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back to index backEUROtalk June,  2013

Russia: Foreign car-manufacturers switch to full-cycle

Most foreign car brands are still assembled in Russia from SKD kits, but this is changing gradually.

Russia’s car sales have barely returned to pre-crisis levels but the auto components market is booming: a more than $40 bn a year industry is being built literally from scratch.

Most foreign car brands are still assembled in Russia from SKD kits.

That is how Avtotor, the nation’s second biggest manufacturer after AvtoVAZ, operates: the BMW ?5 and ?6 CUVs are manufactured in the United States and shipped to Bremerhaven in Germany.

Logistics operator BLG Logistics then takes out the engines, transmission, mirrors, lights, bumpers, and wheels before shipping the parts to Kaliningrad, where they are re-assembled.

Similar operations in Croatia and Poland knock down KIA and General Motors models for Avtotor.

Gradual localisation

Yet SKD agreements signed by car manufacturers with the government mandate a gradual localisation of production.

The first foreign car plant, opened in Russia by Ford in 2002, was making just 25,000 units per year.

By 2018, the combined capacity of Ford and General Motors in Russia will exceed 600,000 cars a year.

In exchange, however, the companies will have to increase the share of Russian-made components to at least 60%, while 30% will have to be fitted with Russian-made engines or transmissions. Volkswagen and Renault-Nissan have also signed up to similar terms.

Russian suppliers struggling

The first attempts by international corporations to work with Russian suppliers failed: this would have made things easier but the manufacturers have not been able to establish reliable quality controls.

Russian experts believe that their compatriots are only able to work in low added value segments or to be partners in joint ventures.

Independent local suppliers could remain in simpler niches, such as tyres or plastic”, Vladimir Bespalov, an analyst with VTB Capital, one of Russia’s biggest investment companies, said.

Those that manage to cooperate with international players by providing an infrastructure would keep more important niches for themselves. Yet, eventually, the infrastructure might become simply a building where a partner would install new equipment”.

Big companies

Only major companies long in possession of world-class technology are the exception.

For instance, the GAZ Group will start making Mercedes-Benz engines at the Yaroslavl Engine Plant in 2013, under contract for the Sprinter, which it will also manufacture under a contract at its Nizhny Novgorod plant.

There is also KAMAZ, which makes competitive heavy-duty trucks, though it was originally built with assistance from foreign automakers, such as Renault, and is now developing cooperation with Daimler. There are no other such plants in Russia.

Our experience may be different from others because we work with Russian suppliers and the Ford Focus cars made in Vsevolozhsk have Russian-made parts. Perhaps we were able to find such partners because we beat other manufacturers in opening plants in Russia”, said Ford Sollers Vice President Sergei Druzhinin.

Still, we brought the bulk of auto component manufacturers here with us. It’s not even because Russian suppliers are any worse: the existing suppliers know our business better, helping us save on establishing and integrating business processes.  So, if a traditional partner of ours is interested in supplying a new plant, we would also welcome them because it would be mutually beneficial”.

Since localisation requirements will only increase, many car manufacturers have gradually started coming to the Russian market accompanied by their own suppliers.

For example, Korea’s Hyundai opened a 105,000-car a year assembly plant in St Petersburg in the autumn of 2010.

Simultaneously, the world’s biggest auto component manufacturer, Magna International, opened three plants at once nearby, investing €112 mn.

Their total annual capacity exceeds 3 mn units, with 80% earmarked for Hyundai and the rest for Russian plants run by General Motors, Nissan, and Volkswagen.

Russia has, indeed, managed to establish conditions for car-manufacturing boom across the board.

In search of high-quality components, car manufacturing corporations, such as Ford and Renault-Nissan, encourage their global suppliers to come to Russia”, explained Sergei Litvinenko, a Senior Manager at PricewaterhouseCoopers.

In December 2012, the Volkswagen Group switched to full-cycle production of the Skoda Yeti at GAZ Group’s Nizhny Novgorod plant. The Skoda Octavia and the new VW Jetta are next in line.

The total local output is expected to reach 130,000 cars a year. The Volkswagen Group plans to invest €250 mn by 2015 in a 150,000 a year engine plant to be located close to the company’s full-cycle plant in Kaluga (with a capacity of 160,000 cars a year, expandable to 225,000).

Engine block casting and crankshaft manufacturing could also be localised in Russia”, said Volkswagen Group Rus CFO Michael Obrovsky.

All will depend on how prepared the local manufacturers are”. AvtoVAZ is planning to begin making at least 400 000 Renault-Nissan engines and automatic transmissions a year in Togliatti for the Lada brand and Russian-made Renault and Nissan models.

And the Volvo Group is investing RUB 3.75 bn (around $120 mn) in a cabin welding and painting and, potentially, stamping plant for assembling 15,000 Volvo and Renault trucks a year.

Russia has a lot of problems that make it a difficult place to do business.

Logistics are complicated because of infrastructure issues, the quality of state institutions is far from ideal, and there are corruption problems.

Yet, on the other hand, it’s any investor’s dream market, with predictable demand and sales making auto component manufacturing profitable.

A recent trade conference showed that many auto component manufacturers are ready to rush headlong into this fairy tale”, Sergei Udalov, Executive Director of the Avtostat analytical agency, said.

Source: Russia Beyond The Headlines - GAI

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