After more than 19 years of negotiations, the Russian Federation has today become the 157th member of the World Trade Organisation (WTO). With reductions in import tariffs part of the accession, including those for vehicles, components and raw materials, the impact is expected to lower prices for consumers, increase global trade for Russia and make the supply chain more competitive. By opening the door to more foreign investment, carmakers, tier suppliers and distributors in Russia could also benefit from increased investments.
“The Russian consumer will benefit from more products, better products and at better prices for every type of consumer item, not just cars,” said Bo Andersson, president of the Gaz Group, Russia’s largest manufacturer of light commercial vehicles (LCVs).
However, Russia’s domestic carmakers and manufacturers, including Gaz, could face pressure on sales and margins as protective tariffs are lowered, particularly in segments where the reduction is faster, such as LCVs. Low-cost competitors, such as those from China, India and South Korea, along with Western brands, are likely to bring strong competition to Russian OEMs.
Andersson nevertheless believes that joining the WTO will offer at least as many opportunities to Russian manufacturers and Gaz, particularly in the global purchasing and import of components as well as in improving service in the aftermarket. “We are a large buyer, spending €2 billion per year,” Andersson said at a meeting with journalists in London. “With WTO we can get more competition and we could get less duty for components.”
Furthermore, the Russian government appears intent on continuing to safeguard and develop its domestic manufacturing base. Russia negotiated a gradual decline in duties for most vehicles to maintain its current industrial policy, Decree 166, which grants duty-free parts imports for carmakers that meet local production and sourcing requirements. The government also appears to be considering other protective measures for its domestic industry, including a ‘recycling tax’ that looks set to hit imported vehicles with fees that would largely replace the drop in import duties.
According to a recent report by Troika Dialog, the largest private investment bank in the Russian Federation, tariffs on new passenger cars will change gradually over the next six years, starting with an immediate drop from current levels of 30-35% to 25% and a further reduction to 15% on full compliance by 2018. Tariffs on new imported LCVs, however, drop from the current 25% to 10% on accession and down to 5% once full compliance is met. Import tariffs on used LCVs will fall from 30% to 10%.
On the transport side, the average tariffs on shipping and transport equipment is 8.3% (though it can be as high as 20%). This will drop to an average of 7.6%. This applies to a wide range of transport equipment such as containers and handling equipment and, according to the Troika report, should benefit companies operating ports and in other areas of the transport sector that imports equipment or where domestic equipment will have to be priced lower to compete with imports.
Gaz rises to the challenge
Troika Dialog predicted a negative impact in particularly for Gaz, which has a 50% market share of the domestic LCV market. The bank expressed more optimism for Russian carmakers that it believes will benefit from foreign direct investment, such as Renault Nissan’s investment in Avtovaz, maker of Lada, and Sollers joint venture with Ford.
Andersson acknowledged that the reduced import duty is likely to “hit our LCV business hard”. He expressed relief that other segments of the Gaz Group would be less affected or even benefit, however, including buses and trucks, vehicles in which Gaz is also the leader in Russia and which will see no change in duties. Furthermore, Gaz is currently in the ramp up stage for launching five models by 1 April 2013 as a contract manufacturer, with agreements to build vehicles for Skoda, Volkswagen, Chevrolet and Mercedes-Benz by next year, carmakers who all stand to benefit from both the WTO as well as by having signed onto to Decree 166.
Andersson, who is GM’s former global purchasing chief, also pointed to current duties of 20% on items such as tyres, plastics and chromes. “Lower duties on these items will force Russian suppliers to be more competitive.”
Finally, he even suggested that WTO membership could present Gaz with other business opportunities, particularly as a distributor for vehicles for other foreign brands. “We have the best distribution network in Russia,” he said. “We have the best dealers, marketing and lead time and so anyone looking to distribute cars in Russia, we can distribute it for them.”
Andersson told Automotive Logistics News that he was thinking specifically of Chinese vehicle brands that do not compete directly with Gaz.
