France-Russia Automotive

N° 6

November 2008

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France-Russia Automotive (Auto Franco-Russe) is an economic newsletter focusing on the development of the Western automotive groups’ business in Russia. France-Russia Automotive is distributed both on paper and electronically. To receive the next issues for a free trial you only need to subscribe on our website: www.autofrancorusse.fr. France-Russia Automotive is published by Agence du Fil SARL Company, whose publications are devoted to the Franco-Russian trade.

EVENT

TROUBLED TIMES FOR LOCAL MANUFACTURERS

Events have succeeded each other since the autumn in the automotive sector. There has been a violent upheaval in local manufacturers' positions and market shares.
Local businessman Oleg Deripaska's holding, Russkye Mashini, has withdrawn from its investment in the Canadian equipment manufacturer Magna International. The holding also owns the automotive manufacturer GAZ, one of the market leaders with annual production of 270,000 cars, trucks and buses and annual sales in excess of 4 billion dollars. The 25% stake in Magna was purchased for about 1.5 billion dollars in 2007 using a loan. The Magna shares were used as collateral with the bank, BNP Paribas, who financed the deal. However, in early October, the large drop in the share price forced the bank to ask for early repayment of the loan, in accordance with the contract. Russkie Mashini preferred not to continue.
A few days later, Magna International announced that it had cancelled a component factory project at Shushari near St Petersburg. The site was scheduled to produce bodywork parts, bumpers and seats
Another victim of the crisis is the planned merger between two local tyre manufactures, Sibur Russian Tyres and Amtel Vredestein, which will not now take place. Under this agreement, Sibur Holding, part of the Gazprom - Gazprombank conglomerate, should have acquired the heavily indebted Amtel and merged it with its tyre making entity, Sibur RT, through a complicated set of share deals. The merged group would have controlled almost a third of the tyre market and have annual sales worth approaching 2 billion dollars. The project planned an initial increase of Amtel's capital of about 150 million dollars to eliminate its short term debt and allow it to pay for raw materials; the company's total debt exceeds 800 million dollars. Unfortunately, the banks involved in the transaction backed off and the Amstel recapitalisation became impossible so the project was aborted. A short time later, the Amstel factories had to shut down due to a lack of cash for raw material purchases. This is the third time they have stopped during 2008 and a restart is not forecast.
Sibur RT's mother company, Sibur Holding, has also suffered It was in the process of being bought by its management who were going to use the shares as collateral for a bank loan. However the share value has fallen and, finally, the banks were unable to go ahead.
Given this worrying background, almost every local manufacturer has problems with their suppliers, especially for steel. Given the increasing number of unpaid debts, suppliers have decided to stop deliveries to the GAZ assembly lines and other stoppages can not be excluded.
This disastrous situation is due to the financial fragility of the Russian industry. For many years they have enjoyed a rich life style and accumulated acquisitions relying on a demand that was in constant growth. The resulting debt has now become a handicap. They have asked for State support - which has promised to be understanding but is not hiding its hopes to renationalise several large companies. However, public money is currently very much in demand and Rome was not built in a day.
During this period, the western companies present in Russia appear to be maintaining their objectives. It is true that the demand for their production is such that growth, even if reduced, remains positive for the segment - whilst sales of local brands have virtually ceased. The current storm could accelerate the discontinuation of old locally designed models to the benefit of the western brands.

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ROSTEKHNOLOGII CONSOLIDATES EQUIPMENT MAKERS

Despite the financial crisis, the public company Rostekhnologii intends to create a holding next year that will be dedicated to automotive components that could be worth as much as 3 billion dollars. Its clients will include the Avtovaz factory and the western brand's Russian assembly plants. The planned Togliatti Technopark will be a key part of the holding. This return to centralised state controlled production should help solve the problem of a shortage of components in the market.

