Logistics can shape Russia’s automotive future
Investment in logistics services and infrastructure will play a critical role for both localisation of suppliers in Russia and maintaining efficiency for the global supply chain on which it continues to depend, write Christopher Ludwig and Marcus Williams from Moscow
The Russian automotive market is facing uncertainty, with sales falling off at the same time that manufacturers invest further in their production capacity and local presence in the market to meet targets set by the Russian government. But although the market has pulled back this year, with sales expected to be around 5% lower compared to the 2.9m vehicles sold in 2012, carmakers, tier suppliers and logistics providers at the 8th Automotive Logistics Russia conference reinforced commitments to expanding their networks in the Russian Federation, while calling for stronger investment in logistics services, equipment and facilities.
Investment continues across the supply chain, from tier ones localising near to OEM plants, foreign carmakers adding production capacity from St Petersburg to the Volga region, and new dealerships opening up to increase vehicle sales and spare parts coverage in Russia’s central and eastern regions as well as in the west.
The Volkswagen Group, for example, plans to add 20,000 units of capacity to its plant in Kaluga, outside Moscow, as well as to ramp up contract manufacturing ofVolkswagen and Skoda vehicles to 132,000 at the Gaz Group factory in Nizhniy Novgorod. According to Zdenek Dresler, head of group service division at Volkswagen Group Rus, the carmaker will expand its dealership network in Russia from 413 in 2012 to 650 by 2018. “That includes expansion in the central and eastern regions, where we want to be part of the future growth,” he said.
But Dresler identified serious gaps in infrastructure and logistics service coverage across Russia. For Volkswagen to meet its distribution targets, for example, the country would need to develop more multimodal hubs for rail and trucking service. “The railways in the country are not being used to their full advantage,” he said. “As well as investment from government, we expect investment from providers in hubs, truck fleets and storage capacity.”
Depending on a global supply chain
Production for foreign brands in Russia, at 1.3m vehicles last year, made up around two-thirds of output in Russia compared to domestic OEMs. But a large amount of this production is currently CKD or heavily dependent on supply chains stretching back to Europe, North America and Asia. Along with global suppliers, the country is dependent on an international freight network moving through its ports, as well as road and rail points from the east and west. Many components and vehicles move through the Russian ports of St Petersburg and Ust-Luga, for example, while SKD kits, material and vehicles are moved by both road and rail through Malaszewicze, Poland, a terminal run by Adampol. Tier suppliers also move many components by road through Poland and Belarus to Russia from as far as Spain. There is some movement of vehicles and kits on the Trans-Siberian railways from China and the Far East, although capacity is constrained.
This supply chain brings a myriad of challenges for manufacturers, particularly in the complex and costly Russian customs systems. While the conference revealed some signs of progress, including approving certain companies to clear customs at their own premises, many companies still rate customs clearances as their biggest headache.
Regulatory pressures are critical, including increasing restrictions on road usage and driver hours. However, most issues come back to customs and the need to localise in Russia. A number of OEMs, including Renault Nissan, General Motors, Ford, the Volkswagen Group and Fiat-Chrysler, along with tier suppliers, have signed agreements that target increases in production capacity and localisation in exchange for reduced customs duties. But the transition to localising the Russian supply chain is uncertain, and some expect that the targets will be delayed or pushed back.
The current slack in the market challenges localisation, as does poor quality in the Russian supply base and unreliability for domestic logistics and infrastructure in Russia. Peter Layer, head of global purchasing and supply chain for Russia/CIS at GM, said that the lack of reliable trucking, intermodal and consolidation services in Russia meant that tier suppliers needed to be based as close as possible to OEM plants. “If we had more reliable infrastructure and logistics, we could do more cross-shipping between suppliers across Russia’s automotive clusters,” he said.
But such limitations also represent opportunities to logistics providers. Along with Layer and Volkswagen’s Dresler, Toyota Motor Russia’s Olga Valieva, director of vehicle logistics, called for more logistics services and facilities across Russia. Valieva would like to see more flexible trucking, rail hubs as well as more port capacity in both the Black Sea and the Far East. “Sea freight to and from Far East points needs to be optimised. To make these deliveries we need proper spec car-wagons for the Trans-Siberian Railway,” she said.
The commitment to growth in Russia could also be seen in the development of spare parts logistics in the country. Both Toyota and GM revealed plans to expand their network of regional warehouses, with more focus on delivery frequency and stability. Andrey Scherbakov, director of spare parts and supply chain at Toyota Motor Russia, revealed that the carmaker is opening a warehouse this year in Novosibirsk, in central Russia, to support its Moscow warehouse. But this development highlights the great challenges in the country, as Toyota seeks to serve growing but relatively low demand density spread across the largest territorial landmass on earth with just two warehouses, and parts that come almost entirely from abroad. But these are the dynamics of the Russian supply chain, and Scherbakov revealed that Toyota, remarkably, is managing daily deliveries across the country.
The regulatory framework in Russia is critical to the development of the supply chain, and in particular its complex customs and duty regime. As reported over the last several years, several carmakers signed up to the government’s Decree 166 in 2011, which set targets for production capacity and localisation in incremental stages in exchange for lower import tariffs. Furthermore, there is also regulation 566, which sets localisation targets for certain commodities for tier suppliers in exchange for similar benefits.
