Russia again appears to be impervious to the threatened ‘double dip new recession’ and the Euro-zone fear with all the talk of the ‘PIGS’. Automotive sales and production fi gures are up and we are seeing previously unpopular players welcomed back to the market.

Russian automotive production is up 40% year-on-year with estimates now set at approximately 1.7 million units for 2011, exceeding the previous 1.472m high in 2008. Approximately 700,000 units will be locally produced and 1 million will be assembled by foreign-owned manufacturers, demonstrating the ongoing Russian love aff air with imported brands.

Of the manufacturers, Avtovaz is the runaway Russian winner with an approximate 35% market share whilst Avtotor represents the global players with approximately 13% market share. Th e biggest OEM producing under the Decree 166 terms is no surprise, Avtoframos, which plans 140,000 units. It reported profi ts in excess of 2 billion roubles for the fi rst six months of 2011, compared with the previous year’s loss of 700 million roubles. Turnover, mirroring the market, jumps 40% for the same period as the car company enjoys a remarkable turnaround.

Fiat has concluded its divorce from Sollers (after its ex-partners recent marriage to Ford). Signing an agreement by which Sollers cedes the Russian distribution rights to all Fiat models from January 1 2012 to Fiat Group Automobiles S.p.A. Fiat will underwrite all warranty claims on Fiat models sold by Sollers from 2006 and will take responsibility for the parts and servicing of Fiat models moving forward.

Fiat now has the challenge of restructuring and developing a new independent dealer network to provide the full range of services, sales and service, to existing and potential Russian clients. It can be taken as read that major Russian retail chains will be looking at the possibilities of integrating additional brands into existing dealerships. Multi-franchise dealerships are no new thing in the Russian marketplace, exemplifi ed by the impressive Rolf Khimki (northern Moscow) site where

Ford, Hyundai, Mazda and Mitsubishi are sold and serviced under one big roof. Whilst it obviously represents a challenge, there are several big retail players who could accommodate an additional 100,000 plus car sales through their networks.

Fiat signed an auto assembly agreement with the Russian government in June. Dmitry Levchenkov, the senior offi cial in charge of car assembly negotiations said, “Th e agreement is based on an old assembly regime, but Fiat is taking on additional obligations - a new (higher) capacity of 120,000 cars per year.” Fiat will also build a new engine plant.

Th e company still has not confi rmed the new plant’s location although the rumour mill currently favours Nizhny Novgorod, despite the attraction of a southern Russian plant. Given Fiat’s Italian location and good multi-modal short-sea access to the Russian market via the Black Sea, surely a shorter supply chain would make sense? Fiat may be about to give away the logistical advantages it enjoys over its northern European neighbours.

Inward Russian investment in Fiat production capacities and the engine plant will exceed $1.1 billion.

Levchenkov said four foreign carmakers and their partners had now agreed to invest $5 billion under the new “166” and “566” conditions on local manufacturing. He said Ford’s partnership with Sollers would contribute $1.2 billion, while General Motors, which will assemble Chevrolets at Russia’s GAZ plant, would invest $1 billion.

In addition to the western manufacturers, Chinese car manufacturers are again entering the Russian market. Supported by Bo Andersen’s recent comments, that GAZ, Russia’s second largest vehicle manufacturer, may re-enter the car market and sell upwards of 3 Chinese brands, Chinese OEM’s are back in some force. Statements from what is Russian nobility (GAZ, not Bo) refl ect a remarkable change in attitude by the Russian government and a confi dence in the nascent manufacturing capability of a once struggling industry.

Chinese auto manufacturers were once seen as a tangible

Strength to strengthThe Russian automotive sector continues to go from strength to strength, ignoring the global woes. Reminiscent of the heady, pre-crisis days when Europe and the US were in the doldrums the Russian juggernaut powered on regardless and briefl y became Europe’s biggest car market ; right up until the foreign cash poured out of Russia following the August 2008 confl ict in South Ossetia. Alexander Rogan reports.

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threat to the domestic manufacturers. Some Chinese manufacturers closed down operations in 2008, learning the painful lesson that Russia was not interested in Chinese fi nished vehicles, as import duties were hiked. Since then they have been busy tying up deals with local automotive groups and expanding SKD and CKD capabilities. Th ere is consideration being given to ‘hot metal’ factories and the establishment of Chinese tier suppliers within Russia, to ensure that ‘localisation’ requirements are met or exceeded.

