Hitting the bottleneck
The themes that dominated most sessions at this year’s Automotive Logistics Russia Conference were familiar ones. In an undeniably booming market – nearly 1.5 million cars are expected to be sold this year, and more than two million by 2011 – everyone is looking to find their way in. The routes going through St Petersburg, Finland, the Baltic, the Black Sea and Asia are all developing but there is still a lack of capacity and modern facilities, and imports are often delayed by Russia’s difficult and highly bureaucratic customs system.
Rail solutions are on everyone’s mind, though a dilapidated infrastructure and high tariffs mean very few are using it. And with many major OEMs now planning to or already producing in Russia, doubts remain over whether logistics can sustain a lean model of production and supply.
Russia abounds with new projects. Magna Steyr has entered into a joint venture with Russian carmaker Gaz, and plans to build and redesign the former Chrysler Sebring in Russia. Alfons Dachs-Wiesinger, Senior Manager, Transport and Logistics Services for Magna Steyr, announced that the company was looking for transport partners and a lead logistics provider to help design and run a very complicated supply chain, with most suppliers based in North America.
“This is a big opportunity for a service provider to get into business with a Russian OEM,” he said. “The context is specific for this project, but it could serve as a model for the future.”
Putting resources into rail
Invest or lose business
The concerns voiced in Russia by carmakers and suppliers bore more than a passing similarity to those heard at other conferences this year in China and even Europe, where OEMs openly challenged LSPs to invest in new assets, or lose business.
“We need more terminals with the capacity and [valueadded] services,” said Alexey Tenkov, Distribution and Logistics Manager, GM. “We need more compounds, more local distribution, and we have a tough situation with the quality of local trucks.”
Marina Osovskaya, Head of Logistics Department, Severstal-Auto also stressed the need for assets. “We need the company who can give us the infrastructure, who can give us the terminals, the railway wagons,” she said. “The same for parts as for finished vehicles: when the demand is high, you have the possibility to do what you need to do.”
So what does need to be done? The constraints are obvious to many – lack of capacity, for example – but finding the answer is not straightforward. Bureaucracy has slowed down customs clearance and inhibited the construction of new and bonded warehouses. The prices set by the government have also hampered growth on the railways. Nevertheless, delegates agreed that rail was a high priority and, without question, an area in which the industry needs investment.
It is inaccurate to say simply that Russia lacks rail infrastructure. The Soviets developed and maintained one of the most extensive rail networks in the world, but according to Salman Babayev, Vice President, Russian Railways (RZD), half the potential capacity has fallen idle since the Soviet era. Babayev admitted that presently RZD is not an attractive candidate because it lacks proper terminals and the ability to offer “complete, door-to-door logistics”. This was the main reason, he said, why the company invited Russian LSP Transgroup to have a 49 per cent share in the formation of RailTransAuto (RTA), a rail company investing heavily in terminals for finished vehicles across the Russian Federation. The company has ordered 5,100 specialised car-carrying rail wagons to be delivered by 2010. It has also formed partnerships with western LSPs, such as Mosolf Group (for more, see news page 7) and with Finnish Railways.
Hopes and fears
The expectations for rail are high, not only for shipments coming from the West, but also as a route from the Far East, such as from Japan, Korea and China, where lead times for deep-sea vessels are close to 50 days, without considering extra waiting time at Baltic or Black Sea bottlenecks. Rail links via Manzhouli, in Mongolia, or the Far Eastern Russian port of Vladivostok, could potentially cut this time in half. Gefco presented some early results of very small trial shipments using this route, which they’ve said are successful (for more, see FVL page 24).
Hopes for the uptake of rail transport for automotive remain high. Hiroyuki Hara, Manager Automotive Department, Itochu, a company that has partnered with Isuzu Motors for kit assembly in St Petersburg, said his company has faced tough bottlenecks in Finland. “I’m really expecting railway transport, because we have some stock in Hanko,” he said. “It happened this year that our cars [from Japan] were stuck in Bremerhaven for two months due to lack of space on the vessel.”
But delegates expressed concerns over damage rates on rail. Hara identified excessive vibrations during the journey as a possible cause, as well as higher incidents of theft and vandalism.
