N° 15

June 2013

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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.

In this issue

The Russian car market has slowed down since the beginning of the year, however its potential remains strong. Western manufacturers are reacting by readjusting their production volumes and continuing to work on new industrial projects. Nissan is preparing for assembly in the Avtovaz plant. PSA and Mitsubishi are getting ready to upgrade their shared plant in Kaluga. Whereas GM has already launched a new assembly line at GAZ and Magna is getting involved in a plant project with Avtotor.

The Editor

THE FIRST HALF OF 2013 WAS MEDIOCRE IN THE RUSSIAN CAR MARKET

Slowing down since the beginning of the year, sales collapsed in May. Manufacturers are downgrading their forecasts.

The Russian passenger car and LCV market fell by 12% in May 2013 in comparison to the same period in 2012. In the first five months, sales were 1,091,968 units, a fall of 4% on 2012 according to statistics from the Association of European Businesses in Russia. "The downward trend in the last three months has continued and even shows signs of getting worse,” warns Joerg Schreiber, Acting Chairman of the AEB Automobile Manufacturers Committee. This is not the first drop, as the movement downwards started in the summer 2012 and has continued intermittently. It was strong at the end of 2012. The beginning of 2013 saw promotional campaigns from manufacturers that stimulated sales but their effect has now worn off.
Local experts advance several explanations for this phenomenon, particularly the high cost of credit but also the increasing cost of owning a vehicle. The prices of services for car owners, insurance etc, are rising quickly in Russia. And other services are becoming paying such as parking in town centres.
Analysts note that Russian consumer confidence is falling. Almost 56% of Russians think that their personal financial situation will be worse or not very good in 2013 according to a Nielsen survey in the first quarter of 2013. The firm notes a sharp fall in Russians' perception as pessimists represented no more than 48% in the previous quarter. "Two thirds of Russian consumers think that it's not the right time to spend money. And a third even think that they should save any available money", according to Nielsen Russia.
Given these negative factors, AEB announced that it was correcting its annual forecasts for 2013 downwards. Its Automobile Manufacturers Committee is now expecting sales of LCVs not to exceed 2.8 million units, or 150,000 or 5% less than in 2012. By way of comparison, total sales of cars and LCVs were 2.9 million units, 2.1 million of which were Western brands in 2008 just before the financial crisis. This was the Russian market's best performance. We will without doubt have to wait a little to see the same level of sales.

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PSA AND MITSUBISHI PUSH ON IN KALUGA

PSA and Mitsubishi are getting ready to upgrade their joint plant in Kaluga. 70% owned by PSA and 30% by Mitsubishi, the plant is currently assembling 44,000 units a year in partial SKD assembly: the Peugeot 408 and the Mitsubishi Outlander. Assembling the Citroën C4 Sedan should start in April 2013. From July 2013, capacity should reach 125,000 units with a complete assembly cycle. Assembly of the Mitsubishi Pajero should start at the same time. The manufacturer is planning to assemble 18 vehicles per hour on a line destined for segment C and 8 per hour on the SUV line.
"We chose Kaluga for our plant because of a good investment climate and the dynamic policies of the regional administration, particularly in terms of creating infrastructures" said Jean-Christophe Marchal, CEO of Peugeot Citroen Mitsubishi Automotive Russia, talking to the Russian Automotive Forum in Moscow. Located to the south of Kaluga, the plant is deliberately "compact", it only covers 128,000 m². Workshop stocks do not exceed the equivalent of 30 minutes' operation.
Managers are looking for local suppliers with mixed results. "The localisation rate at the PSA Mitsubishi Russia plant is currently 31%-32% for vehicles assembled by PSA and 14% for those assembled by Mitsubishi" says Daniel Majerus, Purchasing Director at PSA Russia, "Raw materials are currently imported, and that is very expensive. It is difficult to find local suppliers for example for aluminium parts in large volume".
Today, 2600 people work on the site including 270 French and Japanese expatriates. Staff levels should reach 2900 by the end of 2013. Workers receive 25 hours of basic training. Middle management has five days of training provided by French specialists. "One of our aims for 2013 is to "transfer the keys" to Russian managers" adds Jean-Christophe Marchal. Once this transfer has been completed, the company envisages repatriating a large number of its technical advisers. At the same time, PCMA Rus is in the process of improving its social climate. Managers are counting on negotiations with unions to put in place flexibility measures in order to be able to adapt in production to fluctuations in sales.

