The Russian car market is emerging from the economic downturn and, despite familiar obstacles to be faced, prospects are bright, writes William Ross.
It has certainly been a roller-coaster ride in the Russian auto market over the past five years. After a dramatic, rapid rise in new-car sales in the years up to 2008–and the accompanying scramble to find the logistics services needed in a market not prepared for the volumes involved–sales fell dizzyingly during the financial crisis in 2009, with imports dropping by as much as 75%. Now the ride is zooming back up again, with sales of imported vehicles up by some estimates a staggering 70% in the first quarter of 2011 (although things have calmed down in the second quarter to a still very strong 42%, according to autonews.ru).
But maybe, some say, this time the logistics world might just be a little different. “In the boom years of 2006 to 2008, it was total havoc,” says Søren Jensen, head of WWL Russia. “Importers were simply scrambling to get the cars in, and there was no plan, really, for logistics. The importers were the ones deciding where to discharge the cargo, and from where to distribute into Russia–and it was chaos.”
Now, Jensen says, after the beating the industry has taken over nearly two years, people are taking a more measured approach, and realise that they need to consider more carefully what terminals to use, and to work with more dedicated logistics providers. “Today it’s much more organised; the importers are much more focused on getting their house in order, and more on logistics solutions.” The nation’s infrastructure has also improved. The lack of capacity and services at Russian ports was usually seen as the main issue during the first boom as many opted to avoid them altogether and truck in vehicles from Poland, Germany and ports in neighbouring Finland. Thanks to government and private investment, the ports have been expanded and are better equipped to handle more vehicles. Both roads and rail infrastructure have likewise seen investments, even if the improvements are more evident in Western urban areas.
However, the lack of capacity that was a problem in 2008 is here again in 2011. This time, the story starts with car carriers. “The bottleneck in Russia is the trucks”, says Kirill Petrunkin, CEO of Autotechnoimport, itself one of the larger trucking firms in the country, operating 318 vehicles. “We tried to estimate the number of car carriers that were lost from the market because of the crisis, and figured that some 2,000 were taken out of service, where before we had about 8,000 car carriers in Russia, both for domestic and import.” As the car market fell, so did the demand for trucking. Many smaller companies couldn’t cope and went out of business, with their trucks going back to banks or leasing firms: larger firms put up to a third of their fleets in storage. It’s easy to see why many were in the business in 2008: Petrunkin says that his company’s work was much simpler and straightforward (and profitable). “We only delivered from Hanko, Finland to Moscow,” he says. “The regional dealerships were not very strong, so we were operating in only one direction, and we didn’t have any problems with customs clearance. It was quite an easy business. But the companies were growing in expensive ways. If they had demand, they would just purchase more trucks and hire more people.” When things got tougher, he says, all the operators were overextended, some of them to breaking point.
“For two or two and a half years, our main idea has been to cut costs”, says Konstantin Skorovoda, general director of Russian Transport Lines. “The main challenge now is to change this idea and develop our operations. The problem with the transportation industry is that the majority of leading companies have huge losses from trucks to pay back. But we are heading in the direction of increasing our fleet of car carriers.”
Maria Zaikova, head of corporate communications for the Rolf Group, a distributor and logistics company in Russia, says that her firm also sees a shortfall of some 2,000 to 2,500 car carriers in the market today, with part of the existing fleet “now out of date”. With demand rising towards the end of 2010, it became an increasingly difficult task to get the trucks that had been in storage for up to two years back into operating condition, particularly during the Russian winter, resulting in competition for technical servicing. “Renewing the fleet is quite painful for most logistics operators,” says Zaikova. “They are still recovering from the crisis in terms of profitability, and debt restructuring and the Russian financial institutions still are not offering attractive, specialised programmes.”
That opens the market for more foreign participation, says Uwe Seliger, director of Central Eastern Europe and Russia for BLG Automobile Logistics, one of the major auto logistics players in St Petersburg. “We have to build up a network in the Russian market, the same, more or less, as we are doing in the Western European market,” he says. “We will organise business in the ports, as we have in St Petersburg, we will build up inland compounds for automobile storage and technical treatment for final distribution to the dealer, and we will move into transportation, building up our own truck fleet in order to transport these cars to the market.”