Acting as a distributor would likely mean Gaz would assume not only sales but also outbound logistics and spare parts distribution, both areas in which Andersson believes Gaz to have a strong competitive advantage. “We have an order-to-delivery time of just two weeks for many customers, compared to three months for a Chinese, Indian or Korean manufacturer,” he said.
He also claimed that Gaz had the best spare parts availability rate in the country, with 96% of customers able to have their vehicles repaired on the same day (up from 50% three years ago). “Our spare parts is 25% the cost of a Ford Transit spare part, and we purpose brought it down because we didn’t want the Chinese to grab at our spare parts business,” he said.
Russia maintains protection
Manufacturers have questioned what the full impact of WTO membership would be on Decree 166, which requires established producers to build 350,000 vehicles per year, new entrants to build 300,000 and localization to reach 60% of content. Although agreements are fixed until 2018, the Russian government has now said it may have to prematurely change some of the existing contracts that would have lasted until 2020.
According to Vitaly Belskiy, automotive and transportation consultant at Frost & Sullivan, the Russian government will most likely choose an option to subsidise foreign manufacturers in 2018-2020 to the extent of possible losses linked to the removal of tax benefits.
“It means that when preferential import tariffs are eliminated, which will happen on the 1st of July 2018, when the transitional period ends, those foreign manufacturers which signed Decree 166 will receive subsidies until 2020 which will allow to offset negative effects of higher custom duties imposed on imported components,” he said.
Besides protecting Decree 166 requirements, the Russian government has sent further signals that it intends to protect domestic players during the transition phase, including an attempt to improve the situation for SMEs, specifically relating to developing the local supply base in Russia. According to Frost & Sullivan, some of the key measures introduced by the government could include subsidizing R&D activities, financial support towards implementation of quality control systems and the launch of management training programmes.
Recycling charge: an import duties by another name?
The Russian government is also set to introduce a new vehicle recycling tax that goes into affect in September this year designed to remove older, more polluting vehicles from the road and fund the $2 billion the country needs to invest in adequate vehicle disposal infrastructure. Each vehicle will be subject to a tax covered by the carmaker or importer and designed to cover the cost of recycling. However, the carmaker will not have to pay the tax if they undertake to dispose of the car according to the required standards at the end of its lifecycle.
Some commentators have ventured that because it will be difficult for a foreign carmaker without a base in Russia to do this, the law puts those wishing to import vehicles will be subject to the tax while Russian-based carmakers can exploit the loophole. There is also speculation that the fees will extend beyond importing used cars into the country to include new imports.
Frost & Sullivan’s Belskiy is unequivocal on the point. “In fact, recycling fees are specifically designed to replace import duties and protect the domestic market,” he said. “Otherwise several segments, e.g. heavy duty, would face massive challenges to stay competitive when lower tariffs are introduced. The bigger question is whether the Russian government will be able to manage those additional revenues effectively to support the automotive industry.”
Belskiy went on to say that the recycling fees are expected to offset the threat from competition as a result of the 10% import tariffs on diesel LCVs. He said that the fee for a new LCV with a gross weight of 2.5 tonnes will reach around $4,300.
Denis Schemoul, analyst on Europe Vehicle Production Forecasts at IHS Automotive, agrees that the new recycling tax effectively applies only to imported vehicles (new and used) and largely offsets the changes to import tariffs following the WTO accession, especially for entry and mainstream vehicles.
Andersson, however, indicated that Gaz was not planning its business around such recycling fees for vehicles younger than three years old. “What you will see on scrapping fees will make it very difficult to bring in three-year-old passenger cars, LCVs, buses and trucks – that will not be a viable business [in Russia].”
He called such recycling fees “another can of worms” and declined to comment further on whether the Russian government would implement them more universally. But he did point to obvious benefits to Gaz if they were, including the company becoming a “professional scrapper” itself.
“We are planning our business without scrapping fees. If scrapping fees comes, it will benefit us and we will take it,” he admitted. “We are not looking at this today, but it could even be a good business for us to be in, to be a professional scrapper.”