Avtovaz intends to reduce the costs of materials and supplies in two years

Avtovaz intends to reduce the costs of materials and supplies in two years

Vedomosti – Avtovaz plans to cut the purchasing costs of materials and supplies by 7% in 2016 and by 13% in 2017, as told by the senior managers of two contractor companies of Avtovaz to Vedomosti. The company has revealed the relevant plans during a recent suppliers conference, added the managers.

The losses of Avtovaz reached a record level of almost 74 billion rubles in 2015, due to the market shrinkage and the devaluation to the ruble, according to International Financial Reporting Standards (IFRS). The revenues fell by 8% to 176.5 billion rubles and the cost of sales by 1.6% only, to 182.3 billion rubles. The proportion of materials and supplies has not been specified in the costs of the company, classified as basic. According to Avtovaz report for the second quarter of 2016, the share of raw materials, components and semi-finished products in the production costs of Lada automobiles (Avtovaz also makes contract production for Renault-Nissan alliance) amounted to 72.6% during the first half of the year in Russian Accounting Standards (RAS) terms, down from previous year’s 76.2%.

The team of the new chairman Nicolas Maure, unlike his predecessor Bo Andersson, doesn’t demand for price cuts from the suppliers, however, asks them to find ways to help the company reach its goals, as told by the sources of Vedomosti. Avtovaz sees great potential in increasing the localisation of the production of parts and components and reducing the purchases of imported materials and components, says on of the sources.

Increased localisation – is one of the tasks set for Maure by the shareholders. He spoke about the subject during an interview with Vedomosti in June: “The results of 2015 show that according to IFRS, the production costs do not follow the right trend. We have to make more purchases in rubles, in order to go back on the right track. This means increasing the localisation, not only with the first level suppliers, but also with the subsequent ones.” According to Maure, a three-year programme has been formulated, in which “each car and each product group has a road map for suppliers of both first and subsequent levels”.

The course is right, however, it’s unlikely for Avtovaz to reduce component costs by 20% in two years, think the sources of Vedomosti. Localisation requires time and serious investment and the suppliers will not cut their prices by 7-13%, since the profitability of their businesses is not so high, only 3-5%, explain the sources. The targets of Avtovaz are set in accordance with necessities, rather than possibilities, as noted by one of the sources.

Alongside localisation, the recovery of the ruble, long-term contracts with suppliers with the obligation of gradual price cuts (the reductions are at the rate of 2-3% annually, as told by a supplier) and an increase in the production of new models – Lada Vesta and Xray may be the factors that help Avtovaz, says an analyst from VTB Kapital. However, it seems unlikely to keep up with the planned pace in the reduction of costs, he added.

The senior manager of the large dealer company of Avtovaz is against a price cut in the budget models of Lada for the moment, due to the absence of rivals in the Russian market. The prices of Lada Granta sedan start from 383,900 rubles. For comparison: the prices of Datsun on-DO (manufactured in Avtovaz on a contract scheme), designed on the platform of Granta sedan start from 436,000 rubles (2016 model) and Ravon Nexia sedan (manufactured in Uzbekistan) from 379,000 rubles.

Tags: Avtovaz