Russian light in the darkness of European logistics
The need for more services and quality improvements across the supply chain were revealed at this year’s conference. OEMs called on providers to invest, keep their heads up and stay positive
- 2012 forecast vehicle sales up 5% on last year
- 47% of the car parc is older than 10 years
- 6 OEMs & 38 Tier suppliers committed to local production in return for reduced import duties
- 200,000 vehicle exports by 2020, representing 8% of annual production
- WTO membership due this year will add between 1-3% to GDP
MOSCOW 21 June 2012: While Europe heads towards economic darkness, the long days and white nights of Russia are providing sunshine for automotive manufacturers and logistics providers.
Light vehicle sales are up 15% on last year over the first five months of 2012, and that follows dramatic increases in 2011 when government incentives propelled growth. Though expected to slow during the rest of the year, sales are currently forecast to reach 2.85m compared to 2.72m in 2011.
After acknowledging economic risk in the eurozone and the global economy that could impact Russia, Peter Layer, director of purchasing and supply chain for General Motors Russia, said he would “not be surprised” to see the market reach its pre-crisis peak of 3m vehicle sales by the end of 2012. He also pointed to the benefits of consistent, even if slower, increases. “We like stable growth. It’s healthy for the company as well as our supply chain,” he said.
Some 250 delegates were in Moscow this week in the stylish surroundings of the Radisson Royal Hotel – built as one of Stalin’s so-called seven sisters and situated directly across the Moscow river from the White House parliament building – at the 6th annual Automotive Logistics Russia conference.
Over two days of presentations, discussions and networking, the delegates heard that the automotive industry is getting a boost from significant investment in production capacity, particularly from OEMs that signed up last year to Decree 166. Under it, international OEMs, including GM, committed to the Ministry of Economic Development to invest in new plant capacity of at least 300,000 units per annum ( or 350,000 if an old plant is modernised), and to increase localisation of components, all by 2016.
In exchange they get lower or zero import duties on parts. Localisation of parts for vehicles will have to reach 60% under the decree (30% for powertrain and transmissions, and 15% for stampings).
While parts supply is currently "not the strength of the Russian market", according to Layer, and will require considerable development efforts, he positioned the Decree as a great opportunity for the supply chain. In fact IHS data shows that 38 component manufacturers have signed an equivalent decree for local production, with some 400 more signing letters of intent.
Off camera, Layer also said that GM was “on pace and on track” to meeting its requirements under the decree..
And while Russia still faces many of its long-standing problems – including capacity constraints in ports and roads, poor equipment standards, an under-developed supplier base, a difficult and unpredictable regulatory and customs environment, etc – delegates heard clear evidence that production volume has helped to create new opportunities for logistics flows and consolidation. This includes an increase in multimodal transport and the introduction of more sophisticated and reliable services.
The long and winding unpaved road
As context, delegates were reminded how far there is to go. Russia is ranked a dismal 97th in the latest World Bank index of countries’ logistics performance. To give the BRIC comparison, Brazil and India are at 45 and 46 respectively, while China is up in 26th place.
Russia’s position can be partly attributed to under-investment in road, rail, port and airport infrastructure. John Mylonas, a former GM and Ford executive who is now the CEO of a new carmaker, Myla Motors, which is currently setting up a factory in the country, pointed out that there are five good ports on the small island of his native Cyprus, while the whole of Russia has only four.
Layer noted the potential congestion at St Petersburg as an example, as GM gears up to double output at its plant in the region to 230,000 units per annum. "Even if we are going to localise 60% of the vehicle, the increase in production capacity means that the amount of parts imported is going to grow substantially as well," said Layer. “We need port expansion and improved infrastructure.”
Adding to the challenges, carmakers also see an unwillingness on the part of logistics providers to invest in new equipment and to expand operations.
“There is a lot of ageing equipment, and investment needs to be made into new technology and facilities to ensure we get quality deliveries in terms of parts and finished vehicles,” said Layer. “There is a ton of infrastructure that needs to be looked at.”
