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By Simon Bickerstaffe

Everybody wants to make cars in Russia. After decades of poor choices, its 143 million inhabitants are enjoying car showrooms again. Forget ancient Ladas – Russians today want reliability and comfort. More of them than ever before, about half, are turning to foreign brands. Imports meet some of this demand, but OEMs are now manufacturing locally. Unlike western markets, there is no overcapacity.

Renault is doubling capacity of its Avtoframos plant in Moscow. The Logan, Russia’s best selling four-door, is made there, to be joined by a new model built on the same platform. “We’ve gone from 60,000 to 80,000 units and now to 160,000 by 2009,” saysJean Michel Jalinier, general manager of Renault Russia.

“All the cars manufactured in Russia are sold in Russia. We’re behind on capacity because the market is growing so quickly.”
GM has doubled capacity at its St. Petersburg plant to 70,000. From 2008, it will manufacture compacts and Chevrolet Captiva SUVs. It already has a 60,000-capacity plant in Kaliningrad assembling Cadillacs, Chevrolets and Hummers, plus a joint venture with leading domestic OEM Avtovaz making Niva SUVs at Togliatti.

Ford has increased the capacity of its St Petersburg plant to 60,000 units. The Focus is Russia’s best-selling foreign car and all five variants are made there.

OEMs can’t build plants quickly enough. A country spanning 11 time zones has plenty of room for greenfield sites. Volkswagen will assemble up to 115,000 vehicles in Kaluga, each tailored to the Russian market. Production begins in 2009. Assembly of Golfs and Skoda Octavias from kits starts this year.

St Petersburg will also be host to the Japanese. A Toyota 50,000-capacity plant comes on line at the end of 2007, with the executive-class Camry. Nissan, with the same capacity, has scheduled the start of local production for 2009, making three models specifically adapted for Russia.

Russia is an attractive proposition. The economy is growing and it has large fossil fuel and mineral reserves, including iron ore. Engineers and assembly workers are well educated and highly skilled, but labour costs still affordable. Scientists are world-class. GM has a Russian R&D facility, working on technologies such as hybrid systems and hydrogen storage.

ACEA says Europe produced one-third of the world’s passenger cars in 2006, with Russia managing only two per cent. The country’s car ownership is low, at 180 per 1000 people; in Germany it’s 552. The potential is clear.

“Estimating the market in 2006 to be worth €25–26 billion, by 2012 it should reach more than €37 billion,” says Frost & Sullivan’s Andriy Ivchenko, automotive and transportation industry analyst. “Growing prosperity of the population is one factor driving the market. And the middle class is emerging in Russia, pushing up sales.”

“We’re benefiting from a market that grew 15 per cent a year from 2000–05,” says Jalinier. “It was more than 20 per cent in 2006.”

Others are bullish too. “We’re looking at good growth and expect to sell a minimum of 170,000 units this year,” says Warren Browne, GM executive in charge of Russia. “Market growth of 15–25 per cent is a good opportunity.”

Cars such as the Renault Logan and Chevrolet Lanos cost the same as domestic models, but are better products, with superior warranties and servicing. The B and C segments are popular: vehicles priced below $10,000 account for about half of all sales. There is plenty of new money in Russia, so there’s also demand for luxury cars.

SUVs are popular too. Russian winters and poor roads mean four-wheel drives are in great demand – to GM’s advantage.

“One of our strengths is that we offer more SUVs than most companies in Russia offer cars,” says Browne. “We’ve got seven in the market and we’re adding an eighth, the Antara.”

Renault says this segment is worth 10 per cent of the market – about 200,000 units – but has no contender until the Koleos arrives next year. Most Renault sales are Logans, so Jalinier wants to develop a wider product offering. “It’s not a sustainable position to depend only on one product,” he says.

GM has five brands in Russia. Browne wants to see more new models, launched at the same time as in Europe. “It’ll be easier to deliver those cars if we have local production,” he says. “We can’t localise everything, but we’ll have a manufacturing base in Russia in excess of 200,000 units.”

More than 77 per cent of imported vehicles and components arrive via Finland. Moscow and St Petersburg are close to the border and have good transport links. The Russian Federation has a huge programme to develop the road, rail, port and airport infrastructure, but the pace of implementation is slow.

Eventually a transportation corridor will connect Russia, Asia and western Europe.

Government offers a range of incentives such as reduced taxes and import tariffs on components to support development. Special economic zones have been created to boost regional economies. Yelabuga, 800km east of Moscow, is one example.

“This area has a strong industrial base,” says Ivchenko. “Severstal Auto plans to sub-lease production facilities to foreign brands. Seat and Isuzu will assemble in Yelabuga. Local government support is a critical factor.”

Jalinier says benefits can be outweighed by logistics costs or difficulties in hiring workers, acknowledges the advantages gained from Decree 166, a famous Russian rule that offered western carmakers tax concessions if they set up local operations under certain conditions.

Those conditions include a percentage of local content in each vehicle manufactured in Russia. At present, 30 per cent of Logan components are sourced locally. The plant makes a further 20 per cent. “We’re developing local suppliers,” says Jalinier. “In two years we’ll buy 50 per cent locally, meaning 70 per cent rouble content in each car.”

GM is developing a local supply base, including bringing in companies not supplying the automotive industry but which have expertise in areas such as plastics and metallurgy.

Legislation and adapting to the local way of doing business can be challenging. Joint ventures are popular, because the partners understand idiosyncrasies in areas such as accountancy. These can differ greatly from practices in Europe and North America.

Domestic OEMs benefit from new technology. When Russia implemented Euro II emission standards, some ceased production, lacking compliant powertrains. Gaz fits Chrysler engines to the Volga in readiness for the 2008 introduction of Euro III and is going further. “Gaz is modifying its assembly lines to produce the Chrysler Sebring,” says Ivchenko. “It wants to stop making Russian models because of quality issues.”

When production in Russia reaches a critical mass, it will make sense for global suppliers to follow the OEMs. “We need parts for a certain cost,” says Browne. “If suppliers think it’s advantageous to come to Russia and supply us, we’d help, but we won’t change our evaluation criteria.”

Magna sees the advantages clearly. Decree 166 makes a business case for producing bulky, transport-cost-sensitive items such as stampings, bumpers and cockpit modules locally. “You don’t ship large class-A surface parts for thousands of kilometres,” says Hubert Hödl, vice-president for corporate marketing & business development at Magna International Europe.

The firm is considering sites near St Petersburg, Moscow, Nizhny Novgorod and Togliatti for a new plant. “As Russian OEMs begin outsourcing, we can manage facilities or make greenfield investments for stampings. This is on our to-do list,” says Hödl.

There is little tradition of external supply because of vertical integration in Soviet times. Magna is in contact with Avtovaz, Gaz and Severstal Auto, where requirements are very different to the globals: processes for product development and production are lacking.

Höšdl says: “We want to be a service provider for design and development on a contract basis.” Russian OEMs want cooperation in powertrain and driveline projects and 4x4 is one of the key elements.

Opportunities also exist for setting up supply chains and providing quality audits. Support functions such as IT services are an untapped market. And there is a big market for refined materials such as plastics. “Polypropylene is one of the main interior plastics, but you can’t buy it in Russia,” says Höšdl.

“It’s not a question of whether or not to go into Russia,” says Ivchenko. “It’s a matter of when you’re going to be there.”