Coping with the Russian bear
The Automotive Logistics Russia conference 2009 in Moscow revealed a market reeling from its first major decline in new vehicle sales for nine years, with sales drops of more than 50% in many segments.
But while the logistics landscape has also changed drastically, with the once pressing issues like the lack of transport capacity or port space now turned upside down, carmakers, LSPs and dealers emphasised that the role of logistics has become even more vital in safeguarding precious cashflow. Delivering vehicles and spare parts more quickly has also become even more important to carmakers; where only last year customers were willing to wait up to year for a car to be delivered, consumers now expect their cars or repairs immediately.
The decline in Russia has been more dramatic than in most markets: May sales dropped by 58%, and for the year are down 50%. While sales of cars and trucks reached 3.6m in 2008, even the Association of Russian Automaker’s (OAR) relatively optimistic forecast for this year predicts sales of only 1.9m. PriceWaterhouseCooper, Rolf Group and VW are gloomier, anticipating sales between 1.4m-1.45m.
The figures most relevant to finished vehicle logistics providers look even worse: the import of new cars and trucks in April dropped from 206,000 during that month in 2008, to 74,000 this year, with truck imports almost disappearing following a nearly tenfold decline according to Vladislav Zaslavskij, President of the Association of Car Importers and Customs Brokers (ACICB). OAR predicts that truck sales in the domestic Russian market will fall from 404,000 last year to 150,000 this year, while bus sales – aided by the government renewing fleets in certain regions – is expected fall less, from 65,000 to 45,000 units. The ACICB projects that imports of cars and trucks this year will not exceed 800,000, down from 2.2m last year.
Local production, which reached 1.3m vehicles in 2008, and had been projected to rise to 3m by 2012, has also been significantly cut this year.
The economic factors hurting Russia have been well documented, as the wider economy has suffered the impact of the credit crunch, global downturn and the collapse in the price of oil, Russia’s primary source of wealth. As 40% of new car purchases in Russia last year were by loans, the market has been hit by the scarcity of credit, according to Maria Gontar, Leading Specialist for OAR. The devaluation of the rouble, as well as an increase in customs duties, has also led to price increases.
Positioning now for the future
But while the numbers and current economic indicators are discouraging, most of the representatives at the conference were upbeat about the future prospects of Russia. Gontar said that in the longer term, Russia’s car industry’s “is one of the most promising in the world.”
In view of this, despite declining sales, several carmakers are still pushing forward with expansion plans. The Volkswagen Group has increased its market share substantially this year, with the core VW brand up 15% in the first five months of the year (18,175 units). Skoda and Audi outperformed others with declines of 12% and 14%, respectively. According to Jan Bures, Head of Group Service Division for VW Rus, the German OEM will increase its dealer network in Russia from 182 to 348 by 2012.
VW, along with PSA, Mitsubishi and Volvo Trucks, will also continue to develop production in the Kaluga region, south of Moscow. According to Maxim A. Akimov, Deputy Governor of the Kaluga Region, of the 42 projects and O3 billion worth of committed projects in the region, only two had so far been postponed or cancelled. Meanwhile, the region is continuing to develop new roads and rail links, along with three industrial parks that will serve the automotive plants as well as their suppliers as they continue to localise.
“We believe that we have laid down a foundation for future development,” he said. “It will give the country a positive social impact if we increase the employment levels in the region. It allows us to survive this crisis, and gives us hope for the future.”
Gefco, the logistics division of the PSA Group, perhaps best exemplifies the difficult yet promising position in which foreign OEMs and LSPs currently find themselves in the Russian market. According to Kamil Mazynski, Gefco’s Commercial Director in Russia, after several years in which Gefco’s turnover doubled annually in Russia, this year it will tumble by around 40%. The company has been forced to cut staff from 300 to 170.
But while the company has been forced to pull out of certain markets around the world because of the crisis, Russia is not among them. Mazynski noted, “Our Russian subsidiary is perhaps not the most popular one among Gefco. It has collected much of the investments in Europe, as Russia is considered the major market.”
