Proceeding with caution
Russia's growth and potential were central themes at the Automotive Logistics Russia Conference this year but that growth was seen to be at risk thanks to a lack of infrastructure. Until this is in place manufacturers appear unwilling to commit their resources. Anthony Coia reports from St Petersburg
Logistics providers entering the Russian market are proceeding with caution, and with good reason: the infrastructure necessary to support full activity is simply not in place. What's more, there is little information available from regional government to indicate when it will be. "We need to know which roads will be developed, their capacities and the sequence in which they will be built," said Vehnet's Steve Jones at this year's Russian conference. "As logisticians, we could then place our warehouses and distribution centres." This lack of infrastructure goes not just for the physical apparatus but also the people needed to make it work efficiently. Delegates noted the severe shortage of skilled labour in the country, and how manufacturers and suppliers needed to establish regional training centres to remedy it.
Rail operator and freight forwarder DVTG/Far Eastern Transport Group (FETG) is one provider experiencing problems. Company chairperson Raisa Parshina admitted that transhipment problems exist at places such as the China-Russia border due to inadequate infrastructure. She also admitted that FETG had yet to test a service for container shipments from Europe to Russia, a move that would balance the flow from the Far East. The company is currently renovating a rail facility at the Port of Nakhodka, located approximately 110 miles from Vladivostok, in order to support a rail route to Europe. WWL's Axel Bantel asked her about the viability of rail in terms of price competitiveness and capacity. She recognised that the trans-Russia rail market would take time to develop.
Part of the problem is the monopolistic structure of Russia's rail system. Mikhail Senkov at TZK GAZ stated that, "with only one rail supplier we cannot easily predict the availability of equipment and service. Therefore, we need to maintain higher levels of stock."
However, the outlook for rail wasn't purely pessimistic. Victor Ivanov at JSC RailTransAuto (RTA) emphasised the its potential and projected that the domestic movement finished vehicles would grow from 278,000 units in 2007 to more than 673,000 in 2010.
He went on to highlight that rail benefits in terms of reduced rates to Moscow from different parts of Russia.
Ivanov also pointed out that RTA plans to increase its rolling stock of specialised double-deck wagons from 2,400 units in June 2008 to 5,100 by 2010. Its new wagon has a fully-covered body, a removable upper deck, increased carrying capacity and a new vehicle securement system.
Furthermore, RTA's terminal network is expanding beyond its current locations in Moscow, Kaliningrad, and Zarubino in the Far East to include terminals in Yekaterinburg, Novosibirsk, Zabaykalsk, and Almaty (Kazakhstan) by the end of the year.
Beyond Finnish ports
Most of the international trade discussion at this year's conference focused on imports and, in terms of ocean freight, the country continues to rely on Finnish ports such as Kotka and Hanko. They currently handle about 70 per cent of the volume going to Russia and those volumes are growing annually by 20 per cent. This brought the discussion round to congestion and how best to avoid it with improved efficiency at the ports.
Ust-Luga is a Greenfield port that promises to relieve some of this pressure and Deputy Director General Alexander Goloviznin described how the Yug 2 multipurpose cargo terminal at the port was helping. It received its first car shipment in early June and by the end of the year the port plans to offer a 320-metre berth with a ten-metre draft. By then it will also have a 35-hectare storage area for 13,100 cars said Goloviznin.
Port development was also brought up during this year's new roundtable discussions, where attendees got the chance to get involved in closer dialogue. In particular, they compared costs between Russian and Finnish ports in terms of handling prices and related levies. Russian prices are much higher than those in Finland and this led one attendee to ask whether the Russian ports would consider price reductions or move in the opposite direction.
The customs dynamic
No discussion of Russia's logistics infrastructure can go far without examining the issue of customs clearance. Customs is often a contentious and frustrating experience for automotive shippers. The demand for customs expertise has been so critical that not only do third party specialists provide the service, but also carriers and the manufacturers themselves. Customs Department Director at RTL, Ilya Kositskiy, explained that in addition to its carrier services, the company provides customs clearance. He said that RTL has developed new clearance procedures with Customs, which will improve logistics efficiency for automotive shippers.
Russia's market growth has led to a decrease in the domestic share of new vehicles compared to imports. In fact, sales of foreign brand passenger cars are expected to exceed domestic car sales beginning in 2012. Marina Lyakisheva, Counsel, at international law firm DLA Piper, pointed out that, although customs transactions have increased by 40 per cent in the past couple of years, resources have not increased accordingly.