Rostekhnologii intends to form a holding specialised in automotive components before the end of 2008 with a value of 2.5 to 3 billion dollars. It will be formed on the base of the OAO 'Obiedinennie avtomobilnie technologii' (OAT) which is owned by the investment bank Troïka Dialog. This bank has also invested in Avtovaz. Its board and Avtovaz's board will decide on the list of assets that will form OAT towards mid-December.
The holding will receive the component factories that are currently part of Oboronprom, which is already controlled by Rostekhnologii. It will also receive Avtovaz's component factories and probably those belonging to Kamaz. It could also acquire some assets from the market and create some Greenfield component production facilities based on the Togliatti Technopark.
Oboronprom's assets will not be purchased but taken in lease-management. For its part, Avtovaz could transfer seven factories to OAT for a total of over a billion dollars including the foundry, the matrices, the presses and the component engineering that is currently done by the Avtovaz research centre.
Vladimir Avetissian, OAT general manager offered Avtovaz shareholders (Rostekhnologii, Renault and Troïka Dialog) the possibility of becoming shareholders in OAT in exchange for the assets being transferred. This will allow OAT to count amongst its shareholders Renault and Avtovaz minority investors. According to sources close to Avtovaz management, this proposal has been well received by those involved, including the French manufacturer.
The list of assets to be acquired has not yet been finalised. According to Vladimir Avetissian, OAT is in discussion 'not just with the SOK group (see sidebar) but also with independent manufacturers such as the OAO BalakovoRezinoTechnika. BalakovoRezinoTechnika manufactures different types of rubber for the automotive sector and its clients include Avtovaz, Gaz, Kamaz and Ouaz. Vladimir Avetissian has not provided the complete list of companies that are under negotiation. Kamaz could also become a shareholder provided its adds its component production to the holding.
OAT will become a shareholder in the planned component Technopark that is to be created at Togliatti 'with the active support of the Samara Region and foreign investors' according to Rostekhnologii sources. OAT is counting on foreign equipment manufacturers to create production facilities at Togliatti that are not just aimed at supplying Avtovaz but also western manufacturers' Russian assembly plants. Rostekhnologii and OAT promise that this project will have government support and it can count on Vladimir Artiakov, governor of the Samara region who is also an ex-Rostekhnologii employee. OAT and Rostekhnologii have already reached agreement with the Region for the land on which the Technopark will be built, near the Avtovaz research centre, and also for land in the Stavropol district in the same region. They are Greenfield sites without facilities and the Region has said it is ready to finance the infrastructure.
The Technopark project is jointly managed by Vladimir Kapoustin, industry minister in the regional government and an ex-Avtovaz employee, Maxim Nagaïtzev, development vice-president at Avtovaz, and Alexandre Vinogradov, project manager. The involvement of Maxim Nagaïtzev in the project's beginnings indicates that the Avtoivaz factory and Rostekhnologii expect it to provide significant growth. Victor Baunov, who previously headed up the project, did not have sufficient influence on the company's decisions despite being an Avtovaz vice-president The Technopark project will be managed within OAT by Dr. Frank Detlef Wende, who will run the negotiations with western equipment manufacturers, and Vassili Nikonov, Vladimir Avetissian's deputy and production manager at Togliatti.

Are these projects real?

However, nobody can say with any certainty what part of the promised support will actually materialise. According to an Avtovaz source 'Currently, the Technopark is nothing more than fine words. However, nobody is dealing with the legal problems, especially those related to the ownership of the land that it is planned to use for the project.' Given this uncertainty, the construction of a tyre factory by Pirelli is on standby. Pirelli has formed a JV with Rostekhnologii with the aim of producing over 4 million tyres per year. According to tyre market sources, Pirelli is ready to terminate its partnership with Rostekhnologii. It is noteworthy that the most recent statements from OAT state that 'the Pirelli project will not be part of the holding in the short term and will be dealt with separately.' According to sources, Pirelli looked at the possibility of buying Amtel-Vredestein in September. The Russian-Dutch manufacturer is in a situation that is close to a judicial liquidation. However, Pirelli walked away from this project towards the end of October. At Amtel-Vredestein, questions are answered with 'our company is discussing potential partnerships with several western manufacturers including Pirelli.'
In addition, the level of involvement of the Samara region in the Technopark infrastructures has not yet been clearly determined. Avtovaz, one of the region's main tax payers, is suffering from a sales crisis with enough stocks of unsold product to last two months. No bank has committed to financing the Technopark project according to sources close to Avtovaz. Troïka Dialog has previously announced the possibility of attracting up to a billion dollars for the Technopark project. However, no one in the company is now able to answer the question as to the project's feasibility in the current crisis conditions. Mr. Avetissian and Troïka Dialog limit their comments to generalities and suggest that 'it's a long term investment project which should not be shelved even under current conditions.'

l Who is Rostekhnologii?

The State holding Rostekhnologii was created in 2007 based on the public company Rossoboronexport which was responsible for Russian export arms sales. Rostekhnologii's business is regulated by an ad hoc federal law and its financial results are confidential. Rostekhnologii is currently amassing shares of 450 enterprises in different sectors including electronic manufacturers, chemical producers and defence sector companies. Shares in some companies have been transferred to Rostekhnologii by special presidential decrees. This is what occurred with the Vertoleti Rossii aeronautic holding, the AirUnion air freight company, the GOK Erdenet mining complex, the Russpetzstal steel manufacturing holding…
In the automotive sector, Rostekhnologii now owns Avtovaz, which owns 25% of Asia-Avto in Kazakhstan, and is negotiating the acquisition of the IzhAvto factory at Oudmourtie. Avtovaz sales revenue was 7.2 billion dollars in 2007 generating a net profit of 140 million dollars. Forecast sales are nearly 770,000 cars.
In addition, Rostekhnologii controls the Oboronprom holding which owns several equipment makers supplying Avtovaz:
- DAAZ at Dimitrovgrad in the Oulianovsk region, manufacturing injection systems, neymann and non-ferrous items.
- SAAZ at Skopino in the Riazan region, manufacturing suspension elements.
- SMZ at Serdobsk in the Penza region, manufacturing components for engines and drive trains.
Rostekhnologii is also hoping to control several component factories that are currently part the SOK group (see sidebar), notably Vazinterservice, Schetmash, Osvar, Motor-Super and also Rossavtoplast (steering, suspension, plastics), Avtosvet (lights), Belzan (fixings). According to Rostekhnologii's own forecasts, the State company could eventually control 40% of the automotive component market; a market that is estimated to be worth 4.5 million dollars.
Rostekhnologii has recently suggested the creation of a joint company with the Belarus government: this could involve the joint operation of the MAZ truck factory at Minsk.

l Who are the Rostekhnologii people?

