Growth strategies of Russian truck manufacturers on global markets Lecture by Sergey A. Kogogin Director General, KAMAZ Inc.
Ladies and gentlemen, The subject I d like to discuss today is the «Growth Strategies of the Russian Manufacturers on the Global Markets» (slide 1). Russian manufacturers So, first I d like to define Russian manufacturers I will discuss later on (slide 2). By trucks we mean all the commercial trucks starting from LCV, however most of the examples will refer to the heavy duty truck segment as KAMAZ, the company of which I am CEO, operates in this particular segment. There are only four Russian truck manufacturers. The next slide (slide 3) gives a brief description of the above mentioned manufacturers: KAMAZ is the leader in the heavy duty truck sector (HDT). GAZ is the leader in the LCV sector and in the medium duty truck sector (MDT), it is also the second player, in terms of sales volume, in the heavy duty truck market (HDT, the Ural brand). It is noteworthy that both the above mentioned companies also operate in the large bus market. Sollers is the second player, in terms of volume, in the LCV market and a new player in the heavy duty truck as well as medium duty truck market with Isuzu brand. ZIL is the second player, in terms of volume, in the medium duty truck market. It is also making an attempt to enter the heavy duty truck market in partnership with international truck makers. I would like to point out that only two companies out of those mentioned above (KAMAZ and GAZ) occupy any somewhat significant positions in the world rankings. KAMAZ ranks 13-th among heavy duty truck producers, whereas the GAZ Group ranks 17-th among the LCV producers. Having defined the manufacturers, let us identify the markets which we will be discussing further (slide 4). «Major» markets In the past, only two markets were considered as major world truck markets, the USA and Western Europe (slide 5). The companies, which did not have a presence in these two markets, were unable to qualify as global players. Now the role of other markets is increasing (animation). Already today the following countries could be considered to be the major world truck markets: China, Russia, India. Consequently, the companies, which will not be represented in these markets, cannot be considered to be global, going forward. The Russian market, based on the year 2007 results, became quite comparable to the USA market (slide 6). However, to be fair, we have to admit that the US market is now near its bottom point. S. Kogogin 2
Apart from the market size, there are a number of reasons why the Russian market can be identified (slide 7): noticeable growth potential solvent demand for world class trucks. While in China and India almost all the market consumes the trucks which are rather in the low cost segment, Russia is showing a high level of demand for world class trucks. The sales of new trucks of the European brands in 2007 only, were in excess of 22 thousand units. (2008 projection is more than 35 thousand units.) o With sales of new Russian trucks added to the above number, the overall market volume exceeded 100 thousand units. o Russian trucks, in terms of performance and component base, as well as price, are nearing the Western standards. In addition to that, we need to emphasize the geographic closeness to the European Union, which is especially important for European truck producers. Who could be considered to be the major players in the world truck market? In not too distant history those used to be Western corporations only. Now a process in which new major players are emerging is underway. Previously, there were two key markets and the major players were those companies who used to service these markets. Currently, with the growth of new markets, some new major players have appeared (slide 8). The main basis for that is a strong position of those companies in their respective domestic markets. We can refer to Chinese manufacturers of trucks as an example. The Chinese market today is the largest in the world, and the key positions in this market are being retained by the local manufacturers. As a result, their role in the world industry is increasing very fast. There is another example which illustrates the reverse trend. Brazil does not have its own automotive industry. The Brazilian market has been carved up by the Western producers. Hence, new significant Brazilian players are unlikely to arise in the future. So now I would like to give you some figures and examples relating directly to KAMAZ and our positioning in Europe. Let me clarify from the beginning that by Europe in this case we do not mean Western Europe and not even the enlarged version of the European Union. By Europe we understand the countries which are situated in Europe in geographic terms. Quite recently we all watched the European football championship. This championship had Russia, Ukraine, Moldova and Turkey as participants. Russia, by the way, won the bronze medals. Let us call it «Greater» Europe, not to confuse it with the European Union or Western Europe, for that matter. Thus, if we look at the map of «Greater» Europe and color in heavy duty truck market leaders in each country, we will then arrive at the following picture (slide 9). Mercedes here is shown in the blue color, Volvo in red, MAN in pink, Iveco in yellow, DAF in green, Scania gray, Renault dark green. As you can see, there is also a hefty chunk of navy blue color. These are the countries of «Greater» Europe, where KAMAZ is the market leader. However, historically this did not mean much. The territory itself does not necessarily mean that the market is large. S. Kogogin 3