The duty benefits have been timed to give manufacturers customs advantages ahead of Russia’s phased reductions in tariffs over the coming 5-7 years following its accession last summer to the World Trade Organisation.
Elena Andreichikove, associate, foreign trade regulation, DLA Piper, gave some updates on the documentations and procedures for regulation 566, as those companies that signed memorandums with the Ministry of Economic Development have until the end of June to submit all the necessary documents. Andrei
Andreichikove said that one agreement could be executed per memorandum, and that the list of products in each memorandum could not be extended. However, she did note that the benefits could be extended for parts that fell into a relevant group; for example, ‘interior parts’ could include door modules, instrument panels and ceiling modules.
Furthermore, last year the ministry introduced a method whereby tier suppliers could add a new group of components that had not been mentioned in the original signed memorandums. However, the process involved a complicated set of documents, and also a ‘feasibility’ study by the ministry to determine whether or not the parts could be included.
Ever-changing customs rules
Andreichikove also highlighted that the customs authorities have made a number of simplifications intended to speed up customs clearance for those importing material into Russia. A company can achieve the status of ‘authorised economic operator’ (AEO), which allows it to complete the customs clearance process of goods at the warehouses or storage areas of the AEO. In this way, goods – with the exception of those subject to excise tax – can be released prior to the submission of customs declarations. Those with AEO status are subject to “intense audits” at least once every three years, said Andreichikove.
Despite these measures, however, there was a general feeling at the event that customs clearance remains as difficult and complex as ever. During a vote at the event over whether the customs process had become any simpler for companies present, not a single delegate answered yes. A delegate from Renault’s Avtoframos plant in Moscow, speaking during a question and answer session, pointed to duties that were applied to importing and exporting returnable packaging to Russia. He also pointed out that the customs authorities had recently mandated that any company that is not clearing goods from a bonded warehouse would need to submit its declaration within four hours, as compared to the current 27 hours.
“That would mean that I have one hour to accept the document, and three hours to unload material and submit it,” he said. “I have 40 trucks per day [importing material]. How could 11 people manage to do this so quickly?”
This new approach would effectively push manufacturers to use bonded warehouses at either there own premises or elsewhere, which meant a high cost for construction or renting space.
Kirill Vlasov, chairman of the logistics branch for Delovaya Russia, a business association, admitted that this timing was too fast to be realistic. “It’s based on a KPI that the customs authority have set for customs clearance, but in practice four hours is much too little time,” he said.
Beyond the perennial customs issues, there are a number of other regulatory issues that are impacting automotive logistics in Russia, in particular around road and truck regulations. Since March this year, restrictions came into effect for the use of cargo trucks heavier than 12 tonnes during the day within the ring road around Moscow. According to Vlasov, the city monitors truck traffic by video, and violation of the rule costs 5,000 roubles ($150).
It is possible to use larger trucks during the day but only through a special permit, which Vlasov says is difficult to obtain and requires a lot of paperwork. “Also, the permits are specific to each truck for a specific location,” he says. “That’s difficult since most of the time freight trucks don’t necessarily know where they are going tomorrow. So it will only be effective for long-term contracts.”
There has also been regulation on installing tachographs in every truck to monitor the driving and actions of drivers, similar to what is currently done in the EU. However, the law has been scarcely enforced. There is a shortage of the tachograph technology in the country, while Vlasov said that the authorities have told Delovaya that they will not apply penalties.
The tachographs might be replaced anyway when the government mandates that all vehicles must have a ‘Glonass’ system (Russia’s satellite geo-tracking system, which is an alternative to the American GPS). “Steps to introduce this system [in all vehicles] are now underway, but whether we will be able to do it everywhere by 2015 to measure the kilometres driven is not obvious,” said Vlasov. “But it is in the plans.”
Vlasov also pointed to restrictions on road use and weight limits following winter months, which have become a regular feature of logistics in Russia each spring. Part of the problem, he said, is that there are at least six or seven different federal and local organisations that can establish road and weight restrictions in Russia. “As a public organisation we have not been able to stop this,” he said. “The fines should not be so prohibitive, but they go up to 300,000 roubles.”
Sergey Bobryshev, logistics director at Glovis Russia, said that the sudden shifts in legislation were his company’s biggest challenge, including road restrictions and changes in rail tariffs. Chris Godfrey, manager of outbound engineering for Renault Nissan’s Alliance Logistics Europe, also said that this kind of instability was among the biggest issues that the company faces. “That is why it is so important for us to work with logistics providers who understand this unpredictability and can handle it,” Godfrey said.
There is more uncertainty ahead, as Vlasov said that Russia is likely to introduce toll roads on major routes, such as between Moscow and St Petersburg. However, there is currently little information available on costs. “It’s not yet sure how much the tolls will cost or whether there will be night and day rates. All the projects are underway and still unclear,” he said.
