RUSSIA – OVERVIEW OF AUTOMOTIVE
INDUSTRY IN UPPER AND MIDDLE VOLGA
January 31, 2007
Author: Roman Vvedensky, BISNIS representative in Nizhny Novgorod, Russia
INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
2007. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.
Introduction
The Volga valley has been a traditional location of automotive corporations in Russia for the last 40 years. The local automotive companies produced majority of Russian cars and a good lot of medium and heavy trucks in the Soviet Union, and then in the Russian Federation. The automotive profile of the region was unmistakably defined by Lada cars, produced at AVTOVAZ (Samara region, Middle Volga), UAZ sports utility vehicles (Ulyanovsk, Middle Volga), Volga sedans and GAZ trucks (Nizhny Novgorod, Upper Volga), , and KAMAZ heavy trucks (Naberezhnye Chelny, Republic of Tatarstan, Upper Volga). Under the centralized economic model, most components of the vehicles were produced either by the same companies or their subsidiaries, located close to a central conveyer department.
The historical monopoly of local automotive barons was broken over a decade ago, when Russian consumers began to change their preferences from new Russian cars to second hand models, imported from Europe and Japan, and then, after a national economic recovery in early 2000s, to new foreign cars, assembled in or imported to Russia. This new tendency covers, primarily, cars and sports utility vehicles (SUVs), and partly, light commercial vehicles (LCVs) and mini-vans. The local producers of medium and heavy trucks are in a better off position for they continue to control a vast niche in the national market, and steadily increase exports to CIS, and to some Asian and African countries.
Facing challenges from foreign car manufacturers and Russian consumers, the automotive corporations of Upper and Middle Volga have started to develop medium- and long-term strategies to retain their niches in the Russian market thru cooperation with foreign automotive companies (including car assembly and auto components production), considerable investments, improvement in quality management systems, and better use of their market advantages (sales channels, service and maintenance centers, cooperation with local governments).
The current report provides with a brief overview of major automotive corporations in the Upper Volga, and partly in the Middle Volga, and refers to the existing foreign projects in the automotive business. The report also includes a general forecast on potential development of the sector in the next 4-5 years, for it may be helpful for US companies, interested in this sector of the local economy.
Market overview
The population of Russia, in general, and of the Upper and the Middle Volga region, in particular, has been demonstrating a steady growth in consumption of new cars since 2004, when local banks began to actively develop car loan programs. For the last three years, sales of new cars grew at minimum 15% per year in Russia. In 2004, sales were equally divided between Russian and foreign cars, but the balance was broken in favor of foreign cars, assembled or imported to Russia, in 2005.
The data on cars sales, provided by the Russian news agencies, differs to a certain extent, but all of them agree about positive dynamics in sales. Official statistics reported the following sales of new cars in Russia: 1.610 million cars in 2004, 1.834 million – in 2005, and a little over 2 million cars in 2006. The national economic magazine Expert evaluated the market of new cars in Russia at US$ 30 billion (or 790 billion Rubles) last year. The growth tendency would retain in the next four years, and the local experts forecast annual sales next to 3 million cars in 2010.
At the moment, there are six major plants in European Russia, which assemble foreign cars for the national market:
- Avtotor (http://www.avtotor.ru), North-West of Russia, assembles KIA and BMW cars;
- Ford plant (http://www.ford.ru/ie/f_plant), North-West of Russia, assembles Focus models;
- TagAZ (http://www.tagaz.ru), South of Russia; assembles two models of Hyundai cars (Accent, Sonata), and one model of Hyundai light commercial vehicle (Porter);
- GM-AVTOVAZ (http://www.gm-avtovaz.ru/new_ru/index.php), Middle Volga; assembles models of Chevrolet-Niva SUV (sports utility vehicle), and Chevrolet-Viva car (production of this model may be suspended);
- IzhAuto (http://www.izh-auto.ru); Republic of Udmurtia, Upper Volga; assembles one KIA car model (Spektra);
- ZMA, Republic of Tatarstan, Upper Volga; assembles one FIAT car model (Albea), and two models of Ssang Yong SUV (Rexton, Kyron).
