. Russia's Industry Ministry said two years ago that car sales in the country in 2014 would surpass the roughly 3 million cars sold in Germany this year.

As Russia's economic growth comes to a halt amid trade sanctions stemming from the government's disputes over Ukraine, research company IHS now forecasts that the car market won't reach the 3 million mark until 2018.

Auto industry executives are forecasting a contraction exceeding 10 percent in Russian demand this year. Volkswagen is predicting an industry drop of as much as 18 percent to 2.1 million vehicles, Marcus Osegowitsch, head of the German company's Russian business, told journalists today at the show.

Industrywide deliveries in the country are unlikely to exceed German figures for 10 to 15 years, Renault's Ancelin said. To revive demand, the group is lobbying the Russian government for assistance, such as a cash-for-clunkers offer.

"A scrappage program would interest us," said Ancelin. "Customers would replace their old car with our newest models. I think the Industry Ministry is convinced that something needs to be done."

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