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Despite a fall in sales in Russia, Nissan is continuing to develop. The manufacturer is preparing to launch assembly of its Nissan Almera in the Avtovaz plant that is now part of the Renault-Nissan Alliance. "This model will be assembled on the same line that assembles the Lada Largus (Editor's note: this is the Dacia Logan MCV). The two use elements of the B0 platform", explains John Martin, senior vice president of Nissan Motor. The same shared line will welcome a Renault model later.
The arrival of Avtovaz in Togliatti will not encumber Nissan's projects for the manufacturer's plant in St Petersburg. It is configured to assemble up to 50,000 cars a year. John Martin confirms that its production capacity will not be reduced. The total production capacity in Russia should reach 10,000 units in 2014. The site currently assembles the Nissan Teana, X-Trail and Murano. In 2015, it will also assemble the Nissan Qashqai and another model in addition to these three.
However, the brand has had some difficulties in selling cars in the Russian market, just like all the manufacturers present. Nissan sold 54,691 units in the first five months of 2013 according AEB, a fall of 17% on the same period in 2012. The drop in sales just for the month of May was 12%. A figure that corresponds precisely to the overall fall in the Russian car market in May 2013.
To balance the volume of production, Nissan shut down its plant in St Petersburg several times in the spring of 2013. "Our staff were paid two thirds of their salaries during the period of forced inactivity in compliance with Russian labour law", says John Martin, "In reality, they weren't left with nothing to do during these periods as we got the opportunity to train them in preparation for the future launch of new models in the St Petersburg plant".

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AVTOTOR IS TO BUILD A NEW PLANT WITH MAGNA

The Russian operator Avtotor has started building a new plant in its home region of Kaliningrad. The project is managed in partnership with Magna International. Avtotor already runs an assembly plant that has worked with GM a lot, making the most of the fiscal advantages that the Kaliningrad enclave benefits from. "We decided to build a new site as those currently used by Avtotor, located in disaffected military plants, are not sufficient. Fitted snugly between other plants, they have no potential to grow", Alexander Sorokine, Avtotor's CEO explained at the Russian Automotive Forum in Moscow last April.
To finance the project, Avtotor says it can provide almost $700 million from its own funds. Its Western partners will be invited to provide a similar amount. The operator has also announced it has access to $1.3 billion in credit. It is still about $1.3 billion short of completing the project that is very ambitious in relation to the context.
1000 ha of land has been reserved for the new plant which is planned to have a capacity for 250,000 units per year. Parts of this land is reserved for suppliers. Magna International plans to build a plastic parts plant. Avtotor is also in discussions with Lear, Fagor, Johnson Controls, GKN, Eberspacher and some others. Will these equipment manufacturers accept going to Kaliningrad, where there is only one assembly site and no other customer in perspective? "Coming to our site is not a compulsory condition for supplying our future plant", Alexander Sorokine tells us, "For example, we are negotiating with Continental to supply us from their new plant in Russia”.
The location of Avtotor's future plant in the Kaliningrad enclave, stuck between Poland and Lithuania, risks complicating the task of suppliers just a little. Travelling over land supposes that the goods leave Russia, go through the European area and then cross the Russian border again. A headache in perspective for logistics and customs clearance departments. The only way to avoid operations is to transport goods by sea through the Baltic Sea from ports in the region of St Petersburg or by air.
The Magna training centre in Graz in Austria will be responsible for training at the future plant. The Kant University in Kaliningrad has also been asked to contribute. To house its staff, Avtotor is in the process of building a new estate, a sort of new town configured for 50,000 inhabitants.
The first assembly lines of the future Avtotor plant should be operational in 2016 and have a capacity of up to 50,000 units per year. The full capacity should be reached subsequently, enabling Avtotor to reach its objective of exporting at least 20% of its production outside Russia.

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GM STARTS ASSEMBLY WITH GAZ

"With 288,000 units sold in 2012, the Russian market is the fourth largest for us, after China, the United States and Brazil", says Peter Layer, Purchasing and Supply Chain Director GM Russia & CIS. He was speaking at the Russian Automotive Forum in Moscow. Russian drivers are also faithful to GM, the Chevrolet brand has been the leading Western manufacturer in the Russian market six years. The manufacturer operates several sites in Russia, particularly in St Petersburg plant and an assembly plant in Kaliningrad with Avtotor. A new partnership links it to GAZ. The GAZ plant in Nijni started assembling the Chevrolet Aveo in February 2013. This project required an investment of $29 million, shared between the American manufacturer and GAZ with a production capacity of 30,000 cars a year. GM's main plant in St Petersburg had a component "localisation" rate of 20% in 2013. GM would like to grow this to 60% in 2018, an objective that will not be easy to reach. The manufacturer has launched a few projects aimed at finding new suppliers in the Russian market, particularly a programme to encourage the development of SMEs in the St Petersburg region.

