France-Russia Automotive

N° 3

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France-Russia Automotive (Auto Franco-Russe) is an economic newsletter focusing on the development of the Western automotive groups’ business in Russia. France-Russia Automotive is distributed both on paper and electronically. To receive the next issues for a free trial you only need to subscribe on our website: www.autofrancorusse.fr. France-Russia Automotive is published by Agence du Fil SARL Company, whose publications are devoted to the Franco-Russian trade.

COLUMN

Have you heard of the Samand? Me neither, I had never heard of it before I had the opportunity to admire this saloon car and the other models of the Persian manufacturer Iran Khodro during the MIMS show that was held at Moscow in early September The first models have just arrived in Moscow after crossing the Caspian sea.
I was also able to relax in the rear seat of a Hover, a luxurious 10-seater limousine from the Chinese manufacturer Great Wall Motor Company, a distant but not embarrassing copy of limousines made in the USA.
What really surprised me from the moment I first entered the MIMS show, was the low presence of European manufacturers this year, especially the French: no Peugeot, no Citroën, no Renault, not even Michelin. On the other hand, emerging manufacturers were very evident: they had reserved imposing stand sizes (especially when you know the price) and were exhibiting an equally large number of models whilst offering demonstrations aimed at attracting both customers and the press with a true marketing approach.
When you know that Iran Khodro produced 455,000 vehicles during the first 10 months of 2007, an increase of 10%, and that it plans to export 25% of its production by 2010, you gat an idea of the progress that they have made since the distant past when one of the rare Chinese mini-cars was exhibited in the show's car park and created great amusement when the door joint fell off, and the noise of its door shutting being reminiscent of an old Citroën.
The Koreans also made us smile during the early 70s. We don't need to be reminded of the position their industry enjoys nowadays. Perhaps the Chinese and Persians are preparing us for another lesson in humility.

Alain Bastid

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NEWS

THE MOSCOW MIMS 2007: A PARTIAL SUCCESS

'The progression of sales of foreign cars, at 67% last year, represents an extraordinary performance which we are unlikely to see in another country. We think that Russia will be the world's biggest automobile market by 2012.' This is the opinion of Henrik Nensen, chairman of Ford Russia and chairman of the car manufacturers committee within the Association of European Business in Russia. He was speaking at the MIMS-Interavto 2007 show at the end of August in Moscow.
The show unites about 800 companies from 15 countries. Much smaller than MIMS-Interavto 2006 and much less representative: apart from local car and equipment manufacturers and a few international companies, it was above all a show for the Chinese, Turks, Iranians and Indians. The organisers explain that they wanted to promote a true international dimension every two years in the same way as the world's other major car shows. They have given us a date for next year and promised a show that will be much bigger in 2008.
The companies were virtually absent from the show. 'I am the only French company in this building compared to the large village where you can find all the Italians, the Germans in another without mentioning the Spanish...' regretted Alexandre Mizrahi, director of Klaxcar France, agent for Klaxon. Only to add: 'I am at this show for the second time. I have several small clients in Russia. The Russian market is complicated and we don't get much help.' Alexandre Mizrahi, in common with many French companies, hopes to find more support next year for MIMS 2008.

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THE LIST OF ASSEMBLERS WILL BE CLOSED

The Minister of Economy announced in mid-November 2007 that he will stop signing contracts providing fiscal advantages for industrial assembly of foreign branded vehicles. Renault, Volkswagen, General Motors, GM-Avtovaz, Nissan, Toyota, Ford, Suzuki, PSA, Hyundai, and the Ukrainian assembler Bogdan plus local companies Gaz, Avtovaz, Izhavto (SOK), ZMA and Severstal-Elabuga (these last two are part of the Severstalavto group), have obtained the advantage of tax reductions especially when importing parts required for assembling. Several submissions have apparently been refused including the local company Ouralskaya Avtomobilnaya. Surprise, China's Great Wall is not included in the list of beneficiaries. After two years of unfruitful attempts and despite support from Guerman Greff, Minister of Economy until September 2007, the anti-Chinese lobby amongst Russian industrialists and the civil service have beaten the project. However, it is possible that the Chinese company has not had its last word. Russian administrative decisions often change over time.

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RENAULT AND AVTOVAZ ARE STILL DISCUSSING

Discussions between Renault and Avtovaz are not being called off according to Michel Gornet, deputy General Manager and Manufacturing and logistics Director at Renault, in an interview with the Russian press in September 2007. In the meantime, Renault aims to increase its production capacity on the existing Avtoframos site at Moscow. Whilst speaking about models adapted to the market, Michel Gornet spoke of the virtues of the Logan. Initially designed to be made in Romania with a minimal automation rate and components using simple technologies, this model is ideally suited to Russian industrial conditions where labour remains cheap. The lack of automation on assembly lines in Moscow means that Renault can offer its vehicle at a very competitive price on the local market.