The push for localisation was a hot topic throughout the conference, as the 166 and 566 agreements push global manufacturers to either work with Russian suppliers or encourage more investment among foreign tier suppliers in Russia. Those manufacturers that signed up to Regulation 166 must have annual unit capacity of 350,000 vehicles by 2016, with 60% of the vehicle’s content sourced from the local supply base, along with 30% of powertrain parts and 15% of stampings. In exchange, manufacturers benefit from zero import duties. As mentioned, regulation 566 sets localisation targets for certain commodities produced by tier suppliers in exchange for lower duties.
This regulation has contributed to some shifts in the development of Russia’s automotive clusters. Over the last half decade or more, foreign carmakers in Russia have built new factories and assembled CKD kits in western Russia, including GM, Toyota, Nissan, Ford and Hyundai around St Petersburg, Renault in Moscow and the Volkswagen Group, PSA, Mitsubishi and Volvo Trucks at Kaluga, 180km south of Moscow. But as these OEMs expand their capacity to meet the 166 requirements, investment has flowed back towards Russia’s traditional automotive clusters in the form of joint ventures or contract manufacturing with Russian OEMs.
These partnerships include Gaz's contract manufacturing of Volkswagen, Skoda, Chevrolet and Daimler vehicles in Nizhniy Novgorod; Renault Nissan has added assembly lines with alliance partner Avtovaz in Togliatti and Izhevsk; and Ford’s joint venture with Sollers in Elabuga, in the Republic of Tartarstan, where it is assembling vehicles and will open an engine plant next year.
The capacity expansion won’t be exclusively in these areas. GM, Ford and Hyundai all plan to add production in St Petersburg, while PSA and Volkswagen will expand in Kaluga. Magna has signed an agreement with contract manufacturer Avtotor about expanding contract manufacturing capacity in Kaliningrad, the Russian enclave in Europe, at a factory that already builds cars for Opel, BMW and Hyundai-Kia. Chinese OEMs, including Geely and Lifan, have partnered with Derways in Cherkessk near the Black Sea.
As well as working with Russian OEMs, manufacturers have been making use of a number of ‘special economic zones’ that were introduced by the federal government and regional authorities in Moscow that provide customs, tax and land incentives to residents. A prominent one is the Alabuga SEZ, in Tartarstan, which includes Ford-Sollers as its largest resident, along with joint venture partnerships between Russia’s Kamaz together with Daimler and CNH. According to Timur Khaziev, head of investor relations at SEZ Alabuga, an increasing number of tier suppliers are also investing in the region.
Benefits of the SEZ include tax breaks on VAT, customs and profit tax, while Khaziev also pointed to lower average wages compared to Moscow or St Petersburg, along with a good supply of labour. The region is investing in upgrades to its road and rail infrastructure.
However, delegates on the sidelines of the event pointed out that, as ever with Russian industrial policy, the customs arrangements are complex. Most of the customs benefits apply only to those who agreed to be residents in the SEZ by early 2012. One manufacturer told Automotive Logistics that most of the benefits apply only if suppliers in the SEZs sell their products to other residents in the zone, which would suggest that parts produced in the Alabuga SEZ could not be delivered with the same tax and customs exemptions to an OEM in Togliatti, for example.
Localising is about more than logistics cost
GM’s Peter Layer said that localisation was a good thing for supply chain costs even beyond the customs and duty benefits, and it would be something the carmaker would be pursuing regardless of the industrial agreements with the Russian government. However, he said that measuring the cost impact of using local suppliers was complex and depended on more than reducing logistics costs.
Indeed, Russia has an historic supply base around its traditional manufacturing clusters in the Volga region. The distances between these clusters in places like Nizhniy Novgorod, Togliatti and Elabuga, along with those around St Petersburg and Moscow, range some 400-1,000km; these are distances Layer said would be considered acceptable for moving freight between different locations in North America or Europe (depending on the production and sequencing requirements).
On the surface, the cost savings of using Russian-based suppliers appears to be substantial. Layer provided figures showing truck delivery costs from Western and Central Europe to St Petersburg to be about five or six times costlier than they would be for moving parts from other automotive clusters within Russia. However, the standards for quality and technology are generally not up to the expectations of global carmakers, while the logistics network between the regions is underdeveloped. Layer said that the logistics cost difference could easily be erased if the parts and delivery quality was insufficient. “We could end up spending $1,000 a day if we receive parts that were manufactured with defects, or if they were to be damaged during delivery in Russia,” he said.
GM, like other manufacturers in Russia, has encouraged its established supply base, including suppliers from North America, Europe and South Korea, to come to Russia. However, Layer warned that logistics should again be an important consideration when choosing a location. Poor road infrastructure and inconsistent standards for trucks, drivers and other logistics equipment in Russia means that delivery reliability is often much lower than would be for imported material that moves in a container from a port to a plant. An underdeveloped trucking network has also limited GM’s ability to cross-ship parts and material between its plants or supplier locations.
Suppliers, therefore, should base their manufacturing as close to OEM’s plants as possible, said Layer. “It’s important where you localise. We find that, whereas in North America or Europe you can move parts long distances within the region, in Russia the logistics and infrastructure limits mean that localisation really works best when the suppliers are based close to the plant,” he said. “The less a part has to be moved, the less risk you have in terms of quality and accurate delivery.”
