AMUR has fallen victim to love

10.09.2012 — Analysis

The Automobiles and Motors of the Urals factory is being sold at auction in the Sverdlovsk region. It fell victim to the industrial policy of a national government that is besotted with AvtoVAZ. Experts claim that the investments that were made to save the Russian auto giant were imprudent, and this columnist for RusBusinessNews has determined that this has cost the state dearly.

In Soviet times, the Automobiles and Motors of the Urals plant in Novouralsk was one of the largest subsidiaries of the enormous Likhachev Factory in Moscow, producing about 25,000 trucks a year. The company, located in a closed "nuclear" city was armed with a Japanese body welding line, machining centers where engines were manufactured, powerful presses, and its own tool-making and thermal processing equipment. Vladimir Mashkov, an advisor to the chairman of the government of the Sverdlovsk region, claims that after being privatized in the early 1990s, some of the property and equipment from the factory vanished and the processing chain was disrupted.

Pavel Chernavin, a banker, purchased the auto plant in 2003. Insiders maintain that he did not do so willingly, but under the threat of the company's total collapse the government of the Sverdlovsk region advised him to buy these toxic assets and pay the employees what they were owed. Mr. Chernavin was unable to refuse and so took this fatal step. As a result, he lost not only the factory but also his personal funds that he had invested.

But all had seemed well at first. In 2007, AMUR, CJSC grew 400%, assembling Indian TATA trucks, Chinese FAW and Foton dump trucks, Geely Otaka and Landmark passenger cars, and equipment for the ZIL-130 automobiles from semi-knocked-down kits. But the economic crisis of 2008 destroyed the company's business strategy. The Russian government decided to bail out the auto giant AvtoVAZ and imposed a prohibitive tariff of 5,000 euros on each painted auto body that entered the country, making it impossible to assemble affordable, $7,000 cars in Novouralsk.

Then, in 2010, regulations tightened for foreign automakers in Russia. Customs exemptions were withdrawn on imported parts unless the automaker agreed to localize up to 60% of his production, invest at least $500 million in upgrades at the companies, or spend $750 million to build a new plant. In addition, at least 300,000 vehicles had to be manufactured per year.

Yuri Afanasyev, the former head of AMUR, CSJC, claims that this decision was made to benefit AvtoVAZ, which had entered into a partnership with Renault. The numbers that were cited had nothing to do with the economy or with encouraging the production of high-quality cars in Russia - for example, AMUR's managers estimated that a new plant could be constructed for only $150 million. As such, this call for artificially elevated levels of investment was intended to dispatch some of AvtoVAZ's expendable competitors.

One consequence of the state's initiatives was that AMUR's auto bodies, which had been ordered previously, continued to arrive at the Russian border from India and China, but the company could not afford to have them released from customs. Automotive production in Novouralsk ground to a halt.

But it seemed that the government was prepared to assist the unemployed residents of Novouralsk. Officials suggested that the plant be used to overhaul trucks for the military. Pavel Chernavin calculated that the company could bounce back if it repaired and reequipped at least 10,000 vehicles per year. But oddly this idea failed.

In September 2009, the Russian Ministry of Defense signed an agreement with the AMUR Trading House to convert 300 decontamination trucks into fire engines and provided an advance of 94.2 million rubles. The factory upgraded only 60 of them, for a total of 23.5 million rubles. Two years later, without waiting for the other trucks, the Defense Ministry went to court to demand payment of a fine plus interest, totaling 47 million rubles, for the credit that had been provided. But the debt itself was not claimed for. Simple arithmetic shows that more than 20 million rubles vanished without a trace.

In 2010, the Defense Ministry signed another contract with AMUR, CJSC, paying the company 330 million rubles to overhaul ZIL-131 military trucks. The factory bungled the order completely, managing to produce only a handful of prototypes. The Ministry of Defense decided to revert to its former game plan and again seek payment of a fine plus interest for the credit that had been advanced, but was unable even to do this. The court of arbitration found that the client had not tested the upgraded vehicles in a refrigerated chamber (because it was not working), and thus AMUR had been unable to begin mass production.

Having lost their case in the inferior court, the Ministry of Defense filed an appeal and dramatically increased the size of its claims. Experts claim that this was nothing more than a feigned "heroic effort" to rescue the state's money. The fact is, even a court decision in the ministry's favor will not change anything. AMUR is in bankruptcy proceedings and thus there is a strict sequence of steps that must be taken to recover money from the company. The plant also owes its employees back wages, and there won't be a wrench left in the place by the time it's the Ministry of Defense's turn to collect its share.

Representatives of AMUR, CJSC attest that the government officials understood from the beginning that the 330 million rubles was "money down the drain." It was a small down payment on the firm's "quiet funeral".

But the company didn't go down so quietly after all. The workers who had not received their salaries declared a hunger strike. And, of course, the state accused the senior executives of embezzlement. Yu. Afanasyev, who is now being cast as a scapegoat, claims that everything had been stolen before he came to the factory. Someone had disposed of the engines, someone had toted off the materials, someone had made purchases at inflated prices, and someone had cashed in on the repairs and construction.

And it's unlikely that anyone will ever try to find out what really happened. But AMUR could have succeeded. Experts claim that the government could have encouraged the production of auto parts at Russian factories instead of issuing dictates about increasing investment in localized production. But the state failed to capture the interest of auto-parts manufacturers and so the idea of localization withered on the vine. All so AvtoVAZ can produce twice as many vehicles as in 2009.

Vladimir Terletsky