Russia v. Renault

The New York Times article, “Russia Wants Renault to Fix Lada,” describes a rather complex situation in which the Russian government is unsuccessfully trying to influence the French carmaker, Renault, to help bail out Russia’s largest carmaker, Avtovaz.

I thought the article provided an excellent example of a few of the concepts presented in chapter 10 of our text.

Here’s a summary of Russia’s and Renault’s positions. Both parties hold a 25% stake in Avtovaz.

The Russian Government
Avtovaz has suffered during this recession and is currently partially shut down. Without support, Avtovaz “is not going to make it.” The poor position of the auto factory has led to industrial and social unrest as well as threats of employee strikes. Amid this difficulty, the Russian government has tried both a threat and a promise (of sorts) to pressure Renault into investing in a bailout. Russia has threatened to dilute Renault’s stake if it did not invest. Alternatively, Russia has stated that Renault is “welcome to increase [its] stake in Avtovaz. Russia’s conflicting statements show there may be little credibility in either.

Renault has offered to retool the Avtovaz factory at Russia’s expense and has also offered management and technical support, but Renault has stated it will contribute no cash for a rescue. Experts pronounce that Renault is losing interest in the Eastern European market. Just this week, Renault announced a new car to be sold in India in 2012. Meanwhile, Renault has faced problems of its own back in France and has accepted a large, restrictive loan from the French government. The loan’s restrictions force Renault to keep all of its French factories open. While a mere announcement of a new Indian car in 2012 might not convince Russia that Renault will not cough up the cash, the acceptance of a substantial, cumbersome loan probably will.

The two parties have plans to meet within the next week, but I have little doubt that Russia is going to be left with the financial burden of saving Avtovaz.


Audrey said...

I think that this article does present examples of some of the topics from chapter 10, but I’m wondering if this is really more of a political issue than an economic issue??? This is a sincere question, not an attack at your post. Help me understand. The two parties involved hold a stake in the same company and I’m sure that they both want Avtovaz to succeed, however they’re different types of entities (Government vs. Private Co.), with different motives and incentives (socioeconomic vs. profit-driven), and have different types of consumers (Russian Citizens vs. stakeholders). They’re not competitors, yet they’re not affiliated either. Do the topics in chapter 10 (from an economic standpoint), such as credibility and strategy, apply to a situation like this?

Dr. Tufte said...

I don't think Russia's statements are contradictory. Instead, I'd say they're trying to artificially create an asymmetry that Renault will have to deal with: they are hurt one way if they don't help, and hurt a different way if they do.

I think Audrey's point is well-taken, but that game theory still is applicable here. The problem is that it is much less clear what the payoffs are going to be once the government gets involved. People and firms are usually fairly clear about what they're getting out of a game - and remember that game theory works even if we get the numbers only approximately correct.

Yet, that is often hard to do with governments. For example, does France want Renault to succeed, to keep plants in France open, or to get it to disinvest in foreign ventures. For Russia's part, why do they want to stay involved in a producer that is probably dying anyway: jobs, tradition, prestige?

To make things worse, I strongly suspect that many politicians and bureaucrats actually don't understand the payoffs they expect out of the choices they make. Again, this is a lot easier for a person or a firm, where the game player probably gets to keep the winnings and loses the losses. Does this happen when a government official makes a decision?