The potential for more sophisticated logistics networks
Layer said that the need for such proximity would be lessened if Russia’s logistics network could be developed further. He pointed both to the need for better infrastructure, but also for more advanced logistics and routing services, such as consolidation centres, crossdocking and milkruns.
“That would allow us to move parts around more efficiently and to cross-ship,” he said. “We currently do very, very little of that in Russia. Our parts are either imported and come straight from the port, or about 70% of the remaining suppliers is based next to the plants.
“[Logistics providers] have a huge role to play in helping to develop the logistics and supply base that Russia needs,” he added.
Others at the event shared this interest in more advanced trucking and routing, including commercial vehicle and contract manufacturer Gaz Group, which has 13 plants in 10 regions across the country. The manufacturer has even taken to running some of its own milkruns itself with an in-house fleet.
“We are getting better but we have a long way to go,” said Gaz Group’s director or purchasing development, Eric Barenthein. “Part of that is about central purchasing and distribution. A lot of work still needs to be done in the regions. We have tried more milkruns but it depends on data and it’s been a challenge to consolidate that.”
However, this logistics development could be held back further by the tendency to cluster suppliers around OEMs. Indeed, the policy of the SEZ in Russia appears to reinforce this concentration of the supply chain and could limit the development of cross-shipping and return flows between Russia’s automotive clusters.
Both Layer and Barenthein stressed the importance of helping to bring local Russian suppliers up to global standards.
“The supply base is developing but they have to learn very fast so it is hard to move forward,” said Layer. “We need to help to educate the Russian supply base across the automotive clusters in Russia so that we can all be successful.”
This is something Gaz is pursuing keenly, according to Barenthein, by providing training in production systems and lean processes, including in collaboration with leading universities.
Barenthein said that it is crucial to communicate standards, set clear measurable targets and provide the resources to reach them. He stressed the need to constantly follow up on both.
While Gaz is importing more global parts in certain cases following Russia’s entry to the WTO, Barenthein said that Russian suppliers tend to be better at improvising and adapting to problems. He said that Gaz had built an important code of trust with Russian suppliers, particular since going through the recession, when Gaz struggled to pay suppliers.
“The benefits to Gaz are trust based on history, understanding of local bureaucracy, location and integration, all which limit supply chain risk,” he said.
Managing the tier supply chain
Much of the localisation in Russia depends on tier suppliers managing their own global supply chains and increasing their own local material. Indeed, many global tier suppliers are expanding their presence in Russia, including Magna, which now has six factories in the country and will open a seventh this year.
Karl Martin Lukas, head of supply chain management and logistics services at Magna Logistics Europe, the logistics arm at Magna International, says that the 566 requirements are a major focus for the company. Most of the tier supplier’s current sourcing, apart from a stamping plant in St Petersburg, is international, including from Europe but also a substantial amount from other regions, such as Mexico (to support Volkswagen’s Jetta production in Nizhniy Novgorod), China and South America.
Lukas said that he wasn’t sure whether OEMs and suppliers would be able to meet the targets set out by the regulations in time for 2015. Even as OEMs encourage their tier suppliers to bring production to Russia, it was more difficult to encourage tier twos and threes to follow, which results in tier one suppliers bearing more of the logistics and import costs.
“Tier one suppliers cannot do this on their own. We need help from OEMs to also encourage our suppliers to come to Russia. Together we have a better chance of developing the local supply chain,” he said.
Magna’s network for moving freight to Russian plants includes international consolidation centres in Europe and North America, container shipping, direct routing from Europe and Russia along with flows from other regions.
Lukas pointed to the importance of Magna’s integrated supply chain management function in managing these logistics. Magna Logistics Europe both plans and designs the most optimal logistics flows, as well as purchases logistics services and follows up on logistics provider performance. It has a logistics planning tool that links together with Magna’s ERP system and purchasing system, which Lukas says helps to connect supply chain planning with execution.
While Magna tends to be highly decentralised, with individual plants controlling much of their own logistics flows, for Russia Magna Logistics Europe is responsible for managing almost the entire network, including returnable packaging and line feeding. Almost all of the freight that it moves inbound is procured ‘free carrier onboard’, and so is Magna’s responsibility. “For finished product deliveries to customers, it depends on the OEM, but in most cases in Russia we are also responsible for the shuttle runs to the plants,” he said.
For purchasing logistics, Martin said that Magna Logistics Europe was also trying to bundle together as much freight as possible to get the best logistics solutions from providers. While he acknowledged weaknesses in the Russian freight network, he said that Magna had strong relationships with its logistics providers in the country. “In Russia we have had the opportunity to work together from the beginning, and to make the necessary adjustments to the changing market,” he said.
Lukas said that a challenge for Magna is the variety of call-offs from its different customers in Russia, and planning its supply chain weeks in advance to meet these demands across such a long and complex delivery chain. However, by using a network of consolidation centres in North America, Europe and Russia, for example, Lukas said that the company had been able to mitigate these complexities, and limit the amount of premium freight it might need to send to the country.
Following recent growth in the Russian automotive market, carmakers are looking more carefully at managing their service parts network in Russia. Speakers from General Motors and Toyota highlighted the different approaches that some manufacturers are taking in delivery frequency and outsourcing, as well as the differences for serving Russia compared to Europe, North America or Japan.
