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France-Russia Automotive


N° 11

June 2011


Les Lettres du Fil

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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.

"The status of the special economic zone allows us to have fewer problems than elsewhere", testimony of Andrei Aliev from Bekaert Wires
Nissan, UAZ-Sollers, Mazda, Izhavto-Avtovaz, Mitsubishi  
the next events of the automotive market in Russia  

In this issue


The Russian car market is recovering faster than expected. With 1.235 million cars and commercial vehicles sold in the first six months of 2011, over course of the year the market could reach a value close to that of before the crisis. Several car manufacturers have confirmed their desire to increase their presence in Russia, signing new assembly agreements with the State.
Ford and VW are developing projects to raise their on-site production capacity to over 300,000 units each. Renault is preparing for the assembly of its models at Avtovaz, its local partner. Still with weak market presence, Fiat also intends to establish an assembly plant there.
The tyre manufacturers are not lagging behind: Pirelli and Continental plan to set up factories in Russia.
The manufacturers are come together with local parts manufacturers to aid their modernisation.


The Editor




Continental presented its planned factory in Kaluga, while Pirelli is currently preparing an acquisition.


Pirelli plans to establish itself in Russia, probably by acquiring one or two existing factories. Meanwhile, Continental plans to build its own factory. The two Western companies are expected to join Michelin and Nokian which have been present for a long time in Russia, along with Yokohama which is currently completing the construction of its factory in Lipetsk, with the start of production scheduled for late 2011.
Continental has just announced plans to build a tyre factory in Kaluga. Production should begin in 2013 for a capacity of 4 million tyres per year, with the option to increase it to 12 million. The manufacturer is going to invest up to 240 million Euros in this project. On this occasion, Continental has also agreed to sever the joint venture which links it to Sibur RT, as part of the Matador-Omskshina factory. It was the Russian partner who requested the break, "so as not to be hindered by anti-monopoly regulations within the framework of its future operations with Pirelli", according to its statements. Sibur RT should buy back the 50% owned by Continental. The factory produced almost 2.8 million tyres in 2010.
According to sources, Pirelli is interested in tyre factories in Voronezh and Kirov. Both sites belonged to local tyre manufacturer Amtel, which disappeared during the crisis. The factories fell into the lap of the local Sibur Russian Tyres, which does not wish to keep them, itself pending restructuring.
The hypothesis most often proposed would involve the creation of a joint venture (JV) between Pirelli and Sibur RT, or even several joint ventures. With the possible involvement of Rosstekhnologii, the Russian public holding company responsible for managing the industrial holdings of the State, an agreement to this effect could soon be signed. For now Pirelli withholds its response, continuing negotiations on the capital composition of future structures.
So is the emergence of new Western players good news for local or foreign suppliers of the local tyre industry? Not everyone thinks so. "The Pirelli project is bad news for us because they will bring their traditional suppliers, just as Michelin and Nokian have done. Traditionally, for their establishments around the world, the buying decisions are made by the parent company, there are no competing suppliers on-site", states Vladimir Ulicky, head of sales at Konstrukta, a Slovak company producing equipment for the tyre industry. The Russian market represents 5% of its current turnover.

"The local tyre manufacturers haven't been able to break into this"

"The local tyre manufacturers have not succeeded in their transition. In their independent approaches, Sibur, Amtel and others, have competed with each other. The result is that they could not get past it", says Anton Iablonitsky, member of the board of directors of VIPO, a Slovak company specialising in the engineering of equipment for the tyre industry. A supplier of Sibur since 2000, VIPO also worked for the Kirov factory, the two factories in Voronezh, the Matador-Omskshina factory etc.
It does not expect new orders with the arrival of Pirelli and Continental. "The Western tyre manufacturers are very conservative, not open to new suppliers. Rubber does not always react in a predictable manner, unlike steel. There is much empirical evidence, that the expertise of a tyre manufacturer is an accumulation of its experiences." The VIPO equipment is however installed in the Voronezh factory, and likely to fall into the lap of Pirelli, "Yes, we have equipped this factory even at the time of Vredestein; it was they who had selected our products," confirms Mr. Iablonitsky.
In addition, the Pirelli proposal with Sibur Russian Tyres challenges the major project alliance between Sibur RT and Nizhnekamskshina, a local tyre manufacturer located in Tatarstan. As part of this proposal under discussion since 2010, the two main local tyre manufacturers were to place their commercial assets of passenger vehicle tyres and truck tires in a common pool, managed by the management team of Sibur RT. Negotiated at the highest level of the Russian State, this project has, however, been met with resistance. According to local experts, Sibur RT did not wish to include the factories in Kirov and Voronezh within the scope of the agreement, preferring to sell them to a western manufacturer. Nizhnekama did not wish to transfer the all-steel workshop nor its own research centre. The implementation of this alliance is no longer on the agenda. "The objective of the project alliance between Sibur Russian Tyres and Nizhnekamskshina was to create a structure capable of competing with Bridgestone and Continental in our market. But if Sibur disperses its assets, this will be bad for us and for all those involved in the local industry," states Alexander Pichugin, DG of the national centre for research on tyres "NIISHP Scientific and Technical Centre".


