Restrictive price structures, poor infrastructure and capacity shortages must be addressed if Russia’s railways are to carry its share of the vast country’s increasing vehicle demand.
Considering Russia’s size, railways would seem to be the ideal mode for long distance transport. While rail has certain competitive advantages over truck—not least a subsidised rate for Russian-built vehicles to Far East destinations—long distances alone do not ensure its feasibility. As a sector it is still largely state run and is not altogether geared toward serving the market’s needs. Carmakers also complain about uncompetitive pricing.
On the other hand, rail transport is growing, particularly to regions such as central Russia, the Urals, Siberia and the Far East that are several thousand kilometres from factories and primary import areas—in this respect, rail is unavoidable.
According to Alexander Larin, CEO of logistics service provider Rolf SCS, rail transport becomes efficient in Russia when the distance is more than 2,500km and the quantity of vehicles transported is more than 256 units compared to a range of 500km-800km in the rest of Europe.
Jean-Philippe Jouandin, director of Renault Nissan Alliance Russia, says it uses rail for long distances such as the 2,000km from Moscow to Russia’s fourth largest city, Yekaterinburg, toward the centre of Russia. “Trucks could handle only two or three loads per week round trip,” he says.
Russia’s rail transport network consists of 5,300 fenced wagons that serve the automotive sector. JSC RailTransAuto (RTA), Russia’s largest railway carrier, operates a fleet of 3,000 specialised double-deck rail wagons and supervises more than 60% of Russia’s vehicle rail transport. It operates a network of auto terminals, including ones in Minhevo, near Moscow; Zarubino, near North Korea; Chernyakhovsk, near Kaliningrad; Novosibirsk, in central Russia and Yekaterinburg.
RTA offers delivery between the Far East and Moscow, which takes ten days for a block train. It transports Mazda vehicles from Japan to Moscow and, since November, also ships them regularly to Novosibirsk. Last year, Subaru and Hyundai began using the same route, according to Sergey Diakonov, deputy general director for business development. Along with rail, RTA offers integrated transport by truck to dealers. “For example, shipments would go to a consolidation terminal in the region, such as Novosibirsk, and then we would truck the vehicles to dealers in regional cities such as Abakan, Achinsk, Barnaul, Biysk, and Kemerovo,” he says.
DB Schenker Rail Automotive connected its trans-European Automotive Railnet with Russia in 2010 via a finished vehicle cross-dock in Malaszewicze, Poland. Its main supply chain provides finished vehicle transport from central European OEMs to Minhevo, including the Volkswagen Group, which began using the Polish terminal last year.
Beginning last year, DB Schenker and its partner RTA also developed destinations in Kazakhstan, Novosibirsk and at the Russian/Chinese border in Manzhouli, China. Peter Büsing, COO, Schenker ATG, says that a lack of ro-ro shipping capacity for China could provide an opportunity to serve China by rail through Russia.
Rolf ’s main routes are from Zarubino, in the Far East, to Almaty, Kazakhstan, for which it ships 300 Mitsubishi vehicles monthly. It also ships between 1,500 and 2,000 vehicles monthly from Kaliningrad where BMWs are assembled, to a central warehouse in Lobnya in the Moscow suburbs. Rolf uses rail for 10% of its monthly vehicle volume on average, which equals approximately 2,300 units. For its Kaliningradto- Moscow route, rail moves about 85% of the volume. “In the mid-term, rail may grow to handle 20% of our volume,” Larin says. He adds that the company is targeting more rail to regions such as the Urals, southern Russia, the Far East, and Siberia.
According to Jouandin, Renault’s average transport distance in Russia is 1,000km. Markets that are more than 2,000km from Moscow represent about 40% of Renault’s stake and include central Russia, the Urals, and Siberia, all of which are growing markets and are the best prospects for rail transport.
“For Renault to use rail, the price should be close to that of road for door-to-door delivery, and even cheaper for long distances. The government-influenced price for rail is generally more expensive than for truck—rail costs 20% more than truck on average, except for subsidised shipments,” says Jouandin.
Jouandin adds that rail requires longer waiting times to dispatch loads of vehicles compared to truck. “For Far East shipments, we must wait to fill the wagons. We also need more accuracy in the management of deliveries when loading and unloading rail wagons,” he says. “Rail providers need to reorganise departures. Furthermore, we need different documents for road and rail, so this needs to be simplified and optimised.”
Were Renault able to combine its Russian-built vehicles and imports in the same wagon, it could decrease the time it takes to build a load for Far East shipments. However this would result in the carmaker paying full price for rail transport— even with nine domestics and one import in the same wagon, the load would count as imports and not be subsidised.
But subsidies alone don’t make rail competitive in Russia. For local production of the Logan model shipped from Moscow to Vladivostok, although Renault pays only for documentation and trucking to and from the rail station to the dealership, this transport represents less than 1.5% of Renault’s total volume in Russia.
Since the manufacturer’s Russian dealerships tend to be large, Jouandin says that, in the short term, it would not need rail hubs for transhipping small quantities. It is more efficient to deliver directly to the dealer two or three trucks per week. However, in central Russia, Renault operates 20 smaller dealers that order five or fewer cars per month. Jouandin says that regional rail hubs could work for these smaller markets, although it could take up to a decade for volume to grow sufficiently for rail to be feasible.
