Main objectives of technological development

The main objectives of technological development for JSC AVTOVAZ are:

• Create new, modern and attractive vehicles;

• Achieve a significant increase in the quality of products through the implementation of a quality control system based on ISO quality standards, both at JSC AVTOVAZ and our suppliers;

• Consolidate our leading position in the industry and passenger vehicle-manufacturing sector in Russia. Much of the responsibility for achieving this is borne by the technological and production potential of the Research and Development Centre (R&D Centre) of the Technological Development Directorate of JSC AVTOVAZ;
n Ensure that fixed assets are maintained and replaced on a timely basis;




• Ensure that investment projects in the technological development area have a pay-back period of no more than seven years;

• Reduce the time gap between new product development and production launch to five years;

• Enrich the product mix by adopting modern technology in design and production in order to be able to offer new competitive vehicles to the Russian people at affordable prices;

• Attract new customers;

• Reduce design and production costs through:

- Modernisation and improvement of strategic research, project preparation and execution stages, manufacturing and management techniques that reduce the level of resources consumed and management costs;

- Increase in production capacity (including co-operation with other producers, efficient utilisation of R&D potential, unification of platforms and components, reduction in the number of suppliers accompanied by arrival of larger entities); and

• Maintain the image of JSC AVTOVAZ as that of a company striving to modernise itself. The R&D Centre is a large research facility, performing a full cycle of research and development work. One of its main tasks is to co-ordinate launches of new vehicles and materials.

In 2001 the R&D Centre’s projects were:

• VAZ-2115 - production launch;

• Chevrolet-Niva (Project VAZ-2123 in JSC AVTOVAZ) – preparation for the production of the automotive kit that will be supplied to ZAO GM-AVTOVAZ for vehicle assembly;

• VAZ-1118 - design and testing work, production preparation;

• VAZ-2110M - development of an upgrade model, with further transition to the VAZ-2116 model;

• VAZ-2151- development of a new generation of «classic» vehicles that will replace the VAZ-2105/07/04 range; and

• VAZ-11YY and VAZ-11ZZ - pilot work on potential projects. Resulting models will be produced beyond 2010.

The substitution of imported materials by domestic production resulted in a reduction in vehicle production costs.

In 2001 the R&D Centre oversaw the adoption of 20 new materials in the production process of the VAZ-2110 range.

As a result of production process improvements implemented the Company realised savings of RR 103 million.

UTAC, a quality systems auditor, issued a certificate of compliance with ISO 9001-94 to the Technical Development Directorate for their quality system in the development of new vehicles and product upgrades. This is the first time that the R&D function of JSC AVTOVAZ has been internationally certified.

The quality system that is used in the development of vehicles gives us confidence that future generations of vehicles will enjoy continued demand, and will be sold competitively both domestically and internationally. This in turn will ensure the financial stability of the manufacturing operation.

Capital construction

In order to implement our plans discussed above, in 2001 AVTOVAZ’s capital expenditures on construction for production amounted to RR 6,843 million (2000: RR 6,253 million). The total value of assets completed during the year and transferred to production was RR 10,076 million (2000: RR 10,455 million). The levels of capital construction decreased from RR 16,134 million in 2000 to RR 12,901 million in 2001.

Environmental policy of JSC AVTOVAZ

JSC AVTOVAZ has always paid significant attention to environment
protection. We have focused our development policy on improvements
in environmental safety of our products and manufacturing processes.

The cornerstone of the environmental policy of JSC AVTOVAZ has been the manufacturing of goods that comply with both domestic and international environmental directives, rendering minimum adverse impact on the environment.

We implement the environmental policy of JSC AVTOVAZ on the
following key principles:

• Minimise consumption of energy and materials in production, continue to improve technology and all processes in order to reduce the adverse impact on the environment;

• Ensure secondary utilisation and environmentally safe recycling of products once past their service, together with materials and components at the end of their life cycles;

• Ensure easy access to all environment-related information and provide environment education to the Company’s employees; and

• Ensure strict compliance with domestic and international environmental regulations, and proactively participate in environment protection programmes both in Russia and worldwide.

From early stages of development of new LADA models we strive to ensure that new vehicles are environmentally safe throughout their life cycle.

We are currently working on the following tasks to ensure compliance with international rules of environmental cleanliness:

• Reduce the toxic levels of exhaust gases and ensure compliance with international requirements Euro-3 and Euro-4;

• Reduce the consumption of fuel and emissions of carbon dioxide (CO2);

• Eliminate or reduce the application of environmentally hazardous materials and substances. These primarily are cadmium, barium, lead, mercury and chlorofluoride hydrocarbons;

• Utilise materials and carrying elements that can be easily dismounted and recycled;

• Reduce the level of external and internal noise; and

• Utilise special marking on rubber and plastic parts to make further recycling of old vehicles and components easier.

This year was a turning point in environment protection developments in Russia. New and stricter rules were introduced. In 2001 the State Committee for Standards enacted new toxic emissions standards Euro-2, which we anticipated.

We have completed all necessary tests and "Approval Type TS" was obtained in relation to all vehicles produced at the main assembly lines, including the compulsory installation of converters.
In addition, we obtained a short-term permit for the production of vehicles without converters for the Russian market during 2002. The number of such vehicles should not exceed 50% of our total output.

In 2001 we produced 395,203 vehicles that were fitted with fuel injection systems, including:

• Without converters – 273,354 vehicles;

• With converters for the Russian market – 102,282 vehicles;

• With converters for export markets, Euro-2 compliant – 5,651 vehicles; and

• With converters for export markets, Euro-3 compliant – 13,916 vehicles.