Was not the Russian market only 48 thousand trucks in 2002? And for many years KAMAZ had not been a noticeable player in the European map, despite the great «territorial» advantage. However, with the growth of the market, this situation has been changing. If we look at the situation in 2007, we will be able to see that the Russian market has become the largest in Europe (slide 10). Please compare it with the German market which used to be the largest one before 2005. Just 68 thousand new heavy duty trucks were sold in Germany, while in Russia 103 thousand new heavy duty trucks were sold. Inclusive of the second-hand import, the volume of the Russian market is almost double that of Germany, i.e. 128 thousand heavy duty trucks 1. This is exactly the situation we mentioned above a «new» market is growing and the local player succeeds in retaining leadership in such market. KAMAZ maintains its leadership positions in Russia. And therefore, if we look at the companies sales numbers in «Greater» Europe(slide 11), we will be able to conclude that one needs to talk about the «Great Eight», rather than the «Great Seven» European brand names. Thus, we have discussed who exactly the Russian truck manufacturers are. We have tried to understand how the list of major markets changes and how this impacts the list of the major industry players. And now we shall dwell on the strategies pursued by the Russian manufacturers (slide 12). Russian manufacturers strategies Let us assume that the strategy is an answer to some important issues faced by the companies. Four of such questions are given in the next slide 13: The manufacturers strategies are conditional on how they answer the key strategic questions. These questions are set out below: Where to sell? what markets are to be targeted at What to sell? what product is to be offered At what price? what price ranges would be competitive. These questions (What and at what price) could be united in one group as they are pretty much interlinked. With whom to work together? which alliances are possible and necessary Where? Let us begin with the first question as, to a great extent, we have prepared ground for it. If we are to address the question of where the Russian manufacturers will be focusing their efforts, we can say with a fair amount of confidence, that in the near term, they will be, primarily, preoccupied with their own domestic market (slide 14). Today the Russian manufacturers are not global, as they only have a noticeable presence in the Russian market and in the CIS countries. However, the Russian market is becoming one of the 1 The news just in: in the passenger car sector, based on the sales results for the 5 months period of 2008, the Russian market has moved from the 4-th to the 2-nd place, continuing to be behind Germany only and having passed up all the other countries. S. Kogogin 4
most important in the world and has been demonstrating most rapid growth. Therefore, the Russian manufacturers are now «concentrated» on the domestic market and cannot expand exports significantly. Such a situation is to continue for a few years and will only change after the growth of the Russian market slows down. Sales in the Russian market today allow the domestic producers to have enough cash needed for investments. And only after sufficiently strong positions in the domestic market are secured 2, they will start to develop export sales. First of all, the emphasis will be laid on the CIS countries, to be followed up by the other emerging markets, because the product and pricing are more suitable for these markets. And only after that, an entry into more mature markets is possible, for example the European Union market. The only Russian manufacturer who has announced its plans for Western Europe is GAZ. GAZ acquired a U.K. based manufacturer of Light Commercial Vehicles (LCV), the company called LDV manufacturing Maxus. However, at this particular moment the acquisition of the U.K. company is mainly used to renew the model range in Russia, rather than to expand into the Western European markets. Now GAZ is adapting Maxus to the Russian market and that will mark a milestone in the renewal of the company s model range. There is one more fact that speaks in favor of exports being the key activity, going forward. Although in the past years we felt that the domestic demand was growing even faster than our ability to increase production volumes we tried to retain the share of export sales at the level of 25%. And plan to increase it significantly in the future. However, this is for the future. But now the focus will be primarily on Russia. Why? Could you please look at the next slide (slide 15): the growth of the Russian heavy duty truck market is greater than in all the other European countries counted together. We have already discussed the position of KAMAZ in the «Greater Europe» market. While the diagram in the next slide (slide 16) shows the trend of this indicator. As