According to data unveiled in mid-December 2007 an agreement has been found. Renault should acquire 25% of Avtovaz, to produce at least one new low cost model. We will have more information on this project in our next French-Russia automotive edition.

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AUTOMOBILE UNIONS ARE TRYING TO BE HEARD

The Avtovaz factory at Togliatti was hit by another strike on August 1st 2007 Nearly 2,000 bodywork and mechanical assembly workshop workers stopped the assembly lines for 4 hours. This is not the first industrial action amongst this leader of the local car manufacturing industry. However, the true causes of the strikes are rarely known with any detail.
Carine Clément, a French sociologist working for the Institut de l’Action Collective at Moscow has just published the results of a survey conducted with striking and non-striking workers. According to about twenty employees, the strike was due to pay which had fallen suddenly this year and could be as much as 50% of its previous level.
To understand this, you should be aware that the Avtovaz factory uses 115,000 employees to produce 700,000 cars per year. This is about six vehicles per employee per year. This is five to eight times less than in international manufacturers' factories. This low productivity justifies low salaries, in the range of 230 - 380 dollars (6,000 - 10,000 roubles) for production workers. Consequently many workers prefer doubling their working time and work two shifts to obtain a final salary in excess of 500 dollars per month.
According to the unions, salaries and social charges represent about 12.33% of a vehicle's production costs. Apparently no salary increase is planned at present. This is because the Avtovaz ranges are losing ground in the market to western competitors and there are regular troughs in the demand. At the start of2007, vehicle stocks in the factory and at distributors exceeded 100,000 units.
Rossoboronexport, the public arms sales company and main shareholder in the factory for the last two years, is too involved in the workings of the federal government to announce major job losses which would be politically unpopular especially on the eve of local and presidential elections. It is doubtlessly for this reason that Avtovaz's new owner is limited to half measures. Initially, it was decided that employees could no longer receive two salaries. This caused a sudden drop in revenues. But it’s a good bet that the measures will not be limited to this. Confronted by competitive pressure, Avtovaz will soon be obliged to reduce its employee numbers possibly by re-adjusting the pay rates.
Currently, Avtovaz workers are eyeing western manufacturers present in Russia. The Ford Motors factory in the St Petersburg region is often mentioned: average pay is about 500 - 900 dollars, according to the unions. This does not protect the manufacturer from industrial action: a 24-hour strike in February and the beginnings of a strike in November. It appears that motor industry unions want to be heard.

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GAZ: “WE ARE OPEN TO ALL PARTNERSHIPS!”

The group GAZ originated from Nijni Novgorod and is busy launching production of a new saloon car. Its trucks, buses and other commercial vehicles are still in demand in the market. Explanations from Vladimir Torin, group communications manager.

l Who is GAZ?

The Nijni Novgorod motor plant, which was built by the Ford Motor Group during the 30s, remains the centre of the GAZ group, one of the leaders of the local automobile sector. The group produced 273,000 vehicles in 2006: cars, commercial vehicles, trucks and buses and specialised vehicles. Sales revenues were 4.05 billion dollars in 2006.
http://eng.gazgroup.ru/

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SIBUR – RUSSKIE SHINI IS AIMING AT INTERNATIONAL MARKETS

Sibur – Russkie Shini, one of Russia's largest tyre manufacturers, has just undergone a major reorganisation. It is now a bit more independent from its parent company, Gazprom, and is aiming to find new markets in Europe and Africa for its truck tyres and is seeking partners for its car tyres. Interview with Aleksey Evteev, head of the Sibur – Russkie Shini communication department.

France-Russia Automotive: What is your view of the tyre market?
Aleksey Evteev: We expect all the overall tyre market to increase by 15% in value and 7% in volume per year until 2010. The internal truck steel tyre market is sufficiently large for us and our competitor, the Nizhnekama factory.
In addition, we export tyres to central Europe. We are seeking to conquer new markets and have opened satellites in Germany with others planned for Holland, North Africa and the Near East. Michelin's Cormoran range is our main competitor on these markets. But our range is almost 50% less expensive...