There are also a number of other assembly projects in Russia, focused on larger vehicles (e.g. assembly of Isuzu LCVs at UAZ plant, Middle Volga).
In early 2007, the share of foreign cars, assembled in Russia, has not exceeded 25-27% of the total amount of foreign cars, sold in the national market. Still, the share of foreign cars, produced in Russia, would grow as there are more foreign assembly projects in the pipeline. Local experts forecast over a dozen of large foreign assembly projects in Russia by 2010. Some of these plants would be set as subsidiaries of multinational companies, some – as joint ventures with local manufacturers, and others organized as licensed production. Toyota, VW, Renault, and GM are the next four multinational companies to launch large scale assembly projects in Russia.
Assembly projects are encouraged by two decrees of the Russian federal government: Decree 166, issued in early 2005, and Decree 566, issued in late 2006. Decree 166 determines minimum customs duties on imported components for automotive assembly plants, when duties vary from 0 to maximum 15% depending on a category of an imported product. The first decree has set benefits for assembly projects, while the second decree (# 566) provides benefits for manufacturers of automotive components in Russia. The second decree has put down the customs duties on materials and basic units, necessary to produce automotive components. The list of car producers from the North America, Europe, and Asia, opening their plants in Russia, would be soon supplemented with a number of other foreign companies, leaders of the auto component market, which have already confirmed interest to open their plants in this country. Official statements have been made by Magna International Inc. (Canada), and a group of German companies, including Siemens AG, Robert Bosch AG, Linner, Zahnrad Fabrik Friedrichshafen AG. Some of the German companies have already launched their projects in Central Russia and in the Volga area.
Local assembly plants have contributed to rapidly growing sales of Ford and Hyundai cars in Russia. Ford Focus is assembled at the plant, opened next to St-Petersburg in 2002. It has been a hit of sales with foreign cars in Russia for the last four years. In 2006, Ford sold almost 116,000 cars, SUVs and LCVs in the Russian market, where the sales of Ford Focus made 73,468 cars. Toyota has also high chances to increase sales in Russia after a launch of its plant close to St-Petersburg. Last year, the company reported sales of 95,689 cars and SUVs in Russia, with a 32% share of Toyota Corolla models. Currently, the range of popular budget wise cars in Russia includes Ford Focus, Toyota Corolla, Mitsubishi Lancer, Hyundai Accent, and Daewoo Nexia. Recently, this budget car club has been joined by a new member - Chevrolet with its Aveo, Lacetti, and Lanos models, assembled at GM plants in Korea. Production of these Chevrolet models may be launched in Russia within the next 12-15 months.
Major local players
The Upper and the Middle Volga region is known for a high concentration of mechanical engineering companies, manufacturing a wide range of products for aerospace, shipping, and automotive sectors of the Russian economy. The local automotive plants generate nearly 65% of all revenues, reported by the industrial companies of the region. The regional automotive cluster is led by three local corporations:
- AVTOVAZ (http://www.vaz.ru), Samara region, Middle Volga
- KAMAZ (http://www.kamaz.net/en), Republic of Tatarstan, Upper Volga
- GAZ group of companies (http://www.gaz.ru/about), Nihny Novgorod region, Upper Volga
Last year, the major stake in AVTOVAZ went under control of RosOboronExport (http://www.roe.ru) from its previous owner - SOK group of companies (http://www.sok.ru/en). RosOboronExport is the Russian state company, affiliated with the federal government. SOK group of companies retained another automotive assembly asset in the region - IzhAuto plant (http://www.izh-auto.ru), located in the Republic of Udmurtia, to the east of the Upper Volga region.
AVTOVAZ
AVTOVAZ is still the largest car manufacturer in Russia, although its niche narrowed from 38% in early 2006 to 31% in late 2006. The price range on old models of Lada cars vary from US$ 5,500 to US$ 9,500, which makes them attractive for local consumers, who are ready to put up with limited comfort and obsolete technical parameters of the cars because of an affordable price. The new models, developed by the company’s experts, are priced higher, and they face a serious challenge from Korean cars, and Renault Logan car, assembled in Turkey.