While Gefco and RTA both said they had no problems with vibrations, Viktor Ivanov, General Director for RTA acknowledged that theft was a problem. “Unfortunately, this is true, and a challenge,” he said. “We’re not law enforcement, so we have to buy insurance. But once the wagon is moving it is impossible to steal something. All the theft is done while idling, so the bottom line is to have security every time the wagon is changed or moved.”
Rolling stock market
While RTA’s investment in rolling stock, on top of that by competing rail companies such as Far Eastern Transport Group and Apparel, indicates that there will be sufficient rolling stock available, a larger hurdle for the uptake of rail remains its high cost.
Alexey Tenkov was joined by Toyota Motor Europe’s Erik Van de Wiele, Director, Vehicle Logistics Group, and Heinz Tepe, Key Client Manager at Schenker Deutschland, in declaring that rail was not yet an option as long as road remains substantially cheaper. Delegates questioned Babayev on the high tariffs, but although RZD is the state monopoly for the Russian rail network, it does not set prices, as Ivanov explained.
“Russian Railways does not set prices, but government agencies do,” he said. “They identify the transport cost according to the price of the product. If it’s coal, there is little value and not much that can be added. Right now vehicles are considered luxury – or expensive – so the tariff is high. The solution could be to put cars in other classes. We’ve put the suggestion [for reform] to the tariff committee. We wanted an answer today [June 21st] but it has been postponed.”
Uniformity a good measure
Another challenge for moving cars by rail from Europe is the different gauges, which means terminals must be equipped for transhipment. A question was raised about the possibility of harmonising the tracks. Babayev doubted the feasibility of full harmonisation, but suggested building more Russian gauge tracks in Europe.
“We already have some lines in place in Hungary, for example, and we have looked at the possibility of extending this to the Czech Republic, and then on to Austria.” he said. “Otherwise, selecting a uniform gauge is a very challenging task, especially inside Russia. It would be useful to install more Russian gauge tracks across Europe.”
Other places where such dual tracks exist are in Kaliningrad, as well as in the Port of Sassnitz, in Germany, which has a rail-ferry link to Russia.
A game of monopoly
Muscling out the opposition?
As RTA unveiled its plans, competing rail, trucking and shipping companies voiced concerns that the company was trying to dominate the market. Dmitry Zolotarev, Chairman of the Board for Russian rail company Apparel, suggested the 4,000 wagons between his company’s current fleet, and those
coming into operation this year for RTA, would be more than enough to serve the market. He questioned RTA’s plans for 5,100 wagons. “The arithmetic is simple,” he said. “We will have more than enough wagons for the market.”
Jan Lönnblad, Managing Director, Skandia Autologistics asked whether RTA’s investment and partnership with the state monopoly was an indication that his and other trucking companies should pack their bags: “The biggest bottleneck we face is concerning tariffs,” he told Ivanov. “Your owner [RZD] will help you with that. The second is customs, and the third overall distribution. With these 5,000 railcars, have you calculated that you want to take trucks out of business?”
However, Ivanov assured delegates that RTA, with a current market share of about 10 per cent, plans to cover only 28 per cent of the market. The carmakers response was a measured optimism, while they appeared to have little concern that there would ever be too much capacity. “The direction [being
taken in rail] is 100 per cent correct,” said GM’s Tenkov. “But just as last year we are still looking for new terminals.”
Toyota’s Van de Wiele saw the debate over too much rail capacity to be unhelpful. “There is no sign that growth will stop in Russia,” he said. “I’m a bit worried about the quarrelling. There is enough volume coming to Russia that there will be enough cake to go around. Get things done.”
Can the industry stay lean?
Michael Storey, Commercial Director, Automotive Division, NYK Logistics questioned whether a fragmented, overstretched supply chain could maintain the lean strategies so common in production and supply in today’s automotive industry. He identified the difficulty of relocating suppliers, capacity and infrastructure constraints as factors that can all lead to “uncontrolled breaks in the supply chain”.
He presented a picture of a ship frozen in the port of St Petersburg. “If you want something off it, you ain’t gonna get it,” he said. He used the example of companies setting up SKD/CKD operations around St Petersburg, such as Toyota, Nissan and Ford, to show how damaging a disruption in the supply chain could be.
“It’s difficult to establish how long shipments will take. If you’re building on knockdown, the worst thing you can do is to lose your batch because half of it is stuck in a port in Europe,” he said.
