Ford-Sollers is planning to increase localisation of inbound materials in Russia from 50% to 55% this year and review its arrangements with tier one suppliers in an effort to cut its logistics spend, the carmaker’s vice-president, Adel Sherinov, has revealed.
Despite its 93% growth in sales in Russia in the first quarter of this year compared to the same period last year, Sherinov said he was not optimistic about future sales growth as the recent devaluation of the rouble had left Ford-Sollers facing rising prices for components. This includes components from tier one suppliers in Russia, many of whom are highly dependent on imports and thus still sensitive to exchange rate movements, he said.
Other vehicle makers like Hyundai and AvtoVaz have already voiced similar concerns – indeed AvtoVaz’s high level of dependence on imported components is understood to be one of the main factors behind its losses in 2015.
"We are working hard on vertical integration,” said Sherinov. “Local suppliers should be integrated into the local supply chain. Experience has shown us that localisation has not been established properly and after devaluation, production costs at local suppliers immediately go up. So we have decided to act, starting with the raw material base and moving to final products.”
In Tatarstan, production of polymers and compounds has already been localised and the company has already moved away from using imported steel, he noted – yielding a substantial benefit.
"Last year, we stopped importing any metals for car assembly, which is important since contracts in roubles guarantee more stability for the operation,” said Sherinov. “As a result, savings from the use of Russian steel and polymers, excluding delivery, is more than 10%. Taking logistics into account, the figure reaches 20%.”
Ford-Sollers cannot indemnify tier one suppliers in Russia from future devaluation issues, he continued. “If a company raises its prices because of devaluation we will start using the global resources of Ford as leverage,” said Sherinov. “We will ask the company to explain why it is not using domestic resources – whether human resources or raw materials – and will insist on them transferring business into localised resources, offering our help in the process.”
Foreign carmakers in Russia have no time to drag their heels on localisation, he stressed, given how different today’s economic environment is to the booming market back in 2012. In November last year, Ford-Sollers announced it was cutting production at two of its plants in Russia for two months and halting production at a third for a month due to market conditions.
Despite recent claims by Russia’s minister of industry and trade, Denis Manturov, that the Russian car market would begin recovering this year, a recent study from consultancy BCG suggested sales volumes – which reached 1.9m units last year – would not exceed 2.2m by 2020. A growing oversupply problem could by then lead to the closure of three to six plants owned by foreign carmakers in the country, it suggested.
Pricewaterhouse Coopers (PwC) has made a similar forecast and Ford-Sollers’ own outlook seems even gloomier: it has suggested sales in 2020 may well stay just around the 2m mark.
The localisation of supply and the prospects for the Russian automotive industry over the coming years will form part of discussions at this year's Automotive Logistics Russia conference, which takes place in Moscow on 28-29 June this year.