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Abandoned by its local partner, the Italian manufacturer will set up on the Russian market by itself, where it can count on political support.


After many setbacks, Fiat has finally signed an agreement with the Russian state for an assembly plant. The manufacturer's proposal envisages a capacity of 25,000 units per year. But the Russian authorities encourage Fiat to increase the project size to 120,000 units and add to it the construction of an engine factory, so as not to deviate too much from the conditions they impose on other Western manufacturers. The Italian manufacturer does not appear hostile to this invitation, but requests a credit from the state-owned bank Sberbank for an amount estimated at nearly 1.1 billion dollars from Russian sources. It will probably make its decision based on the response of the bank. Any decision to grant a foreign company a credit of this size based on public funds, will essentially have political overtones. In the event of refusal, Fiat would take the opportunity to return to a more modest configuration of its initial proposal.
The Italian manufacturer sets off with a handicap. Its brand is little known in Russia. Consumers have had time to forget that the full old range of Lada, still very popular, is a local derivative of the Fiat 124. Dedicated "Car of the Year" in 1967, it was assembled in the USSR since 1970, and production continues today at Avtovaz and Izhavto. As for Fiat, the Italian manufacturer has not been able to benefit from the growth of the automotive market in Russia during the past decade. Sales under the Fiat brand reached 21,943 cars in 2010, compared with 96,466 units for Renault or 58,989 for VW, according to statistics from the AEB. This puts Fiat at 19th place in the sales charts for the Russian market.
An attempt to create a joint venture (JV) with local Sollers, had been negotiated in 2010. This partner had already hatched from its assembly lines, the Doblo, Linea and Albea models in its factories in Tatarstan. The project involved the construction of a high capacity factory, for between 300,000 and 500,000 units per year. The Memorandum of Understanding (MoU) was signed in the presence of Prime Minister Putin, who had promised the partners public funding. But just before the final signature, there was a twist: in February 2011 Sollers announced that it had broken away from Fiat, preferring an alliance with Ford.
Finding itself without a local partner, Fiat decided to set itself up alone on the Russian market. But the configuration announced by the manufacturer, 25,000 cars per year, does not correspond at all to those imposed today to its competitors. Those who wish to benefit from an assembly agreement with customs preferences, must submit a proposal for a minimum of 300,000 cars. Clearly the case of Fiat does not fit here.

An exemption for the Italian manufacturer?

Would the Italian manufacturer have benefited from an exemption? The local administrative authorities are not unaware of the friendship displayed by the Russian Prime Minister to his Italian counterpart. And which results in an interest buoyed by Mr. Putin in proposals from major Italian manufacturers like Fiat or the tyre manufacturer Pirelli. The unusual thing is that it was Putin himself who had promised state funding for the failed Fiat project. A promise that was never revoked. The manufacturer can expect a friendly attitude on the part of the administrations. They found a way for Fiat to set up without following the rule. They took from the archives, a file on an assembly agreement filed by the local subsidiary of Fiat in 2008, and which had never been followed. Application filed in 2008, permission granted in 2011, but, with the conditions prevailing in 2008, therefore a minimum capacity of 25,000 cars per year.
The location of the future factory is not yet known. The Russian sources advertised Fiat's interest in the region of Nizhny close to the GAZ automobile cluster but without a direct link with this local manufacturer, already committed to GM. Fiat has not confirmed anything for the moment. The manufacturer intends to assemble vehicles there under its own brand, as well as models of Jeep, little known in Russia today. The exact configuration is likely to depend on the possibility of finding the necessary funding. The Italian manufacturer has to catch up with the Russian market, but not at any price.


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VW and the GAZ Group signed an agreement to bring about the assembly of VW and Skoda models in the local manufacturer's factory in Nizhny. Finalised in June 2011, the project includes the assembly of the Skoda Octavia and Skoda Yeti, and the VW Jetta, from late 2012. The goal is to produce 61,000 units in 2013, 88,000 in 2014, and up to 110,000 cars per year from 2015. The formula chosen by the partners is that of assembly under contract. VW is investing 115 million Euros in this project, and GAZ, 85 million Euros. This project complements the production capacity of the factory of the German manufacturer located in Kaluga, and which can assemble up to 180,000 units.
The local manufacturer is also involved with GM within the framework of an assembly agreement signed in early 2011. In this context it has been contracted to assemble 30,000 Chevrolet Aveo from 2012.
The GAZ Group no longer has any model within the passenger sector in its catalogue since the recent failure of its Siber model, a licensed copy of the Chrysler Sebring. The project was halted in 2010. It cost the group up to 240 million dollars for the 8,952 cars assembled. Since then, the Sebring assembly line remains unused. It will be brought back, notably for VW.
The GAZ Group announced a turnover of 3.22 billion dollars for 2010, up 47% compared to the previous year. Net income reached 70 million dollars, compared to a 360 million loss in 2009. But the group's growth is always undermined by the weight of its debt, close to 1.5 billion dollars, and which has not changed since 2009. GAZ sold 11,061 trucks, 10,818 buses, 82,062 utility vehicles and nearly 5,000 cars in 2010. The group belongs to the industrial holding company Russian Machines of the local businessman Oleg Deripaska.


