Russian Automotive Industry Report Opportunities for UK based companies Prepared by: Michael J. English - Crozier International Ltd. For SMMT with support from UK Trade and Investment May 2004
Table of Contents Item Content Page 1. Executive Summary 4-5 2. Overview of the Russian Automotive Market 6 2.1 Pleminary observations 6 2.2 Imported vehicles 6 2.3 Local production 6 2.4 Foreign company activities 6 2.5 Component supply activities 6 2.6 Government activities 7 2.7 Current market review summary 7 3. Market Growth Prospective 3.1 Macroeconomic view 9 3.2 Russian Car parc analysis 9 3.3 Purchasing Power of the Russian Population 10 3.4 Buying habits 11 3.5 Consumer credit 11 3.6 Future volume forecast 2004-2010 by sector 12 3.7 Perspectives for Traditional Russian Producers 13 3.8 Status of International Producers manufacturing in Russia 15 4. Government policy 4.1 Edict 135-413 17 4.2 Concept of the Russian Automotive Industry development (Overview) 18 5. Business climate 5.1 Observations 19 5.2 Doing business in Russia 19 Section I: OEM & Component section 1 Priority components required by the Russian and Foreign OEM s 20 2 Active joint ventures and current international tier I & II supplier status 24 3 Major suppliers to AvtoVAZ by component (Potential target companies) 29 4 Main automotive Manufacturers review and Production/purchasing opportunities 31 4.1 Background and vision 31 4.2 AvtoVAZ Group 31 4.3 AZLK/ZIL 34 4.4 Izhevsk (SOK Group) 34 4.5 GAZ (Rusavtoprom Group) 35 4.6 UAZ 36 4.7 KamAZ-SeAZ 37 4.8 GM-AvtoVAZ 38 4.9 Ford 39 4.10 Renault 40 4.11 Russian Plants Assembling Foreign Models Avtotor 40 5 Trucks 5.1 KamAZ 41 5.2 UralAZ 42 6 Bus & Coach (Major producers only) 6.1 Rusavtobusprom 43 7. General information 7.1 Homologation/testing procedures 44 7.2 Duty structures 44 8. Approaches to the Russian market 8.1 Potential Developments that could influence UK suppliers 45
8.2 Strategic partner search who and where are the best opportunities 45 8.3 Various types of strategy. 46 8.4 Logistics map 47 8.5 8.6 Local sourcing Conclusions: Opportunities and top 10 recommendations for success 9. Case studies I Johnson Matthey Catalysts 49 II Borg Warner cooling systems 52 III GKN 54 Section II : Aftermarket Section 1. Market structure 1.1 Size of the Russian After-market and UK activity 57 1.2 Buying habits of consumers Moscow/St. Petersburg/Siberia 58 1.3 Perception of UK products 60 1.4 Distribution supply chain/buying groups and their specialisation 60 1.5 Profile of fast fit,reconditioning,tuning and franchising sectors 64 1.6 Details of main after-market outlets in Moscow and the region 64 1.7 Internet websites for the after market research 66 1.8 Internet shopping 66 1.9 Areas that present the best opportunities for British companies 67 2 General information 2.1 Homologation and certification 68 2.2 Duty structures 68 3 Opportunities,strategy and top 10 recommendations for success 3.1 Opportiunity and strategy, to enter the market 68 3.2 Top ten recommendations 69 4 Conclusions-Opportunities for UK based companies- After-market section 70 5 Case studies I Quinton Hazell 71 II Cummins Engine Company 72 III KEMP retail and wholesale dealer 73 IV EXIST.RU 74 48 48 I II III IV V VI VII VIII APPENDICES Concept of the Russian automotive industry development (Government plan) The Russian automotive market group structure Car registrations by region (Oblast) List of potential after-market dealers Macro-economic data List of key Associations with contact details Key automotive events/conferences Doing business in Russia 1. EXECUTIVE SUMMARY Passenger car sector: Russia is recognised after China as the largest potential automotive component growth market in the world. Since the move to a market economy in the early 1990s there has been a steep rise in car ownership currently growing at a rate of x.x million passenger cars per year, and predicted to increase to x.x million per year by 2010. This has been fuelled by political stability and the economic recovery over the past three years, which has been better than expected. With inflation and interest rates under control, the medium term economic outlook is encouraging with a predicted xx% GDP growth per year.