- Dr. Frank Detlef Wende: before joining OAT as deputy general manager he was the managing director at the OOO Avtokomponenty holding (seven factories and 25,000 employees), which owned the State company Oboronprom which, in theory, consisted of manufacturing companies working in the interest of the military sector but was not limited to that. The DAAZ, SMZ and SAAZ component factories were also part of it.
- Vladimir Artiakov: Governor of the Samara region, ex-deputy general manager of Stae company Rossoboronexport responsible for arms exports. He worked under the Rossoboronexport General Manager Sergueï Chemezov. Vladimir Artiakov has been Chairman of Avtovaz since 2006 where he was responsible for creating the links with Renault. Sergueï Chemezov has now replaced him as Avtovaz Chairman and Vladimir Artiakov has been named regional governor.
- Vladimir Kapustine: Industry minister for the Samara region (his title is regional government minister even though the region has no independence in this respect). An ex-Avtovaz employee where he arrived in 2005 when the State company Rossoboronexport took control of the factory. He was previously industry department director at Rossprom, the federal industry agency, that was run at that time by Boris Aleshin – who is now Avtovaz Chairman. Vladimir Kapustine did not have any specific title at Avtovaz. However, he managed the development of a new range of cars. He then led the negotiations with Daimler Chrysler for the purchase of the Tritec factory in Brazil The project was not completed. Since then, Vladimir Kapustine has been involved in the project to reorganise production at Avtovaz and the creation of the Technopark. Both projects are at a standstill.
- Maxim Nagaïtzev: Avtovaz development vice-president who was previously a 'vehicles' sector researcher and teacher at MGTU, a leading Moscow business school. Since arriving at the factory in 2005, he participated in the negotiations with the Canadian Magna to develop a new C class model and was then involved in negotiations with Renault about the development of a new range. According to sources, the 'C' project presented by Avtovaz during recent motor shows is mainly the work of Maxim Nagaïtzev's team and Magna has only had limited input. According to Avtovaz statements, Renault has accepted its request to continue to develop a new model based on the 'C' project.

l Who is SOK?

The SOK group originated in Samara and is controlled by Iouri Kachmazov, a local businessman. Its sales revenue is close to three billion dollars. It consists of several sites dedicated to motor vehicles and Avtovaz in particular, and the main ones are IzhAvto (assembly of old Avtovaz models and Kia), Vazinterservice (air conditioning, clutch plates, etc), Avtonormal (fixings), Motor-Super (suspension parts, gearboxes, brakes…), Schetmash (dashboards), Syzransky (bodywork, seats), Kinelagroplast (heating, fuel tanks, interior parts), Osvar (lights), Sokia (Kia distribution)…
In addition to the automotive sector, the group also produces telephone cables, glass and ceramics in the Samara region.

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AVTOFRAMOS HAS EXPRESSED INTEREST IN AVTOVAZ'S DEALERSHIPS

Since Renault bought 25% of Avtovaz, Avtoframos, the French company's local subsidiary, has been developing new projects. 'We would like to use the Avtovaz dealership network that is well developed in towns with populations that are greater than 100,000' explained Jean-Michel Jalinier, Avtoframos General Manager, during the MIMS motor show at Moscow in August 2008. Avtoframos's own network currently consists of 82 dealerships and 115 sales outlets. The French-Russian company was created with a minority participation from the Moscow town hall who provided the land for the factory and is now working on a project to enlarge its site with the aim of increasing production to 160,000 units by the end of 2009 to cope with increasing market demand. 'We have done 25% more this year but the market grew by 32% so we are behind by 7%' commented Jean-Michel Jalinier.
In parallel, Avtoframos will increase the rate of integration of local suppliers in its products. 'The integration rate is currently above 40%in terms of parts but it is over 50% in terms of roubles which includes salaries, etc. This means that our vehicles can now be considered a local model under international trade rules’ observed Jean-Michel Jalinier. The Avtoframos has been on the Russian market for a number of years already and enjoys working with local managers, 'talented people', but complains about the high staff turnover and salary dumping on its market.

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LOGISTICS: THE AVTOFRAMOS SUPPLY CHAIN BRAIN TEASER

The Renault Avtoframos factory is within the Moscow city limits and receives logistic flows from Romania, France and Russia. It is trying to install a quality logistics culture in it s local suppliers.