At Ford Sollers Holding—Ford’s joint venture with the Russian OEM—Natalia Petrenko, vehicle logistics, strategy and network planning director, says Ford transports its finished vehicles by rail mainly to remote regions in the Far East, Siberia, and to some cities in the Urals. “Although we use rail for not more than 15% of our total volume, the cost is quite significant due to the long distances involved,” she says.
Among Ford’s objectives is to achieve the right balance between delivery cost and delivery time. “We use rail only if the freight cost is cheaper than by truck,” explains Petrenko. “Even if rail is a bit cheaper than truck, we still need to consider the long delivery time involved. Optimising our network is also important. For example, ideally, the rail dispatch compound should be near enough to the production line and the import routes.”
Ford’s main import route to Russia is by short sea to St Petersburg and by road for shorter distances to the dealerships. On average, Ford ships cars from its St Petersburg plant within 24 hours from the gate release, moving 15% of its production volume by rail. “We increased our use of rail somewhat a couple of years ago by using Russian Railways’ governmental programme that offered preferential tariffs for delivery to the Far East and some other distant locations for locally-manufactured products. Since we have limited purchasing power in these regions, this is an attractive opportunity for us,” says Petrenko.
She adds, however, that railway tariffs are generally uncompetitive. “If Russian Railways were to offer tariffs that are more liberal to the business, then definitely OEMs would be interested in increasing their railway portion, which would also require larger fleets,” she suggests.
A factor that could contribute to more rail transport is that the sales recovery in Russia, following the crash, has led to constraints in truck transport. Kirill Petrunkin, CEO of trucking company Autotechnoimport (ATI), says that as local plants began to develop rapidly, outbound logistics became a challenge.
“The truck fleet was unprepared for the transportation of flows within Russia. The demand for rail transport, especially to or from the Far East, has been growing as the flows increase. This is because truck delivery, even to large cities such as Irkutsk, is a challenge similar to the Paris-Dakar Rally,” he says.
Petrunkin says that rail is performing well for imports to Moscow from Poland. “The development of rail compounds in the Moscow region will increase the competitiveness of rail. However, truck still dominates in lead-time for final distribution and for delivery security,” he states.
Rolf ’s Larin points out that as the need for transport between the Far East and central Russia has grown during the past two years, rail transport is becoming more viable. RTA’s Diakonov adds that as the Urals, Siberia, and other regions buy more cars, logistic companies will need to upgrade their networks and offer new routes and facilities in regions.
According to Larin, these regions accounted for about 55% of the new foreign car sales volume last year, or 1m units. He believes that as this volume increases to 2m, rail will become much more efficient in terms of costs and delivery time.
Local vehicle production is also increasing rail demand. Along with international shipments, Diakonov points out that RTA transports large volumes of vehicles from rail stations located near vehicle plants in Russia. For example, it loads vehicles from the Avtovaz plant at Togliatti and from Avtotor’s plant in Kaliningrad to Moscow.
Pricing and investment
As sales and production volume increase in Russia, there appears to be a growing lack of adequate rail equipment in Russia. Says Jouandin: “We need rail providers to invest in new wagons. Due to the equipment shortage, we cannot shift 15% of what we would like to by rail.”
Petrunkin says that poor infrastructure has limited the development of rail transport in Russia. Different track widths connecting the European Union to Russia are a limitation for import operations that require a long lead-time.
For Ford, the main challenges are poorly developed infrastructure and few service providers that could support the door-to-door services for vehicle distribution that meet the industry standard, according to Petrenko. The small number of stations with ramps for handling vehicles is also an issue. “There are no proper rail hubs to support short distance shipments,” she says.
Furthermore, the small volume of vehicles in turn influences pricing. “Since Russian Railways is a monopoly that owns all of the tracks, transportation tariffs are unpredictable,” says Larin. “Rail can be competitive with truck in capacity and price if there is a stable flow. However, tariffs need to be controlled within the next five years, or rail would be unable to compete with truck on price.”
RTA’s Diakonov admits that as the government regulates rail tariffs, prices on rail delivery are inflexible. Yet, he is optimistic that the present situation will improve for rail deliveries and predicts that as Russia’s automotive sector grows, rail transport will become more effective. “We hope that after Russia joins the World Trade Organization [as it is scheduled to do this year], the market share of finished vehicle transportation by rail will rise to be on par with that of Europe’s at more than 25% of the volume moved.”
For Ford, vehicle handling and IT requirements for rail suppliers in Russia must meet its corporate standards. “We are acquainting and upgrading our logistics partners with our standards,” explains Petrenko. Ford completed a railway tender early this year and switched to Optima TransAuto, one of Russia’s biggest rail service providers and fleet owners.
Optima TransAuto also works for Sollers moving cars westward from its Vladivostok plant, giving Ford the possibility of using backloads from St Petersburg to eastern regions. Ford is also using wagons more effectively from a new dispatch compound at the port of St Petersburg. Petrenko adds that Ford is using per-model tariffs instead of the previous per-wagon tariffs.
With growing sales, rail is an opportunity for moving vehicles in Russia. However, service and pricing obstacles have hindered its use—particularly for imported shipments. Solutions may come from liberalising price structures, which would make medium-distance movements more amenable to rail. Infrastructure and capacity development is also essential to realise rail’s potential in Russia.