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Are Russian transporters more expensive than their French counterparts? This is a popular question at Renault. The major projects of the manufacturer in Russia pose new logistical challenges to the company. The "localisation" phase of production in its Avtoframos factory in Moscow, forces it to deal with a growing number of local suppliers. The localisation rate reached 52% (excluding the powertrain) in 2010, this being 20 local suppliers for a production of 112,000 cars per year. "We receive nearly 160 trucks per week in our factory in Moscow," explained Jean-Philippe Jouandin, director of logistics for the Renault-Nissan Alliance for Russia. He was speaking on the occasion of the last Russian Automotive Forum organised by Adam Smith Conferences in March 2011 in Moscow.
Today, Renault's local suppliers are located in St Petersburg, Yaroslavl, Nizhny, Vladimir, Togliatti and in the Moscow region. But their geographical range is likely to expand. In 2011, Renault is expected to increase production to 200,000 units, with 30 local suppliers and 330 trucks to take delivery of per week. The goal for 2013 is to reach 350,000 vehicles per year with the assembly of Renault models at Avtovaz, and at least 380,000 including Nissan. The number of local suppliers would therefore have to rise to 60, for a total of 900 trucks per week. In anticipation of this growth Renault has launched a program to move towards ex-works operation, to optimise the total delivery cost.
At the same time the manufacturer is concerned with its own deliveries, leaving from the factory. Today it needs 700 trucks. In 2013, its needs will be closer to 1,500 trucks. It is not clear if the transporters are able to offer it this fleet. And with the gradual entry into operation of new factories from other car manufacturers, the demand will increase.
In addition, transportation costs have increased quite dramatically in recent years. From a value of 100 in early 2008 before the crisis, the costs shrunk to 60 during the crisis, to climb up to 180 in spring 2011. According to analysis by Renault, the rates offered by local transporters are now 20% higher than those charged by French operators. And this annoys Jean-Philippe Jouandin: "The fuel here is cheaper than in France. The trucks are the same. Salaries and expenses are lower here than in France. So, I have to ask myself why transportation costs are now higher than those charged in France. I suggest to the transporter that it signs a long-term agreement, to regulate the rates. It replies: OK, but with variable prices! I don't understand it..."
A service provider of Renault, the local operator RTL defends itself by explaining that it lacks visibility, and this would be the reason for the rise in prices. In reality, the local transporters operate below capacity, which causes the increase in rates. Maintaining the shortage is a way for them to increase margins. Aware of the risks, Renault is planning its own solutions. "Perhaps an internal structure? Leasing? All options are open" says Jean-Philippe Jouandin.


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Ford has signed an assembly agreement to bring production to the local company Sollers. United in a joint venture (JV) the partners are asking the state bank VEB to lend them 1.3 billion dollars over 10 years, to bring assembly up to more than 300,000 units per year.
Ford already has a factory in Vsevolozhsk near St Petersburg, which assembles the Focus, and since 2009, the Mondeo. Nearly 67,000 Focus cars were sold on the Russian market in 2010. Both models are in demand on the market. So much so that the factory in Vsevolozhsk recently moved to the 3x8 work shift system in April 2011. The forecasts are for an assembly of 90,000 units of both models in 2011, compared with 80,000 in 2010. The maximum capacity advertised for the factory is of 125,000 units, but it has still never been reached.
Sollers has two factories with a capacity of 110,000 and 90,000 units, located in Tatarstan. It also has an engine factory located in the region of Nizhny, with a capacity of 250,000 parts per year.
The partnership with Sollers offers Ford an opportunity to better meet market demand. But above all, the agreement with Sollers allows it to display a large project, of more than 300,000 units per year, a condition imposed by the Russian authorities to renew its assembly agreement with the preferential customs terms, and which expires in 2013.


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The truck tyre manufacturer is poised to revitalise its range with models from Western manufacturers, and it is looking for new suppliers.