The local Renault subsidiary, Avtoframos, has gained a lot of experience in organising logistic flows. Initially, Logans were assembled at Moscow using parts that came exclusively from the Dacia plant at Pitesti in Romania. However, the manufacturer has wanted to progressively increase the share sourced from local suppliers. Not just for the pleasure of working with them but, as Olivier Grisselin, Avtoframos logistics director, explains: 'Russian production is more expensive than Romanian production because labour is more expensive. Russia is not a low cost country! Purchasing parts here is 5% more expensive at the factory gate than for the same pars made in Romania. However, there is a saving on logistics costs and customs duty, which is 2% for parts covered by Decree 166 and about 11% for parts excluded from the scope of Decree 166.
Currently, Avtoframos logistics managers are managing flows from Romania, the Amiens warehouses and the various Russian suppliers whose numbers are growing. Deliveries from Pitesti travel 1850 km. They are split between road and rail. Road transport represents 70 trucks per week shared between 5 fright companies. This means of transport provides great flexibility and a delivery time that is fairly short but variable. 'The average delivery time is five days but it can be more or it can be less' according to Antoine Zeiger, Avtoframos logistics project manager. This method also has several problems in November and December when the transport 'pipelines' are full of fresh goods for the year-end festive season and there is also the winter weather to contend with.
Rail freight from Pitesti carries 44 to 88 containers per week that are delivered to the Paveletskaya railway station at Moscow and then carried by road over the short distance remaining between the railway station and the factory. The advantages of this transport method include: constant availability throughout the year and stable delivery times - but a bit too long from Avtoframos's point of view.
Deliveries from Amiens represent seven trucks per week.
Finally, deliveries from Russian suppliers represent almost 100 trucks per week. They are organised by the suppliers themselves. The average distance for a delivery is 450 km. The failure to meet delivery times and the internal height of the trucks, which is 2.6 m, are amongst the most inconvenient problems with this delivery method. Avtoframos hopes this limit will be changed to 2.9 m for some of the fleet in the future.
Organising logistics from the local suppliers was not easy. 'We were confronted with junior managers with university degrees who spoke English or French in the Russian equipment manufacturers. It was difficult to explain to them that high levels of quality are not possible unless there is also a high quality logistics!' sighed one of the Avtoframos managers. Avtoframos has set an objective of achieving 98% compliance with both quality and time commitments in its logistics circuits towards the end of 2008.

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Keep hope alive!

There is no doubt that the world economy is facing a major crisis and the automotive industry is one of the most affected: the European Automobile Manufacturers Association latest market statistics revealed a 14,5% drop in sales for October 2008 versus October 2007, after -8,2% in September and -15,6% in August. Since January 2008, the overall European passenger cars market has receded 5,5%. The North American market is even more badly hit, with a drop in sales of 32% recorded in October in the USA.
What about Russia? Well, Russia also is experiencing difficult market conditions: according to a leading French weekly news magazine “Analysts think that the Russian market is very much exposed to the crisis, as its growth is strongly related to the availability of credit for potential buyers. Sales growth of foreign brand cars in Russia is only 22% in September 2008, versus 50% in September 2007”.
In October 2008, according to the Automotive Committee of the European Association of European Businesses, foreign brand cars sales in Russia were still progressing 9% versus October 2007.
One can not hide from the fact that the Russian passenger car market is facing a crisis: the 30% or 40% monthly growth rates we got used to the last few years are now history. But even in the middle of huge turbulences on the world car sales market, the Russian figures are still positive!
Russian consumers are getting their hopes up: according to a November 2008 Deloitte research, only 20% of Russians think that the financial crisis is likely to affect them personally.
For car manufacturers and spare parts suppliers already invested in Russia too, there are plenty of reasons to keep hope alive...

Alain Bastid

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GM inaugurates its St Petersburg factory

General Motors has just inaugurated its new factory at Shushari near St Petersburg. Its intended production capacity is 70,000 vehicles per year and it will employ 1,700 people. It will initially produce the Chevrolet Captiva and the Open Antara. 'Russia should become GM's leading European market in 2009. We are already forecasting that we may have to enlarge this factory in two years time.' announced Carl-Peter Forster, GM Europe Director. Previously, GM had manufactured a model based on the Avtovaz 4 x4 at Togliatti but the partnership conditions had been unsatisfactory for some time. The American manufacturer also had two small volume production sites for top of the range models at St Petersburg and Kaliningrad with Avtotor. Its Russian logistics were initially managed through Finland but have gradually become concentrated on St Petersburg.

