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Industrial Policy

War and sanctions force Lada to dump modern technology

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How do you double the value of a Lada? Just fill up the gas tank, goes the Soviet-era joke.

Ladas stopped being a joke a long time ago as its parent AvtoVAZ modernized its range thanks to investments from foreign carmakers — the latest being Renault. But all that’s now at risk thanks to the sanctions unleashed against Russia following its invasion of Ukraine. The result is that the technology in cars produced at the company’s sprawling Tolyatti factory complex on the Volga River will be closer to those made in the dying days of the Soviet Union than anything sold in Europe today.

“The market is in a state of uncertainty about how work will continue,” said Evgeny Eskov, chief editor of Russia’s AutoBusiness Review. “The factory can still work but it will produce models from the past.”

For example, the Granta subcompact model will be made without most modern electronics, so won’t include ABS, driver aids, emergency communication systems and even air bags. It also won’t have oxygen sensors in the exhaust system, dropping its emissions level from Euro 5 to Euro 2 standards. The engine control unit and its firmware will become simpler and Renault suppliers will be replaced by Russian companies, reported Russian car publication Avtostat. To allow sales of such primitive vehicles, the Russian government will need to relax its technical standards.

Last year, Russia saw car production of 1.56 million units and AvtoVAZ covered 23 percent of the market. This year will be very different as most foreign car companies shut down production, leaving the Lada-maker to dominate sales.

Eskov said that at the moment AvtoVAZ will only still be able to make the Granta and the Niva compact SUV models with the parts it has available. Production of the more modern Xray crossover and Largus estate models will be halted, and the three production lines at the massive Tolyatti site will be combined into a single one, reported Avtostat.

AvtoVAZ has also been forced to cut hours for its workers — who go on leave from April 4 to 24, and suspend the production of several models while starting to scour the world for crucial products like semiconductors needed by modern cars but inaccessible to sanctions-hit Russia.

The company did not respond to a request for information on the technical standards and models it can still make, but it has said that it is focusing on fixing supply chain problems this month. All staff will switch to a four-day working week running for three months starting June 6. The state is stepping in to cover the fifth day’s wages, AvtoVAZ also said.

“Work is underway to replace some critical imported components with alternatives,” the company said in a statement, adding that it is also developing special models less dependent on foreign-made parts that will “gradually” go on sale in Russia “in the coming months.”

Because of its beginnings as a Soviet industrial project, around four-fifths of the parts and materials that go into a Lada are made locally — but not the microchips needed for modern connected cars.

The global auto industry has been dealing with semiconductor supply chain bottlenecks for a couple of years — and now Lada has the simultaneous problem of sanctions.

“[AvtoVAZ] is looking to localize more production but they are already at 80 percent [local parts],” said Ian Fletcher, an analyst watching the market at S&P Global Mobility. “It’s not necessarily about a big component, it could be something very small, the biggest issue with building a car is that there are a lot of widgets.”

Chips are down

Carmakers such as Volkswagen, Mercedes Benz and Nissan have all suspended work in Russia because of the war. Renault closed its Moscow plant, which made Renault models for the Russian market, but still holds a 68 percent stake in AvtoVAZ.

The French state has a 15 percent share in Renault but isn’t forcing it to write off its stake in AvtoVAZ just yet. The French government’s line is that Renault, just as other French companies, should be free to decide whether to stay in Russia. A French Cabinet member told POLITICO that “the position of French and European businesses in Russia is going to become unbearable … but we can’t ask them to move too fast.”

But Renault isn’t much help for AvtoVAZ as it revamps its production under Western sanctions.

German component-maker Bosch usually supplies electronics from its plant in Russia’s Samara region, but the company has stopped operations in Russia. Another major producer of automotive electronics, Taiwan, has joined the West’s sanctions against Moscow too.

“The main point is that high-tech content,” said Matthias Schmidt, a Berlin-based auto analyst. “Because of the embargo they can’t import critical components. It’s crucial for Lada.”

One fix could be to seek chip imports from China, analysts said. A Russia law agreed in March will allow goods protected by intellectual property rights to be imported by unlicensed distributors. That system, known as “parallel imports,” could offer AvtoVAZ a way to source parts from third countries.

Russia’s Ministry of Industry and Trade is now drawing up a list of products that can be imported into Russia using this system, so it’s not yet known if that will include automotive electronics.

All that is bound to further ramp up the cost of a new ride.

“The odd Russian will still able to buy a car, but this number is shrinking more and more,” said Eskov in Moscow. “Given the number of cars on the market will fall, fewer people will buy cars, but secondly, people will have fewer means to buy cars.”

He said the price of some Lada models has risen by up to 50 percent this year compared with 2021 due to the ruble’s fall in the immediate aftermath of the invasion (it’s since rebounded), while the cost of associated bills such as insurance are on the rise too.

“The car industry doesn’t know what will happen because many factors are still unknown,” he said. “We don’t know in six months how many [Western] brands will work in Russia and how many won’t.”

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