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FORD RECRUITS FOR ITS TATARSTAN SITE

Ford is in the process of building an assembly project in partnership with Russia's Sollers on its industrial site in Tatarstan. The project already led to the hiring of 150 qualified technicians and 600 workers in 2012 by the local partner. In 2013, it is planned to hire another 300 technicians and 1000 workers. "This recruitment programme is starting to pose new challenges. There is not enough accommodation close to the plant to house the workers. We are looking for available capacities in the low segment for between 700 and 1000 people, for example hotels that could be used for long-term rents. Recently, we found a disaffected hospital that could be converted into accommodation!", explains Ivan Semenov, Human Resources director at Ford Sollers.
The local supply of qualified technicians will soon run out. "We cannot continue hiring them all in our neighbouring KAMAZ plant as we have up to now", says Ivan Semenov, "today, the leading technical universities that train car specialists are in Moscow. Their students naturally hope to find work in the capital at the end of their studies. Yet only one car assembly plant remains in Moscow! (Editor's note: Renault Avtoframos. There were two Russian assembly plants in the capital previously, they closed). They will certainly find work in Moscow, but in dealerships... or elsewhere in the car sector. We are trying to convince them to come work in our Elabuga plant, they will give their career a good start".

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MERCEDES IS LOOKING FOR QUALITY SUPPLIERS

"Local suppliers are sometimes ISO-approved but by local auditors. We would like to find suppliers approved by auditors that we know and understand the requirements. The quality of local suppliers does not meet Mercedes standards" says Andre Schommer, director of Productive Procurement at Mercedes-Benz Trucks Vostok, speaking at the Russian Automotive Forum in Moscow. MBTV is a joint venture between Daimler AG and Russia's KAMAZ. Its main role is to assemble vehicles in "medium" and "heavy-duty trucks" segment on the Russian industrial site of Naberezhnye Chelny in Tatarstan. The joint venture is also responsible for importing buses.
The assembly is supplied from the Woerth plants in Germany. The capacity of the industrial site, 4500 vehicles assembled a year in 2013, should increase to 10,000 in 2018. Andre Schommer's department contacted 45 potential suppliers of equipment in 2012, including 25 for the chassis that the manufacturer wants to supply locally in priority.

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FIAT STILL IN DIFFICULTY

Fiat's project to build a Jeep assembly plant close to St Petersburg seems to be on shaky ground. First announced in 2012 with a capacity of 120,000 units per year, the project has not moved on since then. Some information has leaked out from the manufacturer showing that the investment conditions in the region do not meet its expectations. The Russian public bank Sberbank, Fiat's financial partner in this project, is proposing setting up on the site of the Tagaz assembly plant in Taganrog in the south of Russia. Bankrupt since 2012, Tagaz has come under the wing of the public bank after accumulating debts of almost $1 billion. The plant, that assembled some Hyundai models in the past, is currently mothballed and the electricity has been cut off for lack of payment. Sberbank would like to find an industrial buyer for this site but Fiat managers seem to be hesitating. The Italian manufacturer has made several attempts to set up an assembly plant in Russia with different partners in the past. A utility vehicle assembly plant was set up for a period of time. But its presence in the passenger vehicle market remains exceptionally low, with about 0.2% market share for Fiat and 0.1% for Jeep in 2013.

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MIXED PERFORMANCES AT AVTOVAZ

Avtovaz found itself being criticised in Spring 2013 when the company announced its results: turnover of €4.8 billion in 2012 or an increase of almost 5% for results expressed in roubles. Net profits were relatively low, 5.3 million euros compared to 77.5 million euros in the previous year. At the same time, the company announced the payment of total of 8 million euros in remuneration and bonuses to the 12 members of its board. 2.2 times the amount paid in 2011. Local experts were critical of this group decision, pointing out that Avtovaz's sales deteriorated in 2012 losing almost 7% of the total whereas the overall market rose by 11% across the year according to AEB statistics. Renault even increased by 23%, but the French manufacturer's sales under its brand are counted separately and do not contribute to Renault-Avtovaz's results. Faced with this criticism, the group restricted itself to responding that managers were personally rewarded "for reaching their objectives in 2012". Avtovaz claimed 33% of market share in the Russian market in 2006 and only 18% in 2012.