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Hyundai and Tagaz develop separate projects

Hyundai has launched the development of a segment C model that is aimed specifically at the Russian market. According to its local management, it may install a new factory in the St. Petersburg region to produce the planned model. Deloitte has been contracted to work on this installation project. New vehicle sales in segment C represent about 40% of the market whilst the economic segment B accounts for 38% of sales. Hyundai is currently present on this market with models in the economic segments assembled in the Tagaz factory at Taganrog in the Rostov region of southern Russia. The factory is owned by the Doninvest holding which is owned by businessman Mikhaïl Paramonov. Hyundai's local partners complain regularly of insufficient supplies of assembly kits supplied from the Korean company's factories. In addition to the six Hyundai models, Tagaz also assembles the SsangYong 4 x 4 under its own branding and a model from Chery. It also owns the ROAZ factory at Rostov that is specialised in buses. The company has recently announced plans for several factories with one more in the Rostov region and another at Vladikavkaz in North Ossetia. This latter project is ostensibly political and will create up to 6,000 employees in the region that was the subject of the conflict between Russia and Georgia during summer 2008. However, the size of these projects and their financial details are not yet known. Tagaz sales were 79,620 units in 2007. It announced sales revenues this summer of 1.1 billion dollars for the same period and a loss of 20 million dollars.

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Continental and Sibur RT disagree on the future of their joint venture

The Matador-Omskshina tyre factory was selected to supply the assembly lines of the planned Siber car from Gaz. It is a joint venture between Continental and local company Sibur RT producing 2.5 million tyres per year and already supplies VW's Skoda at Kaluga and Avtoframos's Logans at Moscow with factory fitted tyres. The Sibur RT management have announced that they would like to increase the joint venture's production to 4 million tyres per year. However, Continental has not confirmed this project. Given the probable changes in the market towards higher segments, increasing the production of the Matador-Omskshina factory, which is specialised in the economic segment, is not priority. Since Continental bought Siemens's VDO equipment manufacturing division, which has several factories in Russia, the emphasis has been on developing this equipment division.

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Avtovaz finalises the Izhavto purchase

Avtovaz is finalising its plan to purchase the IzhAvto factiry at Izhevsk in Oudmourtie from the SOK group. The company has just obtained approval from the monopolies service for the project. The negotiations started two years ago and the final sales price will be about 350 million dollars. SOK asked for 500 million dollars for this site with a production capacity of 220,000 cars per year. It assembled 78,802 cars in2007, mainly Kia models. The factory's has debt, approaching 100 million dollars, and the condition of its equipment have obviously contributed to the transaction price being reduced. Avtovaz plans to transfer production of its old models to IzhAvto to free up capacity in its Togliatti factory for future ranges, especially those developed with Renault. Avtovaz has also offered Renault the option of participating in the refurbishment of the Izhavto plant with a view to assembling a French model there but Renault does not appear to have jumped on this proposal.

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Public money to finance distribution networks

Sales of locally designed vehicles collapsed on the first days of the crisis. To such a point that even in October Avtovaz had almost 100,000 unsold vehicles which is the equivalent of two months production. And this figure does not include unsold vehicles in dealerships. At the same time, Avtovaz failed in its attempt to sell its dealership network to Lada Service. No one offered it a price that matched its evaluations in a market in distress. Consequently, the Togliatti based company has found a reason to justify keeping this network of 140 dealerships which is accounts for 25% of its sales. It is the distribution channel that can not refuse the manufacturer's vehicles even when it is unable to sell them.
This has led to Avtovaz asking the government for a billion dollars of financial aid in order to open addition lines of credit for the dealers, according to the official explanation. The problem is that the dealers do not need lines of credit to sell more because they are unable to sell their own stocks. In reality, the lines of credit will allow the factory to keep on working to fill the storage areas. Having observed Avtovaz's attempts to obtain public finance and the Gaz approach that is similar, the managers of the Kamaz truck factory have also asked for aid: a billion dollars - this is obviously the magic number for the Russian automotive sector. More than half this aid, should it be obtained, is intended to finance sales via leasing. Apparently, Russian manufacturers have found a means of financing their distribution networks with taxpayer's money.

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Trends: 'inch-up'

Do you know the 'inch-up'? This is the current market trend: replace the wheels and tyres by the next size up in dealerships when a top of the range vehicle is purchased; Between the tyres at 400 dollars each and the customised wheels at 1,000 to 1,200 dollars each, the option means that dealers can invoice 6,000 - 7,000 dollars more than the sales price. The trade is so profitable that some dealers no longer offer some top of the range models without the ' inch-up' option.

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EXPERIENCES

'THE RUSSIAN CONSUMER WANTS TO KNOW EVERYTHING ABOUT THE TYRES THAT THEY ARE GOING TO BUY!'

Eric Faidy, general manager of Michelin Russia et CEI, is trying to gain market share in winter tyres thanks to products specially adapted to the local climate. Its Davydovo factory, a hundred kilometres east of Moscow, was inaugurated in 2004 and is working at full capacity.

France-Russia Automotive: What is the development dynamic for your tyre ranges on the Russian market? How is the demand progressing?

Eric Faidy: Russia is a country that is important for us due to the size of its market and its growth. The annual market represents over 40 million tyres of which about 35 million are replacements. It is growing by 5 - 7% per year and even faster in our target segments. We are currently the leader in the summer tyre market and are growing very quickly in the winter tyre market. The performance of both our summer and winter tyres is recognised by the specialised press in the tests that it publishes regularly. Over the last few years, we have mobilised our design teams to offer the market tyres that are specially adapted to the Russian winter.
Amongst the market trends, we have observed strong growth in the premium and winter segments. Russia is by far the biggest European market for 4 x 4 tyres.

