Russia comes out of hibernation

ST. PETERSBURG, RUSSIA, 24 JUNE 2010:  Cautious optimism characterised this year’s conference in St Petersburg, held between 22-24 June. As Marc Brenneiser from Rolf SCM, one of the LSPs present, commented: “What pleased me most about this conference was the participation of the OEMs; I have not seen as many since 2008 during the boom.”

The Russian market is showing tentative signs of growth, say carmakers. Renault Nissan, in particular (in alliance with Avtoframos), is investing heavily in the region and forecasting a growth in production across its brands. VW’s Jan Bures, head of the company’s Group Service Division which has CKD operations in the Kaluga region, anticipated an overall market growth in 2010 of 8%. “2009 was a bad year,” he said, “but April and May 2010 have out-performed 2009.

Contrary to expectations in a market that has shrunk as rapidly as Russia, capacity problems were mentioned throughout this year’s conference. According to Brenneiser, OEMs have reacted to the shortages in 2007, exacerbated by the financial crisis in 2008-2009, by binding transport fleets to their production strongholds. Given the disparate nature of the clusters of automotive manufacturing in Russia (St Petersburg, Togliatti, Kaluga and Moscow), this makes filling empty finished vehicle carriers with backhauls virtually impossible. So there is the odd situation that, despite adequate assets on the ground, the way they are being used is causing a capacity crunch.

Jean-Philippe Jouandin from Renault confirmed this when, in the final session of the event, he revealed that his biggest headache was “capacity … how will we be able to deliver all the cars we will produce?”  

Market forces

The Automotive Logistics Russia conference is an annual event – this year is the fifth – and is a part of the global series organised by Automotive Logistics magazine which spans Europe, North America, South America, India and China as well as Russia.

The different events providing business contacts, networking and on-the-ground intelligence, as well as hard information from formal presentations. They also highlight the contrasting states of automotive logistics in different markets.

Russia’s automotive industry is struggling with obsolete technology and a lack of state policy for its development, according to Alexey Serezhenkin, deputy executive director for the Association of Russian Automakers. The country is also facing poor quality management in its supply base, with only 5% of Russian suppliers meeting international quality standards. Serezhenkin was adamant that lack of innovation and resources were continuing to hold back the massive potential for Russia’s car industry.

Likewise, moving parts and vehicles is hampered by an underdeveloped infrastructure and the legacy of a still-lingering Soviet era approach, where logistics was tied closely to military priorities. 

Serezhenkin stated that, in comparison to 2008, the first few months of 2010 showed a significant drop in passenger car production, at 60% of the former level.   Though the recently-announced continuation of the scrappage scheme will assist recovery this year, Gefco’s Christian Zbylut warned delegates “the crisis is not over”.

Localisation headaches

The localisation of parts sourcing into Russia is progressing slowly. The generally accepted ratio is 30% local sourcing to 70% sourcing from overseas, but Renault’s Jouandin said that the French OEM had already achieved 44% local sourcing for its Moscow plant, with the aim of a 10% increase each year.

Serezhenkin complained that many Russian suppliers are in the old Soviet mould with a lack of research and development and little or no technical investment. He called on the government to invest in the industry to address this shortfall. “The Federal government has adopted a lot of measures supporting automotive production, but more measures are needed,” he said. Meanwhile, foreign Tier suppliers seem reluctant to invest in production facilities in Russia until volumes increase.

Customs confusion

So approximately 70% of parts still have to get through frontier processes, and the dark art of clearing customs continues to baffle and elude clarification. Recent and proposed changes to procedures, and the possible introduction of a customs union with Kazakhstan and Belarus alongside the stated aim of moving clearance to the new borders, was causing a lot of concern among carmakers and logistics companies. 

Wilhelmina Shavshina, Legal Director – DLAPiper

Wilhelmina Shavshina, a customs expert from law firm DLA Piper, told delegates: “Now we have a whole range of new issues in connection with the beginning of the customs union operation. The union will have the most impact on your industry.” And while she called for the automotive sector not to be pessimistic, particularly given the political drivers for the union, most delegates and speakers were confused about the exact nature and scope of the changes, and the impact on the processes for clearing parts and vehicles. 

Jan Bures, Head of Group Service – Volkswagen

Jan Bures from VW voiced the opinion of many delegates when he said that there was too little transparency and that, rather than a form of regulation, customs was more often a money-maker for the government. Shavshina revealed that local customs officers and operations often disagreed with or had conflicting paperwork from the central Federal customs organisation, leading to a nightmarish situation for time-critical deliveries to plants. “LSPs need to understand that their services must be co-ordinated with the customs offices. Individual customs sheds or officers may not agree with the codes, and you must negotiate coding with the local offices first,” she advised.

Alexander Rogan of Priority Freight CIS said that in some ways all freight in Russia is emergency freight, and that a cautious and progressive relationship had to develop with customs posts. It requires the building of trust and ensuring that documentation is absolutely accurate.

Even so, that may not be enough. The conference heard of the recent total breakdown in the supply chain for vehicles though St Petersburg port when foreign carmakers changed their pricing simultaneously and the customs office was overwhelmed by the paperwork.