In St Petersburg, Gefco has developed from serving one customer – GM – on a simple transport contract, to also serving Toyota as well as tier suppliers on a range of services including container transfer, storage, full-truck-load consolidation, finished vehicle distribution and customs clearance.
Now, with contracts established with PSA and Mitsubishi in Kaluga, the company is aiming for the same development of services, including inbound flows to the plant, as well as outbound vehicles to the Moscow vehicle distribution centre. And while the recession looks sure to slow down the pace of development, Mazynski notes that PSA and Gefco have a cost advantage in pushing forward with development in Kaluga in the current climate.
“PSA has chosen the right moment. Although they are one of the last to come to the market, they are using the crisis to make up lost ground,” he said. “Also, the construction and land acquisition for the plant, as well as for Gefco’s warehouses and facilities, are much cheaper today than they were at the peak, which makes our cost base much lower.”
Customs – worse than “Big Brother”
Customs has long been rated as one of the most difficult aspects of the Russian market, causing longer waiting times at borders and adding considerable cost to the supply chain. This year, following the decision to increase customs duties in January to protect the heavily declining market share of domestic carmakers in Russia, it is of even more concern for LSPs. An anonymous survey taken at the conference put government policy, including customs, as the most significant challenge for logistics in Russia, at 52%, above issues such as infrastructure or investment.
Zaslavskij said that the share of duties, tax and other fees due to the government has risen to nearly 52.5% the purchase price (from 46% last year). Despite this rise, the drop in sales has meant the revenues that the customs receives from the automotive industry are down drastically, from $1 billion in January 2008 to $350m this year. “In March 2008, revenues from the automotive industry reached $2 billion, and we can forecast that customs lost even more after January,” he said.
Zaslavskij also described a culture within the Russian customs endemic with bureaucracy, while further stifled by efforts to quell possible corruption. “Anti-corruption measures have made it difficult for the customs officials to initiate any new measures,” he said. “The managers of the federal customs feel as though they are participants in a reality TV show, as all of their offices and cars are bugged and being recorded.
“The atmosphere in customs does not encourage any new initiatives, as they will immediately be seen as lobbying to someone’s interest,” Zaslavskij added.
But while such measures might hamper the innovation within the customs departments, delegates on the sidelines of the conference admitted to Automotive Logistics that they were necessary as the Russian customs was still rife with corruption, particularly at the Russian-Finnish border.
Corruption aside, most carmakers and LSPs were looking for a focus on simplifying procedures, as well increased use of IT and electronic communication, something which the Russian customs has been slow to develop. Rather than progress, Zaslavskij said that customs procedures have deteriorated in some respects. Several helpful programmes that had recently been implemented, including a shift to weekly payments rather than upfront fees, have been cancelled. As regards the car industry, he also pointed out some troubling inconsistencies. Mazda Rus, for example, is considered “unreliable” and every car it imports must be examined by customs, whereas Toyota imports are not controlled.
Several at the conference, notably Mazda’s Head of Logistics, Olga Odintsova, were curious to learn when they could expect a thorough reform of customs. But there was little optimism that such change would come soon. Russian Transport Lines’s (RTL) General Director, Konstantin Skovoroda, speaking from the point of view of a custom’s broker, saw little change in the short term. “Only the customs agency knows, but we do not expect any major changes in the near future, which is a pity since its actions are actually contributing to the decline of the market,” he said.
Gefco’s Mazynski noted that in many cases, difficult customs at airports made it faster to arrange a dedicated truck from Europe and to avoid airfreight altogether.
There was also concern expressed about the government’s plans to close customs warehouses and offices in Moscow, and move them to the border. While many at the conference agreed that the move was logical, including RTL and Ford, there is concern over the logistics of the move itself. Ford’s Director of Vehicle Logistics in Russia, Natalia Petrenko, told Automotive Logistics that there could be delays during the transfer, as well as human resources issues in recruiting staff closer to the borders.