- What do you consumers look for first? A price segment, a brand, the product's technicality or the 'Made in France' label?

- The main characteristic of the Russian consumer is his/her curiosity. He/she wants to know everything about the tyres that he/she is going to buy. In our jargon we talk about 'knowledgeable shopper'. In lots of countries, clients are looking for the lowest price. Here, he/she wants to know what they are buying. We are recognised for the performances of our tyres in all weathers and all climatic conditions and for the technologies that we use. Michelin in Russia, as elsewhere, stands for innovation.

- How are locally manufactured tyres from western companies perceived by Russian consumers?

- Initially, the public doubted the quality. This was so strong a feeling that the automobile magazine 'Za Roulem' wanted to compare Michelin tyres manufactured in our Davydovo factory on the outskirts of Moscow with those manufactured in Western Europe. The result did not surprise us: The quality was the same! Our tyres are Michelin tyres before they are Russian, French or Italian. Nowadays, all global car manufacturers manufacture or are going to manufacture here. 'Made in Russia' is no longer a problem for consumers; they trust the main brands that gain their reputations on a daily basis all around the world.

- Your Davydovo factory produces almost 2 million tyres; Is this its cruising speed or are you looking at expanding it?

- The factory is now working at full capacity. It is intended to service the Russian market and produce a good share of winter tyres. We also import tyres because the factory capacity is not enough to supply the market. The factory's future depends how the market develops. Our Chairman, Michel Rollier, stated that we would continue to make commercial and production investments in Russia last year during a visit to Moscow.

- What are your intentions for the Tyre Plus network? What services do you think should be developed as priorities on this market where the supply is still weak?

- We launched the Tyre Plus network in Russia in order to introduce the idea of tyre related services which had not been developed. Car owners were used to buying tyres in an open air market and then fitting them themselves or having the work done elsewhere. Tyre Plus means we can guarantee the same service quality throughout the country. We certify the standards, which correspond to global benchmarks, through regular audits of sales outlets. This is possible for Michelin because of our very large distribution experience with our European, US and Asian brands and our thousands of sales outlets. The network currently consists of over a 100 centres for private vehicles and heavy goods vehicles. We are continuing to develop this network but our priority is the quality of new sales outlets rather than the number of new openings.


- What advice would you give to western equipment makers who are thinking about the Russian market?

- Russia and the CIS is a very dynamic zone and merit close attention. I think that every equipment manufacturer knows that the Russian automobile market became the largest European automobile market this year. Not so long ago, the consensus was that this would happen in 2011 or 2012... It’s already happened!

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'CUSTOMS DO NOT ACCEPT INACCURACIES!'

Customs clearance for products entering the Russian market requires detailed preparation. Explanations from Serge Kisselevsky, Eastern European sales engineer for Daher.

France-Russia Automotive: What are the role of the importer, the carrier and the other providers of logistic services?

Serge Kisselevsky: The importer must be a Russian company. It is the only form that is entitled to pay duties and taxes in Russia, the exporter can not do this. A representative office in Russia owned by a foreign company can not obtain customs clearance. You importer must be registered with the appropriate customs post for the type of products that you intend to deliver. Some types of products are dealt with by a specific customs post. e.g. jewellery passes via the Aktzisnaya customs.
The exporter has to provide the importer with a list of formatted documents: the certificate of origin, one or more 'Gost R' conformity certificates, etc. It needs a team of specialists in order to obtain these documents. There is a general rule for certificates but more and more often each customs post will ask that you include specific information on the documents. Customs clearance can be fast and efficient and you can even clear customs in 24 hours - but its takes a week of preparation! Customs do not accept inaccuracies.
The carrier or freight forwarded will deal with the customs formalities and export. It will provide the company with a copy of the declaration for the French tax authorities.

- Is the practice of 'grey' customs clearance with reduced prices still practiced?

- Some brokers continue to promote this 'grey' opaque customs clearance. People who use them may pay less because the tax burden in Russia is higher than in France. However, the costs of 'grey' customs clearance are increasing and the risks or getting caught are growing all the time.

- What means of transport are used most often?

- The major pat is road transport using full truck loads or by consolidation. The trucks go via Belarus when carrying industrial parts or via Finland for perfumes and fashion products or anything that is at risk from theft. Because of the layout of the road network, most truck routes go via Moscow. Everything is carried by truck as far as the Urals and sometimes as far as Irkoutsk. After that, it's the railway.

- And for small deliveries?

- We organise consolidation loads. This works well for destinations as far as Moscow but the delivery is a bit more difficult to destinations further to the east.

- Do you have automotive sector clients?

- When Gaz bought an engine production line in the Lyon region, we transferred it to Iaroslavl. We also work with them on warehouse management. We also transferred the Michelin factory to Davidovo. We currently work with equipment manufacturers such as Inergy and Faurecia for the Russian market.

- What is the hardest thing about the Russian market?

