France-Russia Automotive
N° 7
June 2009
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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.
HOW LONG BEFORE THE CRISIS ENDS?
"The Russian market will return
to its pre-crisis level in 2012 or, at latest, 2013. This market is
amongst the most promising in the world!" Carlos Ghosn, Chairman of
Renault-Nissan, announced his forecast when inaugurating the Nissan
plant at St. Petersburg in early June 2009.
Renault's business with Avtovaz is making progress. It's the subject of
an article in this edition along with an interview with Avtovaz
ex-Executive Vice-President, Yann Vincent.
Hyundai are also betting on the market recovering fairly quickly: the
company is looking to increase the capacity of its planned St.
Petersburg factory.
The Russian state is trying to protect the local automotive industry by
increasing customs tariffs for imports and implementing government
supported loans for private individuals. This promising measure has not
yet taken off.
Sollers, one of the main local manufacturers, has been obliged to
postpone its projects. The Izhavto factory is no longer operating but
the controversy as to its future continues. Is it going to fall into the
hands of Renault-Avtovaz? GAZ is in a delicate situation and is the
victim of extravagant financial operations conducted by Oleg Deripaska,
its owner. He is also listed as a potential purchaser for Opel alongside
Magna but it is doubtful that he has the means.
You will find all this information and other news about manufacturers,
component suppliers and dealerships in this edition of Auto Franco-Russe.
The Editor
EVENT
TWELVE FRENCHIES AT AVTOVAZ
NOTE : This issue was already ready to be published when we learnt that Yann Vincent and at least two other French vice-presidents of Avtovaz are due to leave the company – see below.
"We are twelve Frenchies at
Avtovaz. The proportion is easy to remember, there is one French person
for every 10,000 Russians!" joked one of the members of the French
Avtovaz management team. Several of them accompanied Avtovaz Executive
Vice-President, Yann Vincent, during the 'Russian Automotive Industry
Forum' organised at Moscow in March 2009 by the British organisation,
the Adam Smith Institute.
Yann Vincent used the occasion to present his objectives for Avtovaz. He
wants to sell 1.2 million cars in 2013 and reform the company at the
same time. Ambitious. To achieve these objectives, the French team is
split over several strategic sectors: production management, purchasing
and financial control. "We want to have a better view of what is
happening in the beast's entrails. Purchasing is the most important
sector and three French people are working on this axis" explained
one insider.
Purchasing is also the most delicate sector. In 2008, one of the Russian
purchasing managers was murdered in the stairwell of his apartment
building in Togliatti. And this is not an isolated incident. These
specificities of local life do not seem to worry Avtovaz's French
managers. However, they do have an escape route: "We no longer work
for Renault and are now employed by Avtovaz but Renault will take us
back if things get difficult; that's part of the deal."
Avtovaz uses vertical integration for some of its supplies, a left-over
from the days of the planned economy. Yann Vincent would like to break
with this tradition and create suppliers based on existing capacities: "We
are going to train five suppliers as Avtovaz subsidiaries. They will be
involved in plastic parts, pressing, foundry, waste processing and
tooling, process and automation manufacture. The common factor for these
five subsidiaries is that they will be more transparent. We want clear
operating accounts and will give the subsidiaries clear and transparent
legal structures. Eventually, some of these subsidiaries could leave
Avtovaz, especially those working in areas that are not part of our core
business." The Avtovaz Managing Director needs the skills of western
component companies to complete these projects.
Meantime, Avtovaz's sales dropped by 47% in January - May 2009 compared
to the same period in 2008. Its market share stabilised at less than
23%. The company has planned a major reduction in production for 2009:
the factory will assemble at best 475,000 units compared to 801,000 in
2008 according to the most recent statements from Group Chairman, Boris
Aleshin. Production varied between 730,000 and 760,000 in previous
years. It should be noted that the company often plays with its
production data and includes the CKD kits for assembly by partners,
including those outside Russia, in its production statistics. The number
of kits produced varies from year to year but may be as many as 100,000
units. As the factory was often stopped during 2008, the number of
vehicles actually assembled was not much more than 700,000. This figure
is indirectly confirmed by sales in Russia; 622,000 units according to
Boris Aleshin.
The State has developed an aid programme for Avtovaz worth 2.7 billion
Euros provided in several stages over three years with the first payment
due in July 2009. Over 2 billion Euros of this support is intended to
finance the strategic investment programme. This includes the renewal of
the range using models provided by Renault.
Avtovaz is not Renault's only site in Russia. The company assembles the
Logan in its Avtoframos factory at Moscow. The Sandero will be made from
2010. The factory extension will increase its capacity from 80,000 to
160,000 units per year. Renault sold 108,070 cars in 2008, of which
74,300 were Logan assembled in the Avtoframos plant. Its market share is
3.7% according to the company.