Among the most obvious issues for any carmaker is how to serve Russia’s size and relatively small volume. For at least most foreign brands, however, 50-60% of all sales and dealerships are in Moscow and St Petersburg. At General Motors, the Moscow region represents 45% of demand for spare parts, and St Petersburg 20%, according to Eugeny Sukhoy, warehouse and distribution manager. The rest is spread across central and eastern regions.
Such concentrations of demand impact the way carmakers position their regional distribution centres to serve dealerships. While in Europe, General Motors has around ten warehouses to serve different countries, in Russia the carmaker has two in the Moscow region covering the western part of the country and much of the Volga region, and one regional warehouse in Yekaterinburg to serve central and eastern cities in Russia.
Toyota has concentrated its spare parts network on Moscow even more, using just one distribution centre there to serve the entire country, according to Andrey Scherbakov at Toyota Motor Russia. However, starting this year Toyota is also opening a regional warehouse in Novosibirsk. Toyota’s demand has actually shifted much more strongly to smaller cities in central and eastern Russia, he said, and so the carmaker is also studying options for adding a second regional warehouse. Scherbakov said that over the past eight years, the demand has shifted from being 60% in Moscow and 25% in St Petersburg, to today’s level of 35% for Moscow and 15% in St Petersburg. “The regional sales are still growing,” he said. “It means there is a higher cost for Toyota to make frequent deliveries to regional dealerships.”
Both carmakers recognise that the location of their warehouses leads to inconsistent levels of order fulfilment and service for dealers, especially in the central and eastern regions of Russia. Scherbakov said that the distances and low density of dealerships and distributors spread across Russia has led Toyota to carry at least twice as much inventory at warehouses in Russia compared to Europe. Sukhoy said that GM also carried more inventory, although he pointed out that it did not make sense to compare the distribution in Italy or Germany to Russia.
Warehousing space is also at a premium in Russia. David Lane from Tablogix pointed out that while Detroit has 50m square metres of class A warehousing space, Moscow has only 10m square metres.
Given the constraints of the Russian distribution network, Sukhoy said that GM has made a conscious decision to focus more on stable availability of parts rather than fast delivery. He pointed to availability rates in its warehouses of 93-94%.
“We are working on a stable and fixed availability. If the lead time to a dealership is four days, it should be consistently four days so that dealers can plan their stock and build expectations with end customers,” said Sukhoy. “We discussed a lot how quickly we should deliver to order and came to the conclusion that the dealers do not need overnight delivery.”
GM’s frequency of delivery depends on the region, as well as balancing service with more efficient full truckloads. The carmaker uses daily shipments for rush orders. In Moscow and St Petersburg, the stock order shipments and deliveries are also daily and “on a high basis”, said Sukhoy.
For non-rush regional distribution of stock orders, GM dispatches supplies as soon as it has full truckloads, which is usually once or twice a week.
Toyota, following more closely the dispatch to order principles of the Toyota Production system, has put emphasis on small, more frequent deliveries. It has daily order shipments, including at weekends, and it demands that its dealers place stock orders seven days a week. In the Moscow region, Toyota delivers twice a day to dealers. It uses trucks smaller than 12 tonnes and so does not face any restrictions.
“We are trying to deliver seven days a week, which is actually the most difficult for us, especially in the [central and eastern] regions,” said Scherbakov. “We have a stable time schedule for the deliveries everyday of the week. For rush orders, dealers can place them everyday, and they are moved either by ordinary transport or by air.”
GM is currently piloting delivery to several dealerships afterhours, particularly in consideration of truck restrictions and traffic during the day in Moscow. Sukhoy said that after GM presented these plans to dealers during a recent meeting, more have expressed interest in receiving such deliveries. Toyota has no current plans to introduce afterhours deliveries, according to Scherbakov.
Communicating targets and improving inventory management
While GM has a lower delivery frequency compared to Toyota, it is putting considerable focus on working with dealerships and logistics providers to improve inventory management and delivery reliability. Dealers are encouraged to make at least once or twice weekly stock orders, which he said benefits logistics companies as it allows them to plan for larger loads. The carmaker is also sharing statistical reports with logistics providers and monitoring their performance to improve delivery services. Twice a day it updates information on its order portals on dynamics with dealers, targets and reasons for underperformance.
“It is not enough today to bring your cargo from point ‘a’ to point ‘b’,” Sukhoy said. “We have to track delivery by the internet, for example. We use a lot of returnable containers and packaging so we have to know in real-time mode where the cargo and packaging are situated. Through this monitoring, the suppliers become more customer orientated.”
Sukhoy credits this focus on inventory management at dealerships, performance tracking among logistics providers, and the opening of the Yekaterinburg warehouse with helping GM to drastically reduce the amount of rushed orders (many of which move by air) in the network. In 2008, 73% of orders were rushed, where today the number is 14%.
“The first priority should be availability of spare parts at the warehouse, and the second is the mentality at dealerships,” said Sukhoy. “Before, the dealers didn’t understand their requirements. They didn’t mind the 7-10% mark-up because it was the end customer who paid for that.”