That hesitance to invest might well stem from the collective memory of a car market that was slashed in half during the global economic downturn in 2009, when Russia’s oil-dependant economy was knocked back by falling prices and a frozen credit market. External risks remain, according to Tatiana Hristova, head of Russian automotive forecasting at IHS Automotive. Those forecasts now assume that Greece will leave the euro by next year. Though she also predicted that Europe would succeed in preventing contagion of its larger markets, and thus avoid a global economic crisis, the fallout could nevertheless shave about 1m units off world car production next year (most of that in Europe).
The outlook for the Russian economy has also been downgraded, as Hristova predicted that sales would decrease modestly in 2013, resuming growth thereafter. Although its consistent growth should help it surpass Germany as Europe’s largest car market around the middle of the decade, the market is expected to surpass 3.5m vehicles by 2018, and level off mildly higher at this point.
Against this picture of stead growth over the next decade, carmakers sent a clear message to logistics providers at the conference that they will need more of their services and want to see the necessary investments. Layer reminded providers about the OEMs which have signed Decree 166 (Fiat, Ford, GM, Renault-Nissan, VW plus Daimler for light commercial vehicles). “There is a tremendous amount of opportunity in Russia, and the country is ripe for logistics improvements,” he said.
The good news for LSPs appears to be that carmakers want to grow with them. Toyota Russia’s Fumitaka Kawashima, senior director for sales, logistics and dealer development, said Toyota is “open for discussion” with logistics providers. “We are interested in seeing an expansion of our logistics infrastructure and want to work together with LSPs and investors on all areas, including ports of entry, terminals and the enlargement of the fleet of both trucks and railways wagons,” he said.
The growth is presenting some significant opportunities across the supply chain, from services inbound to factories, outbound to dealers and on to service parts logistics. GM, Volkswagen, Renault-Nissan, Fiat-Chrysler, PSA Peugeot Citroën and Ford (with its joint venture partner Sollers) are all expanding production capacity or building new plants in Russia.
Inbound opportunities—more complex solutions
The implications for the supply chain from such development and growth are significant. PSA, for example, will switch its production next month from semi-knockdown kit assembly to complete knockdown, which will create a more complex supply chain and parts flow. According to Andrey Anufriev, Kaluga branch manager for Gefco Russia, CKD production will mean importing parts from Argentina and China as well as from Europe. Gefco has designed a supply chain that will use rail from France, the Trans-Siberian Railway from China and ocean freight to the Baltic from Argentina. (see Gefco uses rail on three fronts)
Tier 1s, which had been generally slow to invest in Russia, are also expanding capacity and locating close to OEM plants in manufacturing hubs such as St Petersburg, Kaluga, Togliatti and Nizhny Novgorod. Magna International, for example, now has five plants in Russia and is expanding production in Kaluga for VW and Nizhny Novgorod, where commercial vehicle maker GAZ will produce Skoda and GM cars.
According to Karl Martin Lukas, from Magna Logistics Europe, the increased volume means that the supplier will put more services out to more logistics providers. “Our previous and current strategy has been to use one forwarder to manage our freight from Europe to the Russian plants. But as the volume has increased and the flows are stable, we are going to share more of our business, including tendering for pre-carriage, export, final delivery, customs clearance etc.” Lukas added that Magna was likely to need further consolidation centres in Europe to bundle material for import to Russian plants.
The opportunities are clear for outbound logistics as well. Kawashima revealed that Toyota had this month opened a route from Nagoya in Japan to Vladivostok as a complement to existing flows by ocean to St Petersburg or Ust Luga via ports in the UK, Zeebrugge and Malmö.
Toyota is looking to develop other entry ports in Russia over the next year or two, including a “southern route” through the Black Sea, as well as more use of the Trans-Siberian railway. “We want to move from a single port to a multi-port entry strategy in Russia,” said Kawashima. “We are also undergoing studies for an inland hub within Russia.”
Chrysler Russia, which has now been integrated into Fiat’s operations and distribution, is also expanding its outbound and service parts logistics at the same time that it is finalising plans for new factories in St Petersburg and in Moscow. Chrysler took over responsibilities for Fiat dealers in Russia this year, which meant increasing its destination and service points from 13 to 110, said John Stech, the CEO of Chrysler Russia. “It is a big challenge but it is also giving us a great opportunity to fill and mix loads for vehicles and spare parts delivery,” he told delegates.