"WE CAN IMPROVE OUR SUPPLIER'S PERFORMANCES!"
Three questions for Yann Vincent, ex Renault Quality Director and ex Executive Vice-President of Avtovaz-Renault (Note: He left the Company).
Auto Franco-Russe: You have
indicated your primary issue: quality. Is it possible to go from
thousands of defects per million parts produced to several dozen per
million without changing the production system?
Yann Vincent: Yes, the order of size of this vision is correct... And I
think it's a realistic objective. Renault has already done it in Iran
and we can do it here. For example, even in Renault in France where, not
so long ago, the defect rate for gearboxes was several hundred ppm, we
managed to reduce it.
At Avtovaz and its suppliers, there is a great potential for improvement
especially in terms of reducing costs and waste through better
production management. I have visited several factories and seen their
condition. Most local business people do not believe in the future and
don't understand the past. They take the money today without knowing
what will happen to them tomorrow. Local component suppliers are not
worried about operational effectiveness; they don't even know what the
term means. However, their performances can be improved by at least 50%
simply by better operational organisation without having to buy any
equipment.
- Renault has decided to invest in an existing factory with a long
history of difficulties in terms of quality. Wouldn't it have been
easier to establish a Russian presence with a greenfield site?
- Yes but this solution is also the most expensive.
- How are you approaching the social issues related to renovating
Avtovaz?
- There are 100,000 employees at Avtovaz and the population of Togliatti
is 700,000 so there are certainly social issues. However, this is not
our concern because Avtovaz is responsible for them (its Russian
management - Editor). The social issues here are the same as for Renault
at Sochaux or Michelin at Clermont Ferrand in France.
THE QUARREL BETWEEN RENAULT AND AVTOVAZ
We have just found out that at the Avtovaz General Meeting of shareholders, which took place at the end of June 2009, the decision was made to relieve Yann Vincent of his functions as Vice-President and Managing Director of Avtovaz. Mr. Vincent is due to be replaced by a local executive, a former Executive Consultant of Rosstekhnologii. Several other French Directors and Vice-Presidents are also due to leave the company.
NISSAN INAUGURATES ITS ST PETERSBURG FACTORY
The Nissan factory at Kamenka near
St. Petersburg was inaugurated on June 2nd by Carlos Gosn, Managing
Director of the Nissan-Renault partnership, and by Vladimir Poutine, the
Russian Prime Minister. It will assemble the Teana and X-Trial and has a
nominal capacity of 50,000 vehicles per year. The company will invest
almost 200 million dollars in this project.
Nissan sold 146,000 vehicles in Russia in 2009. Its sales in Q1 2009
were 24,804 units, 35% less than Q1 2008, according to the Association
of European Businesses.
HYUNDAI PLANS TO ACCELERATE
Hyundai is looking at options for
increasing the capacity of its planned factory at Kamenka, near St.
Petersburg, to bring it up to 150,000 units from the start instead of
the 100,000 originally planned. The factory will be operational in early
2011.
The choice of the site was not simple as one of the project contributors
confirms: "We visited the different sites that were proposed in the
Kamenka zone and it was not very promising. There was no infrastructure,
no access to the electricity grid, no water... But the crisis helped and
regional government became much more flexible than previously. If a
location was not suitable, they were ready to find another for you."
The latest news is that the factory will produce 75,000 units of a model
derived from the Hyundai Elantra and 75,000 vehicles under the Kia brand
positioned at the entry level. It is probable that the company is
looking to replace the capacity lost with the ending of Kia assembly in
its Izhavto factory which is close to being bankrupt. Izhavto assembled
35,000 vehicles under the Kia brand in 2007.
Hyundai will bring seven component producers from amongst its past
suppliers with it to the Kamenka site.
Hyundai sold 192,800 cars in the market in 2008, according to AEB.
GM IS LOOKING FOR SUPPLIERS
The General Motors factory at
Kamenka near St. Petersburg, which was inaugurated at the end of 2008,
is currently increasing is assembly rate. It is seeking, as a priority,
suppliers of complex components and those related to safety such as
airbags, etc.. "We are only looking for international suppliers for
all these ranges. Our specifications are not even written in Russian."
commented Ksenia Komyagina, GM Purchasing Manager during the Adam Smith
Russian Automotive Industry conference at Moscow in March 2009.
The GM group sold 338,000 cars in 2008 in this market with most of them
being sold under the Chevrolet brand, according to the AEB.
WHY DID PSA CHOOSE A GREENFIELD SITE?