KAMAZ has just revised its forecasts for the domestic market upwards from 14 to 40 tonnes for 2011, bringing it from 72,000 units to 95,000 units. The proportion of vehicles destined for road freight would be equal to 32% - 33% in these forecasts. The truck tyre manufacturer, the national market leader, has also revised the forecast of its own sales upwards, from 30,000 to 38,000 units in this segment.
This market presents new challenges for the local industry. "We realised that users did not want ox-drawn carts," said Mr. Ashot Arutyunyan, marketing director of KAMAZ. He was speaking on the occasion of the last Russian Automotive Forum organised by Adam Smith Conferences in March 2011 in Moscow. To maintain its market share, KAMAZ pins its hopes on its project with Daimler, also a shareholder in the Russian manufacturer: Daimler owns in partnership with the EBRD, a 15% stake in KAMAZ. The project took the form of a 4x2 vehicle assembled with a large proportion of components used by Daimler, notably the engine, cooling system, exhaust, cab, part of the transmissions system. Two units will be presented at the Comtrans trade fair in Autumn 2011 in Russia. "This vehicle will be positioned in the premium low, or middle-high segments. According to our survey, nearly 20% of users of our trucks will be interested in this new model", adds Mr. Arutyunyan.
The manufacturer is developing several other projects. The assembly with Mercedes Benz started in March. The vehicle is positioned on the premium range, the sales forecasts were 1,100 units in 2011, 2,000 in 2012, and 2,500 in 2013. Another assembly, this time with Mitsubishi Fuso, is for a 7.5 tonne truck. The sales forecasts were 1,700 units in 2011, 2,500 in 2012, and 3,500 in 2013. This 6-8 tonne segment is considered the most dynamic on the Russian truck market. KAMAZ has also tried to propose several "restyled" models for the market, with Daimler, Cummins and ZF parts. But these models met with a mixed reception from potential users, because of projected rise in costs that will be at least 15%. The manufacturer is notably faced with resistance from the Department of Defence, one of its major public clients. The military do not want to hear about a vehicle with a German built cab. The company has tried to build its own cab to meet the demands of "national design", but the costs of it have doubled in relation to the original.
The production of new models, in particular with Daimler, also means looking for new suppliers. This is where KAMAZ has some difficulties, according to Mr. Arutyunyan: "The German partner imposes its own suppliers on us, but it does not have technical documentation on their parts and it has no right to send it to us. We must therefore negotiate with each parts manufacturer. It is a very long negotiation; we make a proposal and we wait two months for the answer. It may be necessary that we ourselves find equivalent solutions on-site".


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The proposed acquisition of MAZ, a manufacturer of trucks located in Belarus, by KAMAZ, its Russian competitor, does not seem to be moving forward. Announced at the start of the year, this project is still at the stage of preliminary discussions.
MAZ's capital is held by the Belarusian State, which grants it financial guarantees on orders for export. As part of the discussion, it was envisaged that KAMAZ would receive 100% of MAZ's capital and in exchange, the Belarusian party would receive a yet-to-be-defined share of KAMAZ's capital. It is the definition of this part that is problematic. The commercial relationship between the Russian companies and the Belarusian manufacturers in the public arena, is often complicated because of the tumultuous political relationship between the two countries. On the other hand, Daimler holds an 11% stake in KAMAZ and the partners are in negotiation regarding several joint ventures based around Mercedes-Benz, which might require an increase in the share of German manufacturer. The European bank, EBRD, also holds 4% of the capital of KAMAZ; its share is managed by Daimler.
MAZ assembled up to 20,000 units before the crisis, mainly trucks and some buses. The Russian market is its main client, absorbing nearly 65% of its production for trucks. The Belarusian company had sold nearly 3,000 trucks in Russia in the first quarter of 2011, according to its statements.
KAMAZ realised 32,300 units in 2010, compared with 26,000 in 2009. Its sales would be raised to nearly 7,000 trucks in the first trimester of 2011. The capital of the company is held by the public holding company Rosstekhnologii (49.9%), the investment bank Troika Dialog (27.3%) and by Daimler and the EBRD (15%).


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The City of Moscow, the principal shareholder of the ZIL automobile factory, has failed to decide on the future of the company, hesitating between closure and keeping it on "life support". A specialist in trucks, the oldest Russian automobile factory has been virtually bankrupt for several years, accumulating a debt of nearly 500 million dollars, for a turnover of 82 million dollars in 2010, and losses of 9 million dollars over the same period. Configured to produce up to 200,000 vehicles, the factory assembled 2,260 units in 2009 and only 1,260 in 2010, mainly 3 tonne and 7.5 tonne trucks. In the first quarter of 2011 its turnover totalled 12 million dollars with losses close to 17 million dollars. The rental of surfaces in disused buildings and the sale of land are still the most profitable activities as they bring ZIL up to 30 million dollars per year.
The company has thus been loss-making for several years, kept afloat by the City of Moscow, concerned with preserving political appearances and not announcing the closure of this industrial site located near the centre of Moscow. However, since the arrival of Serguei Sobianine, the new Mayor of the capital since Autumn 2010, things seem to be moving. In the Spring of 2011 Mr. Sobianine dismissed the management team of ZIL, after accusing them of misappropriating much of the subsidies granted by the City. However, no legal proceedings have been instituted yet. The Mayor hesitated as to the continued operation of the struggling factory. Some of ZIL’s land could be transferred to developers with their eye on its 275 ha alongside the Moskva River. But the city also wants to maintain on-site car production, and seeks partnerships in this perspective. However, the debt burden and the state of the land polluted by nearly a century of industrial use, make any project uncertain.


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GEFCO, the PSA transporter delivered nearly 7,000 containers in 2010 to the manufacturer's factory in Kaluga, from the PSA site in Vesoul in France. The rail route now runs at a rate of one train per day. The passage from partial assembly (SKD) to full assembly (CKD) caused an increase in shipments, from 330 containers to 70 containers per week. Some of the deliveries to the Kaluga site come from Japan, intended for Mitsubishi which shares the site with PSA.
GEFCO also offers its services to other manufacturers in Russia. It operates in particular for the VW group, also established in Kaluga. The French logistics expert is responsible for the transport of imported vehicles from the port of St Petersburg, the removal of those assembled in Kaluga and their distribution across Moscow and St Petersburg. The VW network consists of 241 dealers. Its warehouse in Pushkino near Moscow allows the manufacturer to ensure same day delivery to Moscow and next day delivery to St. Petersburg.