Spare parts opportunities – more warehouse, more direct delivery
Chrysler/Fiat are in expansion mode in Russia, with the intended addition of 20 new Chrysler dealers this year (bringing the Chrysler total to 33). Stech is currently seeking to open a new warehouse for combined Fiat and Chrysler service parts. Hitherto the company has relied on a warehouse managed by Chrysler’s ex-partner Daimler, and a Fiat warehouse managed by the Italian OEM’s former Russian partner Sollers.
Stech also pointed to a high degree of manual operations within its Russian warehouses. The company wants to invest in more automation to improve reliability and quality, and is about to launch an all-new SAP system to invoice both service parts and cars.
With demand for service parts growing more than 30% per year for both Renault and Nissan, Anna Blumkina, spare parts and accessories director for Renault Russia, told a special breakout session of the conference that she is looking to increase the amount of direct dealer deliveries. While Renault Nissan is currently expanding the surface area of its two existing Russian warehouses – one for the west, one for the east – she envisions opening a third to serve the St Petersburg region within the next four years.
A focus on quality
In pursuit of efficiency and lower cost, carmakers and tier suppliers are clearly demonstrating a rising demand for both basic transport and more sophisticated services, whether multimodal logistics, crossdocking or milkrun. Some are also looking for better quality of service, and indicate they are willing to pay for it.
“In the past years we looked at just volume and cost, and that was all,” said Toyota’s Kawashima. “But today we are trying to look more carefully at quality and lead time as well, and so it is on those four points that we have organised tenders on how to improve logistics quality.”
As an example, Toyota Russia has put considerable focus on lowering its vehicle damage rates, which peaked at nearly 10% in early 2010. Increasing audits and working more carefully with logistics providers have now brought the proportion down to around 2% currently, he told the conference.
Renault Nissan’s Blumkina also put a higher focus on quality of delivery, along with inventory management and transport frequency. Renault has introduced warehouse management training for both its in-sourced and outsourced warehouses, as well as inventory and warehouse training for dealers. “This has been very popular and positive experience among out supply chain partners and dealers,” she said.
GM’s Layer also pointed to the need to improve long-term planning and forecasting, which he believed would help assure quality and investment among logistics providers.
But cost still dominates
But putting the demands of quality over cost appears to be far from a universal approach among manufacturers in Russia. Alexander Kostomarov, general manager of Russia’s TL Group – one of the larger vehicle logistics providers – said that transport tariffs have not yet fully recovered from the impact of the recession, in which many providers went bankrupt or significantly decreased their activity. Kostomarov pointed to regional transport providers which are contacting OEMs directly with lower rates.
“It is no secret that regional transport company fleets do not meet modern requirements of the transport sector,” he warned. “The services they provide do not comply. So do you [OEMs] want to decrease the tariffs or to look for the quality of the services provided and maintain environmental safety?”
Chrysler’s Oleg Shamba, director of supply chain management, was blunt about the ranking of quality. “Price and lead time are the most important, and we need to focus on price,” he said, adding that while not opposed to partnerships, formulating long-term agreements was a non-starter. “We will never guarantee volumes to providers over a longer term,” he said.
But if price remains the key issue, the growing demand and evolution of logistics services does nevertheless appear to be increasing the willingness among providers to invest in Russia. An electronic survey of delegates with anonymous voting showed that 61% of those at the conference planned to invest in new capacity over the next year. 33% said they would remain at current levels while only 6% planned to decrease capacity or investments.
Customs remain a headache – but automotive is good at dealing with it
The Russian market is well known for the complications, delays, corruption and high costs connected with customs, licensing and other regulatory issues, and this was once again a key topic at the conference. “Customs, you are the biggest problem in Russia,” had said John Mylonas in the very first session of the conference. The problems could be mind-boggling, he complained. “The legal processes are crazy. The banking system and taxation policies leave me with a pile of paperwork so high that everyday my fingers ache after all that I have to sign.”
But while most manufacturers agreed that customs were difficult in Russia, they also admitted that once procedures were established, and a stable flow of goods was implemented, then the customs system does work and clearance can be achieved within a day. Indeed, Wilhelmina Shavshina, legal director and head of foreign trade regulations for DLA Piper, pointed out that the automotive industry was among the first in Russia to make efforts to simplify customs clearance in St Petersburg.