PSA chose the Kaluga region for
its implantation in Russia where there are no major automotive industry
sites and the manufacturing sector is not greatly developed. The company
has decided to make a "green field" installation on virgin land. The PSA
approach is the opposite of Renault's way which has adopted a local
partner to save time in the process of getting construction permits. The
decision to locate on virgin land rather than an industrial site is
apparently strategic for the company. As Didier Aleton, General Manager
of the planned PSA-Mitsubishi factory commented during a Ubifrance
conference dedicated to the Russian market: "Before deciding, we
visited existing factories. It was too off-putting. We thought that a
green field installation, instead of a local partner, would allow us to
develop towards international quality standards faster and means we will
be able to offer this quality to our clients."
The factory will start producing in 2011 according to the project plan.
It will have a capacity of 160,000 vehicles and 110,000 will be the
French company's segment C vehicles with the remaining 50,000 being SUV
from both companies. PSA has given priority to the mid-range at Kaluga
because this represents about 22% of the Russian market, according to
estimates. Its partner, Mitsubishi, will assemble a 4x4 model which is
also intended to be sold in the European market. However, the latest
news is that production of the Mitsubishi 4x4 in the Kaluga factory has
been postponed until after 2011.
The PSA Group has been accompanied in Russia by its own regular
suppliers. Gefco, its logistics subsidiary, has already been present in
Russia for 8 years. Its supplier and subsidiary, Faurecia, is already
present in Russia and currently looking for a new location.
PSA sold over 60,000 cars and Mitsubishi 111,500 cars in Russia in 2008.
PSA now has a network of 80 dealerships for both French brands. The
network should grow to 250 dealerships by 2012 or 2013.
SUZUKI SUSPENDS ITS PROJECT
Suzuki announced the suspension of
its St. Petersburg factory project at the beginning of June 2009.
Construction of the plant was initially scheduled to start at the end of
2009 but it has accumulated problems. The 70 Ha site in the Sushari
industrial zone, which is not far from the planned Toyota factory, was
found to be unstable. Suzuki is looking for a new site but is not in too
much of a hurry. Rumours suggest a lack of finance for the project that
was estimated to cost nearly 120 million dollars.
Even before the official suspension, suppliers had quit. Japanese
company Sumitomo and Czech company Cadence Innovation had already
announced that they had abandoned their project for a joint factory for
plastic components in the same zone at Shushari. The factory, which was
due to start production in 2010 at a cost 60 million dollars, was mainly
intended to supply the Suzuki plant. The two component suppliers are
already Suzuki suppliers for its Hungarian assembly plant.
Suzuki sold 38,000 cars in Russia in 2008, according to the AEB.
FAURECIA IS LOOKING FOR NEW SITES
Having got Faurecia out of the Technoplast joint venture at Nijni Novgorod, Eric Pichot-Duclos, Faurecia General Manager in Russia, has let it be known that the choice of site was unfortunate. Faurecia gambled its development on the production of cars at Nijni by local company GAZ. However, this development has not occurred and the latest Siber model launched by GAZ has been a failure. However the voluminous plastic parts manufactured by Faurecia are not well-suited to being transported over long distances. Faurecia is now looking for new sites near its potential clients near the St. Petersburg, Togliatti, Kaluga automotive cluster. Magna International, who is already a GAZ partner, has taken over the Nijni joint venture.
YOKOHAMA HAS SELECTED THE LIPETSK REGION
Japanese company, Yokohama has chosen the Lipetsk region for its planned tyre factory. The factory will be located in a 'special economic zone' which provides it with fiscal advantages and allows equipment to be imported without customs duties. The planned capacity is for 1.4 million tyres per year to begin with, increasing to 3.4 millions after an extension. The investment is almost 122 million dollars. Yokohama imported over one million tyres into Russia in 2007 and its sales forecasts prior to the crisis projected 50% annual growth each year. The Lipetsk region is 440 km south of Moscow and is also home to the Novolipietsky metallurgy plant, one of the largest in the country.
MAGNA AND SBERBANK TRY TO BUY OPEL
Canadian component company Magna
joined with Sberbank, a public Russian bank, to try and buy the Opel
brand from GM in early June. The partners then intend to build an
assembly in Russia. GAZ has been mentioned as a possible industrial
partner.
Magna is continuing with its efforts to enter the market. The component
company has already tried to make a strategic partnership with AVTOVAZ.
However, as it had no model to offer, it was sidelined and replaced by
Renault. Magna has also developed a component factory project in
partnership with GAZ at Nijni Novgorod. GAZ's owner, the Russkye Mashini
holding owned by local billionaire Oleg Deripaska, had even bought 25%
of Magna in 2007. GAZ then used the shares as collateral for the loan
used to make the purchase. In autumn 2008, it was unable to pay the
margin calls from the bank and the bank recovered the guarantee. Magna
then abandoned its Nijni project but still has ambitions for the Russian
market.
The latest news is that the owner of GAZ is not doing any better now
than he was last autumn. The Russkye Mashini holding has taken out loans
from Sberbank using the GAZ factory as collateral. GAZ has also
accumulated failures at the same time (see our article) and the holding
is failing to make payments on this loan. Sberbank still accepts Oleg
Deripaska's cavalier financial operations but GAZ could well change
hands.