The one bright spot for car carrier operations is a rise in transport rates. “Transportation rates were below the level of profitability in 2010,” says Zaikova. “Logistics operators were forced to offer such rates just to survive. This year rates for land transportation have doubled, or gone even higher in some regions.” This, she says, is allowing them to renew their fleets and to develop terminal services.
Moving to rail
One thing BLG, a major rail wagon operator in Europe, will not be doing for the moment is investing in rail activities in Russia (not least because their existing wagons aren’t compatible with the Russian railway gauge). The distances involved in moving across the expanse of the country should make rail an ideal solution but it remains underused, largely because of a lack of suitable wagons and an unfavourable tariff system. But some are increasingly taking the train. “Rail is advantageous as an alternative way of transportation, especially this year,” Zaikova says. “Rolf SCS uses railway transportation for many clients and directions: Mitsubishi vehicles from Far East ports to Kazakhstan, Mercedes-Benz vehicles from central Russia to the Far East and for Hyundai cars from St. Petersburg to Siberia.” Rolf, it should be noted, has an exclusive agreement to handle Mitsubishi cars until 2014.
While noting the current lack of specialised wagons, Dmitry Nikolev, general director of RailTransAuto (RTA) is upbeat on the possibilities of rail (RTA is a joint venture of state-owned Russian Railways and rolling stock operator TransGroup). The company operates from the port of Zarubino in the Far East, which is owned by TransGroup. “Because we were able to negotiate reduced rates for new vehicle imports from the Asian-Pacific region to Moscow, we have been able to attract significant volumes of new vehicle delivery via the Trans- Siberian railway,” he says. “The damage level for rail is rather low, according to our clients–five or six times lower than using long- and short-distance ship transport and trucking to Moscow, due to the reduced number of transhipments en route. The lead time is quite good, taking only 11 days to reach Moscow versus an additional 15 days by sea. We believe there are very good possibilities for using the Russian Railway network for automobile transport.”
Even truck operator Kirill Petrunkin sees the advantages that rail can–or will–provide. “Rail is definitely the new player in the market,” he says. “Lead time is important, and we do this much better with trucks. But I think the future for rail is in long-distance deliveries. Trucking companies are more focused today on their areas of competence, and we try not to make deliveries of more than 1,400 kilometres. For a delivery to Yekaterinburg in Siberia, it’s much better by train.”
While things are improving, Russia still provides its fair share of frustrations. Asked what was the major challenge in vehicle logistics in the country between efficiency, bureaucracy, transport modes, costs, quality, damage or lead times, the head of one major European carmaker simply said, “The challenges are in all these areas, as we are living in Russia.”
“The main problem in Russia is the relative unpredictability of things,” says Jan Bures, head of group service for Volkswagen in Russia. “There are constant changes in the legal and customs systems, and in the practical usage of infrastructure. These include custom’s desire to apply customs to the domestic leg of imports, the sudden announcement to close down inner Moscow districts for trucks over 7.5 tonnes– ostensibly to protect the roads against wintertime damage– the introduction of a new, very complicated and expensive way of applying for road usage permits in the regions and the politically fuelled Polish/Russian dispute over a bilateral transportation accord, which led to huge queues at the border in February.”
VW has responded, Bures says, by moving to the port of St Petersburg, and increasingly using rail. Despite others’ optimism about improvements in land transport, Kirill Degusarov, manager of material, planning and logistics (MP&L) for Ford, sees a long way to go. “We’re not using trains because they are not yet developed as a logistics system in Russia,” he says. “We have seen the benefit of public investment in road and rail, but it’s mainly massive development around the big cities like Moscow. In the rest of the country the progress is not so high, or is even poor. Some strategic roads such as that from Moscow to Siberia have been modernised, but in general it’s almost nothing, if you take into account the size of the country. It’s definitely not sufficient.”