The remaining large number of vehicles that are not equipped with converters is largely due to the fact that Russian customers are not yet prepared to accept price increases without direct improvements
in consumer features to match.

Research and Development Projects

Chevrolet-Niva (Project VAZ-2123 in JSC AVTOVAZ)

In 2001 we continued work on the base Chevrolet-Niva model and improved a number of its consumer features. In accordance with the European classification of vehicles, this model is classified as an SUV.

This project is being implemented together with GM’s specialists at our joint venture with GM, ZAO GM-AVTOVAZ, established in July 2001.

We identified steps to improve the technical level of the variants of this model for the Russian and export markets, following suggestions provided by GM’s International Technical Development Centre.

The joint venture started to prepare for the production of this model in April 2001, and the first vehicle will be assembled in September 2002.

We finalise the transfer of original design documentation on this model to the joint venture. This documentation is property of JSC AVTOVAZ in accordance with the General Agreement that AVTOVAZ and GM signed on 27 June 2001.

We are finalising the testing of the antilock braking system. We continued to improve the exhaust system in order to increase the engine power and reduce the level of external noise. Compliance with the emissions Euro-3 norms was crucial.

We continued testing and evaluation of two variants of electric steering boosters manufactured by Russian suppliers.

We continued fatigue tests, including tests of the vehicle’s body when driving on cobblestone surfaces.

We have begun the adaptation of air bags and self-adjusting seat belts with the automotive component firm BREED of Germany.

VAZ-1118

The VAZ-1118 family should significantly extend the range of our
vehicles. These vehicles should be highly competitive in our domestic market against similar imported vehicles.

In accordance with the European classification of vehicles, this is a Class B model.

Models to be produced in this range include:

This range will be fitted with 16-valve engines (centre-to-centre distance of 89 mm and 95 mm). These engines will have an electronic control system. It is required that such engines conform to Euro-3 and
Euro-4 norms. In order to test safety and durability, we have performed the entire cycle of evaluation work.

In the Final Assembly Division, new sectors for the welding of the body frame and hinged components were established. The welding lines will be produced in the Machine Building Division of JSC AVTOVAZ with
participation of specialists from Kuka of Germany.

New body painting equipment will be bought from Eisenmann of Germany; a contract was signed with this supplier.

The new assembly line for the VAZ-1118 range will use two types of conveyor systems: floor and overhead.

Components of chassis and engines for the VAZ-1118 range will be primarily produced using existing equipment; necessary upgrades of equipment will be done. New equipment will be installed in existing facilities by partially replacing obsolete equipment, reorganising work areas and outsourcing the manufacture of components to outside companies.

VAZ-2110M

In order to avoid price competition between the VAZ-2110 and the VAZ-2112 models, and potentially the VAZ-1118, we understand the need to modernise the VAZ-2110 range to be able to charge higher prices. This will require a significant improvement of consumer features.

This range should partially replace the existing 2110 family. They should be highly competitive in our domestic and export markets against the base model.

In accordance with the European classification of vehicles, this is a Class C model.

Two variants of the VAZ-2110M model will be produced. The base model will be a sedan (four doors and five seats).

VAZ-2151

This range will replace the VAZ-2104/05/07 family. This new range is designed to be more competitive than its predecessor both in domestic and overseas markets.

Retention of the «classic» vehicles together with the launch of the VAZ-1118 range will enable JSC AVTOVAZ to increase total output of vehicles to 950 thousand units a year at minimum cost.

In accordance with the European classification of vehicles, this is a Class C model.

Since the rear-wheel models of LADA vehicles, which are currently in production (VAZ-2104/05/07), had not been modernised for a long time, it was an urgent matter to upgrade the design of these vehicles to ensure compliance with current safety rules and anticipate future changes.

Additionally, in order to improve the competitive position of rear-wheel models significant improvements needed to be introduced, including:

- The interior and exterior of the vehicle;
- Roominess; and
- Steering responsiveness.

In developing this new range we use modernised chassis of the «classic» models. With this, we are trying to minimise project costs and make use of existing production facilities.

These vehicles will be fitted with a modernised 1.7 litre engine (used in the VAZ-2104/05/07) and will comply with Euro-3 and Euro-4.

The body of the model will be new reflecting modern trends in design. This will comply with safety requirements, and will have improved
durability, quality and comfort.

During 2001 the R&D Centre developed design proposals and implemented them in scale models. A demo-working sample will be shown at the Seventh International Motor Show in Moscow (MIMS-2002).

In 2002 we will prepare design documents for the first batch of trial models. Production of the VAZ-2151 range on the second assembly line will not require halting production of the VAZ-2104/2105/2107 family, rather a gradual replacement will occur.

Project ANTEL

We continue research into possibilities of reducing toxic emissions.
As part of this, we are working on a vehicle powered by hydrogen-
oxygen fuel cells. In order to create such a vehicle, we are working with the Uralski Electrochemical Combine and the Rocket and Space Corporation. As a result of this co-operation, we have defined a concept of development of a traveling trial model on the basis of the
electrochemical generator «Photon». In addition, we have created a
working VAZ-2131 Antel that is powered by hydrogen-oxygen fuel cells.

We have constructed and tested a mobile refuelling and maintenance module for this vehicle.

In accordance with the approved programme we are carrying out
laboratory and on-the-road tests that allow us to refine the main
performance features of the fuel cell.

If this programme is successful, a prototype of this vehicle will be created in the near future. This model will be similar to an ordinary vehicle in terms of towing performance and cruising range. However, comfort and environmental cleanliness will be significantly improved.

We understand that faster renewal of models and their variety are key to a successful future. With this in mind, we continued work on the other new projects, VAZ-11YY and VAZ-11ZZ.