But while customs reform was recognised as a necessity, most agreed that it was a situation to which LSPs and OEMs have already allocated the necessary resources.
Also, the sales slowdown has improved the bottlenecks at borders and through customs to some extent. “The current average clearing time for customs and demurrage is 24 hours, which is very acceptable for us,” said Dmitry Federov, P&A Logistics and Network Support Manager, Nissan Motor Rus. He hoped for more customs reform on certain kinds of spare parts, including those related to radio frequencies, but otherwise did not feel customs was the most pressing issue.
Quality is top of the agenda
With the decline in volumes, the need to improve the quality of service was widely seen as the most important objective this year. Sergey Sherbinin, the COO of Rolf Retail, the dealer arm of the Rolf Group, noted that the queue for new cars in recent years had reached as long as 12 months for a Nissan Qashqai, or six months for a Toyota Corolla. Today, these cars are available almost immediately. “This year, if the car is not available now to a customer, they will simply go to another dealer,” Sherbinin said. “The industry is becoming more customer focussed.”
Natalia Petrenko, Vehicle Logistics Director for Ford in Russia, also confirmed the need to become more customer oriented. “The issue for us today is no longer the lack of fleets or capacity, but our job has actually become more difficult, as we have to improve lead times to meet our customer’s expectations,” she said. “They don’t want to wait anymore.”
Sherbinin also demonstrated how delays and poor service not only damage a brand image, but also can have a significant impact on the bottom line. A car damaged in transport, leading to a delay of ten days, would knock 8% off the profit margin for a dealer; if the delay or damage leads the customer to cancel his order, the dealer stands to lose more than 70% of its margin.
For spare parts, such quick reaction time is also essential. According to Russian law, if a warranty repair takes more than 45 days, the client is eligible for a new vehicle. The losses for the dealer would be up to 30% the value of the car, or any associated services or gifts that dealer might offer the customer to prevent him from using his rights.
Nissan’s Federov noted that he sees improvement for outbound spare part distribution to dealers as a more pressing problem than supply chain failures elsewhere. “For outbound, there is no one company that can handle all of our operations and problems,” he said. “A company might say it can, but in the end we have to use several outsourced providers.”
Federov pointed to problems that needed improvement, such as the lack of common software between Nissan and its 3PLs, which often leads to poor visibility of inventory and morel manual paperwork. He also felt that the company was at risk should it face internet failures at any location.
Dmitry Bulaenko, Logistics Director for Sollers said that logistics could have an important impact for an OEM during the crisis, and that carmakers should use this current slowdown to improve supply chain operations. He cited critical areas where Sollers was tracking performance and pushing for improvements, including inventory management, re-engineering transport networks, contract renewals and forecasting. “It’s important to show that logistics can make quite an important change to an OEM during the crisis,” he said.
While delegates expressed the ongoing need to develop rail services, there were examples of its burgeoning success in Russia. Russia has one of the world’s most extensive rail networks, but it had fallen into decline following the fall of the Soviet Union. In Kaluga, for example, Akimov admitted that rail posed a challenge because lines were obsolete and had to be demolished. “This was typical of 1990s Russia,” he said. “While it would have been too expensive to carry out all of the projects, we are developing rail more in the region.”
Ford’s Petrenko said that the government’s subsidies for rail transport toward the far eastern parts of Russia were positive, and that following a tender earlier this year, Ford had added several new locations for railway delivery of finished vehicles. “The subsidies are very good and have brought some much needed support to the business,” she said. “Let’s hope it lasts.”
Schenker’s Michael Hess, Logistics Director for Russia, presented details of the import of CKD parts that DB Schenker delivers for VW in Kaluga, in partnership with the national railways of numerous other countries in Central and Eastern Europe. In 2008, the company delivered 50,000 containers from the Czech Republic and Slovakia to Kaluga, which was the equivalent of 1,250 full European trains, generating O20m in revenue. Hess said that similar figures are actually expected for this year, since VW has decided to add a new model to the line in Kaluga. Trains will also begin originating in Wolfsburg, Germany for some of the parts for the new model.