In this story, it’s the Russian State that could become the owner of
both GAZ and Opel via Sberbank. This is not necessarily what it wants.
This is even more true given that it will have to decide between helping
the local industry (GAZ) or investing in foreign industrial developments
(Opel). It financial means are not unending. It is a safe bet that this
story has many more twists in store for us.
Opel sold almost 99,000 cars in the Russian market in 2008 according to
the AEB.
SOLLERS FORCED TO REDUCE ITS PROJECTS AT ELABOUGA
The Sollers factory at Elabouga in
Tatarstan was opened less than a year ago and is the first production
site built from scratch by this local manufacturer. This contrasts with
its other three factories operating under the Severstalavto name: UAZ,
Sollers - Naberezhnye Chelny (ex-ZMA) and the ZMZ engine factory -
Zavolzhsky Motorny, which were all inherited from the communists era,
including their equipment.
The new site is located inside a special economic zone which means the
company does not pay customs duties on imported production equipment. It
is also exonerated from some property taxes and factory profits are
taxed at a reduced rate.
Sollers claims to have invested 250 million dollars in the factory at
Elabouga which will mainly be used for its assembly partnership with
Fiat. Especially the Ducato commercial vehicle: 750,000 units will be
assembled under licence on this site according to the plans. Fiat Ducato
assembly started in May 2008. Initially, this factory was intended to
assemble light and heavy trucks from the Japanese company Isuzu. The
assembly line for the light trucks is operational but it spent more of
spring 2009 stopped than working due to lack of demand for the vehicles.
As for the heavy truck assembly, it has been moved: it will start again
towards the end of 2009 in a factory built in the far east near
Vladivostok on the Pacific coast. "This location provides us with
easier logistics because 70% of the parts come from Japan" confirmed
one of the Isuzu managers. At the same time, selecting a far east site
could allow Sollers to benefit from future fiscal measures intended to
promote this region's economic development.
Sollers project with Fiat on the Elabouga site also includes creating a
supplier pool in the same economic zone to bring part of the supply
chain into the same locality. The project will cost almost 100 million
dollars and appears to be suspended at present.
SIBER FAILS, MAXUS IS SOLD: A BAD YEAR FOR GAZ
Chrysler Sebring assembly by GAZ
is starting to look like a commercial failure. GAZ bought the production
licence and the factory to make it in 2006 when production was stopped
in the USA. Assembly started at the end of 2008 under the local name of
Siber. The factory should have reached a production rate of 65,000 cars
per year by 2010. The project's published cost was 150 million dollars
with 28 million of this for the factory and 20 million advance royalty
payments for the licenses. GAZ had obtained a duty free regime for
importing Siber components.
However, the Siber has not found its place in the market. It arrived in
the middle of the crisis and its purchase cost was higher than planned
so it was too high for the low cost segment but failed to attract well
off consumers who prefer western models. Only a few thousand units have
been sold since production started. GAZ management admits in private
that the model is not a success. The Siber will be offered to
institutional clients such as government departments and the army. At
the same time, the company is looking for a new model to produce for the
low cost segment. Discussions have started with GM.
However, GAZ projects are handicapped by the financial difficulties of
the Rusal holding of businessman Oleg Deripaska which owns 72% of the
GAZ group via Russkie Mashini. Rusal is desperately trying to
restructure its debt: 425 billion dollars with VEB, a State owned bank,
and 7.5 billion dollars with western banks. Oleg Deripaska's promises to
invest in major projects related to Opel appear unrealistic given this
situation.
In the meantime, GAZ has announced its decision to cede its LDV factory
in Britain. LDV produces the Maxus vans at Birmingham. It was bought by
GAZ in 2006 and was intended to provide the platform for assembling vans
at GAZ's main site at Nijni. However, the sinking market has led to this
project being abandoned, according to an announcement by GAZ. The
Malaysian group Weststar was interested in buying until it pulled out of
the deal. GAZ is trying to obtain a grant of 5 million British pounds
from the British government to save the 850 jobs on the site. This grant
is likely to be refused. If this happens, the company plans to close the
factory. This decision will not enhance its credibility for other
European projects.
REBOUNDS IN THE IZHAVTO SAGA
The Izhavto factory story is once
again the talk of the automotive sector. From promises to repurchase by
Avtovaz, we have now gone to a project to close the factory. However,
the accuracy of the announcements made by the protagonists in this story
is questionable.