“Automotive companies have been able to be excluded from customs’ risk profiles, which means exemptions from certain customs controls,” she told delegates. “Many companies can move goods from the border to production facilities and arrange to pay customs duties the following month.” Shavshina is extremely well connected as an advisor to the national government, and is a regular speaker at Automotive Logistics Russia conference.
WTO accession leads to import duties by another name
A more concerning issue to the automotive industry is how Russia will adapt the preferential customs duties and import tariffs offered under Decree 166 after it joins the World Trade Organisation (WTO). This is due to be in August 2012, and brings the requirement for a general reduction in import duties. GM’s Layer suggested that manufacturers might not be prepared for the complications ahead.
“It is unclear how the government will apply all of this [the WTO and Decree 166],” he told delegates. “I think it will be a big rollercoaster ride and I don’t think any of us appreciate yet just what could happen.”
Shavshina said that all agreements signed by the Ministry of Economic Development will be applied in full even after Russia’s accession. The country has already gained exemptions that would protect the benefits offered to qualifying OEMs until July 2018, after which point she said that Russia would consider other WTO permitted measures for keeping the terms of Decree 166.
However, the government has shown signs of implementing other rules to hit importers with taxes and charges in place of the lower duties brought under WTO membership. In her forecast analysis, Hristova from IHS revealed that these include a potential ‘recycling charge’ applied to imported vehicles, to come into effect as early as this autumn. Under it, a tax would be levied depending on the age, type and engine size of a vehicle. For example, an eight year old truck could be taxed as much as €15,000.
“This is a way for Russia to keep its import tariffs” she said.“As cars produced in Russia will be exempt, it’s…another way for the government to protect domestic Russian producers from imported vehicles, including from the used market.”
Customs is Russia's biggest problem says Myla's John Mylonas
What about the Customs Union?
Shavshina pointed to another complication, which relates to import duties applied by the Belorussian and Kazak governments. In 2010, Russia established a customs union with Belarus and Kazakhstan which allows for duty-free trade between the countries, an arrangement that has helped grow trade between the three by almost 40%.
Since the recycling charge has so far only been mooted by the Russian government, cars could be imported into one of the other two countries free from it, then moved without further duties into Russia.
Shavshina also pointed out that Kazakhstan is considering joining the WTO, and will seek import duties lower that those set for Russia. “Thus far the Kazaks have indicated that they would insist on even lower customs duties and I would recommend following these developments carefully, as the difference between the tariffs and those agreed by Russia could be considerable,” she warned.
Driving permits and protectionism
Other concerns over bureaucratic and protectionist tendencies include the recently-reported moves to limit the number of permits issued to foreign trucking companies for cross-border movements, an iniative to protect domestic providers. Polish hauliers are a particular target (see our news story). This issue flared up back in early 2011, when Russia applied a total blockade on Polish trucks moving via Belarus.
Peter Layer worried that such restrictions would limit the inland delivery of parts and vehicles in Russia, and said that the government’s protectionist policy was counter-productive in a growing economy. “If it was a stable market and not growing I could maybe accept that as a general solution,” said Layer. “But we are all experiencing growth here and we have to capture that and not restrict it. This is something we are seeing on the trucking permits on border crossings. We need both governmental support and we need you [LSPs] to get creative and figure out ways to deal with the restrictions you currently have,” he added.
Those restrictions appear to be a perennial issue for the logistics industry. Earlier this year, the government applied a weight limit to moving heavy goods on roads between April and June without a special permit, citing water damage done to roads in the Spring thaw. But the restrictions greatly limited the movement of finished vehicles, and seemed to be another tax by a different name since the permits were expensive to purchase.
Rail transport can work
A transport element of the Russian state commonly cited as being out of date, uncompetitive and monopolistic is the railway company RZD. However, the conference heard notable examples of where its restrictions can be overcome. The result is a considerable amount of long-distance rail traffic to import both automotive components and finished vehicles.