She said that Russia's customs strategy is based on an automated system of risk management, which includes risk profiles for all cargoes and a White List of companies that can receive accelerated customs clearance, thus reducing their logistics costs. The results of risk management have been that the percentage of consignments that were physically examined by customs has decreased from 120 per cent in 2003 (some were examined twice) to between 10 and 15 per cent in 2007.
Vitaly Archangelsky, President of the Oslo Marine Group, thanked the Russian government for closing the border crossing at Vaalimaa, Finland in May, which reduced the number of options from three to two, but also streamlined the process.
LSPs – meeting market demand
As automotive manufacturers laid out their logistics concerns, the fundamental issue facing LSPs was how best to meet customer requirements. Anton Gans of FESCO Transport Group pointed out that, although logistics providers are investing in various parts of the supply chain, no single company could entirely serve it. Moreover, he said that the fragmented Russian market has resulted in high prices and in a more rigid supply chain.
One suggestion for more effectively meeting customer requirements and overcoming restraint was to establish partnerships. Toyota Motor Europe's Mike Mills suggested that LSPs in Russia could consider forming a separate group within the European Car Carrier Group (ECG) or a similar organisation. This would give them one voice with which to negotiate with the authorities. As a group they could work together in a mutually beneficial partnership with the manufacturers he advised.
Frederik Beelaerts van Blokland at Schenker of Canada, added that OEMs and their suppliers are starting to encourage such partnerships: "Most of the large manufacturers and Tier Ones realise that, particularly in Russia, there is no such thing as a jack-of-all-trades – a logistics company that specialises in a multitude of services and is equally good throughout Russia. They have approached many logistics companies and said that they would like company A to offer one service and company B to offer another service and to work together. Individual companies don't stand a chance of winning the business, but working together they do. Usually it is the other way around, where if the LSPs have a gap in their service spectrum, they find a partner and present that to the OEMs," he explained.
Place and space
Russia's demand for logistics expertise is as much about geography as it is about scope of services. Yves Fargues, CEO of GEFCO, predicted that Russia's automotive production would be located not only in the Saint Petersburg, Moscow, Samara/Togliatti areas, but also further east to Novosibirsk and Novouralsk, which will boost the demand for logistics services. "Domestic production will grow very rapidly, which will require the massive import of components," he said.
On the warehousing side, Diana Arakelyan, a senior consultant at Cushman & Wakefield Stiles, said that St Petersburg has the most developed warehousing market in Russia. In 2009, the storage facilities will amount to more than 2 million square metres. Construction costs are growing on average 20 per cent per year. Currently, it is $1,000 per square metre for A-class construction.
Market risk and investment
What to invest in and how to do it also exercised the attendees at this year's conference. Bentley Motors' Veronica Hurst posed the question: 'if Russia joined the World Trade Organisation, would it reduce the risk for investors'. Bantel replied that in China, WTO entry has been a risk mitigater for both local and foreign investors. There, the development of four coastal ports, due in part to its joining the WTO, has made the country more competitive, and to some extent, similar drivers will apply to Russia.
Manufacturers also discussed the timing of entering Russia. Visteon's Jaap Mosselman noted that Western manufacturers would need to look differently at the way they organised themselves in Russia and would have to consider building near their customers. "There is no say from a supply chain perspective about where we are going to place our manufacturing facilities," he observed. "The question is how to get the material there, how to balance our inventory, [secure] proper customs entry and other challenges. Then the question is what level of activity you are going to put forth. You can decide to bring in parts from Western Europe, but the next step would be CKD production and then part localisation (which must be considered). This will have a significant impact on supply chain challenges."
For most, the attitude seemed to be to proceed with caution. Emile Benaim, Director of Vehicle Logistics at Toyota Motor Europe said: "We are definitely not making any decisions before we are pretty sure that we have the network, the equipment, facilities and people available; we want to see before we believe. Toyota is not taking many risks in Russia today. We are gradually going over potential alternatives."
Facilitating lean manufacturing
With more foreign manufacturers entering the production base in Russia there is a demand for logistics experts to accommodate homegrown systems where appropriate and adjust them to Russia's business environment.
