The AvtoVAZ fairy tale

15 October 2009

For those who believe that privatisation automatically increases efficiency, just take a look at today’s AvtoVAZ, once considered a flagship of Soviet industry.

The car plant in Tolyatti is in agony. There was a time when the factory was considered a flagship of Soviet industry and a leading example of a business built on world class, cutting edge technologies. The plant was built by Italian specialists to produce clones of the Fiat automobile, which was popular in Europe at the time. When the new Zhigulis appeared on Soviet roads, they became a source of pride and envy. Under the Lada label, they blazed a trail in the world automobile market — and not only among Soviet satellite states and South American countries, but even in the West, where they were prized for their low price.

All of that seems like a fairy tale today. For many years now, AvtoVAZ automobiles have had the reputation of being noncompetitive, poorly built, outdated and overpriced. Government measures designed to save the factory have only created new problems. Prohibitively high import duties imposed on used Japanese automobiles have wrecked the economy of the Far East, deepened the economic crisis and failed to produce the intended result — more demand for AvtoVAZ cars. The enormous sums spent by the state to prop up the company have disappeared without a trace. Plant owners, without having adequately explained how the initial credit funds were spent, are already receiving a second infusion.

There is, however, some information available about how the budgetary funds were spent. For example, Vladimir Artyakov, who served as the plant’s director for nine months, received a bonus of 1.5 billion rubles ($50.7 million) in addition to his regular salary. That breaks down to a bonus of 5,555,555 rubles ($188,000) per working day. Following that feat, he left AvtoVAZ to become the governor of the Samara region.

It is wrong to claim that the domestic auto industry is doomed because of workers’ high salaries. AvtoVAZ workers earn no more than $400 per month, adjusted for devaluation. In other words, they earn no more than Chinese employees in comparable jobs. Meanwhile, the Zaporozhsky auto plant in Ukraine — also a Soviet-era inheritance — produces respectably modern automobiles that cost two-thirds of comparable models made in Tolyatti. The high price of the Lada is a reflection not of high-priced labor, but ineffective management. That price includes not only the cost of maintaining a veritable army of managers, but the markup charged by a national network of exclusive Lada dealers and middlemen dating back to before the market economy. For those who believe that privatization automatically increases efficiency, just take a look at today’s AvtoVAZ.

It is not surprising that AvtoVAZ workers are demanding that the plant be nationalized. The government for its part fears the instability that massive layoffs might provoke and has promised to save the company, even while rejecting the idea of nationalization. In keeping with an old Russian tradition, the authorities are instead placing their hopes on foreigners. Factory owners have proposed to assemble new models from Renault and Nissan.

How promising is that project? The factory is at risk of having to cut back 27,000 jobs. However, even if the switch to producing foreign cars allows the plant to restart its main conveyor, it will not solve the larger problem. First, the plant would go from being a full-scale production facility to a simpler assembly plant. Second, thousands of people employed by AvtoVAZ parts suppliers would be idled. If the plant shuts down or changes its production profile, far more people around the country will lose their AvtoVAZ-related jobs than are expected to be laid off in Tolyatti itself. And true, they will be scattered throughout numerous cities, possibly lessening the social and political impact of the change. But will it be possible to mollify the people of Tolyatti? The company management stubbornly ignores initiatives coming from trade unions and refuses to enter into negotiations with them or to listen to their proposals. That is why mass protests remain a very real possibility in Tolyatti. Wouldn’t it make more sense to negotiate with the trade unions?

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