Russian carmaker Sollers has signed a €2.4 billion ($3.3 billion) joint venture with Fiat to make up to 500,000 vehicles a year in the country by 2016.
The agreement, which may be backed by a 15-year loan of €2.1 billion currently being considered by the Russian government, was signed last Thursday by Sollers boss Vadim Shvetsov and Sergio Marchionne, CEO of Fiat, in the presence of Russia’s prime minister Vladimir Putin.
The signing took place at Sollers’ facility at Naberezhnye Chelny, in the republic of Tartarstan, over 1,000km east of Moscow, where the vehicles will be assembled, a distance that hints at the logistics challenges ahead given the remoteness of the location in a country already plagued by transport problems.
In an attempt to address this, the joint venture has announced an expansion project at Naberezhnye Chelny that will include a technology park for component production.
Localised content is aimed at 50%, including the production of engines and gearboxes, with a percentage also reported to be coming from Zavolzhsky Motor Plant (ZMZ), one of Russia’s largest production centres specializing in engine production. The plant is located in Zavolzhye nearly 600km west. Parts will also come from a soon-to-be-created technological park at Togliatti, 300km to the south.
But according to Frost and Sullivan analysts Vitaly Belskiy and Dominik Buszta, Fiat-Sollers will need to aim at a higher localization if it wants to decrease final vehicle costs and meet its intention to increase market share of 14%, which is what the production of 500,000 vehicles would give them by 2016.
In terms of outbound movements, the majority of the vehicles produced will be for the domestic market and the joint venture will need to consider collaborative strategies given that there are few providers remaining in Russia that have the capital required to provide an exclusive service.
Only 10% of the joint venture’s production is marked for export.
Demand in the domestic market is looking favourable despite sales in Russia having plunged 56% in 2009 to 1.4m vehicles. PriceWaterhouseCoopers predicts they may rise again this year by as much as 15% to 1.6m vehicles and Sollers forecasts that total Russian car sales will rise to 3.4m by 2016.
Local production in Russia was projected to rise to 3m by 2012 before the downturn but has seen heavy declines. However, as locally produced cars have been less affected by the steep increase in import taxes, cars built in Russia gained market share in 2009.
But while demand might grow, meeting that demand remains a problem. The lack of investment in infrastructure in the transport and logistics sector across such a vast and varied geography, often still dependent on Soviet-era planning, has led to comparative weakness by international standards.
Fiat told Automotive Logistics News that it is too early to comment on the logistics details of the new venture but, as well as the challenges of poor infrastructure and lack of proximity to more developed areas, the joint venture needs to overcome the perceived lack of support that logistics suppliers feel they are getting from carmakers in the country. At last year’s Automotive Logistics conference in Russia, 81% of LSPs canvassed said that carmakers were not working closely enough to support partners in the supply chain, while 56% of attendees said that there needed to be better partnership between carmakers and LSPs.
If production capacity is to increase at Naberezhnye Chelny from its current 75,000 capacity to 500,000, the demand for high quality LSPs is a given according to Frost and Sullivan's analysts.
"In particular, outsourcing of auto component production is expected to increase to 60-70% in the future, reaching average  European level, and thereby creating further pressure and also an opportunity for LSPs," say Belskiy and Bustza in a new report on the Russian automotive logistics industry.
This brings further challenges to the Russian automotive logistics industry which is presently affected by a lack of transparency say the authors, and there is the added difficulty of choosing an LSP with little or no market information available, a factor in the lack of trust revealed by last year's conference survey.
There are signs that efforts are being made to tackle the problems in the sector. Gefco, a good example of a quality LSP, is working with the local authority in Kaluga under a new to develop logistics services for local manufacturers. Meanwhile, Russian LSP Major Auto Trans has been running a service since last September that  moves Nissan vehicles across the Russian Federation to authorised Nissan dealers with provision to include them on mixed loads with other carmakers' product. That said, the ability to diversify operations is a problem for LSPs working in Russia as the number of OEMs is limited.
Sollers, for its part, has also embraced logistics quality standards, implementing processes including just-in-time and process standardisation, something likely to continue through its joint venture with Fiat.
The Fiat-Sollers joint venture plans to produce up to nine new models in the most popular classes in Russia (C, D, SUV, crossover). Six will be based on a new Fiat-Chrysler global platform, including the budget-priced Fiat Linea sedan, which will be launched later this year.
It will be Russia's second largest car producer after AvtoVAZ and extends the relationship between Fiat and Sollers, which already assembles vehicles including Fiat’s Albea passenger car and the Ducato van.
Fiat’s 50% stake in the venture would add a potential 250,000 new cars to its annual production total.