Toyota does not share KPIs with its dealers or providers as often as GM. However, it has a strong culture of order frequency, which is reinforced by its inventory management system. “From the very beginning with dealers we didn’t have target in terms of sales, and our prices do not depend on the volume of sales from each particular dealer,” said Scherbakov. “If a filter is needed, the dealer purchases one filter, and we correlate the training of dealers for this concept. There are requirements in terms of software to provide regular deliveries for orders. This allows us to create a stable supply chain and avoid a sharp division on the side of dealers and distributors between inventory at their warehouses and at ours.”
Scherbakov said that Toyota’s rushed order deliveries currently number around 8-9%, a level he called “quite acceptable”. He also expects that the opening of the regional warehouse will bring this number down further.
Outsourcing and logistics service providers
The carmakers also revealed differences in warehouse management and outsourcing in Russia. Toyota, similar to its approach in Japan, Europe and North America, manages its warehouses in-house with Toyota personnel, which Scherbakov said the company plans to continue for future warehouses.
GM and others, meanwhile, revealed a preference for using third party logistics providers at warehouses. Sukhoy said that the company needed to work closely with the providers, but that the performance levels were adequate.
Alfred Eckle, operations manager for logistics Europe at Ford of Europe, commenting from the floor, said that in Europe Ford had four in-house warehouses, but it also had depots run by 3PLs. “Everything new we have is operated by a 3PL, which we think works better than with our own employees,” he said. “All of the processes in the warehouse are Ford processes.”
Sukhoy said there was a good level of competition among logistics service providers for serving the aftermarket in Russia, including new market entrants. GM had previously used DHL for 100% of its spare parts service, but today it uses DHL only for air deliveries, while land is spread across several other providers. “DHL is more orientated to smaller shipments, while the other suppliers might be coping much better with larger shipments,” said Sukhoy.
Both GM and Toyota said that the most errors in their service parts network originate at the warehouses, usually as a result of an inaccurate parts picking or poor packaging. Sukhoy said that getting the packaging right was the best way to avoid damage, and that GM was working with its providers to eliminate mistakes and to find the best packaging. Toyota’s Scherbakov agreed, and said that it also offered additional training to staff as well as salary bonuses for those who avoid making mistakes.
GM’s Sukhoy concluded that although there were divisions between warehousing and transport operations, including in monitoring flows, he did not think the solution should necessarily be to use the same logistics provider for both. Instead, he said that Russia must develop a stronger level of middle management. “Picking and packaging mistakes are down to weak middle management. If we have strong management at the middle level, we won’t have serious issues with the quality,” he said. “Poor medium level management is the weak point here in Russia.”
Russia’s past capacity problems for finished vehicle traffic at its northwestern ports have largely disappeared, with several Russian and Baltic ports to choose from. There is also now significant interest in developing ports in the south of the country around the Black Sea where capacity remains an issue.
Russia’s biggest car handling terminal is at the Commercial Sea Port of Ust-Luga on the Baltic coast. Operating 24 hours a day, the Yug2 terminal covers 890,000 square metres and has storage capacity for 18,200 vehicles (it also has 500,000 square metres ready for development). It has seven deep-water berths, three railway ramps and has its own dedicated rail department.
Ten-thousand rail wagon have been loaded since October 2010 at the terminal, with a 10% increase so far this year compared to figures for the same period in 2012.
Nikolay Dvoryankin, chief of the customer service department at Ust-Luga, said one of the main advantages of moving cars through the port was that the terminal is a single compound run by one operator, meaning each procedure in the process was coordinated and under the control of one organisation. It is also ready to provide value-added services such as PDI and paint booth work.
He went on to exemplify the advantages of the port to carmakers by focusing on its rail link to Kazakhstan, a market that doubled vehicle sales last year to 98,000. While that is just 3% of Russian sales (2.9m) it is still an indication of a booming market and one of significance for logistics providers because 58,000 of those vehicles were imported from Russia.
Ust Luga offers a 14-day delivery time over the 5,084km journey. Dvoryankin compared those figures with the port of Hanko in Finland, from where it takes 21 days to travel 6,000km. There are also timesavings at the Yug2 terminal, where vehicles are discharged from the ocean vessel and loaded on trains immediately so there is no dwell time.
Damage limitation on the vehicles has been made a priority and was central to the planning of the service. Working with customer Toyota and rail wagon operator Apparel, the company has installed additional protection, including wheel chocks within the wagon, as well as specifically designed lashing.
Dvoryankin said that overall the service is quicker, shorter and offered a saving of €800 per wagon ($1,040). It was also a service that could reach other CIS and Central Asian markets.
Entry via Poland
Carmakers also have good options for entry into the Russian Customs Union on the central corridor via Adampol’s multimodal terminal at Malaszewicze in Poland, just 5km from the Belarus border. Rail transit from the hub to Moscow takes just two days, while the onward link to one of Russia’s burgeoning automotive centres at Elabuga, where Ford Sollers has its plant, takes a further two days.
Elena Lukanova, CEO of Adampol and its Russian subsidiary Vectura, said that the advantages of the terminal attracted GM in 2007 when it decided to improve and maximise the efficiency of transport into Russia using the central corridor, with good links beyond Moscow to the Volga region.
