Russian automaker AvtoVaz is moving into Azerbaijan and in talks to set up the large-scale assembly of its famous Lada family of vehicles in the country.

The company's head, Maxim Sokolov, recently told journalists that negotiations are currently well underway with Baku and expressed hope for “some good news this spring regarding Avtovaz's presence in the region.”

AvtoVaz first announced its intention to launch serial production in Azerbaijan back in January. Large-scale assembly involves delivering fully ready-to-assemble components, often in the form of large units, from a manufacturing plant in Russia to a partner facility.

The arrival of AvtoVaz in Azerbaijan represents a significant step forward in the country’s manufacturing profile as the local automotive industry remains very underdeveloped and primarily focuses on assembling final products rather than making them from scratch. However, there is already some activity in the automotive sector.

Azerbaijan’s automotive production is expected to grow from 712 cars to 4,233 over five years

“The automobile production enterprises in Azerbaijan's industrial zones have experienced a positive trend. Automobile production was initiated in the industrial zones in 2018, with 712 vehicles manufactured in the same year. In 2023, this number surged to 4,233, marking an impressive 109% increase compared to the previous year,” wrote In January of this year, 406 cars were produced in Azerbaijan, which is twice the figure of the same month last year. As of February 1, 2024, there were 266 passenger cars in stock. Truck production increased by 57%, reaching 63 units in January, while tractor production was halved. Still, the development of the sector remains on square one.

Azerbaijan began specialising in vehicle assembly back in the Soviet era. In 1978, the Baku Specialized Automobile Plant (BSAP) was launched, assembling PAZ-37421 vans and PAZ-3742 refrigerated trucks based on PAZ-672 buses. These vehicles were famously adorned with penguins on the rear door, earning them the nickname "penguin" among the people.

The "Baku Worker" machine-building plant produced road trains for transporting pipes used in the construction of oil and gas pipelines. The Kasimov Oilfield Engineering Plant built special vehicles and laboratories for oil fields. The 26 Baku Commissars Repair and Mechanical Plant manufactured service units based on Russia’s famous GAZ trucks.

The Ganja Automobile Plant began construction in 1986, intended to produce buses and trucks. However, due to the conflict that erupted in the region and subsequent economic problems, the facility remained unfinished for many years. The Ganja Automobile Plant only became operational in December 2004. In 2022, the Ganja Automobile Plant produced goods worth a total of AZM78mn ($45.88mn), which is 1.8 times more than in 2021. In 2022, it produced 588 units of various tractor models, 140 Ural brand vehicles, and 255 Russian designed KamAZ trucks. The plant's current production capacity is 1,700-2,000 tractors and 950-1,000 trucks per year. Currently, the plant assembles six models of tractors based on Belarus’ famous designs: "Belarus 80.1," "Belarus 82.1," "Belarus 892," "Belarus 1221," "Belarus 80X," "Belarus 1025," and 6 models of MAZ trucks.

The Nakhchivan Automobile Plant was founded during the period of independence in 1993 under the name NAZ-IMPEX. In 2009, NAZ signed a cooperation agreement in Beijing with the Chinese automobile corporation Lifan for the assembly of their vehicles. Currently, the plant produces models of FAW (First Automobile Works), the second-largest car manufacturer in China by volume. In 2022, NAZ began assembling pickups from the Chinese brand ZX Auto. In March 2023, the assembly of Maple X3 PRO cars started in Nakhchivan.

In May last year, the Russian automotive group Sollers that used to be partnered with US carmaker Ford reached an agreement to organise the production of light commercial vehicles (LCVs) at the facilities of the Azerbaijani company Azermash, located in the Hajigabul industrial quarter. In 2021, the Uzbek company UzAuto Motors, which used to be partnered with US carmaker GM, began assembling five models of Chevrolet cars (Damas, Labo, Lacetti, Tracker, Malibu) at a plant in the Azerbaijani city of Hajigabul. Azermash is a joint venture established by Avtosanoat Invest LLC (Uzbekistan) and STA INSAAT LLC (Azerbaijan).

The Khazar SD car is produced at the automotive plant in the Neftchala Industrial Zone. This is essentially the Iranian sedan IKCO Dena, assembled in Azerbaijan. The opening ceremony of the joint Azerbaijani-Iranian Khazar factory (LLC AzKron, owned by JSC Azermash and JSC Iran Khodro) took place in March 2018, attended by the presidents of the two states.