The Izhavto factory at Izhevsk, in Oudmourtia, has a theoretical
capacity of 200,000 units per year. The company had no activity in 1999
and found itself absorbed by the SOK Group. Since then, it has been
assembling old AVTOVAZ models and, since 2005, models from Korean
company Kia. Izhavto assembled 79,000 cars in 2007. Production was less
than 59,000 unit s in 2008. About 2,400 Lada and 5,300 Kia were
assembled during the first quarter of 2009. Izhavto's owners, SOK Group,
consists of about fifteen automotive component companies supplying
Avtovaz in the Samara region. It also has business in the construction
and other sectors.
The Izhavto saga started in 2006 when Avtovaz showed its interest in the
site to increase its assembly capacity, particularly with the planned
arrival of a western partner. After almost two years of negotiations,
the partners reached an agreement on a price of nearly 350 million
dollars. At the end of 2008, they agreed on the transaction details
which would be an exchange. Avtovaz would get the Izhavto factory and
would give Lada Service, which consisted of a major part of the Avtovaz
dealerships, to SOK. Based on 140 centres covering the whole country,
this network accounts for 50% of the company's sales. A senior SOK
manager was even named as chairman of Lada Service in February 2009.
Less than two months later, the protagonists have changed their
opinions. The measures already taken have been cancelled without
explanation. In April, the SOK Group announced the sale of its factory
to its management team chaired by Mikhaïl Dobindo, Izhavto General
Manager. The transaction was hidden under the opaque cloud which usually
characterises SOK financial operations. The rare pieces of information
suggest that the value of the sale is around the 200 million dollars
level. As the loans market had dried up, the purchasers did not have the
necessary financial means. The seller, SOK, has agreed to be paid from
the factory's future production. A risky gamble given the market
situation: Izhavto has reported losses for 2008.
At the time of the transaction, the factory's debt exceeded 100 million
dollars. They could even be closer to 300 million dollars, according to
some sources. Curiously, the creditors, with the state owned Sberbank in
front, have not reacted.
At the start of May, the new owners, who were still factory directors,
announced that they would stop assembling the Kia as they had been
unable to reach an agreement with the company on reducing the price of
delivered kits. A short while later, the same people announced that they
were stopping all production and that they were making over 3,000 out of
the 5,500 Izhavto employees redundant. Given the timetable imposed by
the process, these redundancies will not become effective until August.
With the factory not producing, the chances of it one day reimbursing
its creditors are virtually zero. However, curiously the creditors still
have nothing to say.
The situation has become so difficult to read that it is probable that
it is a set-up. For what purpose? The French managers at Renault-Avtovaz
confirm that the company is still highly interested in the Izhavto site.
It's not impossible that the operations completed in relation to Izhavto
with the tacit consent of its creditors are still aimed at transferring
the factory to Renault-Avtovaz but without its employees. However, the
final destination could also be different; e.g.: the Magna project with
Sberbank based on Opel. We will keep the file open.
TAGAZ IS USING ITS NETWORK WITH THE BANKS
It was Vladimir Choub, Governor of the Rostov region, who went to meet Guerman Greff, Chairman of the state owned bank, Sberbank, to renegotiate the debts for the Tagaz car factory at Taganrog, in the Rostov region. Vladimir Choub is the father-in-law of Mikhaïl Paramonov, Tagaz's main shareholder.
AMTEL IS BANKRUPT
Local tyre manufacturer Amtel-Vredestein has just applied for a court supervised reorganisation. The company has been in difficulty for two years and has accumulated over 800 million dollars of debts whilst sales were worth about a billion dollars in 2007, with losses every year. Amtel had already sold is Dutch organisation, Vredestein Banden, bought in 2006, to the Indian company Apollo Tyres in the spring. It is the structure that was sold that owns the Vredestein and Maloya brands and the factory at Enschede in the Netherlands. A year earlier, Amtel was separated from Moscow Tyres. The falling market for tyres since the start of the crisis was the last straw for the company. Recently, Amtel's two factories at Voronezh and Kirov have been stopped more often than not, executing orders from the army from time to time. The new Amtel factory, Voronezh 2, where construction is 80% completed according to sources has never started producing. The local Sibur Russian Tyres project to buy Amtel in autumn 2008 couldn't be completed due to a lack of finance and no agreement with creditors on debt restructuring. Pirelli is mentioned with caution amongst the candidates for purchasing the factories. The future for the AV-TO retail network is not known at present.
When is the Russian automobile market expected to begin to recover from this crisis?