- What part of your business is in the manufacturer fitted sector?
- We are present in Avtovaz, Kamaz, UAZ, GAZ. And also supply the Renault Logan, the Kia Spectra and the Ford Focus in GM Avtovaz. There are discussions with Volkswagen. Manufacturers provide a minimal margin but we prefer to maintain this business in order to create customer loyalty.

- Sibur has just been restructured as a holding which is less dependent on Gazprom than it was previously. What impact has this had on how Sibur – Russkie Shini is organised?
- A strategic centre was created within the management with managers from leading companies: TranMashHolding, Russkie Mashini, Russal, etc. The role of this new service is to start new production that meets European standards with a central focus on quality.
On the industrial front, most of the factory equipment has been renewed mainly using Japanese suppliers. Sibur is currently closing its old production lines in the C tyres segment and those for obsolete truck models with a progressive conversion to 'all-steel'. This reorganisation is partly financed by our own capital and partly by loans.

- How is the commercial department organised?
- Since the reorganisation, every factory has had a sales department called 'Filiale Russkie Shini' located within the factory. Each subsidiary is responsible for several regions. Each regional distribution network must only have contact with its relevant sales department and be supplied from its factory. Our aim is to avoid factories competing with each other, subsidiaries competing with each other and price dumping provoked by clients.
Major accounts worth over 20 million USD buy directly from us, including the Ministry of Defence, Ministry of Emergencies and companies such as Norilsky Nikel. Clients worth less than 20 million USD buy from the factory sales subsidiaries and from a specific sales department for Moscow. We manage our own logistics with a fleet of trucks.

- What is your payment policy?
- A new distributor must pay cash until payments reach 1 million Roubles, about 40,000 USD. Once this threshold is reached, the distributor is considered reliable and can obtain payment terms. The terms are variable deepening on the degree of confidence that we have in the distributor. It may be greater than six months for some. Our most reliable and loyal clients can also get discounts of up to 15% and payment terms that are even longer.

- What do you think of the sector lobbyists such as AEB?
- We participate in these structures because we have realised that we and our competitors have 80% of common interests. Igor Karavaev, our strategy and development Director is a member of Chamber of Commerce sub-committee. We are also a member of the Association for European Business. This organisation provides us with a means for lobbying but it is also a good channel for communicating with European partners.

- How do you approach partnerships?
- We work with Matador - Continental and other partnerships are planned including for the HGV range. We are regularly contacted by potential partners. We can also envisage a minority partnership for HGV where we will provide our manufacturing capacity and staff. This could involve production in our factories by replacing our old production lines or 'green field ' projects. We can also envisage 50/50 partnerships for truck tyres. Furthermore, we are not going to limit ourselves to just one partner but will develop by niches: one factory, one partner... In this respect, we are better off than our competitor Nizhnekamskshina because their business is dependent on a single production site.

l Who is Sibur – Russkie Shini?

Sibur – Russkie Shini is part of the Sibur holding, a petrochemical specialist and Gazprom subsidiary. It is one of the leading tyre manufacturers in Russia with its four factories at Yaroslavl, Volgograd, Omsk (Omskshina) and Yekaterinburg (Uralshina). The company claims to be the only manufacturer of 'all-steel' truck tyres on the market. It also makes aircraft tyres, tractor tyres and other tyres for specific markets.
Following a loss of 19.3 million dollars in 2005, Sibur – Russkie Shini reported profits of 19.2 million dollars in 2006.
http://www.eng.sibrustyre.ru/main.shtml

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IN PRACTICE

THE BEST SALES OF FOREIGN BRANDS

Sales of imported and locally assembled foreign makes of car were over one million units during the first 8 months of 2007 according to the AEB.
Amongst the leading brands sold in Russia during the first 8 months of 2007, Chevrolet tops the list with114,964 units (including the models manufactured by the joint venture with GM-Avtovaz). Ford is second with 105,858 cars. Toyota sold 99,503 units. Hyundai with 80,477. Nissan with 72,437 cars. Renault was sixth with 62,588 units sold
In terms of models, the Ford Focus is the leader with 59,521cars sold during the first 8 months of 2007. Renault Logan achieved 42,418 units. They are followed by the Chevrolet Lanos (37,316), Daewoo Nexia (31,467) and Toyota Corolla (29,468). The Chevrolet Niva was sixth with 29,311 units sold.
Three of the models on this list are manufactured locally: Focus at the Ford factory at Vsevolozhsk, Logan at the Renault Avtoframos factory at Moscow, Chevrolet Niva in the GM-Avtovaz joint venture plant at Togliatti. Two others are assembled in the CIS: Daewoo Nexia in Uzbekistan, Chevrolet Lanos in Ukraine.

