Last week saw a milestone in Russian automotive history as the AvtoVaz car factory celebrated its 45th birthday. On the 20th July 1966 the Politbureau of the USSR ordered construction of a new car plant to build a ‘peoples car,’ a collaboration between Italy and the Soviet Union. A new town, Togliatti, named after the Italian Communist

Party leader Palmiro Togliatti, was built around the factory.

AvtoVaz is one of Europe’s biggest car manufacturers with over 130,000 employees building one million cars a year. All AvtoVaz models were sold under the Lada brand, although previously the Zhiguli name was used in the USSR and the Lada brand was reserved for export. Th e Zhiguli brand was ‘borrowed’ from the famous Czech sewing machine manufacture, in a move that today would have intellectual property lawyers reaching for their Mont Blancs.

Th e Togliatti plant, one of the biggest in the world with over 90 miles of production lines, has made more than 26 million cars since it started production and today its brand shares 23% of the Russian market. Typically in the USSR but unusual in a global context, it made most components in-house, not requiring the extensive supply chains we see now. Th e plant produced the iconic Fiat 124, albeit especially adapted for the extreme Russian conditions. If the AvtoVaz production was included with the original Fiat production run, the 124 was one of the best selling automotive designs ever, with over 15 million cars sold worldwide AvtoVaz symbolizes the nascent manufacturing capabilities of post-Soviet monoliths. Th e defi nition of monolith, “something massive and unchanging, especially a large and long-established organisation that is

slow to change, uniform in character and diffi cult to deal with on a human level” was particularly apt following the break- up of the Soviet Union.

AvtoVaz suff ered badly in the global crisis. In October 2008 it sat on 100,000 unsold cars or nearly two months full production. With 130,000 workers and the possibility of civil unrest it became the benefi ciary of vocal support from Prime Minister Putin, deemed too important socially to fail. In summer 2009, Prime Minister Putin drove a canary yellow Lada Sports across the Russian Far East boosting its appeal to Russian buyers. Cash injections, low interest loans, plus being the major benefi ciary of the Russian government scrappage scheme boosted AvtoVaz sales. Th is enabled a turnaround, as sales grew by more than 30% year on year compared with 2009-2010.

However, the brands long term prosperity lies with its strategic alliance with Renault-Nissan. Renault-Nissan paid $1 billion for a 25% stake in AvtoVaz in 2008, outbidding both Fiat and GM. Since then, AvtoVaz has been the benefi ciary of hundreds of millions of Renault-Nissan euros and technology-sharing.

In November last year, in a major policy turnaround, Prime Minister Putin gave his blessing to Renault-Nissan taking a majority stake in AvtoVaz which could see the alliance investing a further $600 million in the once ailing Russian giant. Renault-Nissan is now being lauded for its foresight in 2008, and is widely touted as the leading foreign car manufacturer in Russia.

Putin’s u-turn, allowing Renault-Nissan to control AvtoVaz, will see a major restructuring, but the government will ensure there won’t be mass lay-off s. Th is refl ects Russian Rules and a diff erent approach to doing business in Russia by OEMs. Th ey must accept and abide by the stringent social prerequisites

166 and its effects on the automotive supply chainAlexander Rogan commentates on the possible ramifi cations of the Russian government’s plans to incentivise local production.

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laid down by Prime Minister Putin. Unlike the bloody fallout in the West where car plants were closed, thousands of jobs lost and communities laid waste, Prime Minister Putin is adamant that jobs stay.

Sergei Chemezov, head of the Russian Technologies state corporation, owner of the blocking stake in AvtoVaz, said that the purchase deal would conclude in two or three years allowing the company time to jettison some of its non-core resources. AvtoVaz, whilst divesting assets, reported a $39 million spend on growing vegetables in September 2010. A return to its core manufacturing base is thought to be integral to the development with Renault-Nissan.

Behind the ongoing OEM Russian investment is Government Decree 166 and, according to former First Deputy Prime Minister and current Minister of Industry Viktor Khristenko, Russia’s strategic objective is “to create full competence in all segments.” 80% of all cars sold in Russia by 2020 should be manufactured within Russia. Russia wants to improve local manufacturing capability by ensuring that local content should make up 50% of the market volume by 2020. Note that this is not production but market volume, “not less than 50% of the value added of the total market size should be in Russia”. Th us Tier 1 and Tier 2 suppliers will have to set up shop in Russia in a serious way to supply the already committed additional million plus cars per year to be manufactured by the combined eff orts of Ford, GM, Renault and Volkswagen.

Th is represents an increase of 350% in absolute terms by 2020, and from the current 1% of GDP to 2.5%. Compare the billions invested by the car manufacturers to expand output in Russia with the relatively little their component manufacturing partners have invested so far. Decree 166 means that the Tier1 and Tier 2 investment plans will have to embrace Russia, as much as the other emerging market destinations of Brazil, China and India.

As an example, Valeo with one Russian production facility and 16 Chinese plans to open one new plant this year for Renault-Nissan and AvtoVaz.

Quite how this positive discrimination, in favour of the investing OEMs, will stand against the World Trade Organisation and Russia’s accession (later this year?) is questionable. Russia’s actions have already been attacked by the EU and the US Government. Putin was reported earlier this month as saying that he will not approve any change to government policies of attracting inward investment.

