Russian carmaker Avtovaz is facing serious ongoing supply problems to its plants in the country. Last week (September 6th) it was forced to stop the line at its joint venture plant with GM in Togliatti because of disruption to inbound parts supply for the Chevrolet Niva. Two days later several reports in the Russia media indicated that it had entered into negotiations with the majority of its tier one suppliers in an effort to revise contract terms and reduce prices for components.
The supply base for Avtovaz, majority controlled by Renault Nissan, appears not to be in a position to lower prices in the current state of the Russian economy without some flexibility in the terms of payment schedules.
These most recent issues follow the bankruptcy of one of Avtovaz's (and Russia’s) largest automotive parts suppliers, AvtovazAgregat. The company was the exclusive supplier of a number of parts to Avtovaz, making 400 different components, 94% of them for the vehicle maker. Those components include seats, exhaust and fuel systems and catalytic converters amongst others.
AvtoVazAgregat was established in 1984 during Soviet Union era as a manufacturing division of Avtovaz and was meant to be the sole supplier of components to it but that changed when it was privatised and it came under the control of a group called Lada Inter Service and later Volgomost.
In May this year, when Bo Andersson was still chief executive at Avtovaz, the carmaker was looking at buying the supplier out. However, according to Mikhail Blokhin, the head of the Association of Automotive Component Producers (AACP), in July Avtovaz pulled out of the plan and had cancelled all of its contracts with the supplier by September. Given the continuing crisis in the Russian market and its prior lack of investment in other projects because it had no real competition, AvtovazAgregat failed to find new buyers for its equipment. It consequently ran up a wage debt of 400m roubles ($6.1m).
Impossible termsAt the same time it was cancelling its contracts with AvtovazAgregat, sources say that AvtoVaz’s management was attempting to secure parts supply with other companies based on a 5% reduction in the market price for components. The carmaker’s objective was to lower production costs so it could sell cars at lower prices and increase sales while improving profitability across the supply chain. However, none of those suppliers agreed to the proposed terms.
“The carmaker put forward a demand based on a 5% reduction in prices,” explained Lyudmila Ivanova, co-founder of Togliatti-based supplier Vital. “Unfortunately, the economy will not allow us to meet these requirements, so we have offered to reduce the price by between 1-3% only.”
Furthermore, Konstantin Fedorov, sales director of Belzan, another components supplier explained that his company presented Avtovaz with a list of several components it could make on the assembly plant to get savings from reduced logistics costs.
Several other companies said they would consider reducing prices if Avtovaz would alter the method of payment, for example, by allowing partial pre-payment for shipments.
However, Avtovaz has been working in the other direction for some time now and wants to increase delay on payment for the supply of components from 30 to 60 days.
At the same time, components supplies at Avtovaz are complicated by the large amount of theft that is continues at its plants despite the best efforts of the management to prevent them.
At the beginning of September, Avtovaz reported missing parts worth 6m roubles for the period between May and June of 2016. It was a lot worse between January and February this year when 20m roubles worth of parts went missing.
Avtovaz has refused to comment on the overall situation with its supply of parts and how the thefts could affect its operations in the country.