“We’ve heard a lot about corruption, bureaucracy and the Russian Customs, but let me just remind you all that we are no longer living in the 1990s,” emphasised Vladimir Chernichkin, deputy sales director of Transcontainer, a joint venture operator for RZD that is currently managing numerous projects in the automotive industry.
Addressing the conference break-out session on inbound logistics, he said forcefully that “there are civilised ways of doing logistics in Russia. We can do just-in-time, door-to-door, green. These solutions are possible and we’re operating many of them.”
He instanced several rail solutions: the DB Schenker link from Germany to Kaluga for VW; Ford’s material movements from Poland to Alabuga and to the Ford-Sollers plant in the Tartarstan Republic; GM rail movements from South Korea to Uzbekistan; and BMW movements to Duisburg, Germany from Changchun, China, as well as the reverse from Leipzig to Shenyang.
The BMW movements from Changchun are particularly noteworthy, said Chernichkin, since they are generally electronic components that would normally go by air.
Gefco’s Kulaga region chief, Andrey Anufriev, described the use of rail to import SKD kits from France. This involves a distance of 3,000km, some 400 rail wagons, 1,500 containers, two different rail gauges, multiple border crossing and operating across different state monopolies.
Despite these challenges the system works, having transported 40,000 containers last year across seven to eight train deliveries per week, with zero disruptions to the Kaluga production line. According to Anufriev, the lead-time of five days, including customs clearance, is significantly shorter than for the equivalent truck movements, as well as costing some 35% less per vehicle.
A new stage will be reached this summer as PSA switches to CKD production, and Gefco will implement a three front, multimodal supply chain from Europe, South America and China. As well as the train from France, the LSP will consolidate components sourced from South America at its crossdock in Argentina, and ship them to the port of Riga in Latvia. They will go on by truck, but “we hope to eventually put in a block train between Kaluga and Riga.”
Material from China and Asia will move to Kaluga by rail from Shanghai, using Transcontainer, with an end-to-end time of 25 days, half that of the ocean link, according to Anufriev.
Mazda also moves with the Trans-Siberian railways
Using long-distance rail for vehicle delivery was described by Mazda’s vice president of customer service and logistics in Europe, Jørgen Olesen, joined by Dmitry Nikolaev, general director of the RailTransAuto. RTA is Mazda’s service provider on the rail route between the port of Zarubino in the east and Moscow in the west.
Olesen described a decision in 2007 to reduce lead times and cost, as well as lessen risk and free up capacity, which at that time was tight on the ocean link. Among the challenges were border crossing and customs issues that saw different prices applied to vehicles depending on where they were going.
RTA designed and commissioned a new rail wagon that could take larger vehicles and was completely enclosed. The company also set up the terminals at both ends of the route and, following a $1m investment in testing, the service went into operation in 2008. Both the Mikhnevo terminal near Moscow and the Zarubino terminal 240km from Vladivostok now handle 200,000 vehicles a year. A new route to Novosibirsk was added in November last year.
Nikolaev said the rail wagons can load cars of any height and cater for any brand. RTA has to be flexible with terminal capacity because of varying sales figures and the fact that bottlenecks can occur when rail wagons are being repaired, he said, and noted that the special wagons are in high demand since they offer the best protection in moving cars by rail.
RTA is working on making more available and in lengthening the block trains to 40 wagons. It also needs to counter the 10% increase in rail tariffs imposed by Russian Railways that threatens the cost-effectiveness of the service.
Rail’s strengths and weaknesses
Such intercontinental, multimodal supply chains demonstrate that building complicated logistics systems within and across Russia is possible. And beyond cost savings, as well as CO2 reduction and increased speed, Gefco believes that the rail solution has overcome capacity constraints. “We would have been unable to deliver the volume that we require using only road, as there is not enough capacity,” noted Anufriev.
Mazda was able to recover and adjust more quickly from the post-Lehman market collapse because its car sales didn’t face ocean lead times, observed Olesen. He estimated cumulative gains of up to $50m for the company from the whole initiative.
Nevertheless, both Gefco’s Anufriev and RTA’s Chernichkin accept the limitations of rail. For example, Gefco has to act as an interface between the railways and the custom authorities because, in Anufriev’s words, “they do not speak to each other”.