- The end of year period. There is more freight and fewer trucks available so the prices increase. They increased by 20% or even 25% in 2006 but will certainly be a bit more sensible this year.

l Who is Daher?

Daher sends about 6,000 trucks to Russia. It also works with Kazakhstan and the Ukraine and for leading industrial companies. The Daher subsidiary in Russia has its own broker's licence. The company also proposes services such as customs engineering, searching for legal customs duty and sales tax exonerations as part of exemption programmes for foreign investments, e.g. for transferring a production line.
www.daher.com

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GOODYEAR DEVELOPS A MARKET SPECIFIC RANGE

The US equipment company intends to increase its market presence thanks to an off-take (with another manufacturer by under its branding) production in a neighbouring country. Inna Selivanova, Goodyear Russia marketing director explains.

Auto Franco-Russe: What is Goodyear's rate of growth in the Russian market?

Inna Selivanova: We have been present in the market since 1998 and have enjoyed double figure growth for the last four years. Segment A is in good health and growing at 18 - 22% per year. However, I think the Russian segment A is now close to saturation. It is primarily the segment B that will allow us to increase our sales volumes. We are in competition on this segment with Korean and Japanese tyres, the 'second lines' from the major brands and also the Cordiant range from the local company Sibur Russian Tyres.
Growth rates vary from region to region depending on local income levels. There is high demand for low costs products in some regions. We have created the Medeo range to better reply to this demand and penetrate these regional markets; it was produced in take-off by Sibur RT.

- How is this collaboration developing?

- Our collaboration with Sibur has had its ups and downs. It's a complicated story that has lasted for almost three years. It has now ended. But we have not abandoned the idea! We are now working with a partner in a CIS country to develop a new off-take production. This range will be positioned above the 'budget' low cost products. I can not say more at present but the project should become a reality soon.

- What is your distribution model?

- We work with the main regional wholesalers. We are also looking at developing our own retail sales. We have created a service centre franchise called Premio. We expect to have 70 such outlets by the end of 2008 and the development will continue further.

- What advice would you give to western companies that are interested by the Russian market?

- Russia is a risky region. It is sometimes difficult to take decisions and their financial impact can be great. However, the Russian market changes very quickly so the decision making process must adapt to this: shorten deadlines and know how to make courageous decisions. I know it is not always easy for western companies with their traditional hierarchy. And you need to think hard about developing your own distribution network. It’s a very expensive exercise and the business model has to be well defined to avoid making any mistakes.

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IN BRIEF

Fiat is going to start assembling the Bravo and Grande Punto in the Sollers factory at Tatarstan towards the end of 2009. It has a partnership with Sollers (ex-Severstalavto) who currently assembles the Albea, Doblo and Ducato vans. Fiat Linea assembly should start in early 2009.

PSA should manufacture the Prologue at Kaluga, along with other models, from 2011. The first phase of the factory will supply only the Russian market.. Following the planned extension, the factory may supply vehicles for export to neighbouring countries where the needs and client expectations are similar to those found in Russia.

The VW factory at Kaluga has celebrated the completion of the 50,000th vehicle assembled on the site, a Skoda Octavia, at the end of October 2008.

Dodge is discussing the assembly of the Caliber with Gaz, probably in small quantities.

German company MAN is looking at an opportunity to open a truck factory in the Briansk region in western Russia.

Daimler is in negotiations to obtain a stake in Kamaz. According to Russian press reports, the German company could acquire up to 42% of the company. Almost 38% will remain state owned via the Rostekhnologii industrial holding who is also the majority owner of Avtovaz. Kamaz produced 52,000 trucks in 2007.

Mazda has just inaugurated rail transport of vehicles by using the Trans-Siberian railway for a journey of over 9,000 km. The secure convoys left the Pacific port of Zarubino, near Vladivostok, and arrived at the Mikhnevo terminal, near Moscow. The new ship-rail itinerary will allow vehicles to be delivered from Japan to Moscow in 18 days compared to 50 days by the standard itinerary using ships to European ports then trucks via Finland. The company plans to transport up to a third of its deliveries by this new route which is more expensive than the old one. The logistics were worked out by the local company RailTransAvto, a subsidiary of RZD, the Russian railway company. According to press reports, Toyota is testing a similar itinerary.

Anvis has started construction work on its new factory at Togliatti. The company is a subsidiary of Arques Industries AG and manufactures anti-vibration devices for the automotive sector. The factory is planned to be operational in summer 2009 and will supply Russian car manufacturers which probably explains why it is located next door to Avtovaz. The sales forecast is 25 million Euros in 2012.

The Ford dealership, Genser, has promoted the option of buying the Ford Focus in a 'European assembled' version in a recent ad campaign. It is not alone in emphasising the non-Russian provenance of its vehicles: the 'Made in Russia' label is always seen by consumers as synonymous with a quality that is potentially lower than international standards.