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SECOND-HAND EUROPEAN CARS FETCH GOOD PRICES

Imports of new and second-hand vehicles reached almost 832,000 units during the first 7 months of 2007 according to the Russian Customs statistics. About 86,000 of these came from CIS member countries consisting mainly of the Chevrolet Lanos assembled in Ukraine and Daewoo Nexia assembled in Uzbekistan.
Second-hand vehicles imported from Japan represent about a third of the non CIS import market. The average age is three to five years and their average price declared to Customs is about 12,000 dollars. The Hyundai and other South Korean KIA represented almost 70,000 imported vehicles during the first 7 months of 2007 with an average price of 10,000 dollars.
European origin vehicles are amongst the most expensive especially German vehicles. For many drivers, it is more prestigious to drive a second-hand vehicle from a major European manufacturer that to have a new vehicle from further away.

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The exponential growth in the Moscow car fleet is mainly provided by foreign brands. This is the conclusion of a report completed in August-September 2007 by the Avtostat agency. According to the report, 280,000 out of 355,000 new vehicles registered in the capital during 2006 were foreign brands, equivalent to 79%. The trend is similar for the Moscow region but less strong: 160,000 new car registrations with 65% of them being foreign brands.
Statistics from the Interior Ministry highway police seem to confirm this trend: from 900,000 foreign branded vehicles registered at the start of 2004, the number has grown to over 1.67 million by mid-2007 with a reasonable forecast that this will reach 1.7 million by the end of 2007.
The total number of vehicles of all types in the capital is 3.5 million. The locally designed Lada is still the leader: nearly 1.1 million units. There are still 500,000 obsolete locally designed vehicles which are no longer manufactured, in most cases: GAZ, Moskvich, ZAZ…
About 25.1% of the cars registered in Moscow are less than three years old and 21.8% of the fleet are between three and seven years old. Over half the fleet is over seven years old. 36.9% are over ten years old; these are mainly locally designed vehicles but include a few foreign brands that arrived as second-hand imports, especially German makes. The general trend is for the fleet to become younger: more and more drivers in the capital are choosing a new vehicle rather than buying second-hand.
Ford is the leading foreigner at Moscow with 139,769 cars registered by mid-2007. They are followed by Toyota (139,184), Volkswagen (123,793), Nissan (111,458), Mercedes (105,483) and Mitsubishi (105 007). Renault is 12th in the capital with 58,710 units according to Avtostat.
Ford's first place is due to its excellent sales results with the Focus assembled in its factory near St Petersburg: its 35,893 vehicle sales in Moscow in 2006 gives Ford 10% of new foreign vehicle registrations. They are followed by Hyundai, Nissan, Toyota, Mitsubishi and Renault. There is a strong showing for locally assembled vehicles: Ford, of course, but also the Hyundai Accent from the Taganrog factory and the Renault Logan from the Avtoframos factory in Moscow.
The truck fleet in Moscow and its surrounding region is being renewed slowly. According to Avtostat, whilst Scania, MAN, Renault, Mercedes-Benz, Volvo, IVECO and DAF are regularly registered, they are mainly second-hand imports with an average age of three to seven years.

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TYPICAL PURCHASER

Does a Russian consumer behave like his/her European counterpart when buying a car? The typical purchaser, described by the Association for European Business in 2006, provides an accurate answer. The average age of a new car buyer is 37 years old in Russia compared to 46.7 in Europe. Retired people represent only 4% of them compared to 21% in Europe.
84% of buyers are men (69% in Europe) and 74% of them are married or living in a couple (75% in Europe) and their household consists of 3.3 people compared to 2.8 in Europe. About 56% of drivers are one-car households (45% in Europe). Its the level of declared revenues that shows the greatest difference: 20,800 dollars per year in Russia compared with 46,300 in Europe.
12% are buying their first vehicle (only1% in Europe). Almost 77% of drivers intend to use their vehicle for travelling to and from work and 48% for business purposes (70% and 33% respectively in Europe).