The automotive market has changed over the past 10 years; the percentage of foreign new and used car sales has increased dramatically, and dealer networks have been established. Local Russian passenger car, light van, truck and bus production is steadily recovering, with the introductions of new models, but with a questionable future as described in this report. The foreign OEM s that have entered the market are starting to make an impact on the volumes and driving the quality standards up within the Russian component industry. The local OEM s were historically vertically integrated; however over the past decade this has been broken down with complete restructuring of the component industry, most component suppliers are now owned by the large Russian industrial groups or are independent entities. However, despite this optimistic scenario the window of opportunity for British UK component suppliers is closing fast. It is generally felt that there is between 12-18 months left for companies to make a commitment. The drive by the foreign manufacturer to localise is gaining momentum, World suppliers are moving into Russia and the Russian component suppliers are starting to be competitive. The foreign manufacturers have taken different approaches to the market and are now starting to make an impact on volumes. It is predicted that by 2008 foreign branded car production will exceed that produced by the traditional Russian OEMs. With the increased buying power of the Russians, the market is rapidly changing. In 2002 xx.x% of foreign cars purchased were < US$xx,000 compared with 2003 when only xx.x % were <US$xx,000. In 2003 new car registration doubled. Retail financing is playing a major role in this growth and as interest rates continue to fall in Russia this can only be good for the foreign suppliers. Today the demand is outstripping supply and the waiting time for a new car is 4-6 months. In general existing foreign OEM component suppliers will have the priority when it comes to purchasing decisions taken by OEM s now investing in Russia. However they are increasingly turning to local component suppliers if there is no commitment to supply locally. Obviously this doesn t apply to all components. Manufacturers are single sourcing due to the limited volume base which further reduces the opportunities. Ford and Renault are actively looking for suppliers as described in section 3.4 and will give priority to their existing approved suppliers. That includes the UK based Nissan suppliers in the case of Renault. Plastics are a key component and there is a drive by the foreign OEMs to find local suppliers. The future of AvtoVAZ (the biggest Russian producer) is not secure unless major funds can be found to upgrade their model range. All models will have to be changed by 2010 in-order to meet the Euro legislation on crash tests, emissions, recycling and competitiveness. What is the approach to Russia? The general feeling from those who have been through the painful process is that joint ventures are to be discouraged unless it is a necessity. Brownfield sites are the best option if the company has a guaranteed volume base from the foreign OEM. If the target customer is AvtoVAZ then taking control of the existing supplier is recommended. However, the list of independent suppliers is small. Legislation in Russia today is still not transparent and there is a need for a total reform. This is recognised and there is a commitment from the new government to treat this as a priority. There are no central government incentives for investors, although a lot of help can be obtained from the regional oblasts (Governments) through their foreign trade departments. They can recommendation suitable sites and advise on local incentives, tax in-kind investments and local regulations and approvals. Samara, Togliatti, Nizhny Novgorod region and Leningrad regional governments are singled out as being the most active in the automotive sector. The accession to the WTO will have an impact on the automotive sector, but today it is not clear how much impact. In the long term it is believed there will be a reduction in import duty which will further damage growth by the local Russian producers. In conclusion, the market for foreign car sales is growing rapidly; some major plants are now established in Russia with others to follow. There are still niche opportunities for British component suppliers, at tier II and III levels, but as explained the window is closing fast with a maximum of 18 months left. After that
time it will be a long haul to establish a presence> Full details of the opportunities can be found in the report. Truck sector: Today, the medium and heavy truck market is dominated by Russian manufacturers however this sector is also changing. The parc of used foreign brands is increasing with the expansion of the dealer network and parts supply chain which is driving companies like KamAZ to improve their image. This trend will continue with little change in designs by the indigenous manufacturers. Volvo were the first to set up a local manufacturing plant although volumes are low (planned 240 units in 2004). Selling the complete transport solution concept is a new innovation and the way forward in Russia. It is early days for localisation, but this will come within the next 3-5 years. The light and medium truck sector 3.5-16 tonnes GVW market is seen as weak> Zil and GAZ have traditionally produce outdated models in this range and a potential for an international player to fill this gap exisits. We would not recommend ZIL as a partner. It is effectively bankrupt and will fade away in the next 3-5 year. Kamaz has potential, but as described later, suppliers will be competing on price, and there are only niche market opportunities. Bus and Coach Sector: Production increased during 2003 to xx,xxx buses. An increase of xx% over 2002. However 99 percent of models produced are considered outdated by international standards. Most designs are a carry over from the 1970 s and