Logistics, customs clearance and Russian industrial policy will play critical roles in the on-going modernisation and success of Russia’s GAZ Group in the coming years, according to its president, Bo Andersson, the former global purchasing and supply chain chief for General Motors.
Speaking to Automotive Logistics during the Automotive News Europe Congress in Cologne, Germany last week, Andersson said that logistics would be particularly important to GAZ’s contract manufacturing operations at its car factory in Nizhny Novgorod. The company has signed agreements with GM to produce 30,000 units a year and also with Volkswagen to build 110,000 units a year.
Andersson said that GAZ would carry out the logistics in partnership with the OEMs. “Logistics will be critical to the efficiency of our contract manufacturing,” Andersson said. “I have already hired several logistics experts.”
Since taking over tenure as president of GAZ, majority owned by Oleg Deripaska’s Basic Elements, Andersson put an end to GAZ-brand passenger car production, which had a tiny market share but built the iconic, Soviet-era Volga. The group is now focused on its core, light commercial vehicles, trucks and buses, for which it is Russia’s largest manufacturer. Along with GM and VW, the company has also signed agreements for light commercial vehicle (LCV) production with Daimler and China’s FAW.
Andersson pointed in particular to customs clearance as critical, as the contract manufacturing operations will require a high amount of imported content. Importantly for GAZ, it is certified to do customs clearance itself.
“We will carry out these operations in house,” he said.
Building a modern supply chain
GAZ’s own supply chain displays a significant amount of variety and complexity depending on different models and vehicles. For many vehicles, the supply chain is nearly 100% vertically integrated, while for other vehicles, such as newer bus models, the company is more of a coach builder, with engines imported from MAN and chassis from Scania.
Andersson told Automotive Logistics that GAZ currently leaves most logistics responsibility in the hands of its suppliers, rather than as ex-works or on FCA incoterms. “In the short term, we are having more success with our suppliers handling the logistics, but in the long term we will see how that changes,” he said.
The group’s supply chain also has some notable flexibility. Andersson said that GAZ produces about 500 LCVs per day, completely customised, and delivered between two and seven days.
As GAZ looks to grow with the expanding Russian market–expected to surpass Germany in vehicle sales by 2015–Andersson’s vision for the group and its future supply chain looks to combine Western quality and efficiency standards adopted to Russia’s more hierarchal and state-driven traditions. Andersson said that “driving manufacturing discipline” should be at the heart of the Russian government’s industrial policy, and he told delegates that this is something he regularly tells Vladimir Putin, Russia’s powerful prime minister.
But the trade and manufacturing policy of the Russian government appears to be having a mixed impact on the domestic industry’s competitiveness. Andersson pointed to the 30% duty placed on raw material imports such as steel and tyre, which make tyre costs “totally unfair”, he said. At the same time, domestic raw material quality is poor.
Yet while the Russian government is holding import duties for cars at 30%, there is currently no duty for imports of construction equipment and buses. “We feel the pain of this policy,” he told delegates.
Likewise, he pointed out that used trucks from Western Europe make up to 10% of the market.
Perhaps more importantly, Andersson questioned policies that may hold back Russian manufacturing from modernisation and “industrial discipline”. The Russian scrappage incentive, for example, may have propelled sales volume but it has effectively bailed out domestic carmakers, such as Avtovaz’s Lada, that still produce poor quality, out-of-date cars. “The Lada is exactly the same car it was 25 years ago, but the scrappage incentive allows customers to buy it with a new lick of paint,” Andersson said.
Andersson also pointed to Russia’s lag in regulation, such as the Euro-4 engine standards for trucks now pushed back to 2012. Likewise, he said there were around 1m, very old buses still on the road in the country, although he admitted that a truck and bus scrappage incentive might be in the pipeline.
More discipline from government
Thus far, Andersson’s focus on efficiency and the bottom line appears to be yielding results for GAZ. Since he took over as president, the company has shed around 37,000 workers and 10,000 managers, while moving from the brink of bankruptcy in 2009 to a profit of $74m last year. Majority state-owned companies, such as Avtovaz and Kamaz, he claimed, “were rich enough not to layoff anybody”.
But Andersson, who graduated from the Swedish military academy and admitted that he enjoys some of the traditional Soviet traditions in Nizhny Novgorod, sees a clear role for government policy to play in strengthening Russia’s manufacturing base. He even questioned whether the Russian government would be active enough in pushing foreign manufacturers to localise their supply chains in Russia as aggressively as promised. Several major carmakers, including GM, VW and Renault, signed decree 166 earlier this year, which set targets of producing 300,000 vehicles and sourcing 60% of components in Russia. However, Andersson said that several companies had nevertheless “snuck in” with significantly smaller manufacturing plans than those set out in the decree, such as Fiat and Mazda.
Even the previous, less-stringent measures (in effect until 2018 for those that signed them), which called for around 25,000 units per year and 30% localisation, the Kremlin allowed companies to take the position of “localising later”, Andersson told delegates. For Decree 166, the government would have to show considerably more discipline. 
Outbound concerns
Turning back to this year, Andersson told Automotive Logistics that one of the biggest challenges for the Russian market remains outbound logistics, as the market faces an acute shortage of trucks. “I know that many OEMs are even considering starting their own fleet trucks,” he said.
However, Andersson said that GAZ was not considering such an investment, as the vehicles in its product mix, which includes LCVs, trucks, buses and military equipment, have different transport needs. Many trucks are driven on their own axles to final destinations, while a high proportion of military equipment is put on the rail.
Overall, Andersson said about 10% of its vehicles move by rail, however he did not see significant scope to raise this proportion, particularly as the lead-time for its LCVs are critical. “We have lead times between two and seven days for our LCVs, and the rail would mean at least two weeks,” he said.