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STRATEGIES

Despite difficulties in delivering kits from Hyundai, the TAGAZ car plant at Taganrog, in the Rostov region manufactured 56,000 vehicles in 2006 and had sales that was almost 433 million dollars. The factory was built in 1998 to produce three Daewoo models under its own brand of Doninvest as required by its owner, Mikhaïl Paramonov. However, Daewoo's well reported problems and the Russian financial crisis led to production stopping. 'We then started assembling the Citroën Berlingot commercial vehicle. The idea was good and several Berlingot are still used today as taxis in Moscow. And demand for commercial vehicles is growing even faster than demand for cars. However, at the time, the demand was not sufficient and the model chosen was not one of the cheapest. Whatever the reasons for us and Citroën going our separate ways, the market was not yet ready for this type of vehicle at that time' explains Ivan Karpouzov, TAGAZ communication manager. The company has assembled Hyundai vehicles since 2001 and should soon assemble the 150,000th Accent according to a spokesperson. 'We had a few delivery problems especially with engines but the brand has agreed to deliver more. They have promised to provide us with 80,000 kits next year. Our total capacity means we can assemble up to 120,000 vehicles plus 30,000 Porter commercial vehicles assembled on a separate line. Only Ford and Avtoframos can claim greater volumes than us for the future' he confirmed. TAGAZ has planned to locally source components but for small volumes such as tyres and discs for the Accent. 'We are working on this with the Nizhnekama tyre factory and Pirelli. We are also making seats because they are large parts and too expensive to deliver. We plan to source plastic parts locally. We ask local suppliers to provide a constant level of quality at prices below those of the Koreans. However, we prefer internal production as that means we can manage both quality and production costs' added Ivan Karpouzov.

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DELPHI: 'We are also relying on future implantations!'

The component manufacturer, Delphi, has created local partnerships including with the SOK group, to supply parts for specific models promised for the Russian market by global manufacturers. There is no shortage of projects. The company has developed OEM contacts with local manufacturers such as Avtovaz, Gaz... 'We have created a cable factory at Samara with the local manufacturer SOK (see later - Editor). We are also producing connectors together. SOK is a good and reliable partner. We are also discussing the possibility of a partnership with a gearbox factory as a joint venture' said Steven Gaut, Delphi Powertrain Systems Marketing Director. The component maker has a confident approach to this market. 'The Russian market is no more difficult than South America or Japan. We practice the same methods everywhere, developing a special relationship with a local partner to learn about and understand the context in terms of politics, economy, human resources, etc.' explains Steven Gaut. Once the management has been found, Delphi creates autonomous regional entities with the initial investment coming from the parent company as a complement to that provided by the partners. The local company then buys a licence to obtain access to the technologies. 'This system is already operating with SOK and we are negotiating with other potential partners' added Steven Gaut. Currently, Delphi only has a limited presence in the Russian market but this situation should not last long as new opportunities are developing. 'It is not really very interesting to establish partnerships for current models' affirmed Steven Gaut. 'We are aiming more for the models to come because several manufacturers intend to launch specific models for the Russian market. The regulations are in the process of changing in Russia. They are now practicing the Euro 2 and Euro 3 standards for gearboxes. In Europe we are working on Euro 5 and preparing Euro 6. If the Russian legislation changes quickly, Delphi already has the products that are required.
We are also counting on future implantations. PSA is going to build a factory in Russia and they are our second largest client in Europe. Our existing contracts for the 206 or the 307 are good opportunities for adding extra volumes to the orders.'

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SOK: 'Our 50,000 employees are ready to learn!'

'We are anticipating the arrival of foreign manufacturers. Those who enter the Russian market prefer to work with their existing suppliers initially or look for local sub-contractors that can meet their criteria. This is where we are positioned. All our factories are ISO 9001 certified. And we have a manpower reserve that is ready to learn with over 50,000 employees' stated Dimitri Roumiantzev, department head for the SOK group, local car component specialist, amongst other things..
Dimitri Roumiantzev agrees that the group factories have had a few problems with maintaining constant levels of quality. SOK is planning projects with European or Asian partners to improve its production quality; especially with car component joint ventures. There are ongoing projects with the German, Halla, for headlights and Pegaform for plastics. The Delphi partnership appears to be working well (see earlier - Editor).
The group originated from Samara and had sales of 2.4 billion dollars in the automobile sector in 2006. Its development is centred on several axes including automobile manufacture and component production. The Izhavto assembly plant has produced Kia models since 2005, the Spectra, Rio and Sorento four-wheel drive, plus the Izh minibus. Some of the Spectra components are locally produced. The Vazinter plant continues to assemble old Avtovaz models. The Roslada assembly plant is stopped and looking for a partner.
SOK has 15 to 20 factories for components in different regions. It supplies Avtovaz, GM-Avtovaz and Ford for some factory fitted components. Group companies are also in the Volkswagen catalogue for its planned factory.
SOK is also Kia's exclusive distributor with over 100 outlets and also distributes a dozen other brands.
The group is also developing in the construction sector: building bridges, tunnels, roads and factories. This sector is enjoying rapid sales growth and its share has increased to 20%.