Also, it is difficult in Russia to make shorter distances viable because of rail’s tariff structure and infrastructure limits, although Transcontainer is currently studying several possibilities within the automotive sector.
Anufriev also pointed to problems in working with rail operators in Eastern Europe. He included the frequency of labour strikes as well as different national holiday schedules. More recently, there have been security issues including the theft of material.
Train length and gauge differences also mean that material needs to be transhipped at the Polish-Belorussian border. Bureaucratic restrictions mean that the Belorus railway does transhipment from Brest on the way to Russia, and the Polish railway does transhipment in Poland on the way back. “We would prefer to have only one transhipment point,” says Anufriev. “However, we face a monopoly…and have very little leverage.”
Using rail for long distances presents other structural problems. There is a limited flexibility in shifting volume up or down, said Anufriev, particularly if a cargo move had already been scheduled. Furthermore, rail between Europe and Russia is mostly one-way traffic; Gefco uses about one-third of the wagon capacity moving back to France for returnable packaging, but currently the remainder is empty.
In the future it hopes to backfill with cargo like Russian-made spare parts, although for the moment very little of this exists. “We hope that as Russian automotive production increases, there will be more opportunities for return cargo and third party freight,” he said.
Overall, and while rail is far from being a “panacea” in Russia, Anufriev told delegates it is a stable and “viable” solution for Gefco. He even noted an upside to working with state monopolies like RZD, in that state-run operations in Russia had a more predictable ‘tariff evolution’ compared to the variations in rates for road freight.
Quality issues for finished vehicles
There was a large session at the conference dedicated to finished vehicle logistics, and TL Group’s Kostomarov used it to return to the quality issue. He felt that the poor quality and high damage rates of regional transport operators offset their lower costs.
“The only solution I can see is (their) unification…under the aegis of companies such as Gefco, Major Auto Trans or TL Logistics,” he said. “That will ensure better service and as a united group (they) can introduce standards and schemes that have already been developed and mastered.”
The transport industry is in need of such wider development of standards based on a policy of partnership, he added. Simply reducing costs is a limited goal when Russia needs fleet investment and equity.
Kawashima’s colleague at Toyota Russia, Alexsey Kokotkin, senior manager of vehicle logistics, noted that one of the problems was the absence of government standards for logistics quality in Russia. He said that each LSP and OEM had its own interpretation of quality and that an industry-wide effort to establish a standard practice was needed.
Kokotkin also went into detail about the specifics affecting damage and delivery. Despite the dramatic reduction in damage rates over the past two years, between January and May this year traffic accidents accounted for damage to 14 vehicles, while there were 10 cases of total loss and 35 vehicles with other serious damage.
Toyota Russia has set targets for service quality and on time delivery which mean that backlogs should be zero, delays should be not more than one day (and apply to less than 2% of the total), and the damage ratio for trucks must be less than 1%. In addition there should be no accidents to workers. He stressed that all Toyota’s logistics partners need to follow those standards too.
“An LSP will pay attention to its own fleet, but if a subcontractor’s share is significant, above 5%, the same should apply and they should be controlled and instructed in this way,” he stated.
As a result of monthly meetings with its logistics partners, Kokotkin said it had become clear that protective equipment on fleets was essential, and that shielded or covered trucks reduce damage, along with correct loading and the standardisation of lashing equipment.
Drivers need to be trained properly and regularly monitored for safe driving. Speed controls in the truck would lower damage, and using GPS can prevent speeding and other traffic violations which lead to accidents and driver injuries. A driver’s psychological make-up and attitude is also important, he said, and lack of care or poor maintenance standards needed to be addressed. John Mylonas had earlier told delegates how he had personally caught drivers siphoning fuel from the cars they were transporting.
The driver quality point was picked up on by GM’s head of forecast, logistics and distribution, Alexey Tenkov, who agreed that the key action was to correctly train and develop the driver pool. “If they are not following procedures there is an increase in damage. Instruction and procedure are crucial,” he concluded.
Quality extends to the dealers too
Tenkov went on to highlight the fact that dealers are not preparing for higher volumes with facility improvements or increased staffing levels. He challenged them to make their yards more secure and improve the turnround of vehicle delivery and handover.
