A Great Escape of Renault
It was one of the greatest prison escapes of all time. In November 2018, Carlos Ghosn, the Franco-Lebanon CEO of Renault and Nissan, was arrested by Japanese authorities in Tokyo and detained at home awaiting trial for embezzlement of public funds.
But a year later, he disappeared from Tokyo to return to Lebanon. He was smuggled out of his home by Confederates, hidden in a large box used to hold musical equipment, and flown from Japan on a private jet to Beirut. Lebanon has no extradition treaty with Japan, and despite Japan’s best efforts, Ghosn remains in Lebanon to this day, a wanted man almost anywhere in the world.
At the time of his arrest, Ghosn was one of the most famous men on the planet, someone close to rock star status. Rarely does international fame explode with such spectacular fireworks displays. But what does this have to do with Russian and Western sanctions? All of. Ghosn was the man who brought Renault to Russia at Putin’s invitation, and thus launched the French company on a fifteen-year, multi-billion-dollar adventure that ended with the Russian invasion of Ukraine. Putin and Renault’s abrupt withdrawal from Russi, along with other Western automakers. Their departure sent the Russian auto industry into turmoil. Russian factories, facing shortages of critical components (especially those using semiconductors), have been forced to halt production, sometimes for months and some altogether. Workers are laid off or work part-time with reduced wages.
By July 2022, new car sales were down more than 80% compared to July 2021, as more than 120,000 unsold cars piled up at dealerships. The biggest casualties were the leading AvtoVAZ complex in Togliatti, a city on the Volga River, which employs more than 32,000 workers and is Russia’s largest car manufacturer. The French company Renault has been a partner of AvtoVAZ since 2004, and since 2012 the company has become the majority owner. The partnership was strongly backed by Putin, who played a key role in persuading Renault and then-chairman Carlos Ghosn to take control of AvtoVAZ, a longtime loser inherited from the Soviet era. Shove.
Why is the Russian auto industry so vulnerable to Western sanctions? What is the role of Renault and Carlos Ghosn? Can AvtoVAZ succeed without Western partners? And when will Renault return to Russia?
GHOSN’S REVOLUTIONARY OPINION
To understand what Renault brought to Russia and why his departure had such dire consequences, let’s start with Carlos Ghosn and his unique role in the global auto industry. In the early 2000s, the global auto industry was ripe for a revolution. It’s a mature technology, based on traditional components and materials — mainly metals — and largely unchanged for decades.
But around the turn of this century, new materials (such as plastics and other synthetics) and high-tech components (especially semiconductors and information technology) began to form the basis for a new industry.
Car enthusiasts talk about “analog” (older) and “digital” cars, featuring innovations such as anti-lock brakes, traction control, airbags, advanced power steering forward, all digitally controlled. Today, a “digital” car contains more than 50 computers, they have become so familiar that we take them for granted. But it’s not just cars that have gone digital; Factory production lines (e.g. automation and robotics) and supply systems (e.g. just-in-time) were also disrupted.
This trend has two revolutionary connotations: first, it creates cheaper but more modern cars that are perfectly suited to the rapidly growing mass market in the developing world; second, the automation of production and parts processing means that the auto industry has less and less demand for well-paid skilled labor; this also encourages investment in developing countries, where cheap unskilled labor is abundant. But most developing countries are not yet able to produce advanced digital components themselves.
It creates an opportunity for an international division of labor between high-tech suppliers and lower-tech assemblers. The first automotive CEO to grasp the revolutionary implications of this trend for the auto industry — and act on it — was Carlos Ghosn. Ghosn, from a Lebanese-Brazilian family but educated in France, is a classic product of the French elite system. Hired by Renault, near bankruptcy, Ghosn turned the company’s chronic losses into a profit after four years. He make another success in business one more time when he is sent by Renault to Tokyo to rescue Nissan, which is a partner of Renault.
By 2005, when he became the CEO of Renault, Ghosn had become the rock star of the business world, known by the nickname “The Killer Pays”, described as a hero in Japanese comics and on postage stamps in his native Lebanon.
Around the world, he is hailed by the business media as one of the world’s greatest entrepreneurs. Ghosn’s business model for Renault, rooted in his observations in Japan and earlier stints at Michelin in Latin America, is a “wheel of talk and a wheel”, using European technology ( mainly French) to manufacture advanced components, which are then shipped to factories. in the developing world to assemble on standardized platforms, using cheap local labor and “just-in-time” manufacturing techniques. The model was first successfully tested in Romania (where Renault acquired the local carmaker Dacia) and then expanded to factories in the developing world.
RENAULT ARRIVES IN RUSSIA
Russia seems to be the ideal candidate. In the early 2000s, the Russian auto industry was on the verge of collapse. It suffers from the classic evils of industrial legacy from the Soviet Union, combined with the ill effects of 1990s Russia’s “Far Eastern capitalism” — the peanut model and production line. backward, corrupt subcontractors and suppliers, outdated technology, lack of financial capacity and cumbersome and inefficient staff. In short, it seems tailored to Ghosn’s vision.
