Russia’s new automotive boom is served by a decidedly different network than in 2008, with more local production, increasing use of domestic ports, and growing sales beyond St Petersburg and Moscow. Anthony Coia reports.
With 2012 new vehicle sales likely to finish 7-10% higher than 2011 – at around 3m units – Russia has been one of the only European markets to grow as the recession in the eurozone and Southern Europe deepens. But even as Russia looks set to equal or surpass its previous peak of new vehicle sales back in 2008, the market’s production and distribution network is oriented very differently.
Russian industrial policy, including Decree 166, has encouraged local vehicle manufacturing and a reduction in imports as a percentage of the total volume. Even Russia’s accession to the World Trade Organisation in August 2012, although technically designed to reduce import barriers, is not likely to reverse this trend towards Russian production, particularly with the recent introduction of a recycling fee for imported cars and trucks.
Partly as a result, there is also a continuing shift among importers to use Russian ports rather than foreign ports, which can reduce the transport distances and costs to dealerships. In particular, there has been growth at the terminals at Ust-Luga, Yug-2 and Novaya Gavan, while carmakers have also turned more to the Fishery Port and Petrolesport terminals in St Petersburg. Although these ports tend to require short-sea shipping from hubs in Western Europe, the growth has largely come at the expense of Finnish, Polish or other Baltic ports outside Russia. Manufacturers have also expressed interest in using ports in southern Russia, although there is still a lack of infrastructure and shipping services.
Meanwhile, the share of new vehicle sales in Russia’s ‘regions’ – the majority of the country outside of Moscow and St Petersburg – increased from 51% in 2010 to 57% in 2012, with particular growth in the Urals, Siberia, and southern regions. At Toyota Motor Russia, for example, the fastest growth has been in Siberia, where it grew by 153% last year compared to 2011, and in the central regions, where it showed more than 150% growth during the same period, according to Olga Valieva, senior manager, vehicle logistics. Such expansion has created more opportunities for regional hubs and for rail transport.
The shift to Russian production
The proportion of locally produced new foreign brand cars has risen steadily in Russia, including from 54% in 2011 to 58% in 2012. The increase should continue in the next two or three years as carmakers ramp up production to meet the targets of Decree 166, which include building 300,000-350,000 units per year in Russia.
While imports have grown along with Russian sales increases, their proportion of sales compared to Russian production has fallen for most carmakers. Relative to Russia’s last sales peak in 2008, for example, when sales were also around 3m units, imports in 2012 are set to be about 500,000 units lower at around 1m units. Carmakers such as Volkswagen and Citroën note a decreasing proportion of imports, as do vehicle logistics carriers serving such carmakers, including Rolf SCS and Major Auto Trans. Rolf SCS chief executive Alexander Larin says he does not expect imports to grow from the current levels of 23% of the company’s transport volumes.
A lower import ratio appears to be a fait accompli even though Russia’s WTO membership ostensibly means lower import tariffs. Duties were lowered last August from 30% to 25% for passenger cars and reduced even more for light commercial vehicles. Import duties will decline gradually to 15% during the next five years.
In September, however, Russia implemented a scrapping fee that is almost equivalent in size to the duty reduction, which is likely to prevent any shift in trade balance. “This environmental tax for scrapping vehicles at the end of their lives is essentially leverage against the WTO,” says Tomasz Lis, head of Russia and CIS for Höegh Autoliners. “Consequently, we are seeing a gradual shift from imports to localised production.”
Inland distribution networks
This shift to local manufacturing, together with sales growth outside Moscow and St Petersburg, is impacting the Russian distribution network, including more terminals and rail transport. According to chief executive officer Alexander Zhuravlev, Major Auto Trans has seen growth in volumes and services in the areas of plant distribution, rail transport for distances greater than 2,000km, and the development of compounds. It recently built a second vehicle compound in Togliatti, southwest Russia.
Rolf ’s Larin points out that the growth of local production will push logistics operators to develop services within the country, whether inland terminals, PDI or transport. For example, Rolf SCS has launched its own trucking fleet in the Far East. In Naberezhnye Chelny, Siberia, Rolf increased its fleet from 19 to 46 units. Major Auto Trans’ Zhuravlev also says that to improve efficiency, the company needs to extend its service geography to include more loading and unloading points.
Citroën is among the OEMs expanding its regional presence within Russia. The French OEM, part of the PSA Group, relies on its logistics supplier Gefco (in which Russian Railways is currently acquiring a majority stake from PSA), which has its own fleet of 150 trucks. According to Katia Makarytcheva, head of logistics for Citroën, the OEM uses four compounds in Russia, two of which are located in the Moscow region, and one of which is accessible by rail. It also uses Petrolesport in St Petersburg, which it started using in early 2012 following quality issues at the Fishery Port terminal. The fourth compound is at PSA’s plant in Kaluga.