What is expected to happen in the Russian
automobile market? To use some economics jargon, is the Russian automobile
market going to follow: a classic V shape (with a short and violent crisis
followed by a fast, dynamic rebound), a U shape (a protracted recession, with a
prolonged period of stagnation before a return to normal, the timeframe of which
is difficult to forecast), or a W shape (alternating, for a number of years,
between slight improvements and slumps)
If we look at the situation from a negative perspective, the outlook that at the
beginning of the summer of 2009 was particularly bleak: car sales dropped by
over 40% in the first 4 months of the year and by 58% in the month of May alone;
local production dropped by 60%; and the disappearance of car loan products,
which abounded less than a year ago, simply killed any demand that was left…
If, on the other hand, we look at the situation from a positive perspective, the
Sberbank has just taken 35% of the German brand Opal’s capital; for a population
of 140 million inhabitants, the Russian automobile fleet was still at only 32
million cars at the beginning of 2009, (over half of which are at least 10 years
old); the price of hydrocarbon has increased sharply again, compensating, in
this way, for the drop in volume ; the OCDE predict a growth in GDP of 0.7% in
2010, after a fall of 7% in 2009 ; etc.
For our part, we are of the opinion that the Russian market can recover quickly,
almost as quickly as it crashed, if the economic situation and internal politics
allow. The banking market could take off again quite quickly, as it has acquired
a taste for the business of personal car loans.
Factory projects in process, such as that of Hyundai or PSA, were maintained, in
spite of the storm that hit the sector. 2011 is being targeted as the year that
will bring a growth in momentum; others have planned expansion around the same
time, in order to manage an increase in production; and Renault-Avtovaz still
project sales of 1.2 million cars in 2012.
All of these players are already looking for auto-parts suppliers capable of
meeting a future increase in demand.
Local suppliers, however, are suffering terribly and are not getting any or very
little of the public aid made available to large national manufacturers. A
number of these suppliers risk losing their businesses before the market
recovers.
Last August, one of the top experts in the Russian automobile market confided in
us saying “the government promises billions to Avtovaz but we, the small
businesses, don’t know how we’re going to finish out the month”.
These players need partners in order to survive and cannot afford to be too
demanding regarding the conditions. We are convinced, however, that these
difficult circumstances will give way to the successes of tomorrow and that the
players who know how to take risks have everything to gain in the medium term.
Alain Bastid
Production and sales are falling
Car production in January - April
2009 was 39.1% of the level for the same period in 2008, according to
data from the Industry and Trade Minister. Truck production was 26.7%
for the same period compared to 2008. Bus production was at 34.3% of its
2008 level. These figures are much lower than the average for
manufacturing industry where recorded production in January - April that
was 65.7% of its level for the same period in 2008.
According to the Automotive Committee of the Association of European
Businesses, car and commercial vehicle (LCV) sales for all manufacturers
fell by 44% for the January to April period compared to the same period
in 2008. To put this in perspective, sales of new cars in Europe fell by
13.9% during the first five months of 2009, according to the Association
of European Car Manufacturers.
AEB forecasts that the market will be less than 1.7 million cars and LCV
in Russia this year. The market had reached about 2.92 million cars and
LCV in 2008 of which 2.08 million were foreign brands imported or
assembled in Russia.
The State is trying to restart the automotive market
The State is acting on its promise
to stimulate the automotive market by supporting loans to private
individuals. It has agreed to pay part of the interest on these loans.
Almost 20 million dollars have been allocated to this measure over the
next three years. The promise was announced in February but has not yet
had visible effects as the methods seem to be very difficult to
implement. Here are four questions to help you understand:
The vehicles included Initially the supported loans were
explicitly reserved for buying vehicles of Russian manufacture: Avtovaz,
Gaz, UAZ-Sollers. The ceiling would also cover the purchase of a Renault
Logan manufactured by its subsidiary at Moscow. Other western models
assembled locally were not included. However, Ford and VW managers in
Russia made it known that they employed Russian workers to assemble cars
in Russia for the Russian market. There was no reason why they should be
left out of the measure. "We produce here. We asked the government to
ensure that every company that manufactures in Russia has a model
included in the list of models that benefit from this support" explained
Martin Jahn, General Manager of Volkswagen Russia, during the Russian
Motor Industry conference at Moscow in March 2009. They are the base
models of the Ford Focus and VW Jetta. "Our vehicles are more expensive
than the maximum amount of the supported loan. Consequently, we asked
that the conditions of the supported loan apply to a proportion of the
loan equal to the maximum amount of the supported loan" added Nigel
Brackenbury, Ford Russia Chairman. The government heard their arguments.
In order to include the western vehicles assembled in Russia where the
price is greater than the maximum loan, it has preferred to increase the
upper limit.
The amount of the loan It was fixed at about 11,000 dollars
(350,000 roubles) but it is now being suggested that it will be
increased to 19,000 dollars (600,000 roubles).
The supported interest rate It is equal to two thirds of
the interbank refinancing rate. This rate was almost 13% in May 2009
which leans the State will pay about 8.7% of the cost of the loan. The
interbank rate does not reflect the rates that are actually practiced.
If we use the loan market prior to the crisis as a base, we note that
the stated rates were near 18% but the effective rates could be as high
as 28% on loans for periods of 3 to 7 years. The public support is
therefore closer to one third of the actual interest rate but this is
still a good helping hand.