Following on with the same focus on quality and performance that became a theme of the conference, Hess said that DB Schenker is now developing an online track and trace system for the rail shipments, as well as for a simplified border procedures with more automation.
Going local – a slow pace for returnable packaging
The production of foreign cars in Russia is still in its nascent stage, with the pace of output slowed considerably during the slowdown. In the meantime, the country faces many of the challenges familiar to other OEMs and LSPs that have begun producing in new markets – a lack of standards, little to no use of returnable packaging, and few local suppliers.
For packaging, the situation is still mainly a “one way ticket,” according to PSA’s Vitaly Brazhkin, Director of Spare Parts Logistics and Warehousing Operations in Russia. This is mainly as a result of a long distance supply chain, with many imports from Europe, as well as the long distances in Russia itself. The local solution in Russia for PSA, according to Brazhkin, is excess packaging for protection, namely a lot of bubble wrap and cardboard.
According to Gefco’s Mazynski, there has been zero interest so far in a solution such as Gefbox, the company’s re-useable packaging and container pooling system. “Companies are using disposable packaging, which is cheaper and easier,” he said. “Only the Ford factory is St Petersburg is currently using returnable packaging. There will be a market, but not in the short term.”
A container pooling and returnable packaging scenario, such as those offered elsewhere in Europe by Schoeller Arca Systems, is more likely to develop as more suppliers and OEMs localise their production in Russia, according to LSPs. Mazynski said that particularly when the tier suppliers develop in Russia, “the real logistics will start.” He notes that currently in St Petersburg there is essentially one 3PL for the inbound flows of each foreign OEM: Schenker for Ford, Gefco for GM and NYK for Toyota. “When the localisation starts, there will be 10 contracts rather than one, with the need for warehousing and other services. Then the real game will begin for logistics. We hope this comes sooner rather than later.”
Such localisation is happening, but at a slow pace. According to Deputy Governor Akimov, in Kaluga there is only one supplier out of eight that has been localised around the VW plant. He acknowledged that the Kaluga region would have to offer help to these suppliers, who might be put off by the higher rental rates for warehouses in Russia. “Rents are cheaper in Europe because the loans are low rate or subsidised. Our best prices, at O8 per square metre, are twice that in Slovakia, for example,” said Akimov.
Renault, at its Avtoframos plant near Moscow, has shown some success is localising suppliers. According to Jean-Philippe Jouandin, Russia Supply Chain Director for Renault, Logan production has reached 43% localisation, with 100 truck deliveries per week managed by suppliers. Renault plans to reach 51% local content by the end of 2009, and the eventual target is 85%. In the meantime, Renault is shipping 80 transport units per week of CKD parts, the bulk of which move from its logistics centre in Pitesti, Romania (with 60 trucks and 22 containers by train per week), plus a small amount moving by truck from France.
A focus on benchmarking and tracking performance was emphasised by numerous other carmakers and LSPs. Software-provider Vehnet’s Managing Director, Steve Jones, announced a new industry-wide benchmarking initiative that Vehnet will establish in partnership with the American provider ADMI. Carmakers such as Sollers’ Bulaenko and PSA’s Brazhkin expressed a keen. Likewise, Nissan’s Federev said that Renault and Nissan were doing more to work together as an alliance, including benchmarking; he said that two were also looking to do a tender together for outbound spare parts distribution.
VW’s Bures also said that the company was working to improve and access the KPIs of its providers. He illustrated VW’s performance monitoring, revealing the results of the company’s LSPs in Russia. The benchmarking reveals that they are at a level comparable with other regions, although there are some gaps in service, according to Bures, such as missing parts. But he ultimately had high praise for VW’s LSPs, and felt that the improvement would come through the process of monitoring and communicating about performance. “You only get what you measure,” he said.