Approximately 35% of Citroën’s vehicles are domestically produced, which has enabled it to achieve a significant logistics cost reduction. The Kaluga factory is expected to produce at full capacity by the end of 2013, which should hold down the carmaker’s import ratio. Like other OEMs, Citroën is expecting its fastest growth in Russia’s regions in the east and south. Currently, 45% of Citroën’s sales are outside of St Petersburg, a proportion expected to rise to 60% as early as 2013. Ukraine also has a strong potential as Citroën’s sales had increased by 70% in the first nine months of 2012.
The rise of Russian rail
After seeing its transport volumes increase by 50% to 248,000 vehicles in 2012, Rolf SCS expects an increase of 20% to 300,000 vehicles in 2013, according to Larin. Besides sales growth, new customers are driving the increase, including OEMs such as Volvo, UAZ and Chery.
Larin notes that growing volume has also led to a doubling of rail volume, while various OEMs in the country report using the mode more. Citroën’s Makarytcheva says railway transport could be competitive with truck transport, especially in the spring and summer when some roads are closed to trucks and weight limitations restrict heavy goods vehicles.
Generally, however, rail transport times are longer, and the cost is typically cheaper than truck only for domestic production, according to Makarytcheva. “Since we will be launching full production of the Citroën C4 in July 2013, we are currently testing the feasibility of rail transport,” she explains.
Toyota delivers 75% of its vehicles to dealers in Russia by truck and 25% by rail, according to Valieva. The OEM uses rail transport for delivery from Ust-Luga port and its hub to distant regional dealers in the Urals and Siberia. In April 2012, it began to transport its Camry model by rail. “Our trend toward increasing the percentage of rail began in 2010, when it was 5-6%,” she says. “In 2011, it was 12% and last year was 25%. Rail usage has enabled Toyota to reduce its damage ratio compared to truck deliveries.”
Volkswagen Group Russia has also begun domestic transport via rail, although mainly for import volumes. Zdenek Dresler, head of group service, says the benefits include more stable capacity and delivery terms, better transport quality and cost efficiency. However, nearly 99% of Volkswagen production out of its domestic production – which accounts for 60% of Russian volume – is sent by truck.
Toyota’s Valieva points out that the disadvantage to rail is that there is not a standard rail wagon for all models in Russia, while there are also problems with infrastructure development. “We need rail connection enhancements in order to remove cargo overflows, as well as new wagon construction, reasonable timelines for vehicle delivery, and lower tariffs,” explains Valieva.
Moving direct to dealers
Ford Sollers, a joint venture between Ford and Sollers, distributes vehicles from plants in St Petersburg and in Elabuga, Tatarstan, to 120 dealerships. Sollers also has a plant in the Far East at Vladivostok. According to Natalia Petrenko, vehicle logistics strategy and network planning director, the ratio of local production to imports is 85:15.
Ford Sollers sends most of its vehicles from the Elabuga plant by direct delivery. “The plant’s location enables us to utilise the return trucks from the Urals and Siberia back to the central and northwest regions, which is in line with our cost and lead-time objectives,” says Petrenko.
Approximately 90% of its domestic vehicles are dispatched from the plants directly to dealerships on trucks. The remainder are transferred to a compound and merged with the import flows from the Fishery Port terminal in St Petersburg. From here, shipments are sent by rail to remote regional locations.
Petrenko says Ford Sollers has dramatically reduced transport damages in its Russian distribution. “We deliver 98% of our vehicles damage-free – an improvement of four times, and with a considerable average transport distance per vehicle within Russia of 1,540 kilometres,” explains Petrenko.
A more Russian-flavoured port network
Although the trend in Russia is for an increasing proportion of domestic production, the import volume remains substantial, with the shipping, terminal and connecting distribution links continuing to change and mature.
Among the ro-ro carriers serving Russia is Höegh Autoliners, which calls at St Petersburg and Ust-Luga with volumes that are transhipped through the port of Tyne, near Newcastle in the UK, and the German port of Bremerhaven. For short-sea transport legs, Höegh uses its subsidiary, Euro Marine Logistics (EML), a joint venture with Mitsui. “We do not call at Russian ports directly by deep-sea vessel due to the smaller import volumes, which makes it cheaper and more reliable to use short-sea vessels,” says Höegh’s Tomasz Lis.
Lis points out that as volumes grow, the port of St Petersburg remains limited in its development possibilities because it is surrounded by the city. Although most import vehicles currently enter Russia through St Petersburg, Ust-Luga’s Yug-2 and Novaya Gavan terminals are gaining significance. Novaya Gavan, run by Russian Transport Lines, is the newer of the two and has been operational for about one year. Thanks to space, as well as easier navigation in winter compared to St Petersburg, Lis believes that Ust-Luga will increase its share of vehicles entering northwest Russia.
Konstantin Sokolov, general manager at the Commercial Sea Port of Ust-Luga, which runs the Yug-2 terminal, says the terminal can store more than 18,200 units, allowing for consolidated storage for many OEMs. A further 500,000 square metres of space is under development, while there is also a customs post at the port.
