When Russia joined the WTO in August, analysts pointed to risks for Russian OEMs as lower duties promised greater foreign competition. Market share leaders such as Lada for passenger cars or GAZ for light commercial vehicles would be vulnerable to European and Japanese imports on quality and the Chinese on price. There would also be pressure on Russian suppliers to be more competitive as raw material and parts duties dropped.
All of the above is generally true, particularly as the duties on LCVs dropped from 25% to 15% on the day of accession (passenger car duty will decline more gradually). But Russian industrial policy always has at least another – often protectionist – angle. For the automotive industry and its supply chain, WTO arrives in the shadows and largely under the terms of Decree 166, the policy agreed with several OEMs on volume and localisation targets in exchange for zero duties until 2018. The big developments are already in train, with GM and VW each investing at least $1 billion in the country up to 2018. Renault Nissan is expected to finalise a deal that will give it majority control of Avtovaz. Foreign manufacturers have also turned to Russian OEMs to help meet targets. GAZ will launch five models for VW, Skoda, GM and Daimler from its Nizhny Novgorod factory by April 2013. It has also partnered with Bosal to build exhaust systems. By this time next year GAZ will be handling 500 truckloads per day of largely imported material at the factory to assemble the vehicles.
While investments and partnerships like these will drive production, supply and logistics in the Russian automotive industry in the coming years more than WTO membership, Russia’s accession will not be irrelevant.
Membership should help simplify trade practices, put pressure on reducing corruption and give consumers more choice. But in automotive at least, its big bang might be less about unleashing a flood of imports and more about encouraging the developments of services, including logistics.
Starting with duties, the WTO impact will be relatively mild in the medium term, at least for new passenger cars. Carmakers that didn’t sign up to 166, like Toyota, are unlikely to find the drops huge, although there should at least be more transparency on future rates. The impact for certain segments, such as LCVs, is more significant, but Russia has mooted a ‘recycling tax’ to cover vehicle disposal, which would be applicable to new and used imports, according to Vitaly Belskiy, analyst at Frost & Sullivan.
“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.“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.”
While acknowledging that the WTO brings competition and margin pressure, GAZ’s president Bo Andersson, a former global purchasing chief at GM, believes that it will push companies like his to focus more on service to customers and business partners, including quality, lead times and spare parts availability, as well as retaining employees.
“When you have more competition you have to show strength on the service side to show you can take care of customers, such as providing spare parts, good warranties and responding faster than anyone else,” he said.
GAZ has put particular focus on vehicle and spare parts logistics, for example. It set strict delivery deadlines to outbound carriers if they are to be paid in full, while Andersson says GAZ’s spare part availability is the best in the country. GAZ is also taking its inbound logistics in house, with plans to move a large share of material within eight hours of the factory using its own assets.
Andersson has even suggested that there could be opportunity for GAZ to move further into business-to-business service territory beyond contract manufacturing by acting as a distributor and even offering logistics services. Its sales network for vehicles and spare parts could be offered to new OEMs, such as the Chinese, looking for a distributor in Russia, a responsibility that would likely include vehicle and spare parts logistics as well. “We have the best dealers, marketing and lead time so anyone looking to distribute cars in Russia, we can distribute it for them.”
Other opportunities could come in logistics services for its contract manufacturing clients. GAZ currently has responsibility for customs clearance and in-plant logistics, but there could be opportunities for more in the future. Finally, Andersson even suggested that, should the Russian government implement a recycling charge and requirement, GAZ could become a “professional scrapper”.
If 166 has helped secure manufacturing and supply chain development for Russian companies like GAZ, WTO should mean that such companies improve services including logistics to better hold onto customers and improve their competitive advantage.