While some carmakers representatives, such Toyota’s Van de Wiele, insisted the company would maintain a lean strategy anywhere in the world, others were less sanguine about the idea in Russia. Darren Chaisty, Section Manager, Nissan Europe, doubted whether Nissan could stay lean in Russia.
“We are going to a CKD operation for many reasons, but one of them is that we are not sure if we’ll be able to keep our lean strategy,” he said.
Vitaly Brazhkin, Logistics Manager, Peugeot Rus Avto, indicated that, for spare parts, the company was not very lean. “When we’re not sure about delivery, we tend to carry more than we need,” he said. “Then, when channels have stabilised, we return to normal figures of supply. Typically we don’t keep more than a month, or for some critical parts, two months in the warehouse.”
Storey suggested that the way carmakers could maintain more lean principles was through visibility, and presented NYK’s Griffin package, software currently used in retail logistics.
Ildar Yusupov, CEO of STS-Kamaz Logistics and the company’s Executive Director, Marat Zainetdinov, presented details of how Russian OEM Kamaz has made efforts to modernise its logistics and make lean a priority. The company implemented an IT system that tracked orders, deliveries, storage and information flows in the supply chain. They also made efforts to set benchmarks, itemise processes and redesign the supply chain to limit empty flows both inbound and outbound, which had been as high as 60 per cent empty return. “When lean was launched, we made logistics a priority,” said Yusupov. “Cost is already reduced 28 million roubles ($1.1m), and we’re only at the beginning. Lean production is now our raison d’être.”
Kamaz, with its existing supply base in Russia, is able to move towards a lean model. But as foreign OEMs break ground= in Russia, they’re finding the local supplier base very low. In the case of Magna, in joint venture with Gaz, there are no local suppliers. The reason is that Gaz, which is losing market share like many other Russian carmakers, wants a fresh start. “The Russian industry faces the challenge for renewing their products,” said Magna’s Dachs-Wiesinger. “That’s the reason why Gaz wanted to enter a new era.”
The “new time” means the purchase of the old Chrysler Sebring, which Magna and Gaz will remodel, and produce at a rate of 65,000 per year by 2010 (following a first run of 20,000 in 2008). A lengthy obstacle, however, is that nearly all the suppliers are based in North America. “You cannot switch the supplier locations within a year,” said Dachs-Wiesinger. He added that the volume is not yet high enough to persuade suppliers to localise in Russia. “The logistics cost [of shipping parts from North America] are not favourable,” he said.
Besides the need to design a complicated pipeline across the Atlantic and Europe into the already bottlenecked Russian and Baltic ports, Magna also faces difficulties adjusting to the local working culture. Dachs-Wiesinger said it is very difficult to find employees who are both technically skilled, and have English-language skills. “We have many who are good in one, but few who can do both,” he said.
There have also been problems with different attitudes to work. “Responsibility is harder to find,” he said. “Communication and teamwork have to be learned and trained.”
On the other hand, he said the staff is very young – 32 years old, on average. “The people are really motivated and willing to make a success.”
The company plans to move slowly and cautiously towards localisation. The initial phase will include less complicated parts like bumpers, wheels, suspension and headlights. By 2009 Magna hopes to move from 997 North American suppliers to 819, with 55 based in Russia.
Renault Russia, which builds Logans in the old Muscovite plant in the Moscow region, is also moving gradually towards a localised supply base and leaner manufacturing model. In 2006, the company sold 58,600 Logans in Russia, and project more than 88,000 will be sold in 2007. Renault plans to sell 105,500 Logans by 2009.
Patricio Neffa, Project Director, Renault Russia told delegates about the company’s plans for Russia over the coming years. It has already moved from a nine per cent localisation ratio in 2005, to 26 per cent in 2006, with suppliers concentrated around Moscow, St Petersburg and Nizhny Novgorod. The company has set up specialised distribution centres for finished vehicles and spare parts, and established a customs post in the plant. Renault Russia has shifted 30 per cent of its inbound flow to rail.
By 2010, Renault aims for 45 per cent localisation, and will build a new distribution platform for mixed Logan and other finished vehicle flows to regions. Capacity at the plant will be doubled to 140,000 cars per annum.