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MAZ LOSES HEAVY DUTY MARKET SHARE

MAZ trucks share of the Russian market has been falling since the beginning of the year. Russia is the main market for this Belarusian plant located close to Minsk. However, MAZ trucks only occupied 7.4% of the 14-40 tonne segment in the first quarter of 2013, compared to 14.3% for the same period last year. Its share of the heavy goods market in Russia was even 17.7% in 2005. Local analysts note that products from the Belarusian plant are suffering from competition from Western brand trucks that are increasingly present in Russia, particularly thanks to on-site assembly. Volvo assembles Volvo Trucks and Renault Trucks in Kaluga, Mercedes Benz has an assembly plant with KAMAZ in Tatarstan, Scania operates on a site close to St Petersburg, MAN is preparing to launch a site also close to St Petersburg and IVECO also assembles locally. DAF and China's FAW are at the stage of looking for a location for an international project. The Russian heavy goods market is starting to look quite full. In addition, the now effective transition of the Russian market to the Euro-4 standard makes the Belarusian manufacturer's position is even more fragile. After three years, discussions between the Belarusian and Russian government to develop a strategic alliance between MAZ and KAMAZ with an exchange of shareholdings are still at a dead end, there is no political will.

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MAGNA FINDS IT DIFFICULT TO GET RAW MATERIALS

The lack of raw materials is causing problems for equipment manufacturers. That's what Andrey Dmitriev, Purchasing Manager at the Magna Exterior Interior plant in Kaluga thinks: "Low quality raw materials are an obstacle. Quality is often not consistent, particularly steel. The obligation to find products locally encourages focusing in priority on production on-site of important and costly parts. They will provide a high localisation rate. However, the production of the simplest and cheapest parts is better suited to localisation as they are easy to produce on-site". It may be pertinent to call on the non-car segment manufacturers to produce small plastic parts locally. "For example, those that produce cosmetic products or electric parts, these are generally less expensive" says Andrey Dmitriev.
Opened in 2010,the Magna Exterior Interior Kaluga plant produces shields, calenders and small plastic parts. Situated to the north of the town, close to the VW plant, the site has almost 440 employees. It supplies VW and Skoad but also with the PSA-Mitsubishi plant to the south of Kaluga, 45 km from Magna. It is also a supplier for Renault-Nissan in Russia. Magna International operates six factories in Russia, positioned on car clusters: three in St Petersburg, two in Nijni and one in Kaluga. Ford, GM and Hyundai as well as GAZ are also Magna customers in the Russian market.

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TITAN INTERNATIONAL PREPARES TO BUY THE VOLTYRE PLANT

The American Titan International is about to complete discussions to buy the Voltyre Prom Plant specialized in agricultural and industrial tyres. Owned by the Cordiant Group (formerly Sibur Russian Tyres), the plant is located in an industrial zone close to Volgograd in the south of Russia. It is responsible for 43% of the Russian agricultural tyre market and 16% of the industrial tyre market according to Cordiant. The plant was put up a sale two years ago as part of Cordiant's regrouping project, the company wanted to concentrate on passenger and heavy goods tyres. Several potential buyers were approached about no agreement was made over the sale price. Titan International is organising a roundtable in which the Russian Direct Investment Fund, a sovereign investment fund, will finance the operation along with J.P. Morgan Chase's One Equity Partners. Titan will be limited at the beginning to the role of industrial site operator. Maurice Taylor, Titan International's CEO explains his interest for the Russian agricultural market by the fact that "Russia has 91 tractors for 1000 farmers, this is few compared to other countries". France has 1460 is for every 1000 farmers and Canada has 1824. It is nevertheless true that Russia's tractors are for the most part very old. The progressive replacement opens the door is wide open to Caterpillar, John Deere and the like. These of all customers of Titan International.

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CARS AND LCV'S: SALES DOWN, THE UPPER SEGMENT IS HOLDING UP

Western and Russian manufacturers' sales have remained unstable since the beginning of the year with an overall fall of 4% in the first five months of 2013 according to AEB (Association of European Businesses in Russia, See below) statistics. In this not very radiant context, Russia's Avtovaz, still market leader, is showing a fall with 182,552 units sold for this period, a fall of 8%. Whereas Renault, its majority shareholder, is second in the market with 85,784 units sold in the first five months, a growth of 13%. But just in the month of May 2013, Avtovaz announced a fall of 18% whereas Renault achieved the same result as in 2012 with nil growth.
In third place, Kia sold 77,389 units in the first five months of 2013, an increase of 5%. But this growth was only 1% in May. Hyundai sold 72,587 units in five months, a fall of 1% with the same fall just for the month of May. Chevrolet sold 65,345 units in five months, a fall in sales of 13% and 34% down just for the month of May. VW sold 52,582 units in the first five months, a fall of 4%, and lost 11% just in the month of May.
Other manufacturers were no better off. Toyota was 7% down, 1% of which happened in the month of May. Nissan was 17% down, 12% of which happened in the month of May. Ford was 18% down, 17% of which happened in the month of May. PSA Peugeot Citroen showed a fall of 21% or 25,411 units sold under the two brands in the first five months of 2013 and a fall of 25% just the month of May.
Only results in the upper segment are still rising. At Mercedes, sales grew by 18% in the first five months of 2013 and 14% just a month of May. At BMW, growth was 18% in the first five months and 21% in the month of May. At Audi, the increase was 12% in the first five months and 3% in the month of May. Sales are slightly above 15,000 units over five months for each of these three brands.