Even though it has slowed, the Russian market is still surprisingly resistant. Sales of western brands reached 169,115 units in October 2008 which is an increase of 9% compared to the same month in 2007, according to the automotive committee of the Association of European Businesses that represents the western car and equipment manufacturers in Russia. Whilst sales in European markets are falling (-6% in France, -8% in Germany and as much as -23% in the UK) for the same month of October, the Russian market is still showing positive growth. Sales have increased by 36% over the first ten months of the year compared to the same period in 2007.

Amongst those losing sales we find the economic models that had the greatest falls in September 2008: - 22% for the Ford Focus assembled at Vsevolojsk, -15% for the Renault Logan assembled by Avtoframos at Moscow, - 28% for the Hyundai Accent assembled at Taganrog. These models are aimed at the middle class and their sales rely heavily on bank loans. The availability of loans to private individuals was the first casualty of the current crisis.

The government has promised to increase customs duty from 25% to 30% in the near future for imported new and used cars less than three years old Duties for used trucks and buses will also be increased.

Tyre maker Sibur Russian Tyres has asked the government to increase customs duties on imported tyres from 20% to 30% for car tyres and from 15% to 25% for truck tyres. At the same time, its local supplier of steel cord, Severstal Metiz, has asked the government to stop the 5% tax on raw material, specifically steel wire, where almost all is imported due to a lack of local production.

Several manufacturers are examining assembly projects located in the extreme east of Russia. The current fleet is about 1.25 million vehicles in this region that is far from the automotive production centres. 60% of it consists of used vehicles from Japan that are right hand drive according to data from Ernst & Young. The low price of these imports makes the market harder to penetrate for new vehicles in the economic ranges. Sollers (ex-Severstalavto) would like to set up an assembly plant in the region for models from Korean company SsangYong and Japanese company Isuzu. This local company hopes to save on transport costs for the assembly kits that currently enter via Vladivostok, the region's main port.

The union at the Ford factory at Vsevolojsk has taken the company to court to claim back pay of additional payments for night work. The union evaluates the back pay at about 350,000 dollars. Its leader, Alexei Etmanov has made it known that he does not expect to take the dispute further than the court. This in-house Ford union is affiliated to the small independent MPRA-Edinstvo and is one of the most active in the automotive sector. Following several strikes, they are now using more conventional methods for making their claims.

'According to our calculations, the national market for counterfeit components is now larger than the market for original components' according to a statement made by Frank Detlef Wende, Managing director of Avtokomponenty, during a trade forum. This pessimistic estimate reflects the situation of his company as well as it has been directly affected by this scourge. The bulk of the counterfeiting involves spare parts for Avtovaz vehicles, Avtokomponenty's main client. Almost 30% of the holding's production is destined to be factory fitted in the Avtovaz factory with another 20% for the aftermarket for the same vehicles.

The three main local manufacturers Avtovaz, Gaz and Kamaz seem to be accumulating unpaid bills with their steel suppliers. According to information published in the magazine Kommersant, the Magnitogorsky-MMK metal works has temporarily stopped supplies to Gaz. For their part, the automotive manufacturers are protesting against the high price increases for laminated steel practiced by their local suppliers.

Gaz had to stop the assembly lines for the Gazel commercial vehicles for two weeks. The workers were sent home on two thirds pay. The production line restarted in November.

The multi-brand Atlant M dealerships, one of the leaders on the national market, has announced that it is to stop importing the brands Brilliance, Changfeng, JMC and Shuanghuan. It is now going to concentrate on European, American and Japanese brands. The Incom Avto dealership made the same choice and, to get there faster, it discounted its remaining SsangYong stocks. This greatly displeased Sollers (ex-Severstalavto) who assemble these Korean models in their Tatarstan factory.

Avtovaz has forecast a significant fall in its financial results due to the crisis conditions. Its net profits for the first nine months of 2008 were 32 million dollars compared to 300 million dollars for the same period in 2007. It is probable that the result will be a small loss this year. At the same time, Avtovaz has warned that assembly of the small MCV and Van commercial vehicles based on the Renault Logan will not start until 2011 instead of 2010 as previously announced. The delay is undoubtedly due to the shortage of available cash.

The Ukrainian, Bogdan has interrupted its plans to build an assembly plant at Borsk, near Nijni. It was intended that this factory would assemble the Chevrolet Lanos which Bogdan already assembles in Ukraine for the Russian market.

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AGENDA

- Automechanika: March 3-5th 2009 in Moscow
The third edition of the International Exhibition Automechanika will be organized in Moscow by the German Messe Frankfurt. It focuses on service stations, car equipment, accessories and services.
www.automechanika-expo.ru

- Tires and Rubber: March 10-13 2009 in Moscow
This event will gather Russian and international tire manufacturers, wholesalers, as well as some special equipment manufacturers.
www.maxima-expo.ru

- The Russian Automotive Industry: March 17th - 19th 2009 in Moscow
An international conference organised by the Adam Smith Institute. Interventions are planned from the main players from the local and international industry. You can meat the cream of the leaders in Russian automobile industry and their purchasing directors.
www.adamsmithconferences.com

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SUPPLEMENT

THE NIZHNY NOVGOROD REGION

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