Ford is also addressing its dealer challenges, said Natalia Petrenko, vehicle logistics strategy and network planning director at Ford Sollers. She said that guaranteeing a good lead-time was important, but that sustainability and predictable delivery times were as crucial. Communication on departures and arrivals was a priority and part of Ford’s audit. She highlighted that the company has introduced a 24/7 delivery pattern to prevent delays at its dealerships in Moscow.
Toyota’s Kokotkin reported that they informed dealers when the carrier was leaving its loading location, and followed up with a call when the truck was at least three hours away.
The need for better roads
Given that 80% of vehicle deliveries in Russia are made by truck, the quality of the roads used to traverse a country that is 10,000km from east to west are at least as important as the equipment used and the person driving.
Road conditions between Moscow and Kaluga are acceptable, according to Vitaly Emereev, deputy minister of economic development for the Kaluga region, but further south is a “catastrophe”.
“The Soviet heritage is a real burden but we are making efforts to maintain good roads and investing in that,” he said. But such investment has yet to be made in many other regions, according to Sergey Melnikov, director of logistics at Predpriyatiye Stroykomplekt, a parts and finished vehicle logistics service provider based in Ekaterinburg, some 600km east of Moscow. Travel beyond the main centres of production to the regions is hindered by the fact that there have been no new roads built for the last five years.
Melnikov described as “very unsatisfactory” delivery by road compared to the very low damage recorded by rail since his company started a new service in January transporting vehicles from Moscow, St Petersburg and Vladivostok to its distribution hub in Ekaterinburg. From there it serves 60 dealers in the Ural region, and has purchased its first fleet of Scania carriers for final delivery.
The need for a variety of port options
Russia’s ports are also in need of an upgrade. Speaking for the ocean carriers, Soren Tousgaard Jensen, managing director of WWL Russia, said that while there have been improvements in adapting the country’s ports to vehicle imports, there was limited space and the terminals are small. He said there was a limit on the sort of ships that could call into ports like Zarubino, for example, so that OEMs looking for large volumes would not be able to use it.
The development of smaller ports would necessitate a form of coastal milk run, which would raise customs issues and mean extra workload and added costs, noted Jensen, and is not really an option. Mazda’s Olesen agreed, which is why Scandinavian ports such as Kotka in Finland remain popular. Storage is cheaper and there is no duty during storage.“There will be a continuous need for ports outside of Russia,” he concluded. (back to top)
The regions compete for industry with tax breaks
In a unique session, the conference heard from a number of regional officials who described the development and advantages of their locations for automotive manufacturing and logistics. The overall picture was one of competition for investment, as well as a growing push to move industry further from the centre of large cities like Moscow.
Regions which are currently growing their automotive activities, like Kaluga and St Petersburg, as well as more established regions like the Volga (which includes Togliatti, Samara and Nizhny Novgorod), are facing competition in the form of tax holidays and infrastructure development from areas such as Ulyanovsk (about 400km from Nizhny Novgorod), and Alabuga, in the Republic of Tartarstan.
The former is a traditional machine-building and aerospace hub for Russia, with factories for UAZ and a Chinese automotive joint venture between BAW and Foton. Alabuga has a Ford-Sollers facility as well as a Daimler-Kamaz commercial vehicle plant.
Ulyanovsk boasts two airports as well as access by river transport, according to Igor Ryabinov, deputy general director for region, and offers an eight-year tax holiday that includes exemptions from property, land and transport taxes, and 35% savings of all other tax costs.
Alabuga, meanwhile, is proposing greenfield projects for industrial investment, which will entail both infrastructure development and tax holidays on the land. The land is publicly owned, and Leysan Zakiryanov, investor relations manager for the region, pointed to tax breaks for 10 years on property, land and transport, and corporate income tax breaks that would last until 2054.
Nevertheless, an area like Kaluga has significant first-mover advantages as well as being adjacent to Moscow. It has VW, PSA and Volvo Trucks, with clusters under development for Tier 1 companies such as Magna, Benteler, Continental and Lear. The region has also developed a cluster for logistics operations, which includes Gefco, DB Schenker, Rhenus, Fesco and Transcontainer.