“Russia is not only Moscow and St Petersburg, the regions have got a voice and OEMs recognise the demand there,” said Lukanova.
Adampol’s terminal at Malaszewicze has a 37 hectare duty free zone, with a 24-hectare vehicle storage compound and 11 hectares dedicated to container storage and rail loading. The compound can store 800 containers and has the capacity to move 40,000 a year, with double deck loading for rail. The facility offers two level ramp loading with adjustment for Russian rail wagons and can simultaneously load three trains. Seven rail services are run per week.
There are also 2 hectares of land given over to SKD transport (daily capacity for 76 units), PDI services and warehousing. Customs operations run 24/7 at the terminal.
Black Sea challenges
In the southwest of the country there is another example of where logistics partnerships are improving services, even in the face of infrastructure restraints. Gefco is working with Neptune Lines and TBMS Logistics, a Russian provider of ocean carriage and multimodal forwarding of project cargoes, on moving vehicles from Novorossiysk Commercial Sea Port on the Black Sea.
Maria Polianskaya, Gefco’s finished vehicle logistics manager in Russia explained that in 2010 the company was looking for ways of levelling out the impact of market volatility that was making it practically impossible to plan for the future.
“We saw that the southern region accounts for about 12% of Russia’s vehicle market,” said Polianskaya. “Carriers go there regularly but they come back empty. Ideally they should be loaded both ways.”
Gefco looked south with ideas of optimising the number of carriers, reducing the cost of delivery and shortening the delivery time, and it looked at production facilities in Turkey, Spain, Portugal and Italy as sources of return hauls. The problem the project faced was that there were no ports handling vehicle volumes in the south region.
“After the collapse of the Soviet Union the south of Russia had little development in terms of sea ports,” said Alexander Bulygin, a partner at TMBC Logistics. “The situation is the same now. The only sea port that can be used is Tuapse but the issue there, as at Novorossiysk, is that there is no storage space.”
Gefco and TMBC worked on a strategy over three years that allowed them, because of the recession and the drop off in other cargo, to free up space at Novorossiysk. This has resulted in Gefco securing two terminals with a combined space of just more than 40,000 square metres. This is obviously small in comparison with the bigger terminals in Russia but Gefco has engineered the compound and pushed load optimisation over a seven-day week so that it now clears three vessels a month with the capacity for 50 trucks to call per day. The facility offers remote customs clearance and its success led to the opening of another facility in June this year for additional capacity according to Polianskaya.
Bulygin added that the port had improved performance and had the potential to process anything up to 100,000 cars a year.
Asked about Gefco’s plans for rail as an import mode from other markets, given that it developed its own services in the past and is now owned by Russian Railways, Polianskaya said the company was looking at other modes first. She said that import volumes were down at the moment and rail was playing more of an important role within Russia’s borders.
Wallenius Wilhelmsen Logistics (WWL) is also providing services in the Black Sea and calls at Sevastopol on the southern tip of Ukraine for Chinese carmaker FAW, which arrives to the port , according to Søren Tousgard Jensen, managing director for Russia. There are no space problems at Sevastopol, said Jensen, and WWL makes a monthly delivery of 500 vehicles using a feeder vessel from the port of Piraeus, Greece and Derince, Turkey.
Jensen said an accurate forecast on potential volumes to Black Sea ports is difficult but there is a lot of demand for establishing entry ports there.
“We have a lot of requests from all the carmakers, and high and heavy manufacturers, for entry ports in the Black Sea,” said Jensen. “The limiting factor is what the port can handle. If we open the floodgates and say we can offer a service into Novorossiysk or any other place then we will have everybody immediately coming up. It is a capacity issue.”
Toyota is one of the carmakers looking for a port in the Black Sea and waiting for the development of customs posts. Olga Valieva, director of finished vehicle logistics at Toyota Motor Russia, said that if such a solution were found vehicles produced at its plant in Turkey would be transferred via that route.
“We want to develop the southern route with a proper port on the Black Sea,” she said. “Proper means in terms of its capacity for essential volumes, depth of berth and general infrastructure, which is essential for an automobile terminal. We also anticipate the development of customs infrastructure in the south.”
WWL will also be adding a European customer to its own terminal operations in Kotka next month and has made the first delivery of inland cargo to Moscow from Kaluga by road in the form of commercial equipment.
Road transport and protection
Road transport of vehicles in Russia continues to be challenged by a combination of legal restriction, underdevelopment and poor maintenance. Restrictions on the use of roads during the spring to dry out water damage disrupt delivery routes and lead times. When they are open, debris thrown up from the roads is a concern for vehicle carriers. According to Alberto Picco, sales director, at trailer manufacturer, Rolfo, between 25-30% of insurance claims are to do with stone damage. Rolfo provides units with sealed bases to prevent stones and dust flying up from beneath the truck and by the end of August will have finished tests on a side protection for the lower deck of its trailers.
Rolfo now has 1,500 units of its Blizzard3 in operation, which Picco said could endure Russia’s extreme variations in temperature. Building in this sort of tolerance accounted for up to 30% of development cost for Rolfo.
Differences in the quality of road transport are pronounced in Russia. Standards for trucks, roads and drivers have all been overlooked and need to be improved.