“Th e dialogue with Euro commission and American partners is being continued in the process of entering the WTO. Th ey insist that we removed the requirement about production of 300,000 cars and localisation by 60%. We said that our position in this part could not be changed, that it is a red line, which could not be stepped over, as we could not disregard the interests of our producers,” he said.

In February this year, the Russian Ministry of Industry and Trade and the Ministry of Economic Development further strengthened Decree 166 (originally introduced in 2005) and, whilst the new conditions didn’t abolish existing agreements, they off ered a more seductive regime to OEMs , incentivising them to further increase production and the development of modern industry in Russia. And that is what Decree 166 is all about. Not the production of cars or allowing OEMs to profi t from a burgeoning new car market, but the long term security of Russian workers and the introduction of high tech inward investment to Russia, to balance the income Russia generates from her natural resources. Currently 600,000 workers are employed on the automotive assembly lines and another three million are employed in related industries.

Under the modifi ed regime, foreign producers can import components at a zero import tax rate if they commit to producing 300,000 cars (in the case of a new producer) and 350,000 cars (in the case of an existing producer) per year within three years of signing the accord.

Th e localisation level is increased to a minimum of 60% within fi ve years, including engine and drive chain production and the opening of R&D sites.

So far AvtoVaz/Renault/Nissan, IzhAuto, KAMAZ/Mercedes,

Ford/Sollers, Volkswagen and General Motors have signed the agreements with the Ministry of Economic Development.

Th is is, by any stretch of the imagination, an enormous undertaking by the OEMs given their dependence upon their Tier 1 and Tier 2 suppliers. Th e scariest aspect of this is not that it is questionable whether the Tier 1 and 2s will invest (in time) in Russia, but who in turn will supply the Tier 1 and 2s?

Th e Tier 1 and Tier 2 manufacturers need to develop their own domestic supplier base and to create a workable supply chain within the existing Russian infrastructure. Th ey also need to compete for their employees. If they are unsuccessful, the agreements will be breached.

OEMs have already had to come to agreements, within the manufacturing clusters, not to poach staff from each other, as it is diffi cult to employ, train and keep staff . If newcomers follow the existing pattern of staying close to the existing manufacturing clusters (Kaliningrad, Kaluga, Nizhny Novgorod and St Petersburg) it remains to be seen how they, as a Tier 3 or 4 manufacturer, are to compete against Tier 1, 2 and OEMs, in the job market. Especially when the market heats up and the OEMs come on stream, producing 30,000 cars per month each.

A recent conversation regarding a new assembly plant in Russia raised concerns about the viability of such high localisation. One suggestion was to sign up to the agreement, push Tier 1 and Tier 2 suppliers into investing in Russia, recommending that they, in return for their Russian investment , ‘buy time’ by getting the same eight year window off ered to OEMs and push the problem further downstream.

Th is is possibly two cultures on a collision course, given western big business propensity to look at the next quarter’s result and Russia looking for success with her pyatiletka plans over the next fi ve to ten years.

It has to be said that not all OEMs are experiencing diffi culty with localisation or a slowness in its implementation, and one certainly is speeding ahead in terms of developing suppliers from scratch and managing the quality control issue faced when introducing new suppliers, systems and products into a new production assembly.

Renault-Nissan recently outlined its strategy to increase its Russian supplier network. It plans to invest in a powertrain plant to produce gearboxes and engines for Renault, Lada and Nissan models. Plant production is 400,000 engines per annum compared with the 200,000 per annum capacity of a powertrain facility planned by Ford and Sollers.

Th e Renault- AvtoVaz relationship allows Renault to reduce

cost by sharing production and suppliers. Nissan will introduce a Russian-built car based on the Renault Logan range in 2012, and AvtoVaz plan to make engines and gearboxes for all three brands in 2013.

AvtoVaz accounted for 45% of Russia’s 2010 production of 1.21 million vehicles, with the Lada brand having a 23% market share. According to Carlos Ghosn, Renault, Nissan and AvtoVaz will together manufacture 1.6 million cars by 2016, for a 40% share of the market.

Russian-made parts account for 56% of the components used to assemble Renault models on the Moscow assembly lines and the company expects to increase local content to 74% by 2013 by increasing the number of Russian suppliers. Renault-Nissan’s main rivals are closer to 30% so it shows a clear advantage.

Th e Renault-Nissan strategy demonstrates the competitive edge AvtoVaz off ers as competitors with less volume and market share would fi nd it hard to achieve a return on investment and perhaps exemplifi es why, so far, the Tier 1 and 2 manufacturers have been slow off the mark.

Under the old regime of a 25,000 car per year commitment it wasn’t worth while setting up new plants. A commitment by four manufacturers to each produce 300,000+ cars per annum is a whole new ball game.

20-21 September - Swissotel Moscow

All eyes are once again on Russia as car sales forecasts blossom. Th e Automotive Supply Chain Conference, Russia will allow delegates the opportunity to drive their businesses forward by listening to supply chain management and logistics experts, networking with decision makers from inside and outside the market and building relationships with the resurgent manufacturing sector.

Th e Automotive Supply Chain Conference, Russia will examine the ramifi cations of the new measures for all sectors of the industry. OEMs, component manufacturers and supply chain service providers will all vie for the new opportunities which domestic expansion will provide. Capacity, both in manufacturing and transportation, may be an issue as will the never-ending confusion surrounding the Russian customs system. Th ere will be increased demands on the transportation infrastructure which will need to keep pace with the market growth.

Find out more at www.automotivesupplychain.org

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