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"The status of the special economic zone allows us to have fewer problems than elsewhere".»


Explanations of Andrei Aliev, Regional Sales Manager at Bekaert Wires LLC, a Belgian manufacturer of tyre casing which opened its factory in the "economic zone" of Lipetsk in the South of Russia.


France-Russia Automotive: Why choose Lipetsk for the establishment of the factory?
Andrei Aliev: The choice of Lipetsk is that of a "special economic zone", so we benefit from tax advantages, plus the benefits granted by the regional administrative authorities, including those regarding infrastructure, connections to electricity grids and gas etc. And above all, we have fewer difficulties than other actors elsewhere.
The proximity of the Novolipetsk steel plant is advantageous in HR terms, because in the area there are a lot of employees available, well trained in production. As for the transportation of our products, it is easily done by truck as there is a dense road.

- Who are your competitors on the Russian market?
- The Uralkord factory, the SeverstalMetiz factory in Orel, and the BMZ factory in Belarus. Other producers such as Magnitka fail to ensure a minimum quality, so their products are not in demand.

- Who are the clients of Bekaert in Russia?
- All of the tyre manufacturers present here, except Michelin. All are equipped with Steelastic machines, to cover the rubber cables. Michelin is supplied elsewhere. Nokian in Vsevolozhsk is an example of a good client. They are increasing their production capacity and implementing new production lines.

- Are you in contact with Yokohama, which is establishing itself in your region?
- We are in discussion with Yokohama. They will begin production in a few months. For now they have planned workforces above what is necessary, as they intend to gradually implement all stages of the production cycle, including the mixing, and increase future production capacity.


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With 1,235,442 cars and utility vehicles sold on the Russian market in the first six months of 2011, the market is regaining its strength just as before the crisis. According to statistics compiled by the Association of European Businesses (AEB)in Russia, the market had jumped 56%, in relation to the first six months of 2010, while in 2010, the sales of cars and utility vehicles had already shown a 30% increase for 2009.
Continuing this trend, the market could reach 2.5 to 2.7 million units over the year - almost the same level as before the crisis, when it reached 2.7 million in 2008. Note that this growth is higher than the forecasts of analysts. The firm PriceWaterhouse did not foresee a return to that level before 2014. "With these results, we find that the Russian market has fully stabilised," says David Thomas, director of the Automobile Manufacturers Committee of the AEB and also president of Volvo Car Russia.
At the top there is the local brand Lada Avtovaz which sold 291,540 cars during the first six months of 2011, or 31% more than during the same period in 2010. Chevrolet sold 81,527 units which is 54% more than in the same period of 2010. And Renault sold 74,337 units, at an increase of 76%.
Among the brands that have displayed the best growth, Nissan sold 59,374 units, an increase of 119% over the same period in 2010; VW sold 45,517 units, an increase of 102%; and Mitsubishi sold 35 006 units, an increase of 135%.

  Learn more about the AEB    

The Automobile Manufacturers Committee of the Association of European Businesses in Russia publishes the monthly statistics for sales of cars and commercial vehicles, of all manufacturers, Western and local, operating on Russian territory. Without distinction, the statistics cover the sales of new vehicles assembled on-site or imported.


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Improving quality at a local parts manufacturer is a Herculean task. Yet the demand for locally manufactured parts is strong. This market is promising.


With the large plans of car manufacturers in Russia, finding parts manufacturers at proximity is a critical issue. How does one find reliable suppliers? The topic is regularly discussed at the Russian Automotive Forum conferences organised by Adam Smith Conferences in Moscow. Those who have tried to supply themselves using local parts manufacturers, often provide disappointed testimony. Some quotes:
"Of the 300 Russian parts manufacturers, less than 30 meet our requirements" (VW).
"It's easier to bring international suppliers than to develop production with local parts manufacturers who have no money" (Volvo).
"Local suppliers have insufficient knowledge of the automotive market. Furthermore, they are not reliable, the price may change after signing, the product quality does not always correspond to the samples" (Bosch).
"There is no process of industrial organisation among local parts manufacturers. And the costs are not low. It is more expensive than in Poland or the Czech Republic but we manufacture on-site because the customs tariffs are very high" (Faurecia).
However, the market for car parts in Russia presents a sizeable challenge. It could be close to 28 billion dollars, according to analysis by the GAZ Group. From which to fuel vocations. But this market is also different from those of developed countries. "According to the average in the automotive industry worldwide, almost 70% of car parts manufactured are intended for assembly (OEM), and 30% for the aftermarket. In Russia, the ratio is the reverse: 25% of parts are intended for OEM and 75% for the aftermarket," explains Igor Grun, CEO of BelMag, a supplier of suspension parts for Lada-Avtovaz. BelMag posted a turnover of 15.5 million Euros in 2010, for 273 employees. The strong demand for parts for the aftermarket is attributed to the ranges Lada Avtovaz cars. These vehicles, of poor quality, represent almost 43% of the fleet. "How can the Russian car parts market be compared to that of other countries? The statistics do not mean much..." adds Igor Grun.
The parts market has suffered from the crisis. But there again, not in the same way as markets in developed countries. "The market for parts fell by 23% during the crisis, because the demand for parts as original equipment fell 40%. Meanwhile, the aftermarket has remained much more stable. But a significant portion of sales from “grey” imports, estimated at nearly 72% in 2008", observes Rudy Amirkhanian, a partner at local consulting firm Strategic Initiatives. According to his analysis, "Russia is a low-cost country because the cost of labour is low and the cost of electricity is low. But the prices are often higher than in other countries because the volume of the market is unstable. As for local equipment manufacturers, they have no R&D role. Overall their added value is low". A legacy of the planned economy of Soviet times, when the manufacturer was responsible for designing all the parts needed for a future model. And then go back to the manufacture, using the few parts manufacturers present, much of which were integrated within their own structures.

