Yves Caracatzanis took over one of the toughest jobs in the auto industry in June when he was picked to lead Russia's AvtoVAZ, the money-losing, Renault-owned parent company of the Lada brand. Past heads include Swede Bo Andersson, who made progress in the struggle to turn around the ex-Soviet giant but was pushed out after one too many conflicts with unions and suppliers.
A longtime Renault employee, Caracatzanis, 54, previously worked in Russia managing the French automaker's supply chain. He also brings experience in budget-car manufacturing from his previous job as CEO of Renault's low-cost Dacia brand. He spoke with Automotive News Europe Correspondent Nick Gibbs about the plan to revive Russia's No. 1 car brand.
Q:The Russian market is recovering again. Where will it go?
A: We think between 2.5 million and 3.2 million by 2025. If the Renault-Nissan-Mitsubishi alliance succeeds, we will account for 40 percent of the market.
What's your capacity utilization?
AvtoVAZ is using about 60 percent of its capacity. There is still room. We are part of the alliance, and we can produce for the alliance. Fifty percent of Renault cars are produced in the Togliatti plant. We are producing the Logan and Sandero.
Former AvtoVAZ CEO Bo Andersson clashed with Russian suppliers over quality. He wanted to bring in more global companies. How are you handling that issue?
We are working with the suppliers to improve their quality and their efficiency. We need to be highly localized, with our aim being that all the cars we produce will be 80 percent localized. Of that content, 50 percent will come from Russian suppliers and 50 percent from global suppliers based in Russia.
How many people work for AvtoVAZ?
The total in the AvtoVAZ group is 46,500. When Renault took over, it was a lot more. We have stabilized it, and we are at the same head count as at the end of last year. But in that time, we have increased revenue by more than 30 percent, so the efficiency is increasing.
Do you want to keep employment at 46,500, or do you want to decrease it?
We are at the level we need right now. We have a job to offer to each employee of the company.
Is the goal to maintain that head count and make money elsewhere?
The goal is to make our 20 percent market share profitable. We are at 20 percent now, but competition is tough. Today the operating margin is back to positive, and the forecast is to maintain a positive margin for the full year. Net last year was negative. In the first half, it was positive. But we have some one-off events, and a big investment in engineering is starting right now, so we will be negative for the year.
The midterm plan is to be back to net positive after 2021. We have a huge investment to renew the brand and continue the modernization of our Togliatti factory, and we still have a huge debt.
What will help you maintain your market share and increase profits?
Launching new products. When you have a strong market share, it's difficult to keep it. So we're developing product with the DNA of strong design, confidence in all situations, quality and best value for money.
What do you mean by "confidence in all situations"?
Russia is a big country. We have 12 time zones. "Confidence in all situations" means the car is reliable.
Who are your biggest competitors?
Kia and Hyundai are strong. But entering the Russian market is not so easy because you need to be localized. Due to the size of the country, you also need a strong dealer network. Today we are Russia's No. 1 automaker. Value for money is key. The entry price of the Granta is about €5,200 [$6,000], with three years' warranty.
The value of the ruble is in flux. Would 100 percent localization offset that risk?
That is impossible. Some technology is only available from one worldwide supplier in one country. As an example, for camera systems you have two or three Chinese companies sourcing to the entire global automotive industry.
Couldn't you persuade the Chinese to locate here?
It's not an economic reality. For some commodities, you need much more volume than the Russian market can offer.
Do you now meet the requirements of the government's Decree 166, which was designed to increase localization?
We have a consortium with Renault, Lada, Nissan and Kamaz for this decree, and we are meeting the requirement. However, there is a new decree cooking, called Decree 719. We're working with the authorities to define what is best for the automotive industry.
Is it true that the application of 719 will be different for each company?
Decree 719 is not finished. It's a kind of scoring system. It's like an exam. Even if you have good marks in one discipline, you still don't pass the exam.
Are the authorities listening to you in terms of realistically being able to meet the requirements?
We are working on it. What is proposed today is not final. They want to put some threshold on r&d. But it needs to be consistent with what the auto industry can do. You can't, for example, have the Russian threshold higher than what the auto industry is doing worldwide, in terms of percentage of revenue going into r&d.
We are confident. We support the authorities, and we're working on signing a specific investment plan with them.
The government wants to boost exports. What are you recommending to them on achievable limits?
The first recommendation is to do a free-trade agreement with the countries we can export to. With free trade agreements, life is easier. That is why we are selling cars to 34 countries. When there is a free trade agreement, it's good for business. The government will subsidize part of the extra cost to homologate cars for export to countries without an FTA, and also for logistics.
The new Vesta and X-ray were developed to improve Lada's market share in the big cities. Are they helping?
Russia is not just St. Petersburg and Moscow. You see more Lada cars in the cities, but it's not our main marketplace. I just want to stay at 20 percent of the Russian market. I don't care where it is. If it's profitable, it's no issue for me.
Wouldn't a larger urban share improve the mix and boost profits?
It's not that I don't want to sell in Moscow and St. Petersburg. But with 50 percent of families in Russia with no car, you see the potential of the market. Let us provide them affordable, reliable cars with nice design.