Besides the main Russian ports, Höegh calls at the port of Paldiski, Estonia, via Bremerhaven, for mainly high-and-heavy equipment imports to Russia. It also calls directly at Klaipeda, Lithuania, with vehicles destined mainly for Belarus, as well as picking up high-and-heavy equipment for export. In southern Russia, Höegh calls the Ukrainian port of Illychevsk via transhipment at the Greek port of Piraeus.
Changing import flows
Toyota remains one of the largest vehicle importers in Russia, having not joined other OEMs in signing Decree 166. Valieva says that while Toyota is also increasing Russian production, the OEM expects imports to climb with its growth. She does not expect a dramatic decrease in the import ratio in the near future.
Toyota uses the Swedish and Belgian ports of Malmö and Zeebrugge as hubs to collect European production along with vehicles from Japan, Turkey, Thailand, and South Africa, which are then sent by short sea to Ust-Luga and St Petersburg. Whereas Toyota used to use Polish, Finnish and Ukrainian ports, it stopped using foreign ports in 2011 to save costs and lead-time. “We restarted using St Petersburg port in addition to Ust-Luga – to which we switched from Illychevsk – in January 2012 and began using Vladivostok in June 2012,” she explains.
Along with the ports of Ust-Luga, St Petersburg and Vladivostock, Toyota has a hub at Toyota Motor Manufacturing Russia’s factory in St Petersburg. “From these four hubs, we deliver vehicles directly to the dealerships and we plan to engage the same approach for our upcoming hubs,” says Valieva. “Direct delivery from ports enabled us to reduce the lead-time by four to five days compared to transit through the Moscow compound.”
Valieva says Toyota is looking for one more port hub in southern Russia in anticipation of increased imports from its Turkish plant in 2013. The carmaker will also open another hub in the Moscow region, which will receive the Sollersproduced Toyota Prado from its plant in Vladivostok.
Toyota has run into infrastructure constraints already in the Far East, explains Valieva. “Zarubino is overflowing and has no development potential. Vladivostok port is located in the centre of town, so space is limited. Nakhodka port was viable, but it is now being used for coal.”
Toyota is also looking for vehicle storage and handling, especially for Black Sea ports, and rail delivery from the Far East region.
Citroën uses the ports of St Petersburg and Illychevsk for imports, although it is currently looking for a southern Russian port in the Black Sea to reduce its transport costs. “Currently, we transport all vehicles from Illychevsk to Moscow by road for customs clearance. We want a port at which we can clear customs and then ship directly to the dealerships as we do at St Petersburg,” explains Makarytcheva.
Along with production in Kaluga and Nizhny Novgorod, Volkswagen distributes vehicles from the port of St Petersburg and a rail terminal in the Moscow region. For imports, it receives 60% of its vehicles by sea, 35% by rail and 5% by truck. “We have increased our sea imports to Russia from 40% to 60% of the total import volume,” says Dresler. “Consequently, we reduced road imports, thus saving costs and taking advantage of higher port efficiency.”
In contrast to vehicle imports, exports from Russia are small, with key destinations being the CIS countries. Lis estimates it will take a few years before Russia exports any significant shipments to non-CIS markets. However, Ust- Luga’s Sokolov expects that local production could eventually lead to significant export growth.
Providers look to multimodal and inland terminals
Some providers in Russia have also been able to capitalise on the change in Russia’s flows from foreign to domestic ports. While major Major Auto Trans has lost volume at the foreign ports from which it provides transport to Moscow – including Gdansk in Poland, Kotka in Finland and Paldiski – to vehicle compounds in the Moscow region, its volumes have increased at northwest Russian ports, says Zhuravlev.
Rolf SCS actually had its fastest growth last year in its port operations, with volumes up by 83% to 128,500 vehicles. Growth has been fastest at the company’s 7,000-car capacity Petrolesport terminal, where Toyota, PSA and Volvo were among the customers to start using the terminal, some having switched from Finnish ports.
Rolf ’s recent joint venture with NYK Line should expand operations for ro-ro operations at Petrolesport and at the port of Zarubino in the Far East. Far East port volumes increased by 50% last year for Japanese brands, according to Larin.
In total, Rolf ’s terminal operations, including handling and processing, increased by nearly 25% in 2012 to 120,200 units, helped by its ownership of customs-authorised Elite Trans in St Petersburg. Last year, the company also expanded its Lobnya terminal, near Moscow, from 6,400 to 7,500 spaces, which Rolf plans to expand further to 9,000 spaces by the end of 2012.
The growth of Russia’s domestic vehicle production, along with the expansion of services at domestic ports and vehicle compounds, makes up a large part of the difference between the Russian automotive industry of today compared to the boom before the last crisis. While foreign brands continue to grow strongly, the push by the government for manufacturers to produce and handle vehicles locally is having a significant impact. While carmakers, including Toyota, Volkswagen and PSA will still require a range of import routes, the successful providers in Russia are increasingly those able to offer multimodal services and terminals across the continental breadth of the country.