Ports in Russia
Borders and bottlenecks
With factories planned for St Petersburg and Moscow, and OEMs importing bigger volumes into Russia, one of the most pressing issues is port access. St Petersburg is a bottleneck, as is Finland, where about 80 per cent of imported cars enter Russia. For parts, the scenario is largely the same, where container traffic has crowded the entry ports, and shipments are sometimes caught for days behind the red tape of customs clearance.
Baltic ports, such as Tallinn in Estonia, Riga in Latvia and Klaipeda, Lithuania are all adding capacity, but there remain issues when crossing the Russian border, where rail gauge, customs and a lack of trucks cause long delays. The Black Sea is a developing region, but still lacks warehousing, and the
ports have been described as glorified parking lots. It also has long lead times to Moscow and St Petersburg. According to Alexander Goloviznin, Deputy General Director, Ust-Luga Company, the Black Sea is even more congested than the Baltic.
For some years now, many have been counting on the development of the Ust-Luga Company’s container terminal and its“Yug-2” car terminal in the developing Ust-Luga port, east of St Petersburg in the Baltic.
“Ust-Luga, well, that’s a really long story,” said Goloviznin. “I’m embarrassed to say that last week we celebrated 15 years as a company, but the terminal project really started about eight years ago.”
Yug-2 has had a history of starts and stops. Earlier this year the company announced that it would begin receiving new cars in July, but the date has now been pushed back to the end of September or October.
“Last year we initially said November 2007, but then got a kick from our shareholders to be faster,” he said. “The reality is we have a lot of work to do, but September will be quite realistic.”
The terminal will now be combined with a ferry complex, occupying an area of 1.2 square kilometres. On the initial stage the capacity will be around 100,000 cars per year, with storage for 6,000. The full capacity of the terminal will be 4.7 million tonnes of cargo including 360,000 cars per annum. A customs excise office will be set up, and an agreement has been made with RTA to develop a rail link in 2008.
Goloviznin said that plans for a bonded storage area would be introduced if the demand was there, and in that case would allow cars to be stored up to two years. However, he told delegates that the port was not being built with longterm storage in mind. “I have to warn you that the tariff for the storage will be increasing week by week; we cannot afford long-term storage.”
The container terminal will start operating at the end of 2008, with an initial capacity of 500 TEU, and plans for a depth of 16 metres. The port is 100 kilometres from St Petersburg, and while there is no road to Moscow right now, a federal road is under construction.
However, Goloviznin acknowledged that, even if Ust-Luga develops as quickly as he hopes it will, Russia may still be facing a long-term capacity problem, and that volumes via other Baltic routes would continue. “In the first quarter of 2007, the growth of import cars was more than 70 per cent. Container movements have been growing 25 per cent a year for five years. Consultants say that the Russian TEU will be 40 million eventually. Ust-Luga will be three to four million, and St Petersburg two million. Without enough building, it gives a good opportunity for Finland and the Baltic states.”
Was Saint Pete the right choice?
With St Petersburg a frozen port and limited in space, carmakers may regret building their plants and logistics networks in the St Petersburg area, even though it has the most developed infrastructure in Russia. At the end of the conference, Elliot Swiss said out loud what many carmakers at the conference were already saying in private: “[At GM] we’re looking at any or other alternatives,” he said. “The reason we all went to St Petersburg is the reason that it’s a problem now: the port.”
As NYK’s Storey indicated, the risks to lean supply or production are high, and though Russian Transport Logistics operates a small terminal exclusively for Nissan in St Petersburg, finished vehicles by and large can still not enter through the port. Van de Wiele told delegates that the decision to build plants in St Petersburg had less to do with entry there than it did through its historic entry points via Finland: “I think the decision to go to St Petersburg is not related to port choice or anything. Historically, the route into Russia has been via Finland, and the closet to Finland is St Petersburg. I think the logic doesn’t go further. We don’t regret [putting the plant there] but the challenge is to find the most appropriate choice to bring cars into Russia,” he said. Though he will be running a port in direct competition with St Petersburg, Goloviznin rose to its defence: “If Finland is the traditional route, then it’s a bit of a myth,” he said. “St Petersburg takes in more capacity than all of Finland combined.” He pointed out that the port took in almost 1.5 million TEUs last year, and will likely hit two million by 2008. It seems likely that more than one solution will be needed for Russia. As its ports and infrastructure improve and demand continues at its current pace, capacity in neighbouring regions is going to be crucial.