Getting things into Russia is one area that remains a major frustration for many, despite a personal intercession by Russian president Dmitry Medvedev in 2010. Already ranked near the bottom globally for ease of use, customs procedures have only gotten worse since the last boom.
“Looking at bottlenecks, I would stress the limited number of entry points to the Russian Federation Customs territory,” says Anna Vorobjeva, logistics director of MAN in Russia. “The number of customs offices on the borders is the same as it was before the crisis, while the customs rules make customs clearance not only costly but also very time consuming.” “This is involved with the concept of transferring customs clearance and customs controls to locations close to the state border,” says Wilhelmina Shavshina, legal director and head of foreign trade regulation for law firm DLA Piper. “Frankly speaking, the concept implementation process has attracted harsh criticism from business. Technically, the concept has not even been adopted at the governmental level. The opinions of the Ministry of Transport, the Border Service, the Ministry of Economic Development and governing bodies at the border territory level have all been disregarded”.
This confusion, she says, has resulted in a rise in customs agent fees of 30%, while the cost of temporary storage services has risen between 30% and 300%. “Sometimes you have to wait at the border, especially during periods when a number of domestic cust Rail services have improved, particularly from the Far East thanks to favourable oms stations are closed down,” Shavshina says. “A lot of criticism is connected with the lack of transparent information on the short- and long-term plans of the customs authorities with respect to implementing the concept,” she says. “Look at the situation in St Petersburg, where decisions on the relocation of the customs authorities resulted in tremendous problems for the automotive industry. I know at least one company had to shut its production line because of delayed clearance of components at the new clearance point. In February and March 2010, two customs stations in St Petersburg suddenly stopped carrying out customs clearance, and over 100 companies had to change their logistics schemes quite unexpectedly.”
“The investments being made in the ports are necessary, as we have to increase and enlarge our facilities,” says BLG’s Uwe Seliger. “But we also have to be careful and be aware that, of vehicle registrations in the Russian market, only 30% will be imported. The rest will be produced in Russia. So on the importing side, you won’t need as many car facilities in the port. Maybe in the future Russians will be exporting their cars, and then we will need more facilities, but it’s not necessary now to focus only on automobile imports.”
Even though Seliger foresees growth tapering off to some 15–20% in the coming years, BLG’s forecast is that the market will need 7,000 to 8,000 more car carriers to meet demand. The foreign manufacturers are also increasingly localising operations. “Not only light vehicle but also heavy-vehicle producers are establishing production in the Russian market, and among the latter is MAN,” says Anna Vorobjeva.
Renault established a strategic partnership with top Russian manufacturer Avtovaz in 2008, and it is bullish on its prospects. “Renault has been the number-one foreign carmaker in Russia since March 2011,” says Jean-Philippe Jouandin, supply chain director. “Russia should be Renault’s number four market by 2013, and its number one if you include the Lada volumes,” referring to the Avtovaz model which remains Russia’s top-selling car.
Ford, too, has created a new venture with Russian maker Sollers. The company will manufacture passenger cars and light commercial vehicles in the St Petersburg region as well as in the Republic of Tartarstan. The latter, Ford’s Kirill Degusarov says, will provide logistics and cost advantages. “It will give us quite a competitive level in comparison with other companies because we are going to make a massive localisation, including engines and transmissions,” he says, noting the new research and development facility the joint venture has established for localised parts in Tartarstan. “If we manufacture and distribute vehicles in the middle of the country, then the price will be lower. We expect good progress in expanding our sales in the middle of the country, and not only in Moscow and St Petersburg.”
So in a new boom time, many things are changing for vehicle logistics in Russia, just as the country and the auto market is changing and developing. While the frustrations and bottlenecks are still there, so is great potential. “Russia is a very challenging, just as it was before the crisis,” says Konstantin Skovoroda. “There are many opportunities because everybody needs capacity. We still have many customers who will be ready to buy cars, to be involved in this business, and there are many things to be built, such as assembly plants. This market is again becoming very interesting, and very promising. I’m optimistic, as usual!”