For the Azerbaijani automotive industry to get on track, it's essential for local enterprises not only to assemble cars but also to manufacture them. Typically, international carmakers produce parts at a centralised facility and export them to assembly facilities in various host countries. Localising the production of car parts has been an issue for many countries playing host to the assembly plants.

Here, Uzbekistan's experience could be valuable as it has long been home to an extensive automotive sector originally based on Korea’s Daewoo’s technology that was later taken over by GM when it went bust, including the Uzbek Daewoo factory in Andijan. GM has since pulled out of what is now UzAvto, which the government tried floated last year as part of its privatisation drive.

Azerbaijan needs to attract major investors to the automotive sector and encourage global brands to establish car part manufacturing capacity in the country. While none of the global car brands have expressed an interest in investing into Azerbaijan, specific steps are being taken in the Turkic region to expand and increase the automotive industry's capacity.

A year ago, Azerbaijan, Uzbekistan, and Kazakhstan announced the creation of the “Turkic automobile industry” conglomerate. It was noted that this would allow the existing production capacities in Kazakhstan and Azerbaijan to transition from large-unit assembly to full-cycle production and increase the level of localization. This will also open new prospects for the Uzbek automotive brand to enter the markets of Georgia, Turkey, and African countries. The factories in Kazakhstan and Azerbaijan will assemble new Chevrolet models with the help of UzAvto, leading to an increase in the supply of components to these countries from Uzbekistan.

The consolidation of production will lead to increased profits, reduced risks, and enhanced reliability of the economic environment. This also opens up opportunities to implement innovative technologies in production activities. Importantly, the tripartite conglomerate combines markets with a population of over 65mn people.

UzAvto is the driving force behind the new automotive alliance, which, in partnership with Kazakhstan's Allur Auto, will produce Chevrolet Onix cars in Kazakhstan. Later on, the production of Uzbek cars (small-unit assembly (CKD)) is also planned to start in Azerbaijan at the Azermash plant's facilities.

Returning to the collaboration in the automotive industry with Russia, it's noteworthy that a joint project between Russia’s giant truck maker KAMAZ and Ganja Automobile Plant was launched in 2014. The first batch of KAMAZ vehicles was produced in 2015. Currently, eight models of KAMAZ vehicles are manufactured there. In 2023, a joint service centre of KAMAZ and the Ganja Automobile Plant opened in the Jabrayil district of Azerbaijan, which was recently liberated as a result of the Second Karabakh War.

In an interview with bne IntelliNews, Azerbaijani economist Vugar Bayramov, a member of the Milli Majlis Committee on Economic Policy, Industry, and Entrepreneurship, said that the development of the automotive industry in Azerbaijan represents a strategic direction that is actively supported and encouraged by the country's government. “The main goal of this support is not only to strengthen the economic potential of the nation but also to attract foreign investments and to implement innovative technologies in the production process,” he said.

The establishment of a joint venture with Iran, which also has a well-developed automotive sector based on France’s Peugeot technology, to produce Khazar brand cars is a vivid example of the successful implementation of this strategy. This allows not only to supply the domestic market with quality vehicles but also contributes to the development of local industry and technological exchange.

Furthermore, another project is the development of electric bus production in Sumgayit, which underscores Azerbaijan's commitment to environmentally friendly and sustainable modes of transport. The planned start of production in 2025 and negotiations with leading global companies, including those from China, highlight the government's policy and commitment to sustainable production and dealing with climate change. This will not only open up new opportunities for export but also significantly enhance the level of the automotive industry in the country.

“The implementation of the electric bus project, and subsequently electric cars, will largely contribute to the realisation of the government's environmental initiative to create green zones in the Karabakh and East Zangezur economic regions as part of their ongoing development, now they have returned to Baku’s sovereign control. This will not only improve the environmental situation but also ensure the demand for new types of transport, contributing to further development of the local industry. For this reason, serious and fundamental work will be carried out in the automotive industry in the coming years,” Bayramov said.

The portfolio of the Azerbaijani automotive industry is currently modest. Largely, the production cycle involves assembling the final product from imported spare parts. Additionally, the demand for locally produced cars within the republic is not high, with citizens still showing a preference for foreign-manufactured vehicles. However, with the correct investment policy and the right choice of partners, the situation could change significantly in the not-too-distant future.