Renault inspects its suppliers.

This was notably the case for Renault-Avtovaz, which has now launched an extensive program of quality improvement and which multiplies the number of inspections at suppliers. "When we visit the local parts manufacturers, they tell us: "we are going to show you our machines!" I answer, "no, we do not want to see your machines... we want to see what's wrong with your machines!" Just because you have ISO certification and machinery "Made in Germany" doesn't mean that you will have quality" jokes Nuno de Morais, director of the new Renault-Avtovaz joint venture for quality and development of suppliers (Common Supplier Quality and Supplier Development). Established in Russia since 2008, he is also responsible for the Lada Quality Plan. He was involved in the latest Russian Automotive Forum in March 2011 in Moscow.
Renault-Avtovaz has initiated a selective improvement programme for suppliers, to raise them to an acceptable level of quality. This now covers 67 parts manufacturers. "We must rethink all the processes at the supplier, up to the recycling of parts found to be non-compliant. Otherwise you risk finding the same parts in subsequent deliveries," explains Nuno de Morais.
At the same time, the company gradually introduced supplier diversity. The new model of Avtovaz, the Lada Granta, whose assembly is expected to begin in late 2011, reflects this trend. Nearly 30% of its components should come from Western manufacturers. Notably on the list are Bosch, the Japanese company Takata, Valeo, Visteon, Behr, etc. The rest of the parts come from local suppliers of the Lada Kalina range, of which the Granta is an evolution.
The efforts of Renault-Avtovaz in the field of quality aim to reduce the defect rate in the current Avtovaz models, which the local manufacturer attributes to the unsatisfactory quality of its parts manufacturers. The goal for 2010 was to go from the 750 defects ppm usually observed, to 150 defects ppm. This goal was not met, for various reasons. The goal for 2011 is yet more ambitious: to fall to 80 defects ppm. The French manufacturer sets the bar high. It fully intends to clear out the stables of Augeas at Avtovaz, before beginning production of Renault models there.


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Old and obsolete equipment, and the disappearance of whole sectors of the chemical industry, undermine the local production of tyres.


Participants in the Tyres & Rubber trade fair in Moscow in March 2011 gave a pessimistic view of the state of their industry. It suffers from out-dated equipment. "The mixing equipment for local tyre manufacturers is very old," says Alexander Vorontsov technical director of Con-Cord Group, representative of Farrel, a British manufacturer of mixers for the CEI, "The six mixers in the truck tyre workshop in Nizhnekamskshina date from 1978. They break down regularly. Not long ago, it was necessary to replace a mixer whose tank had split. The mixer for the all-steel production line and those of the workshop for car tyres are operating at full capacity and cannot provide more. The Sibur RT mixers in Yaroslavl are also very old. Sibur has started to renew the equipment. There are four remaining to be replaced, but everything has been stopped because with the change of ownership, we do not know to whom they should be charged".
Often, the old equipment can no longer meet market demand. This is the case of the Volzhsky factory within the holding company Sibur Russian Tyres, and which manufactures textile frames for the needs of the tyre manufacturer. "The Volzhsky factory produces "raw" casings, not impregnated and not passed through heat treatment", says a senior management executive of Sibur RT. "This treatment is carried out directly by our tyre factories and it prevents us from offering our casings to other tyre manufacturers, which are used to buying ready-made products". Sibur has purchased the equipment needed to install a heat treatment line, but this equipment is still in its packaging because no one has thought to construct a building to install this production line.
The weakness of the local chemical industry also poses threats to the supply of tyre manufacturers. "Many segments of our chemical industry have disappeared. There is no stability, no medium-term vision", says Liudmila Shumeiko, manager of the company JULIA, producer and marketer of resin for tyres. JULIA manufactures its products at the Uralkhimplast factory in Nizhny Taguil in the Urals. "In my market, prices of raw materials for my resins have suffered three increases in two months! They have increased by a total of 20% over this period. This is due in particular to the closure of three factories among those making benzol, which fell victim to explosion, fire and bankruptcy. I suggest to my partner Uralkhimplast that "we set prices and agree to increase the amount ordered". The partner replied: "it's not possible! Because the more I produce the more it costs me". Under these conditions, we would not be able to emerge without government intervention. But I see no programme to protect local producers..."