These issues concern Volkswagen, which is looking for fresh sales opportunities in the south and east of the country, meaning longer delivery routes over less well-developed roads. Zdenek Dresler said the company is extends its dealer network to the east, it needs better logistics infrastructure including terminals, hubs and compounds, and more truck fleet capacity for movements of its vehicles.
The Volkswagen Group is also exporting its Polo sedan from Russia to Belarus and Kazakhstan, which are within the Russian customs union.
On the use of rail for vehicle movements, Dresler said there were opportunities for further development but again this was dependent on new terminals and hubs. It was also necessary to think about cost efficiency considering Russia's high rail tariffs compared to other European markets.
Rail needs be competitive
In Russia rail is generally considered only to be a competitive mode on distances more than 2,000km, something Dresler concurred with adding that in the Moscow region the company needed to be more flexible than rail allowed, but he said VW was using it for imported cars.
Toyota has started using rail for transport to the Ural and Siberian regions from its northwest hub as well as from the Far East.
The company began operations from the port of Vladivostok last year for deliveries to Far East dealerships and those in the East Siberia region.
Olga Valieva from Toyota said that the company was looking for enhancement on the Trans-Siberian Railroad (TSR) on its Far East route. She said it needed to be made competitive with the northeastern route but is so at the moment only as far as Irkutsk. Rail wagon specs for finished vehicle transport had to come up to standard. As well as this the carmaker is looking for an increase in capacity at the Far Eastern ports and the modernisation of terminal facilities.
The company has also started moving the Land Cruiser Prada in SKD form from the Far East and has opened a hub in Moscow to receive them.
For Glovis Russia’s Sergey Bobreyshev the TSR was not an option and, unsurprisingly for a ship operator, Glovis was bringing all Hyundai-Kia traffic from Asia in by ocean.
He pointed out that there were still many technical issues to overcome on rail movements from the Far East. Bobreyshev’s view was that it is neither efficient nor cost effective, there is no flexibility and it is impossible to monitor quality. Added to that were the damage and delays of transport during the winter. Finally, he capacity on the service is just too limited.
“If TSR is used at full capacity it would only take 2% of the total container traffic from Asia to the West,” he added.
Toyota combines hubs
In the northwest region Toyota changed its logistics model in 2011; rather than using multiple points of entry for international vehicle imports (including those using truck) it is using three hubs operating as a single source, namely those at the ports of St Petersburg and Ust-Luga, and its hub alongside Toyota Motor Manufacturing Russia on the outskirts of the city.
“In 2010, in addition to the Russian ports, we also used overseas ports Hanko and Illychevsk,” said Valieva. “These vehicles were then going to the dealers via the Moscow transit hub. A year later we stopped using international ports of entry and eliminated the transit hub in Moscow from our operations which has reduced lead time for domestic deliveries.”
While it has cut the points of entry in the northwest it has added the US to the countries from which vehicles are imported there with the Venza SUV now being delivered from Toyota’s plant in Georgetown, Kentucky. Toyota already imports vehicles from the European Union, Japan, Thailand and South Africa through the northwest hub.
Valieva said that Toyota Motor Russia was looking to share logistics best practices with other OEMs operating in the country in an effort to improve the quality of services. She highlighted targets such as road closures in the spring and the restrictions on trucks over 12-tonnes entering Moscow during the day.
Toyota Motor Russia is also driving up standards through its logistics partner cooperation policy.“From 2011 our company implemented a supplier selection policy and started free completion amongst logistics partners. This allowed us to improve the quality of operations,” said Valieva.
For the last four years the company has altered the structure of its truck partners, increasing them from one to five in the northwest region. Valieva said the company is open to offers from new partners to further improve in its operations.
Although Russia still has a long way to go towards improving its logistics and localising its supply chain, one can argue that it is a market in which logistics is arguably more important than elsewhere. Given the global nature of Magna’s supply chain in Russia, for example, Karl Martin Lukas emphasised how important it was to manage logistics costs and performance. “The value of logistics relative to the cost of the end product is higher for Russia because of our supply chain, so logistics is very important to our operations and our profits,” he said.
Chris Godfrey from Renault Nissan also pointed out that logistics was a real competitive advantage in Russia. “Getting our products to market fastest and in the most cost efficient way is really critical in Russia, and we think helps us to sell more cars compared to our competition,” he said.
This competitive factor could be part of why manufacturers in Russia are not cooperating so closely yet in logistics. Although
Renault and Nissan have now fully integrated flows, they are not yet sharing logistics with Avtovaz, despite sharing factories. “Lada has its own logistics company, and so far they manage their flows, and we manage ours,” Godfrey said. “In future we may consider sharing more, but I won’t speculate about that here.”
The situation is also similar for GM and Volkswagen, which are sharing production facilities together with Gaz. But so far the three manufacturers have made no efforts to combine inbound or outbound flows, or share more of the local supplier base. Rather, executives from Volkswagen, GM and Gaz said that they would focus first on getting the right quality and output for contract manufacturing projects.
“I think we will consider it, but we have other things to worry about first,” said Peter Layer.
Many in Russia seem likely to agree, but the imperative to improve logistics nevertheless remains strong.