In 2007, Putin went to Paris to personally greet Ghosn and the French government. Renault has agreed to take a 24% stake in AvtoVAZ and provide the necessary technology to modernize the plant. Ghosn’s ambitions seemed limitless: in 2009, he announced that Renault would produce 1.4 million cars in Russia by 2017 and that Russia would soon become its largest market.
But Renault’s first experience in Russia was unlucky. The partnership was ended earlier than the “subprime” crisis of 2008–2009 that occurred around the world. AvtoVAZ’s sales, instead of increasing, halved.
However, as a minority shareholder, Renault has no power. So when Putin pressured Renault to invest more capital, Ghosn insisted on taking full control. In 2012, Renault took a 51% stake in AvtoVAZ, and Ghosn became chairman (along with his other hats), with a majority on the board.
Now, Renault must show its capabilities. Ghosn hired Bo Andersson as an executive to manage AvtoAVZ, who is a tough Swedish. Andersson is not a newcomer to Russia; he caught Ghosn’s eye when he converted the Russian truck manufacturer GAZ and turned it into a profit.
As the new CEO of AvtoVAZ, Andersson quickly laid off 30,000 employees, purged AvtoVAZ’s corrupt supplier network and implemented a new procurement system based on the importation of components. advanced parts and platforms from abroad. But Andersson’s two-fingered tactic prompted protests from AvtoVAZ and threats of retaliation from suppliers.
And once again, events intervened: Russia’s actions in Ukraine in 2013–2014 caused Western sanctions and the ruble to depreciate, making reliance on imported parts unprofitable.
In 2015, AvtoVAZ sales exploded. The following year, Andersson was fired. At the time, Renault had been in Russia for a decade and had ten consecutive years of losses to prove. Clearly, a new approach is needed. In 2016, Renault appointed a new CEO, a procurement specialist named Nicolas Maure, who has experience in both Russia and Romania and, above all, is more diplomatic.
Maure developed a “compromised” version of Ghosn’s original model (as he tactfully put it, “we round the corners” — “we soften the rough edges”), based more on Russian suppliers, while continuing to rely on imports of digital components.
In 2017, Renault made a profit at AvtoVAZ for the first time, and the next four years, from 2018 to 2020, were profitable. Renault, it seems, has finally found the handle. Then came the invasion of Ukraine and in one night Renault was gone.
What will the future look like if the invasion does not take place? There has always been a central contradiction in Renault’s operations in Russia. Putin initially received the Ghosn model with the aim of rapidly developing a new generation of cars for the domestic Russian market.
But the implicit unequal division of labor — the French import “smart” parts and the Russians provide “stupid” labor — will never be accepted, unless a suitable person temporary. Over time, from the mid-2000s to the 2010s, Russia’s insistence on “import substitution” and “comprehensive localization” grew stronger. Perhaps there will be a new conflict.
What future awaits AvtoVAZ now? The imposition of sanctions and the sudden departure of the majority owner left AvtoVAZ in limbo. It can produce “analog” cars using existing Russian technology, but not “digital” cars, because under Ghosn’s “wheel and wheel” model, the components The digital part continues to come mainly from abroad and most of them are now gone. accessible.
The only way available is to “temporarily” retreat to previous models, such as the Soviet-era “Moskvich” (now revived by the old Renault factory in Moscow) and “pure vanilla” Ladas. , manufactured without digital components such as auto. brakes, airbags and GPS.
The government promises to accelerate the “import substitution” program under a new CEO, former Transport Minister Maksim Sokolov. But it will take many more years for AvtoVAZ to produce digital cars entirely from Russian components.
Meanwhile, short-term opportunities for “parallel imports” are limited, as advanced parts producing countries are mostly subject to Western sanctions and many of their key components are under the agreement. licensing agreement with Renault. AvtoVAZ’s prospects are poor. And the future of Renault? Over fifteen years of effort and expense, Renault endured three economic crises, numerous conflicts and mishaps, and ended up with a net loss of more than $2 billion.
But with the departure of Russia, Renault lost its second market, and the last market remained profitable. It has now retreated to its home base of France, where it must fight a battle to survive as the era of electric vehicles (EVs) arrives in Europe. The Ghosn era is but a distant memory. Renault may never return to Russia.
The story of Renault is only one part of a larger picture of the impact of Western sanctions on Russian industry. Over the past thirty years, Russian governments and businesses have embraced a high degree of dependence on Western technology and supply chains, taking advantage of the global division of labor.
In the short term, this is a logical choice, as it offers “quick wins,” in the form of rapid improvements to products and services, such as automobiles. But it also leaves the Russian economy vulnerable, reduces local innovation incentives and perpetuates chronic weaknesses in Russian technology.
Western sanctions have now exposed this vulnerability. The auto industry is just one example. In my next Substacks article, I invite you to join me in looking at another case: the impact of sanctions on Russia’s efforts to develop LNG, liquefied natural gas — a topic we’ve been talking about. Stay tuned.