The banks involved There are not many banks offering the
supported loans at the time of writing. Four public or para-public banks
have been chosen by the government to distribute the supported loans at
their counters or through partnerships with dealerships. However, only
Sverbank offers them effectively and this at a small scale.
Since the crisis started, banks have exited the personal loan market as
they were unsure as to whether they would recover their money if there
were to be large scale redundancies. However, the automotive loan market
is wrapped up in a multitude of precautions. e.g.: the bank can hold the
vehicle's registration documents at any time during the loan period.
This has not prevented the measures to help people buy a car with a loan
from having difficulty getting started.
Dealers are suffering
Car dealers are amongst those most
affected by the crisis There are over 4,000 dealers across the country.
Many of them borrowed to buy the land and construct at high prices. A
year ago, it cost 20 to 25 million dollars to build a car dealership
centre. Now it’s almost half that amount. The installations have
depreciated and independent dealers are not finding buyers. Bankruptcy
looms.
The Incom Auto network was one of the first victims of the crisis. It
had accumulated 500 million dollars of debt and put 49 centres up for
sale at the beginning of 2009. The Eleks Polius network with 24 centres
suffered a similar fate. The major networks, such as Rolf, are also
having to cut back on the number of centres.
The rapid development of dealerships over the last few years was due to
the demand from global manufacturers who managed to create a coverage
that was equal to that of the Russian brands. Hyundai, the leader in
terms of presence, had 490 dealerships at the end of 2008 whilst Avtivaz
had 471. Chevrolet claimed 265 dealerships at the same date and local
company GAZ had 277. Renault had 79 dealerships and 106 sales outlets in
70 towns. PSA had a network of 80 dealerships for both Peugeot and
Citroën brands. Its coverage should grow to 250 dealerships by 2012 or
2013.
The dealerships are unequally spread across the country and reflect the
population's income levels. In the central region, there are over 1,250
dealerships for a population of 37 million. Over half the dealers are
located in Moscow, according to a survey by the specialised Autobusiness
magazine. At the other end of the country, there are only 34 dealerships
for a population of 6.7 million in the far east. In Ekaterinburg, a town
with a population of 1.3 million people in the Urals region, there are
34 dealerships. At Tioumen there are 20 dealerships for a population of
600,000. At Sourgout, an oil and gas production centre, there are 40
dealerships for a population of only 300,000. The density is much lower
elsewhere, especially in regions neighbouring Moscow. In some towns with
populations of less than 500,000, there are no more than one or two
dealerships and they have trouble surviving despite the lack of
competition. Tatyana Arabadji, editor of the specialised Autobusiness
magazine tries to explain this disparity: "The regions neighbouring
Moscow, such as Ivanova or Orel, are poor regions. There is not enough
potential for dealerships and the rare consumers of western products do
not find it an inconvenience to travels a few hundred kilometres to get
their supplies in Moscow." It’s like during the communist era when
people had to go to Moscow to buy a few kilos of food. Old habits die
hard.
Dealerships for western brands are suffering from a shortage of stocks
of spare parts. Most of the parts are ordered one by one and delivered
from stocks located in Europe. Delivery lead times, which include the
time for customs clearance, often mean that the vehicle is immobilised
for several weeks. This situation has led to the development of parallel
supply circuits for spare parts for international brands taken from
second-hand vehicles or counterfeits.
As for sales of second-hand vehicles, this market mainly escapes the
local car dealerships: it is only 8% of their sales revenues, according
to Ernst & Young.
Imports fall under protectionist pressure
The Russian government continues to try and limit
imports of second-hand vehicles which reached 753,000 units in 2008. Its
different measures are starting to have an effect. Customs duties were
increased at the end of 2008 from 25% to 30% for new vehicles. The
increase for second-hand vehicles was accompanied by a change to the
calculation method used. The result is that the duties have almost
doubled. Customs duties for a new vehicle with a 1.6 litre engine are
now 3,800 to 4,000 Euros whilst a 5 year old version of the same vehicle
has customs duties of 5,500 Euros, according to the estimates of the
local subsidiary of radio BFM.
The drop in imports is clearly visible: only 49,396 new vehicles were
cleared by customs in April 2009 which is 22% fewer than in March 2009
and 72.9% fewer than in April 2008, according to Autostat. Imports of
second-hand vehicles have fallen even more: 4,929 cars were imported
between January and April 2009 compared to 120,300 for the same period
in 2008, according to the same source. Implementing protectionist
measures resulted in demonstrations by motorists in all the major towns
starting with Vladivostok, Russia’s Pacific port, which handles over
half the traffic of new and second-hand vehicles, especially those
coming from Japan.