Last year, AVTOVAZ produced 766,000 cars, where 99,000 cars were exported. This year, the company plans to produce 776,600 cars, including 110,000 cars for exports sales. The company’s revenues in 2007 are forecast at US$ 6.3 billion. Lada Kalina is the latest model of a class B car, developed and produced by AVTOVAZ. The company plans to produce 145,000 Lada Kalina cars this year. Modest success of Lada Kalina sales motivated the company’s management to look for a strategic partner among foreign companies, interested in the Russian market. In late December 2006, AVTOVAZ signed a MOU with Magna International Inc., to build a new plant at AVTOVAZ premises. The design production capacity of the new plant is 450,000 cars per year. The company plans to assemble a foreign car model (the name of the car brand is not disclosed), and a new local model under the brand name Lada. The production volume for two models is preliminary set at a 50-50 ratio. In late 2006, the representatives of AVTOVAZ also announced plans to set a joint venture to assemble Renault Logan.
AVTOVAZ has got a recent experience of a joint project with a multinational company. GM- AVTOVAZ produced 47,881 Chevrolet-Niva and Chevrolet-Viva vehicles last year. The sports utility vehicle (SUV) Chevrolet-Niva, developed and designed by the U.S.-Russian team of experts, is the main product of the joint venture, which has become rather popular in the Russian market due to its good technical characteristic and a reasonable price.
KAMAZ
KAMAZ is controlled by the company’s management, although the list of its shareholders includes representatives of the local and federal government, and major national financial institutions. According to official statements, KAMAZ group of companies produced 43,344 trucks with a load capacity of 14-40 tons in 2006. Traditionally, 25% of the output, including vehicles and assembly sets, was exported to other countries. KAMAZ has a number of assembly projects with foreign countries, including China, Kazakhstan, Ukraine, and Pakistan.
Alongside with AVTOVAZ, KAMAZ was the first to apply to the Russian government for the customs duty benefits on auto components, imported from foreign suppliers for KAMAZ trucks. Opposite to some large Russian corporations, which choose buying a license to assemble foreign vehicles in Russia, KAMAZ prefers to develop its own production and technology. To increase the quality of auto components, used in KAMAZ trucks, the corporation set joint ventures with leading foreign producers: a U.S.-Russian JV Cummins-Kama, and a German-Russian JV ZF-Kama, which supply KAMAZ with modern diesel motors and transmission systems, respectively. The management of KAMAZ has announced plans to invest over US$ 1 billion in a new re-engineering program for the corporation. Currently, KAMAZ controls a 35% niche of medium and heavy trucks in the Russian market.
GAZ Group
GAZ group of companies is affiliated with the national holding group Bazovy Element (Basic Element, http://www.basel.ru/en), which controls a number of industrial, construction and financial assets in Russia. GAZ Group includes 18 enterprises, producing cars, buses, light, medium, heavy trucks, construction vehicles, diesel motors, and fuel systems in Russia. It controls a 50% niche in LCVs, and a 69% niche in buses, manufactured in Russia. The niche in cars is relatively small, and it does not exceed 5-7% of the total amount of cars, produced in this country. According to the official information of GAZ Group, its annual sales totaled US$ 3.37 billion in 2005 and US$ 4.4 billion - in 2006.
GAZ automotive works, located in Nizhny Novgorod, is the largest company in GAZ Group, which generates over half of its total revenues. Last year, GAZ produced and sold 220,000 vehicles and assembly sets, where 20% were exported to other countries. Currently, the company’s vehicles - GAZelle and Sobol LCVs - are the most popular vehicles for small business in the Russian market. Still, the company’s management intends to recapture the niche of Class C cars, lost by GAZ with a fading popularity of Volga sedans. Last April, Group GAZ bought a license and the equipment from DaimlerChrysler to produce restyled models of Chrysler Sebring and Dodge Stratus at its plant in Nizhny Novgorod. The design production capacity of a new plant is 65,000 cars per year.