Infrastructure developments that will improve logistics services include a multi-modal hub for PSA and Gefco, a cargo park for rail, a customs clearance zone and a car terminal. ]
But Moscow is for people, not factories
Even if regional infrastructure improves dramatically, such areas still need to boast that they are ‘just’ within 1,000km of Moscow, illustrating the weighting of sales in that area. Nevertheless, Kirill Bestsenko, deputy head of the department of transport and development of road transport infrastructure for Moscow, told delegates bluntly that the city is “trying to get rid of logistics sites because they don’t make it easy to live in Moscow. We’re struggling to keep talent and brains here”.
Though there was no objective to “destroy” business, the city must arrange the flow of goods around it and limit the transit of cargo and passengers within it, he said. “No revolutionary matters or steps will be taken, but this evolution will not be about constructing more roads or parking lots.”
“The objective is to push this development beyond the Moscow ring road. The city cannot be an industrial hub – it is for people, not manufacturing facilities.”
While the trend of development in the automotive industry is indeed generally away from the two major urban areas – with some exceptions for the developments around St Petersburg and Renault’s Avtoframos factory in Moscow – there were strong concerns expressed at the conference that restrictions on cargo movements will hurt deliveries to dealers. This is in the context that the Moscow region represents about half of the country’s total car sales. But Bestsenko was not sympathetic. “It will be the dealers’ problem to work around these limits, not ours,” he said bluntly.
Conclusion – stay positive IHS's Hristova predicted the Russian car parc would double in size in the next decade or so, with exports rising too
While the 2012 Automotive Logistics Russia conference covered a host of regulatory and infrastructure challenges that are unique to the country, and indeed revealed some new ones, the theme of opportunity still pervaded the event.
Back on the first morning, IHS’s Hristova pointed out that the Russia’s car parc is among the oldest in Europe; almost 50% of cars on the road today are more than 10 years old. She predicted that the size of the car parc would nearly double over the next 12-15 years, presenting a picture of steady growth for new car sales as well as huge development of the aftermarket.
Shipping lines and international transport providers were also pleased to hear her projection that Russian exports would rise along with the increase in installed production capacity. She predicted that exports will rise from the 40,000 (mostly Lada units) in 2011, to 132,000 by 2016 and 205,000 by 2020.
Echoing the theme of this year’s event, which was ‘Russian Supply Chain 2.0; the upgrades set to transform automotive logistics’, GM’s Peter Layer identified logistics as becoming a strength for Russia. The relationship between OEMs and LSPs has improved, he said, and there have been new logistics schemes introduced for ports, railways and road.
Overall, he summed up the mood by urging providers to stay positive. “Don’t get too down or depressed or reserved about investing in this country,” was his advice. “There is a lot of opportunity beyond the challenges it faces.”
The conference is part of the worldwide Automotive Logistics series, which in 2012 includes:
Europe (in Bonn, Germany 28Feb-1Mar – view report)
China (Beijing 18-20Apr – view report)
South America (Sao Paulo, Brazil 4-5Sep – view report)
North America (held as Automotive Logistics Global, Detroit, 25-27Sep – view report)
India (Pune 5-7Dec – view report)
Plus a conference dedicated to the outbound sector
Finished Vehicle Logistics North America (in Newport Beach CA, USA, 31May-1Jun – view report);
Value for each delegate
1) Networking Opportunities
Careful scheduling allows interaction between customers and suppliers at: introductory cocktails coffee breaks networking lunches informal meetings within the conference area the mid-conference business dinner
Conference App allowed delegates to ask questions anonymously through their smart phones or iPADs/laptops
3) Business and Social environment
We recognize the all-important personal dimension to any business relationship, so the event provides a relaxed environment for the mid-conference Gala dinner and the pre-conference cocktail reception.
In summary, delegates at Automotive Logistics Russia 2012: Heard great presentations from OEMs, tier 1 suppliers and LSPs Asked questions in person or through the Conference App, and joined round-table discussions Networked with the senior executives across the industry Made new contacts, gained new introductions and developed new business opportunities Benefitted from the interaction at social occasions, including the main conference dinner and introductory cocktail reception (all included in the delegate fee) Receive soft copies of the speaker presentations to download and circulate within their organisations