the country has no traditional bus engine producer. Rusavtobusprom, a division of Sibal the giant steels and aluminium producer, purchased most of the large bus producers in c2000. Although production has increased there has been little change in design or investment. Price is the key factor to their marketing policy. This will not change until there is a change in fare rates and a revision of the whole Russian internal public transport funding policy. Until the municipal authorities are privatised there will be little change within this sector of the industry in the near future. The main competition in the city bus sector is the influx of used city buses from Europe which are more efficient, better quality and user friendly. There were efforts in 2003 by the Russian government to try to stop this trend it as had little impact. Scania are the first international company to start production in Russia (St.Petersburg). Volumes are relatively today but there are plans for expansion and possible exporting options. There is an interest in updating components, however there is still a strong Soviet mentality remaining within the bus industry which is a definite barrier to foreign companies trying to move into this sector. There will be niche market opportunities but little hope for change for the next 3-5 years. 2. OVERVIEW OF THE RUSSIAN AUTOMOTIVE MARKET 2.1 Preliminary observations The Russian economy increasingly provides a safe and stabile business environment. Political stability is almost guaranteed for another 4 years. Russian consumers are becoming more aware of the cost effectiveness vs quality ratio. Total number of cars registered in Russia is expected to reach 30 million by 2008 (xx million - 2003). Combined local and foreign production plus new and used imports are expected to reach xx million per year by 2008 (xx.xx million-2003) 2.2 Import of vehicles Import of used cars will continue to grow regardless of the customs hike during 2003. Import of new cars will continue to increase at a rapid rate with the growing economy giving greater market opportunities in the after-market. 2.3 Local production
Low price is among the rare advantages of locally produced cars by traditional Russian producers (GAZ, VAZ, KamAZ, UAZ, etc.): As safety and environmental emission standards are introduced, Russian manufacturers are being forced to upgrade quality standards. This presents opportunities for new technology and foreign companies. However the nature and structure of Russian OEMs means they are slow in adopting this new technology. Local Russian production will show a gradual decline over the next 5 years, with the increased activities of the foreign implants. AvtoVAZ will be forced by legislation to change all models by 2010. 2.4 Foreign company s activities Local production by international manufacturers is now playing an important role in developing the Russian automotive industry, leading to higher technology and quality standards. Ford, GM, BMW, Hyundai and Renault are actively paving the way in Russia and Toyota and Kia will follow within 2 years. Green field and Brownfield sites are the recommended way to invest in Russia. 2.5 Component supplier activities (See section I Item 2. for full details) Activities have been slow.some major tier I suppliers in specialist high tech sectors have a leading edge, and entered the market through the Russian producers, giving the volume base required. The tier II suppliers are waiting for the increased production volumes of the foreign implants. Component manufactures looking for investment opportunities in Russia prefer Brownfield investment. Opportunities exist specifically for tier II supplier in plastics and rubber seal production. The window for component manufactures to enter the Russian market is closing. Base raw material quality and availability is poor and is preventing development in the plastics and specialist sectors. Joint ventures are discouraged. Average age of Russian machinery is 20-25 years old, which discourges foreign interest. 2.6 Government activities There is only one incentive for foreign manufactures, Decree 135/413, however, the investment threshold is high and in practicable terms only applies to the vehicle manufactures and is generally accepted to be complicated and unworkable. The publication of the automotive development concept in 2002, (reference section 2.4.2) outlining the strategy until 2010. It is considered an abstract document (a form of protectionism) and of little value to the foreign manufacturers. 2.7 Current market review summary The local Russian car production in 2003 showed a x.x% increase over 2002 However the trend is a gradual decline in overall percentage of market share with the foreign implants starting to make an impact on the market. Demand for new and used foreign cars continues as the general economy strengthens. In October 2002, the government imposed higher customs duties on vehicles over 7 years old in order to stem the flow of imported used cars which directly compete with AvtoVaz. This had a direct impact on buying habits which was not anticipated by the government. Sales of new cars doubled in 2003 giving a combined used and new car import total the same as 2002. The demise of the local Russian car production will not be as dramatic as originally predicted by experts. The market will still have a need for low budget cars in the US$x,x00-x,x00 price range. However, the foreign manufacturers will be dominating the increased consumer demand for cars over the next 5-8 years.
Figure 1: Passenger car market share Russian car market trend 2000-2003 100% 80% 60% 40% 20% Imported used Imported new Foreign implants Locally produced SUV Locally produced 0% 2000 2001 2002 2003 Import of used cars The import of used cars has been a big concern for the Russian government and Russian producers. The imports peaked in 2002 at xxx,000 units. This figure was artificially high as there was a rush to import prior to the hike in import duties in October 2002.