Regardless of unpredictability in vehicle sales, Russia needs more investment for vehicle logistics.
Russia’s automotive growth in recent years, coupled with government incentives for local production, led many OEMs to set up shop in the country. More domestic production has rebalanced the Russian finished vehicle logistics network away from being primarily orientated for imports. However, until recently at least, import volume has been reasonably strong, with some carmakers and providers fearing the potential for a shortage of port space and truck capacity.
Although the Russian market is flat and currently forecast to decline about 5% in 2013, much of the production capacity expansion that had been set in motion several years ago is now coming online. Renault and Nissan have begun production at an Avtovaz plant in Tolyatti, while Gaz is building Chevrolet, Volkswagen and Mercedes vans in Nizhny Novgorod. In 2014, Volkswagen will also expand its facility in Kaluga to accommodate production of the Skoda Rapid – the plant currently produces approximately 225,000 cars and 8,600 VW and Renault trucks per year. GM has expanded its plant in St Petersburg, while Hyundai’s plant in the region has recently begun Kia production as well.
Chinese brands are growing fast too, according to Alexander Larin, CEO of Rolf, a Russian logistics firm in which NYK recently took a 51% stake. Larin highlights the new Derways plant in Karachaevo-Cherkessk, near the Black Sea, which is building Lifan, Haima and Geely, all Chinese brand vehicles. UAZ has also signed an agreement to produce the Chinese BAW brand in Ulyanovsk, near Tolyatti.
The Russian government has supported, if not directed, much of this local production. Its Decree 166 calls for the building of 300,000-350,000 units per year in Russia. It also introduced a ‘recycling fee’ on all imports last year, widely seen as a way to claw back the loss of import duty required as criteria for joining the World Trade Organisation in summer 2012.
This increase in Russian production has been spread across the country’s central and eastern regions, which has led to increased distances for vehicle logistics to primary markets in the west, and therefore higher costs and pressure on truck capacity. However, some providers also see opportunities to become more creative in their routing. “On one hand [the longer distance] complicates management, planning etc. On the other hand, it gives us opportunities to be more efficient and more ‘creative’ in our business,” says Alexander Zhuravlev, CEO of Major Auto Trans.
He points, in particular, to the opportunities for finding more empty backhauls now that Russia has more cross-flows. Renault Nissan is also taking a similar approach by balancing its flows between production in the west in Moscow and St Petersburg, with those coming out of plants in central Russia (read more).The increase in home production is also likely to reduce the percentage of imports as a share of the market. However, until the market levelled off this year, imports had been rising along with total vehicle sales.
“The forecast is for 1.1m vehicles to be imported over the next year - more than the number imported into China,” says Axel Bantel, who had been head of commercial in the European region for WWL before recently taking on a new assignment in Asia at the company.
“Demand for new vehicles is still increasing in Russia,” agrees Uwe Seliger, director of Central and Eastern Europe and Russia for BLG Automotive Logistics. “And one third of vehicles sold are still imported.”
However, the combination of sluggish sales this year and new capacity coming online could mean a fall-off in imports. An executive from one manufacturer predicts that its imports to Russia will fall by tens of thousands in the coming years.
OEMs and their logistics service providers rely on a number of routes into Russia. The Baltic, historically the main entry route for finished vehicles, remains the most popular because its two main ports, St Petersburg and Ust-Luga, have the greatest capacity and the most suitable facilities. The Russian government wants Ust-Luga to become the biggest port in the region as part of a push to move more traffic away from St Petersburg port, which is located close to the city.
Russian logistics company RTL is working on the third stage of its Novaya Gavan Terminal, which is 14km from the rest of Ust-Luga, but still considered part of the port. Over €71m ($94.5m) is being invested to increase the depth of water to 12 metres and extend the quay to 265 metres. The work is due to be completed at the end of this year or early in 2014. Around €44m has already been spent on the new ro-ro terminal.
Even this may not be enough to satisfy demand, though. “St Petersburg and Ust-Luga have been building capacity,” says Søren Jensen, head of Russia at WWL, which opened a Russian office in 2011. “But they are still tight for space. Ust-Luga has more potential for expansion because it is not in the city, but we still use Kotka, in Finland, as well as Russian ports.”
Most car carriers use feeder services such as United Europe Car Carriers from major ports like Hamburg and Rotterdam, as Jensen explains. “It takes too long to get a big ship into St Petersburg, for example, and our vessels are not built to cope with ice, so we couldn’t serve Russia in the winter.”
"I’m sure the Black Sea will become an entry point. There are huge demands for imports via this route but because there are no facilities, there is not currently much volume" – Uwe Seliger, BLG
Black Sea priorities
Feeders, including Neptune and NCC, also serve Black Sea ports, a region that manufacturers have expressed interest in, but have so far failed to find a suitable Russian port. The Turkish automotive industry favours this route but, as Koray Igcioglu, director of Omsan Lojistik in Russia, comments, “vehicle imports are not the first priority” for ports on the Russian Black Sea coast.
“More automotive logistics ports are needed in the region,” says Igcioglu, “but no one is doing anything about it. As the winter Olympics takes place in Sochi, Russia, next year, we don’t expect any improvement until at least 2015.”
WWL’s Jensen says a small ro-ro port is being built at Taman in the Black Sea. “But this is aimed mainly at ferry traffic and won’t replace any existing port on the Baltic,” he says.