Ulrich Schorb of Rhenus Automotive said that lean production systems were driving the approach to manufacturing in Russia but that, although the OEMs know the part costs, they do not know the logistics costs from the supplier. The lack of stable production by OEMs in Russia is due to issues involving labour, the supply chain, quality and suppliers said Schorb. Rhenus could help to reduce costs by mitigating adverse infrastructure conditions as well as weather problems.
Since last October Rhenus has been unloading containers at the SKD operation sited at Volkswagen's Kaluga plant, which produces 200 vehicles daily. Added Schorb: "In St Petersburg, Ford is going to the next level of production. It plans to increase its production from 300 cars per day to 540. In February, we began providing seat sequencing from an existing warehouse. We plan to open an external material warehouse in July, where we will handle Ford's entire parts warehousing and line-side delivery using card and call processes, and just-in-sequence deliveries."
Humphreys asked Schorb whether any OEMs are using on-site warehouses. Schorb replied that their economic advantage is clear. There must be a facility that can handle stock to minimise production problems, adding that GM has issued a tender for a logistics operator to run its warehouse in Russia. "Toyota also plans to change to the way of traditional systems in Europe by using a warehouse and moving away from the American-type milkrun system," said Schorb. "A Tier One supplier, depending on its economies of scale and philosophy, could run the warehouse. For Delphi, if sub-assembly is a core competence, you may not want to give it to a logistics service provider."
Domestic manufacturers are also making changes to their logistics systems. Senkov said that, as it developed its lean operating system, TZK GAZ optimised its production, finances and purchasing. Now it is focusing on warehousing. In July, GAZ plans to get more efficient by separating the logistics and production functions.
In addition to warehousing, packaging and material handling equipment can also address the lean challenge. An example is found in Linpac Allibert's I-Frame, which moves products to and from the line side. Rodney Salmon, Commercial Director, Global Automotive Solutions, said that the I-frame is in use at the Ford plant in St Petersburg. "We have also designed a packaging solution for automotive that is easy to use with no waste. The dunnage remains inside the container so the person on the line side is not removing lots of cardboard," he explained.
Opportunities for collaboration
As is common at Automotive Logistics conferences, the issue of collaboration came up again. Louis Yiakoumi asked Humphreys whether there should be better collaboration among the Tier Ones to address the lack of LTL consolidation systems. Said Humphreys: "We are not collaborating because we are so focused on our own particular businesses. However, it should happen, and in this particular market, where we have huge amounts of Greenfield construction in terms of new vehicles, then maybe this would be the ideal opportunity to do it."
Lear's Hauke Harnisch concurred: "At this point we are not collaborating because we are all trying to get acquainted with our own business circumstances. In fact, we are facing difficulties sharing resources even with our own divisions."
Asked whether it should it be up to the LSP to offer a consolidation service to separate suppliers, Humphreys answered that it would be difficult for the LSP to mention three competitors in the same sentence without being stopped. However, if the manufacturers were to present some synergies to the LSPs, then they would likely be willing to consider it. "We are doing exactly that in the aftermarket with the OEMs, where the dealerships are clustered in areas. Rather than have two or three vehicles going to the same supplier parks, we are combining them. We are also doing it for OEMs on inbound collection services," said Tony O'Sullivan Director at CEVA Logistics. Addressing Humphreys, he said: "You do not compete on logistics. Your differential is your technology or products. It is a saving that we can all achieve."
Humphreys replied that Delphi would need to make sure that it is a win-win situation for all parties. "It becomes very complicated if you get three or four different people involved. However, if we did work together, maybe we would have a stronger voice on some of the issues."
This was the message from Automotive Logistics Russia 2008. To meet customer requirements and establish a stable infrastructure, companies need to work on a culture of collaboration. Concerted efforts are being made by companies such as RTA and the Port of Ust Luga to put the resources in place to support growth, but the government needs to be part of the group effort by providing greater transparency and facilitating accurate forecasts. Without this the industry is at risk, not just from disjointed development, but also from the risk of overinvestment. As FESCO's Anton Gans pointed out: "Russia's lack of infrastructure could actually lead to an overinvestment in this area. There will be a surplus of port facilities and rail wagons at some point. This is good for the customer in terms of lower prices. However, it also brings along unstable quality, especially when one considers that fragmented capacity would not provide the same level of quality throughout the entire network."