Th e fi rst half of 2011 has seen a doubling in sales by the Chinese OEMs with Lifan and Chery SKDs (assembled in Taganrog by Russian partner TagAz and sold under the Vortex brand) being the main benefi ciaries. Seanews also reports that Chinese exports overall to Russia (via the Baltic region) were up 26% in the fi rst half of the year. Customs reported that Chinese exports between January-July were 1.353 million tons compared with 1,075 million tons last year.

FAW Haima Motor Company, the Hainan Island-based FAW subsidiary, managed sales of over 1000 units despite starting sales in November 2010 from its recently started KD operations at a new Cherkessk-located plant. Th e plant, a subsidiary of Derways Automobile Company, is partly controlled by Russia’s Mercury Group (main distributors for Aston Martin, Bentley, and Ferrari). Derways has an estimated annual capacity of 100,000 vehicles and also manufactures vehicles for Great Wall Motors, Chery and, for the moment, Geely.

Despite opening a Russian CKD plant in January 2010, Geely, new owners of Volvo, are now considering the construction of their fi rst wholly-owned Russian assembly plant. Among the vehicles Geely plans to build in Russia are the compact MK ‘King Kong’ sedan, previously imported into Russia by the Rolf Group under its Red Dragon brand, and the midsize FC sedan, also known as the Vision.

Zhang Lin, CEO of Geely International Corporation, said a plant ‘will allow a shift from the current semi-knock-down kit assembly to full-scale production and local sourcing of components’.

Production capacity of the new plant was not disclosed, but estimates suggest an initial capacity of 30,000-35,000 cars a year. Currently, the Geely MK is assembled from SKDs by Derways in Ingushetia. A lack of localisation and the location with its logistics challenges and work force concerns make the current situation unattractive.

Th e new facility may be located at Yaroslavl, 250 kilometres northeast of Moscow on the Volga River. Alexandra Lileyeva, spokesperson for the regional governor said: “We are talking to a number of foreign investors regarding our plans to create an auto components production cluster.”

President Medvedev recently called for more cooperation between Russia and China. “Th e Russian economy’s demand for large-scale replacements of many pieces of outdated equipment and the modernisation of many sectors in the heavy and light industries, energy, and transport will only

grow,......in this regard, Chinese products could occupy their own competitive niche in our market, especially with eff ective loan support from Chinese banking institutions.”

What should be of interest to existing Russian-based manufacturing OEMs (both domestic and foreign) and a concern to the absent (historical) tier suppliers will be the Geely plan to organise its own production sourcing of components in Russia through the establishment of a special industrial park, where Chinese auto parts producers will locate.

Th ere are strong overland trade lanes between China and Russia, through the Russian Far East, Mongolia or Kazakhstan. Historical barriers have been strategic as customs ‘issues’ dissuaded Chinese car companies. Apparatchiks faithfully followed direction from the “power vertical” and Chinese cars and Chinese parts languished in ports and airports. Demurrage and the declining market discouraged the Chinese OEMs.

Given an apparent change of Russian heart, it will be relatively straightforward to identify a business-friendly location in one of the Russian regions and build both assembly lines and a supporting infrastructure. Given the comparative short lead time by rail, Chinese manufacturers could be supplying Russian-located Chinese-owned tiers economically and easily by this route.

Foreign-owned OEMs in Russia sit on stock, using container ports as emergency back-up supplies when overland routes become choked or when customs or ice fl ows cause serious congestion. Some manufacturers have as many as a thousand forty-foot containers in situ for any such problem. An OEM with a stable overland supply chain, with no ice, congestion or customs concerns, would enjoy a tangible advantage.

Having signed their agreements there is little room for negotiation or lobbying the power players to ‘soften’ a Chinese entrance. Th e power players have what they want in the form of $5 billion committed. If China is now welcomed as another inward investor then we could be on the cusp of a whole new ball game.

And, some food for thought, if the Chinese OEMs take a leaf from Volvo Truck Russia’s attempts to embrace Decree 566 and be accepted as a ‘component manufacturer’ as much as an OEM, Geely-owned tiers, under the 566 agreement, could import automotive components at zero duty and then, in turn, supply the Chinese OEM which will not have to commit to manufacturing 350,000 cars per year. Th is would provide all the benefi ts of “Decree 166” and a lot less dollar inward investment would be required.

20-21 September 2011 • Moscow

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