GAZ Group made two more corporate purchases to level up its technology edge. Last year, it purchased the U.K. based company LDV (http://www.ldv.com), producing LCVs under the brand name Maxus. The Russian corporation plans to launch assembly of Maxus LCVs at GAZ plant late this year. Maxus commercial vehicles should enter the high-end segment of the LCV family, produced at GAZ automotive works. GAZ Group also invested Euro 57 million in the diesel motor plant, purchased from Renault Trucks. The new plant will be located in the Yaroslavl region, Upper Volga, and it will produce annually 20,000 DCi11 medium and heavy diesel motors, complying with Euro-3 ecological standards. The experts of GAZ Group have also developed a heavy diesel motor with the Austrian company AVL (http://www.avl.com) to be mounted on heavy trucks and buses. Last November, GAZ Group announced signing of a MOU with Magna International Europe to set two joint ventures: one plant will produce plastic parts for exterior and interior components of vehicles (including bumpers), assembled by GAZ in Nizhny Novgorod , and another plant will produce pressed metal parts. Total investment of GAZ Group into the project with Magna International Europe is estimated at Euro 300 million.
Severstal-Auto
Severstal-Auto (http://www.severstalauto.ru/en) is another powerful national holding company, which is growing muscles in the regional automotive market. The company’s automotive assets includes: UAZ plant (http://www.uaz.ru/eng), located in the Ulyanovsk region, Middle Volga, ZMZ motor plant (http://www.zmz.ru/eng/main.html), Nizhny Novgorod region, and ZMA plant (http://www.zma.ru) in the Republic of Tatarstan, Upper Volga.
The holding company gives a clear preference to cooperation with foreign car manufacturers. The company continued production only of two own SUV models (UAZ Patriot, and UAZ Hunter), where 30% of components for UAZ Patriot are foreign make. It ceased production of UAZ mini-vans and OKA midget cars, and concentrated on cooperation with Isuzu (Japan), FIAT (Italy) and SsangYong (Korea). The company announced a new car assembly project at the free economic zone Alabuga, Republic of Tatarstan, where it will assemble and, then, produce components for several FIAT car models: Albea, Paleo, Doblo, Grande Punto, and FIAT LCV Ducato. The design production capacity of the new plant is 150,000 cars per year. ZMA plant, another company’s automotive asset in eastern Tatarstan, will also continue assembly of FIAT cars, and produce SsangYong SUVs: Rexton, Kyron, and Actyon. UAZ plant will continue assembly of Isuzu commercial vehicles.
Cooperation with FIAT in the Russian market has also assisted Severstal-Auto to solve problems of ZMZ motor company, which traditionally supplied its motors to GAZ automotive works, mounted on Volga sedans, and GAZelle LCVs. With the current production capacity of 240,000 motors per year, ZMZ may receive a maximum order of 179,000 gasoline motors or even less from GAZ this year. The joint project between ZMZ plant and FIAT Powertrain Technologies provides for assembly of a new diesel motor F1A, mounted on FIAT Ducato LCVs, and UAZ Patriot SUVs. The diesel motor will meet Euro-3 ecological standards. The design production capacity of the project is 90,000 diesel motors per year. It will be launched in February 2008. Total investment in the project is estimated at US$ 100 million.