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IRAN KHODRO: 'We plan to create our own subsidiary in Russia'

The Iranian car manufacturer, Iran Khodro, forecasts that 15% of its production will be exported in 2007 (637,000 vehicles) to 39 countries and this will reach 25% and over a million vehicles by 2010 according to its chief executive. Algeria, Egypt, Jordan, Lebanon Syria, Turkey and the Central European countries of Bosnia, Bulgaria and Croatia are currently the main markets. However, the company's priorities are the Middle East and CIS markets. Iran Khodro has been present in Russia for two and a half years and has sold 10,000 cars, mainly the Samand. 'The general growth of the Russian market is beneficial to us. Our sales have shown rapid growth in 2007 with a forecast of 15,000 vehicle sales. This significant progress is due to an exclusive partnership with the wholesaler, Autofriend, who has done excellent work. Currently, the vehicles mainly come from Iran. After numerous evaluations, we have concluded that the best route is to load vehicles at Anzani and unload them on the other side of the Caspian Sea at Astrakhan' stated Alireza Mirzaei, vice-president Export and International for the Iranian car manufacturer, Iran Khodro. There are many projects. 'Apart from the Samand, we intend to shortly launch the renewed version of the Soren with the objective of selling 5,000 during 2008. We are also looking at the possibility of opening our own subsidiary in Russia. However, this will only become a reality once we are certain that this will not harm the interests of our partner, Autofriend' confirmed Alireza Mirsaej. The chief executive admits that setting up a company in the Russian market can be difficult, especially with the regulations. 'Amongst the difficulties that we met when trying to get started in this market, I think the most difficult was obtaining Russian regulatory conformity certificates. Even if this is an obligation for every market when we want to get started, this required a lot of work. In a general sense, exporting was a new experience for us two years ago and we had to learn everything' he explained.

Alain Bastid

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BRIDGESTONE cultivates a good citizen image

Bridgestone is selling via the Pole Position regional wholesalers and stores network: 70 sales outlets with two pilot stores in Moscow and the rest as franchises. The franchise specification includes at least two fitting workstations, a storage area and a minimum surface area. 'Our stores sell 5 -10% of products from other manufacturers including the Nokian and Gislaved winter ranges (Editor - a Swedish Continental brand). These sales are justified by clients who are used to these brands for winter tyres' attests Mikhaïl Lavrenov, director of the Bridgestone Pole Position Varshavka pilot store. The Pole Position stores only sell Bridgestone products in the summer range as these ranges are well developed.
The tyre manufacturer does not supply any of the car manufacturers. It was in negotiation with GAZ a few years ago with a view to equipping the Gazel but the discussions were unfruitful.
Bridgestone cultivates a good citizen image in Russia. They have translated a road safety campaign into Russian, the campaign leaflets are given out to Russian drivers in the Pole Position stores.

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AMTEL-VREDESTEIN is demonstrating the difference between it and its Russian equivalents

Despite high debts, the company is trying to continue its development and is targeting the A segment.