The additives industry is endangered

"Additives for the production of tyres represents a small market, because the equipment used by the Russian tyre manufacturers is often too old to draw upon some of the perceived benefits of the use of additives," says Yuri Neklyudov, director of the office of Struktol which represents the German Schill + Seilacher, specialising in additives and equipment for quality control of mixtures. "When a Russian factory buys our additives, it must wait fourteen months for the customs clearance of its order. These timeframes are very punitive. We must also pay 15% to 20% in customs duties, plus VAT. And if we want to send a sample of a value of 3 Euros to one of our customers, we have to pay up to 300 Euros in miscellaneous expenses... and in the end, the product does not even reach its destination. Providing our products on the Russian market is a truly Kafkan journey."
According to the analysis of the NIISHP Scientific and Technical Centre, the chemical industry known as "low volume chemistry", which manufactures additives for the tyre, is in poor condition, almost all companies having gone bankrupt. Only the Cheboksary factory survives. NIISHP proposed to Victor Khristenko, Minister of Industry and Commerce, the development of a programme of reestablishment of “low volume chemistry" on disused military sites, previously engaged in chemical production. The facilities available on these sites can in part be reused. According to experts, this "low volume chemistry” is vital, especially for the production of military tyres and those of aircraft. “Today it is enough that Western suppliers stop deliveries of additives, and our tyre production will stop". But policy makers within the Russian administrative authorities seem to think that the global market for additives is secured by the presence of Chinese suppliers capable of compensating for any deficiency in the West.

There have been some success in this segment

Not all suppliers are pessimistic; there are also successes across this segment. Like that of Pneuform, a Czech company that makes moulds. In Russia it is represented by Fartop, a local company based in Yaroslavl. Fartop has a mould maintenance workshop at the Sibur RT factory. Igor Pomerantzev, Fartop manager, expressed satisfaction: "Pneuform increased its market share in Russia, we have now nearly 70% of the market for moulds for the manufacture of car tyres by Russian actors. We are approached by all local players. Pirelli is asking us to set up a mould maintenance centre in its future factory in Voronezh. Nokian sought us to install a maintenance centre in Vsevolozhsk, which would be responsible for the maintenance of the moulds as well as their replacement. In the end, Yokohama sought us to equip its future factory in Lipetsk. Pneuform moulds were shipped to the factory in Japan as a test and they were used to produce some tyres, with satisfactory results".
The two market leaders, Sibur Russian Tyres and Nizhnekamskshina succeeded in launching new products, all-steel tyres for trucks. Nizhnekamskshina did this in collaboration with Continental. But their production does not seem to have been a great success so far. "The all-steel tyres are required in small quantities by the Kamaz factory in Russia and the truck factory in Minsk, Belarus. They also use imported products", says Alexandre Nenakhov, research director of Loil Neftekhim, a multi-brand distributor, tyre industry supplier. "There is not enough demand for these products. The Kama Steel brand of Nizhnekamskshina is currently unknown. It will take time to promote it. Customers are not rushing, not seeing the point because the expected savings are not very great. The transporters making return trips towards Europe do not take risks by buying tyres other than those of major brands. The failure of a tyre occurring in Europe means the involvement of a break-down service, because a trailer cannot be lifted with the means on board." The cost of this involvement will outweigh the savings made on purchasing a set of all-steel tyres, manufactured locally.
"All-steel tires are still reserved for transporting from Europe-Moscow, Europe-St Petersburg and Europe-Ekaterinburg. In addition, deliveries are made via poor quality roads where the all-steel tyre offers no benefit," states Igor Vesselov, scientific director of the NIISHP research centre. According to him, "the Chinese tyre manufacturers seek to gain a share of this market. Their products are lighter, and less expensive. The Chinese are getting these results by reducing the number of layers in the tyre. This makes it less solid. For this reason, many users are reluctant to buy all-steel tyres made in China".


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The Russian government has tried to introduce a new rule for assembly agreements with Western manufacturers. It includes a commitment by the manufacturer to a minimum production of 300,000 vehicles, the production of body parts and stamping on site, a production of at least 200,000 engines and transmission systems on site, and implementation of a research and development centre on site. The Russian state also requires an investment plan involving a minimum of one billion dollars. In return, the industry will continue to benefit from a preferential customs regime for the entry of the necessary components for its assembly lines.
This is a departure from the rule applied previously, and which included a commitment to a minimum production of 25,000 vehicles. Most manufacturers have chosen a configuration of somewhere between 30,000 and 120,000 vehicles per year.
The government has put pressure on the manufacturers already present or interested, to renegotiate their agreements under the new rule but without much success. Manufacturers have been reluctant in view of the size of investment required for uncertain prospects. VW has signed but does not hide the fact that it plans to invest 115 million Euros and not a kopeck more. Ford has also signed, asking that the investment is financed by a Russian state bank. This is one way of saying that it is the Russians who will pay for the rule that they invented. Renault is among the beneficiaries of the new agreement, but the French manufacturer had already fulfilled these conditions, both in the size of its investment and in the production capacity of its local partner. Other manufacturers have declined the offer, saying that by the end of their current contracts, there may be new rules, and that it is crucial to wait.