Foreign projects of
auto component production in the Volga area
According to the info of the Russian magazine Expert, there are over a dozen of foreign projects, related to automotive component production in the Upper and the Middle Volga region. They include:
- Stadco, a joint venture with Severstal-Auto, Tatarstan, metal press forming (the project is under development);
- Cummins, a joint venture with KAMAZ Cummins-Kama, Tatarstan, production of diesel engines;
- Robert Bosch AG, a joint venture Bosch-Saratov, Saratov region, production of ignition plugs and motor drive circuitry;
- Robert Bosch AG, a joint project with Zahnrad Fabrik Friedrichshafen AG, Samara region, production of fuel systems and transmission components (the project to be launched in late 2007);
- Zahnrad Fabrik Friedrichshafen AG, a joint venture with KAMAZ ZF-Kama, Tatarstan, production of transmission systems;
- LINNER, LINNER plant in the Volga area, production of grease filters (the project is under development);
- Hella Autotechnik, a joint project with AvtoSvet company (SOK Group), Vladimir region, production of front light lamp clusters;
- Delphi, a joint project with Samara Cable Company (SOK Group), Samara region, production of wire bundles;
- WOCO, WOCO plant, Samara region, production of industrial rubber and rubber metal articles;
- Tudor, a joint venture TuBor, Nizhny Novgorod region, production of batteries;
- Autocomponent Engineering, a joint project with Plastic company, Samara region, production of steering wheels with safety cushions;
- Tenneco, Tenneco Automotive Volga plant, Samara region, production of dash pots and filters.
Nizhny Novgorod region also hosts ZAO Instrum-Rand (a joint venture of Ingersoll-Rand with Pavlovo mechanical engineering company, and GAZ automotive works), which produces electrical engineering tools, and OOO Lear, a subsidiary of Lear Corp., which produces car seats, and interior components for cars and LCVs. Bor Glassworks, the largest producer of glass in Russia, is part of Asahi Group, and it produces windshields and side windows for Russian and foreign cars, assembled in Russia.
Recommendations for
U.S. companies
The U.S. companies, which take interest in the Russian automotive market, should closely monitor commercial news on the automotive projects, launched in the North-West of Russia, in Central Russia, in the Urals, and in the Volga area. There are also a number of new automotive projects, developed in Siberia and in the Far East, but they are likely to concentrate on assembly of Chinese vehicles, which may provide little business opportunity for a U.S. company.
Automotive projects, implemented in European Russia, and in the Urals, are often developed either directly or with involvement of well-known multinational automotive companies, which are interested, in its turn, in reliable counterparts and sub-contractors among North American, European or Japanese automotive firms. Local markets may come up with a good proposal on qualified labor for the new projects, and local suppliers of raw materials and logistics agents have already gained certain experience on how to work with foreign customers.
The new structure of the Russian automotive market will be set by 2009-2010, when foreign producers localize and launch their projects, and Russian companies reform their businesses. The current market situation pushes main players to actively communicate with potential partners, and to improve sales mechanisms. Now is the right time for a U.S. company, which has a business product to offer, to consider entry to the Russian automotive market. Growing competition among car producers and withdrawal of customs obstacles with an entry of Russia to World Trade Organization will make the market penetration harder after 2009.
A U.S. company, engaged in automotive production, may consider opening of a production site or a warehouse for its customers in Russia. Liberalization of customs duties on supplies of raw materials and units for automotive components production widens the range of customers from assembly plants to producers of auto components. A U.S. company may also offer its services in consulting and design to local car manufacturers, which continue production of their models, and which are interested to increase their attractiveness for a customer. It is little secret that local companies are also interested to improve their management systems and to optimize business processes, and a U.S. expertise may be highly demanded there. Preference will be given to U.S. experts or U.S. managers (the latter also get high salaries when hired by Russian companies), who have a good experience of competing with Asian car manufacturers. Development of the automotive industry in Russia will also create additional business opportunities for U.S. companies, which deal in aftermarket and sell equipment for automotive production as well as products for car service, repair and maintenance.
List of web-references
on major automotive companies, their projects, and contact lists:
AVTOVAZ
GM-AVTOVAZ
http://www.gm-avtovaz.ru/new_ru/index.php
SOK group of companies
GAZ group of companies
KAMAZ
Severstal-Auto
http://www.severstalauto.ru/en/
For more information on Upper Volga region, Russia, visit
BISNIS online at http://www.bisnis.doc.gov/bisnis/country/volga.cfm
BISNIS (www.bisnis.doc.gov)
is part of the U.S. Commercial Service (www.export.gov).