The Automobile Manufacturers Committee of the Association of European Businesses in Russia publishes the monthly statistics for sales of cars and commercial vehicles, of all manufacturers, Western and local, operating on Russian territory. Without distinction, the statistics cover the sales of new vehicles assembled on-site or imported.
www.aebrus.ru

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PRODUCTION FALLS UNEVENLY

The production of passenger cars in the interior market was 760,000 units for the first five months of 2013, a fall of 2.3% compared to the same period in 2012, according to the Russian federal agency Rosstat. The fall increased in the month of May when the production in the tourism segment was 143,000 cars, 18.1% less than the month of May 2012.
However, the fall of 31,600 units in May did not concern everyone. Avtovaz, the leading national manufacturer, had to reduce production by half to compensate for the weakness of its sales. Almost 22,000 fewer cars were produced, Avtovaz was responsible for more than two thirds of this overall fall. At the same time, sales fell again by 18% in May 2013, according to AEB.
Fewer trucks were also assembled in the first five months of 2013, with 77,000 units produced or 6.1% less than in the same period in 2012. Local analysts note that the fall is becoming repetitive. "Last year, the market grew strongly from the beginning of the year, the fall only started in the second half", notes the Autostat agency. In 2013, the turndown started earlier.

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IN BRIEF

Renault will lease a fleet of electric cars to the Russian Post Office to test for three years from September 2013, the fleet will include Kangoo Z.E. utility vehicles and two Twizy, two-seater mini cars. Discussions covered about 100 leased electric vehicles but the financial problems at the Russian Post Office obliged the operator to reduce the size. Electric vehicles are not very popular in the Russian market: in all, 200 units were sold across the country, above all Mitsubishi i-Mievs. Moscow has about 50 charging stations, more than half of which belong to the town's electric power supply operator.

"Chinese imports into the heavy goods market increased sharply in 2011 just before the application of new laws on the recycling tax for imported cars. Many trucks that meet the Euro 2 standard have been imported with the Euro 4 label", says Ashot Arutunyan, marketing director at KAMAZ, "another attempt at massive imports of Chinese trucks through the Kazakhstan border, making the most of the customs union with Russia in December 2012". Chinese imports of heavy goods vehicles represent strong competition for the local manufacturer. From 644 units in 2010, they increased to 5186 units in 2011 and 9123 units in 2012, according to statistics collected by KAMAZ. This dried up in 2013 with only 153 units imported in the first quarter.

Avtovaz announced the starting of production of the Lada Granta with an automatic gearbox. This is a great step forward for the Russian car industry: it is the first time in its history that an automatic gearbox has been fitted to a consumer passenger car. In the past, automatic gearboxes were fitted to the limousines of the country's leaders.

The inauguration of the Continental Plant Kaluga is now pencilled in for the end of the summer of 2013, considerably ahead of the initial plan. The tyre manufacturer is in a hurry to strengthen its position using shortcut supply circuits. With a concern for quality, the plant will first produce above all tyres in the "value" range under the Matador range and a "business" range under the Gislaved brand. The quality criteria for these brands are a little less strict than for Continental, this should enable the industry is to start producing whilst adjusting the last settings in its production lines.

Qualified staff are becoming a rare commodity in Russian dealerships. "Staff turnover in sales forces in dealerships reaches 40% in the Premium segment and up to 60% in the mass market" says Vladimir Vidulov, Country Manager Russia at JATO Dynamics, a UK-based specialist in car information. "In the provinces, especially in the Urals, there is a strong lack of qualified labour...". To support dealerships, JATO is adapting its Carspecs help interface for sales forces in the Russian market. This enables sales staff to access detailed vehicle specifications, their standard or optional fittings as well as vehicle prices, the prices of options and rules for adding options in real time.

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AGENDA

Automechanika powered by MIMS : from 26 to 29 August 2013 at Moscow, Expocenter Krasnaya Presnia.
Automotive equipment, car accessories and vehicle maintenance.
mims.ru

Comtrans 2013 : from 10 to 14 September 2013 at Moscow, Crocus Expo.
The International Exhibition for Commercial Vehicles.
www.mediaglobe.pro

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