Finished vehicle challenges

Price, time and quality are the cardinal considerations when moving finished vehicles wherever you happen to be operating, but in Russia the issue of infrastructure continues to cast a shadow over the search for the best solution. For a number of speakers and delegates in the two sessions dedicated to finished vehicle logistics at the conference, rail emerged as the preferred mode, not least because not a single kilometre of new highway has been built in the past five years in Russia. The road that exists is fragmented and poorly maintained.

But although rail could be a good solution for Russia, Ivan Karasev, head of logistics at Sollers Auto, told delegates that a certain prejudice against it has been allowed to fester because of the type of carriages used. Before 2008 the majority of cars moving by rail were secondhand and were being transported in obsolete carriages without proper fastening equipment. While this makes the cost affordable, no-one moving new vehicles who is concerned with damage limitation can consider loading on this outdated equipment. However, there is currently a lack of availability of new stock in Russia.

Ivan Karasev, Head of Logistics – Sollers Auto

Damage rates in Russia are at least 1.5 times higher than those in Europe said Karasev, with the European figure being around 3%, according to Pound Gates’ commercial director Mark Morgan. 

Added to this is the fact that modern and efficient rail terminals equipped for unloading for the final shipment by road to the dealer are scarce, and that a lack of training amongst logistics staff is leading to costly damages.

New carriages to meet the demand for quality and safety are now being built, and Rail Trans Auto’s general director Dmitry Nikolaev made a bold guarantee that Sollers would see damage-free transport in the carriages RTA was providing for them. He did admit, however, that further investment is needed because it didn’t have enough carriages to meet full demand. 

He added that RTA was responding to the need for greater investment with hesitancy at the moment, given the lack of stability in the Russian market. “We don’t want to be excessive,” he said.  In the meantime, added Nikolaev, the modernisation of existing stock will be adequate to meet the needs of Sollers Auto and its other customers. It expects to move 792,000 vehicles this year and reduce damage rates by five times with its mix of new and modernised carriages.

At the same time rail terminals designed to meet international standards are being built. But the final issue of policy constraints still means that rail is struggling to be competitive with road, especially for distances under 3,000km. Elena Zhadanova from RTL said it seemed absurd that it is still cheaper to truck from Moscow to Vladivostok than to use rail.

Marc Brenneiser from Rolf SCS, a company that has been continuing to invest and develop market share in Russia through the crisis, sees rail as critical to the future. He believes that logistics companies will need to develop in the country’s regions as the consumption markets spiral out from the major cities, but that currently there is virtually no infrastructure or assets to do this. Noting that all Rolf terminals and warehouses have railheads, he said that “a serious rival to rail does not exist”. 

Packaging opportunity 

Overheard in St. Petersburg… 

 

 

“Customs has an aim to collect as much as possible from every company.”
Wilhelmina Shavshina, DLA Piper

“Last week I met a temporary head of customs and he said: ‘You can ask me anything, but if I don’t answer it isn’t because I don’t want to answer, it is just that I don’t know’. He kept silent for most of the meeting.”
Konstantin Skovoroda, RTL

“The regions, the east, the far Urals are going to be our growth drivers. We have a problem because the production centres are in the west.”
Mark Brenneiser, Rolf SCS

“We experience all the challenges that most of you do, related to customs clearance, the changing customs union and optimising our SKD logistics flows related to ports and railway transport.”
Ivan Karasev, Sollers Auto

“Russian logistics is becoming more European. It is developing. I am glad that, during the crisis, those not strong enough have left the market and those with potential now have the space to develop further.”
Anna Vorobjeva, MAN Russia

“I have been desperately impressed with how people here have coped with two or three years of economic difficulty and the lessons Russians have learnt from the experience. This group has a high level of resolve looking ahead.”
Phil Shankley, Gefco

“Packaging is still sexy,” commented Natalya Shishkina from Schoeller Arca Systems during a special conference session devoted to the subject.  However, while packaging companies were presenting new returnable solutions to the market, OEMs and carmakers were more interested in when some form of pooling might become available in Russia, and which standards, Galia or VDA, would be used. Gefco and Chep representatives hinted that production figures needed to grow before a pooling concept was financially viable, but in the meantime, a range of solutions are being put in place by individual carmakers.

Stephanie Hegels from VW in Kaluga said that the containers used in Europe were not appropriate for Russia. Longer distances and bad roads meant the need for different types. Michael Kutin of Schoeller Arca Systems said that its new product, Magnum Helium, must comply with different requirements than those in Europe, as Russia containers may be exposed to extreme temperatures.    

Michael Kutin, Automotive Sales Director, Russia – Schoeller Arca Systems

But after all that…

For all its frustrations there remains huge potential for automotive production and logistics in Russia.  Volumes this year are expected to rise modestly from 2009’s level to reach between 1.5 and 1.7 million vehicles.

Russia’s substantial natural resources, combined with a low rate of car ownership (less than one car per family compared to eight in the US), is the recipe for future growth.

It may take years before the market regains its 2008 peak of 3 million cars, but as NYK’s Svein Steimler commented: “Patience is a virtue”. In the Russian context, it certainly is.     

Conference calendar