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The Renault-Nissan alliance continues discussions with the public holding company Rosstekhnologii for an increased share in the capital of Avtovaz. Renault already has a 25% share of the capital of the Russian company. Rosstekhnologii suggested that the alliance acquires a further 25% of the capital. The latest news is that Renault could increase its stake to 35%, and Nissan could account for 15%. Financing is yet to be agreed. Rosstekhnologii is asking for nearly a billion dollars, equivalent to what Renault had paid for its 25% stake + 1 share. Carlos Ghosn does not want to spend more than 415 million dollars, given the current valuation of the company.
Avtovaz announced a turnover of 4.6 billion dollars for 2010, up 57% compared to the previous year. Net income rose to 120 million dollars, compared to a 1.6 billion dollar loss in 2009. The company received assistance totalling more than 2.5 billion dollars, before and during the crisis. Avtovaz sold 569,000 cars in 2010, which is 37.5% more than in 2009. And 236,511 cars have been assembled between January and May 2011, which is 39% more than in the same period of 2010.


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The Russian Parliament has just reformed the mechanisms for periodic technical inspection of vehicles. Now the inspection will be performed by a network of private inspection centres, to be created on the basis of existing service facilities and dealers, accredited by the Russian Union of Insurers. In all, about 10,000 control centres should be established by 2012, the date of entry into force of the new measure. The preliminary passage into one of the control centres will be required for the issuance of the compulsory insurance policy for the civil liability of drivers. Until then, the realisation of periodic technical inspection was carried out by traffic police within the Ministry for Internal Affairs. This practice was deemed to be generating massive corruption levels. According to internal surveys, up to 70% of the 34 million Russian drivers received their certificate of conformity without ever presenting the vehicle for inspection, paying an average bribe of 100 to 150 dollars.


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The Mercury dealer specialising in luxury car brands has just stopped distributing Lamborghinis. Sales of this brand do not cover the costs incurred by the distributor according to Mercury. It sold 10 Lamborghini in 2010. Among its other brands, Bentley is the most popular with 129 units sold in 2010, as well as 66 Maserati and 32 Ferrari. The Mercury Group is the operator of several luxury brands outside of the car industry: Giorgio Armani, Chopard etc. It also owns the department store Tsum in central Moscow, where cars are displayed alongside other luxury brands. The company belongs to local businessmen and Leonid Strounine and Leonid Fridland. The turnover of the group was estimated at between 500 and 600 million Euros in 2009.


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Thefts committed by company staff haunt the Russian automotive industry. The scale of the damage varies among companies. At Ford in Vsevolozhsk, three attempted thefts were intercepted in 2010. The amount of the loot recovered amounted to nearly 600 dollars. At Avtovaz, known for the high penetration of its business by organised crime, the department for internal security in collaboration with the services on the ground observe several cases of large-scale theft each year. They just caught an internal criminal association practising the misappropriation of cars during deliveries to dealers. Losses recorded amounted to almost 33 million dollars for the year 2009 alone.


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The Nissan factory in the suburbs of St. Petersburg has assembled 17,000 cars in the first six months of 2011. The site has been operational since 2009 and its advertised capacity is of 50,000 units per year.

The Russian state has sold its 13.11% share of the capital of the UAZ factory, which is part of the Sollers group.

Mazda will establish an assembly plant in the Primorye region located in the Far East of Russia, bordering the Pacific Ocean. The site will have an assembly capacity of up to 50,000 units per year.

The Izhavto factory resumed service after a long break following its bankruptcy in 2009. The numbers have doubled since the beginning of 2011; today the factory employs 4,700 people to assemble the old Avtovaz models.

The Mitsubishi i-MIEV has just been put on sale by the Rolf dealer network. This is the first electric car to have obtained certification for the Russian market. It is priced starting at 60,000 dollars. Rolf plans to develop a network of 28 charging stations.


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Automechanika : from 24 to 27 August 2011 at Moscow
Automotive equipment, car accessories and vehicle maintenance.


Comtrans 2011 : from 13 to 17 September 2011 at Moscow
the International Exhibition for Commercial Vehicles


Autoretail Russia 2011 Forum : from 11 to 13 October 2011 at Moscow
Organised by the Adam Smith Institute, the event will bring together top executives from both vehicle manufacturers and leading dealerships.


Russian Automotive Forum : March 2012 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.


Tyre and Rubber Expo: from 16 to 19 April 2012, at the Expocenter in Moscow
Over 200 manufacturers will introduce their range of tyres for all types of vehicle, rubber parts for the automotive industry, raw materials and components for the tyre industry, as well as the parts for production, recapping, balancing etc. The organisers are expecting 7,000 trade visitors.


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