Amtel-Vredestein does not do anything in the same way as other Russian tyre manufacturers. Whilst its major competitors, such as Sibur - Russkie Shini and Nizhnekamskshina, have recently started claiming to be receptive to foreign participation to bring them up to international standards faster in terms of technology and marketing, Amtel bought the Dutch tyre maker Vredestein in 2005.
The acquisition of Vredestein by Amtel has meant it could achieve its strategic objectives very early. Firstly, acquire western know-how and technology. Secondly, create cross-fertilisation with Dutch specialists especially when designing and commissioning the Voronej-2 factory. Finally, own a western brand which was essential for its position on segment A in the Russian market.
Amtel was the first Russian manufacturer to start developing an integrated retail network in 2006. Its Av-To network now consists of 94 outlets to which the wholesalers, Pigma and Megashina, should be added. Whilst the future of the AV-TO network as an integrated structure is now suspended awaiting the strategic decisions of the new management, the relevance of the concept is not in question.
Amtel currently claims to be the first Russian manufacturer to launch a full range of tyres of the A segment. Vassily Ignatiev, The tyre maker's marketing director, confirms that this range should be launched in Russia before the end of 2007 with significant publicity and marketing budgets: 'We could not do it sooner because we did not have a full range, an essential factor for attacking this segment. The tyres from Vredestein's European range must be adapted tithe Russian market where we use different nails and rubber-mixes. We are now ready and we are launching with significant marketing and publicity budgets coupled with the advantage of a Dutch trademark. We aim to obtain 6 - 7% market share by 2011 compared to just 0.7% currently.'
The future is uncertain. Company results were much better in 2006 with sales of 823 million dollars, a year on year increase of 23%, with losses reduced from 81 million in 2005 to 7 million dollars. The results for the first half of 2007 confirm this upward trend with a 30% increase in sales revenue. However, the level of debt remains very high and continues to impact the results.
The distribution network is currently undergoing a drastic reduction with about twenty sales points having been closed and may be sold. An alternative to this is to seek a foreign partner who could provide liquidity and know-how.
Alfa Bank has recently taken control and replaced Samir Gupta, the ex-main shareholder. Petr Zolotarev, who was DG at Russkie Mashini, was named CEO and replaced Alexei Gourin. The financial director has also been replaced. Petr Zolotarev, 42 years old, is an economist by training. Following his education at Moscow,, London and Lausanne, he has mainly worked for Ioukos where he climbed up the company to become president of Ioukos RF and group board member. Since 2005, he has demonstrated the profile of a westernised manager at Basovy Element as General Manager of this Russkie Mashini holding.
Without prejudging his future decisions, it is to be expected that they will involve far greater financial thoroughness than in the past. Already, some services have relocated from the Amtel head office on the prestigious Avenue Koutouzovsky to the offices of the old Moscow Tyres factory with its interior decor that is reminiscent of the USSR of the 70s, located in a working class district.
The strategic choices for the rest must be made quickly by Petr Zolotarev, according to the analysts who monitor the shares: what should be done with the Moscow factory that is currently almost at a standstill; what should be done with the AV-TO retail network; is it useful or necessary to have foreign groups enter the capital of the group's factories; etc.

Alain Bastid

l Amtel's dates

l Vassily Ignatiev's advice for foreign companies that are interested in Russia:

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VIANOR: 'Don't try and transfer your existing programmes into this market! Adapt…'

Tyre maker Nokian has chosen to use franchising to help its auto centre network , conquer the Russian market. A concept that the tyre maker now plans to use for other markets.

Nokian, the Finnish tyre maker has just opened its 100th tyre centre under the Vianor name in Russia. In common with almost all the Vianor outlets in Russia, its a franchised centre located at Naberezhnie Chelni in Tatarstan. The company has used Russia to test its new development strategy. The Vianor network counts 45 - 60 outlets with 6 - 7 franchises in each of Finland and Sweden. In Russia it has two outlets and over a hundred franchises and is present in 69 towns.
The first Viador centre in Russia opened in Rostov in 2005. 'At the start we identified about thirty towns in Russia where the population was greater than Helsinki (half a million) and we wanted to target these towns as a priority. We quickly realised that we needed to be more ambitious' reminisced Seppo Kupi, Vianor Holding general manager.
'Russia was the test bed for developing franchises for Nokian. However, we intend to progressively add to our own outlets possible to have one in every large town where they will play the role of pilot outlets' explained Andrei Pantioukhov, Vianor's Russian general manager.
According to Seppo Kupi, 'Vianor does not plan to greatly increase the number of owned outlets globally. Future development will be via franchises as in Russia'. Its rapid growth in the Russian market has provided the manufacturer with an opportunity to abandon its historical model and to test a new way which will now be applied in other countries.
Rafaïl Badretdinov, joint owner, with his son and nephew, of the Brinex network is a new Vianor franchisee. He now has six auto centres in the Kama region: at Naberezhnie Chelni, Almetievsk and Nizhnekamsk, near the huge factory of local tyre maker Nizhnekamskshina. It's not easy to offer the Finnish brand under these conditions. 'At the start we wondered how we could compete with products from the local factory. The regional markets are inundated with Nizhnekama tyres which have not always followed a legal distribution route and are sold at very low prices. Consumers were not used to paying higher prices or to paying for services. It is difficult for us to sell a lot of Nokian tyres but we are trying to keep them at 60% of our sales'; confided Rafaïl Badretdinov. The network requires that the share of Nokian tyres and Nordman winter tyres does not fall below 60% of sales.