Human resources are struggling
Since the start of the year, local
manufacturers have been applying staff reduction programmes, according
to surveys by the local financial press. Kamaz is in the process of
dismissing 5,000 employees out of its 50,000. The UAZ factory owned by
Sollers has already made 600 people redundant out 12,000. GAZ has
planned reductions that could be as great as 50,000 people. The ZMZ –
Zavolzhsky Motorny engine factory in the same Group has announced
lay-offs for over 400 people out of 6,000. Avtovaz has not announced any
redundancies but an adjustment of its teams which will change from two
shifts to one through temporary unemployment and a recruitment freeze
for the company which has 105,000 employees. Its production output will
be limited to 30,000 cars per month for the immediate future.
During this period, the western manufacturers prefer to reorganise
production and use short working weeks and partial unemployment.
Avtoframos, Renault's Moscow subsidiary, has announced that it will go
from three shifts to two without reducing staff numbers for the moment.
This measure will result in a drop in production to 50,000 units per
year instead of the previous 80,000. Ford is negotiating with the unions
for the introduction of a 4-day working week from June. The US company
wants to reduce production in its Vsevolojsk factory near St. Petersburg
from the 125,000 units initially planned to 63,000 units in 2009.
Imports impose on the battery market
The car battery market reached
13.5 million units in 2007, according to Rosstat. About twenty local
manufacturers produced 5.7 million units which is a drop compared to the
6.6 million units produced in 2006. Local production during the first
six months of 2008 confirmed this downward trend and was less than 2.8
million units.
We find brands such as Varta, Bosch, Delphi, Tudor, Banner along with
Turkish, South Korean and Chinese brands amongst the imported products.
Batteries from neighbouring Ukraine and Kazakhstan represent about a
million units.
IN BRIEF
The appearance of service stations
offering diesel that complies with Euro 4 has allowed PSA
and
Renault to offer their ranges fitted with diesel engines.
Previously, the quality of local diesel prevented this. The Russian car
market changed to the Euro 3 standard on January 1st 2008. The Euro 4
standard is expected to be widely applied by 2010.
4x4 vehicles have a popularity that has never changed on the
Russian market; engine power symbolises social authority and success in
the eyes of local consumers. This popularity is far higher than that for
models considered prestige according to western criteria. At the same
time, the concept of the estate car - family car, has failed to impose
itself with consumers which explain the fairly limited sales of this
type of vehicle. Many consumers prefer a large 4x4 to a family
car.
Some dealerships have found a way of increasing their margins by
offering clients top of the range vehicles such as the 4x4 Toyota
Land Cruiser Prado with a past generation hi-fi equipment,
specifically a radio-cassette. They explain to their rich clients that
this is the only model that they get from Japan because the Japanese
have not yet discovered the CD and DVD, as everyone knows. Re-equipping
the vehicle with a DVD player and navigator at the time of the
sale provides the dealership with a good margin.
The Transparency International association has just published its
survey on corruption levels around the world: it is progressing.
In Russia, public servants and administrations are accused of being the
sectors most affected by corruption. This has got Russian bureaucrats a
score of 4.5 out of 5. Russian, Ukrainian and Moroccan administrations
are classified as being some of the most dubious in the world, according
to the survey. Around 31% of people asked about Russia said they had
given bribes during the previous twelve months. This rate could be
much higher in the business world.
The Industry and Trade Minister has started a lobbying campaign
for his project which aims to partially support vehicle leasing by
companies. The programme is aimed at leasing organisations of the
automotive manufacturers that are at least 50% Russian owned. According
to the Minister, his programme will promote the purchase of 21,200
commercial vehicles and 4,300 cars.
MILESTONES
44.5 billion dollars: this
is the value of the automotive component market in Russia, according to
Ernst & Young. 12.5 billion of this is for first fitting (assembly).
1.4 billion dollars: this is the amount set aside by the
government and the regions for various federal and territorial
structures, even as far down as municipalities, to finance the renewal
of their car fleets. The car loan stimulation programme for private
citizens should receive finance worth 195 million dollars over three
years.
41.2 million vehicles of which 32 million are car: this was the
Russian vehicle fleet on January 1st 2009, according to Autostat.
1.5 million people work in the Russian automotive industry
according to statements made by Viktor Khristenko, the Industry and
Trade Minister.
753,000 second-hand vehicle imported in 2008
AGENDA
- MIMS – Interavto: August 26th
to 30th 2009 at Moscow
Moscow International Motor Show and the International Automotive
Exhibition InterAuto are now the meeting places for car manufacturers
and suppliers from all around the world.
mims.ru
interauto-expo.ru
www.autospb.messefrankfurt.ru
Equipment, accessories, services.
automechanika.ru
- The Russian Automotive Industry: march 2010
at 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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La maquette de l'Auto Franco-Russe a été réalisée avec le concours de l'agence Vingt-Quatre Graphisme