you can see, KAMAZ s growth rate is faster than that of the other manufacturers, they are shown with the yellow line in the slide. If the trend continues, we will end up being the fifth, rather than the sixth in terms of this indicator already in 2008. But even this does not help KAMAZ to keep up with the growth rate of the Russian heavy duty truck market. Please look at slide 17: the blue bar stands for KAMAZ s growth rate in the last three years, while the red bar reflects the market growth rate. This has even led to KAMAZ losing its market share. It is precisely this situation that forces us still to focus on the Russian market, first of all. What to sell and at what price? Now let us discuss what the Russian manufacturers are going to sell and at what price (slide 18). We have already mentioned that the importance of the new markets in China, India, Russia has been increasing. In order to win over these markets, Western producers are looking into the possibility of creating a low cost product. And this is where the advantage of the Russian producers really comes to the forefront they do have such a product! 2 It is noteworthy that Prime Minister Putin has set a benchmark of 80% of the vehicles sold in Russia to be produced in Russia. S. Kogogin 5
Nevertheless, there are a number of issues typical of the Russian producers. In the heavy duty truck sector these issues are the following: Our clients became more wealthy and at the same time more exacting to the technical characteristics of the vehicles. KAMAZ s goal is to upgrade the current product portfolio in line with customers requests. Stricter certification rules are applied in the Russian market. The Russian government announced the introduction of Euro-4 starting from 2010 and Euro-5 after 2013. We need to be ready to comply with these standards. About 40% of the Russian heavy duty truck market is the long-haul truck segment which was historically supplied by MAZ, the producer from Belorussia. KAMAZ is almost not represented in this segment. However, this segment is large and very interesting for us, therefore one of the top priorities today is to penetrate that segment of the Russian market. There is no doubt that all Russian producers understand the great need to modernize production facilities and have already started to invest in modernization. At the same time, we should remain efficient and that means price competitive after all these innovations. What would that look like? (slide 19). Now more than 70% of KAMAZ sales are accounted for by dump trucks and special purpose vehicles (or chassis for special purpose vehicles). In the segment of long haulage, our market share today is only 2%, however in none of the other segments does this share go below 30%. It is difficult to say today whether it is good or bad. Didn t the dump truck market double in 2007, with long haulage tractor trucks only growing by 10%. However, we are confident that long-haul truck segment is one of the most promising. To day the share of this segment on the Russian market is much lower than it is in the developed markets. The key issue today is the cab. Here comes a convenient point at which we can pass over to the next sub-title dealing with partnerships as many of the issues relating to the model range could be addressed through partnership with other truck producers and/or component producers. Who to work together with? Little by little three paths have crystallized themselves which are now being followed by Russian producers (slide 20): Assembling foreign brands This strategy, for instance, is being used by Sollers (Isuzu, Japan). It involves minimum degree of freedom and the lowest investment risks. Limitations in access to export markets. In other words, grappling with today s issues of having a presence in the Russian market, in the future one may be confronted with problems in trying to enter export markets. S. Kogogin 6
Developing your own products using world-class component base allows investment and R&D risks to be shared with the partner Higher degree of freedom. Retaining key competencies. Providing more flexibility. KAMAZ (JV with Cummins, ZF, Knorr-Bremse, Federal Mogul, etc.). «Buying» lacking competencies as licenses or through acquisition of Western companies. Maximum degree of freedom, gaining new competencies. Vast investment resources are necessary. Certain loss of flexibility. GAZ Purchase of a license for Renault engine Buying LDV, U.K. In the next slide (slide 21) you can see a reflection of the second strategy in the use of world class components on KAMAZ trucks. (Slide 22) If we are to recapitulate what has been said above, we can draw the following conclusions. Summary, conclusions (slide 23): The role of the Russian manufacturers in the world truck industry is increasing. To a great extent, this is due to the increasing role of the Russian market which is becoming one of the largest markets in the world. The key priority for the nearest future is to maintain and to build upon the positions achieved in the domestic market. It is important that, while doing this, we do not fall into a trap: avoid making such alliances as would restrict our future export development. In the long-term Russian producers will focus, first of all, on development of the emerging export markets. S. Kogogin 7