Russia's domestic car industry struggles to stay afloat

It's 7am, half an hour before the start of the morning shift, and a constant stream of workers is heading from the underground station to the main entrance of Nizhny Novgorod's huge Gaz car factory.

It is an imposing sight, with its tall columns and Soviet-era emblems, and testament to its importance to the Russian automotive industry.

As the sun rises behind the factory, the mood among the workers is defiantly upbeat.

"You know, there is always optimism about the future," says a middle-aged woman who has been working at the factory for 20 years.

"The plant has been working, and will be working, and so will the Gaz group," says an older man.

The Russian car market saw a dramatic drop in sales during the financial crisis - some 50% last year alone.

They felt the impact here, when the Gaz group, owned by Russian billionaire Oleg Deripaska, had to cut salaries and jobs and undergo a tough debt restructuring. Loan guarantees from the state helped to keep it afloat.

The plant in Nizhny Novgorod churns out mostly light trucks these days but it is still best known as the home of the Volga - a big, heavy sedan that they have been building here since the mid-1950s.

In the Soviet Union, it was the favourite car of the communist elite. Now it has come to symbolise many of the failings of Russia's homegrown car industry.

The latest model, the Volga Siber, was launched in October 2008 - just in time for the financial crisis.

Built on a 1980s Chrysler platform (Gaz bought an entire production line from the US carmaker and shipped it to Nizhny Novgorod), it was supposed to give the Volga legend a new lease on life.

However, critics panned the car as sturdy and unglamorous and sales fell well short of expectations.

Between January and October Gaz sold only 3,961 cars, according to the Association of European Businesses - a fraction of the originally planned full-year figure of 65,000. And even those sales were supported by heavy subsidies.

During the crisis, the Russian government introduced a car scrappage scheme to prevent mass lay-offs at domestic manufacturers and the social unrest that could bring.

In addition to that, Gaz offers its own discounts for customers who trade in their old cars.

Local car dealer Alexander Kashin did the maths for us. "There is the state programme which makes it possible for us to give a 50,000 ruble ($1,600; £1,000) discount if you trade in your old car. And on top of that, Gaz itself offers a discount of 70,000 rubles to support sales of the Volga Siber."

That means a buyer can get some 25% off a car that comes with a price tag north of 500,000 rubles. No wonder Mr Kashin is seeing more customers these days.

Russian brands are the main beneficiaries of the car-scrappage scheme, especially Avtovaz's Lada, which targets a different part of the market and is cheaper than the Volga.

However, the government cannot keep handing out subsidies forever. Foreign brands, which are seen as more reliable and better value for money, have eaten away at the market share of their Russian rivals.

Analysts doubt whether domestic carmakers can survive on their own.

"The absence of technological know-how, the high cost of developing new models, the lack of qualified people who can deliver the package - not just a good engine but a car that's economic, ergonomic and looks good - all that is making it difficult for Russian manufacturers to stay in the market," says Alex Kazbegi, car analyst at Renaissance Capital.

The Russian government seems to have recognised that. It is keen to introduce western technology into the auto industry - so much so that it is now ready to cede control of Avtovaz, the country's biggest carmaker.

It has offered France's Renault, which currently holds 25% of Avtovaz, to increase its stake to over 50%. Negotiations about the shape such a deal could take are still going on, says Bruno Ancelin, the head of Renault's operations in Russia.

The carmaker is convinced of the potential of the Russian market, which has a motorisation rate that is only about half that of western Europe.

The investment in Avtovaz, Mr Ancelin says, was a strategic choice.

"We decided to help them and bring to them some new technologies, new platforms, in order for them to modernise their line-up, their plant, and to recover as the first brand on the Russian market."

Avtovaz is planning to start manufacturing new models based on a Renault-Nissan platform from 2012.

The Gaz group meanwhile, has recently denied speculation that it might end production of the Volga and just focus on its more successful light truck business.

However, the company has been in talks with a number of foreign carmakers to assemble vehicles under contract in the Nizhny Novgorod factory, using the production facilities currently assigned to the Volga.

If Volkswagen, GM or Daimler were indeed to strike a deal with Gaz, it might well spell the end of the line for one of Russia's most iconic cars.