Storage, the leading service

Dedicated tyre centres in this country with a hard climate have two periods of seasonal demand when drivers replace summer tyres with winter tyres and vice-versa. The rest of the year, the level of activity is much lower hence the need to develop other services. 'We want to develop complementary services for the inter-season, cleaning, oil changes, battery replacement, etc. This selection of services is not exhaustive and can be adjusted depending on the ability of each partner' added Andrei Pantioukhov.
Another service that is enjoying a lot of success in Russia: storage of winter tyres between seasons by the auto centre. Drivers do not want to dirty the inside of their vehicles by carrying their tyres and lack space to store them in their homes. The service included cleaning the tyres, wrapping them in plastic film, labelling and storage. It also means that the centre is certain that the client will return at least for the next season.
'We have a capacity for about 1,500 units in total and there is no distinction between our products and those being stored. When our storage capacity is exceeded, we send our clients' tyres to a dedicated central depot. The service has been so successful since it was launched that we are busy looking for new storage sites' comments Raphaïl Badretdinov.
Andrei Pantioukhov plays a double role in his relations with the franchises: Vianor manager and also general manager of Nokian Shina, the Finnish tyre maker's local subsidiary which has a factory near Vsevolojsk, in the St Petersburg region that produces 4 million tyres per year. This factory produces 70% of the Nokian and Nordman tyres sold in Russia. This is a fairly comfortable situation for controlling the special conditions offered to the franchises.
The tyre maker offers better prices and payment terms to its franchises than those offered to distributors. Delivery is free anywhere in Russia once a minimum volume is exceeded. Finally, franchises have a delivery priority when products are out of stock.
The company has implemented a travelling Vianor School in June 2007. Its role is to train franchise directors, sales staff and mechanics. The training is jointly financed 50/50 by the company and its partners who decide themselves who they send for training to increase staff retention. Vianor is also working on an incentive programme project for the employees of its Russian partners.
However, the tyre maker's local subsidiary does not underestimate the problems of franchising. 'Sometimes our partners are not ready to increase the number of sales points. We can help them including arranging the necessary financial support. If this is not enough, we can then look at having several partners in the same region. In another case, their respective zones overlap, e.g. at the edges of two regions.' commented Andrei Pantioukhov. Use their experience to advise western operators who want to enter the Russian market: 'Don't try to transfer your existing programmes onto the Russian market. Be ready to adjust your programme to the interests of your future partners.'

Nokian Tyres has sales of 432.5 million Euros for first half 2007. Nokian sales in Russia and the CIS increased by +52.1 % during the same period (+23.8 % for all countries). Russia now accounts for 34% of its total sales.
70% of the products sold in Russia by Nokian come from its Vsevolojsk factory, near St Petersburg. This factory will be enlarged to eventually contain six new production lines and increase its capacity from 4 to 10 million tyres per year by 2011. Nokian Russia's investment in 2007 will be 110 million Euros with 62 million of this being for enlarging the factory.
www.nokiantyres.com

The Vianor centres network developed considerably at the end of the 90s. Its development was marked by the purchase of Isko Oyj in Finland in 1999. Currently Vianor Holding is a 100% owned Nokian Tyres subsidiary with 298 centres in 8 countries of which 130 are franchises and the rest are owned outlets. Vianor is aiming for 120 centres by the end of 2007 in Russia and up to 300 by the end of 2009.
Vianor is also involved in commercial vehicles. According to Seppo Kupi, sector VI accounts for 25% of the network's sales in Scandinavia with a 50/50 mix between new and retread tyres. Vianor has a specialised sector VI new and retread centre at St Petersburg near the Shushari retread factory. Some of the Russian centers will also offer sector VI tyres.
vianor.ru

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IN BRIEF

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AGENDA

- Autoinvest 2008
February 11th to 12th 2008 at St Petersburg
A conference for investors interested in car component production in the region.
eng.autoinvest-russia.ru/

- Automechanika
March 4-6th 2008 in Moscow
The second edition of the International Exhibition Automechanika will be organized in Moscow by the German Messe Frankfurt. Automechanika May 2007 edition attracted more than 200 exhibitors from some 20 countries. It focuses on service stations, car equipment, accessories and services. The 2008 exhibition will also comprise a conference covering Russia’s automotive industry, OEM suppliers and aftermarket sales issues.
www.automechanika-expo.ru/eng

- Tires and Rubber
March 4-7 2008 in Moscow
Located on the same exhibition centre as Automechanika, this smaller local event will gather Russian and international tire manufacturers, wholesalers, as well as some special equipment manufacturers.
www.maxima-expo.ru

- The Russian Automotive Industry
March 11th - 13th 2008 at Moscow
An international conference organised by the Adam Smith Institute. Interventions are planned from the main players from the local and international industry. You can meat the cream of the leaders in Russian automobile industry and their purchasing directors.
www.adamsmithconferences.com

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La maquette de l'Auto Franco-Russe a été réalisée avec le concours de l'agence Vingt-Quatre Graphisme