The Russian Black Sea ports are important gateways for container imports and bulk exports and port authorities don’t seem to see much incentive to take land away from this traffic to give to car terminals, which require so much space. Ukrainian ports on the Black Sea, such as Illychevsk, offer alternatives but face limited infrastructure and border issues.
Omsan moves cars into Illychevsk but faces delays and other problems at the border. Strained relations between Russia and Ukraine also cause difficulties: when Russia introduced the recycling fee for imports, the Ukrainian government did the same – but only for Russian-made vehicles.
“I’m sure the Black Sea will come [as an entry point for finished vehicles],” says BLG’s Seliger. “There are huge demands for imports via this route but because there are no facilities, there is not currently much volume.”
Rolf and Gefco are both turning to Novorossiysk on the Black Sea. Rolf’s new service begins this summer as the first stage of its Black Sea development. “We will initially offer this service for cars produced in Turkey for the Russian market,” says Larin, “but the route is also attractive for cars produced in Asia for the south, central and Volga regions of Russia. It will be of particular benefit to customers who tranship via Giao Tauro in the Mediterranean, of which NYK has a share.”
Gefco opened its Novorossiysk service in December for Peugeot-Citroen cars, opening an office in Krasnodar to run it.
Trucking from Europe still accounts for some import traffic and although Russia’s extensive railway network might appear to offer an ideal option for transporting automotive traffic to the country. But different gauge widths mean that imports are often railed only as far as European hubs, at which point vehicles are transferred to road trailers.
“Rail is too expensive,” says Edward Karibov, outbound logistics director at Ford Sollers. “In Europe, rail is competitive over 500km; in Russia, it’s only competitive when you are moving goods 3,000km or more. Rail only takes about 10% of our volume, all to the Far East of Russia.”
WWL, which is slowly developing a full multimodal logistics service in Russia similar to that offered in Europe, uses rail only for high-and-heavy cargo. “We use road for inland distribution from St Petersburg and Kotka,” says Bantel. “We would only use rail for distances of at least 1,500km. We would offer a rail service if asked, but there has been no demand for one as yet.”
A lack of rail wagons and rate instability make rail even less attractive. “Most OEMs want rate stability for at least a year,” Bantel continues, “and the railways don’t offer that.”
A majority of the rail used in Russia is to and from the Far East, such as vehicles moving on the trans-Siberian railway from Japan, or the movement of cars from plants in the west to cities such as Vladivostok.
These volumes are relatively small but things could change now that Gefco is a subsidiary of Russian rail monopoly RZD. “We now have more opportunities to provide logistics solutions by rail,” a company spokesperson says by e-mail. “Our Domodedovo compound has its own railway connection and handles vehicles transported by rail from the Far East.”
Ports lack rail infrastructure, too. “They are working on it,” says Krzystof Szeligowski, key account manager at Adampol, the Polish logistics company which set up Vectura to handle inland distribution in Russia in 2003. “But it takes so much time to get anything done in Russia, I can’t see rail services being good enough for another ten years. We move vehicles from our Malaszewica hub in Poland through Belarus, which is just a 16-hour drive away.”
BLG is looking to rail for future development but currently relies on road. “When we decided to build our network in Russia, we invested in port terminals, trucks and inland depots,” Seliger explains. “Our key investment in rail won’t come for another 5-10 years. Our rail volume is very small in Russia anyway.”
Instead, BLG is expanding its own road fleet to 300 trucks by 2015. “We want 70-80% of the trucks we use to be our own assets, as we don’t want to depend on third parties so much,” he adds.
Twists in the road
Although road transport is more stable, with rates even dropping in some cases, it is not without its own problems. Congestion around major cities causes difficulties and winter weather can lead to delays. The long awaited Moscow-St Petersburg motorway is yet to be finished – as Szeligowski noted earlier, it takes a long time to get anything done.
Restrictions on lorry movements in Moscow also cause headaches. Heavy goods vehicles are not allowed to cross the city using the ring road before 10pm during summer months and logistics companies fear this ban may extend to trucks delivering into the city. “The only choice is for dealers to accept night-time deliveries or for us to use the smaller vehicles which are allowed,” says BLG’s Seliger.
Seliger believes the Russian market will still grow in spite of these restrictions, eventually overtaking Germany as Europe’s largest new vehicle market. Logistics companies are trying to prepare for the future with expanded fleets and more multimodal distribution. At Ford Sollers, Karibov is looking at the potential of developing car compound distribution centres around the country – perhaps one near Moscow and another further east – to facilitate logistics.
But for the finished vehicle market in Russia to thrive, it needs much more investment. “There is enough capacity at the moment,” says Karibov, “but I think availability will be a big issue in future. European carriers aren’t involved in Russia and aren’t allowed to operate here anyway. Rail is increasing slowly but is still too expensive, while the car carrier fleet is aging. Companies aren’t investing or anticipating growth and with slim margins, it’s hard for them to think about this.”
Elena Fedorovskaya, head of car logistics at Volkswagen Russia, agrees. “There is not enough development of logistics infrastructure for handling finished vehicles,” she says. “We need more compounds, rail terminals, sea ports, roads.”
The question is who is going to be the first to put their hands in their pockets – and when? With the market outlook uncertain, manufacturers could be left waiting out in the cold next winter – and in Russia, that is very cold indeed.