The Twists and Turns of the 2015 Russian Auto Market

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September 9, 2015

By Kristina Rus

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On Friday, September 4, an assembly plant of Volkswagen engines was officially launched in Kaluga, Russia. For now it will only produce 1.6-liter engine for Volkswagen and Skoda models assembled in Russia.

This motor of EA211 series is a new modification of previously manufactured EA111. German engineers managed to reduce its weight by 10%, and lower fuel consumption by 7%, and make it more compact.

Kaluga motors will equip Volkswagen Polo and Jetta, and Skoda Rapid, Octavia and Yeti, produced in Kaluga and Nizhny Novgorod.

Prime Minister of the Russian Federation Dmitry Medvedev visited the opening ceremony of the Volkswagen engine plant. 

The automotive company has invested almost € 250 million into the plant which covers an area of 32 thousand square meters. It is noted that the first stone of the plant was laid 2 years ago with the help of the Prime Minister of the Russian Federation.

Dmitry Medvedev said that this is the first time the company from another country opened an engine manufacturing plant in Russia. In addition, the Prime Minister noted that despite the short term of construction, the building is impressive, and residents will receive new jobs, good wages and a modern production facility. He called good and long the history of relations of Russia with the German automaker: “It is not subject to any corrosion or climate. This is a mutually beneficial cooperation, and we cherish it”.

The event was also attended by the representative of RF President in the Central Federal district Alexander Beglov, acting Governor of Kaluga region Anatoly Artamonov, the chief Federal inspector in the Kaluga region Alexander Savin, the German Ambassador Rüdiger von Fritsch, Ambassador of the Czech Republic in Russia, Vladimir Remek, the General Director of “Volkswagen group Rus” Marcus Osegowitsch, member of the “Volkswagen” board Thomas Schmal, representatives of partner companies, as well as foreign and Russian journalists.

Anatoly Artamonov

Anatoly Artamonov, in turn, expressed gratitude to the Federal leadership for the promotion of regional investment policy and support in the implementation of the project of the German automaker. He assured the Prime Minister that in the Kaluga region the work on creation of favorable business environment will continue to improve. “We are adjusting our educational standards to the needs of the investors, improve social infrastructure, and implement large-scale housing program, developing special training centers. People come from other Russian regions, in order to live here and work”, – said the head of the region.

Marcus Osegowitsch, General Director of the Volkswagen Group Rus said that the plant will produce 150 thousand engines per year and it will create 400 new jobs. He is confident that the Kaluga engines will be of the highest quality.

The new plant will allow Volkswagen to achieve 50% level of localization [local supply, taking advantage of the weaker ruble and insuring against currency fluctuations – KR]

In particular, according to “Rossiyskaya Gazeta”, the billet of the cylinder block will be made from Russian aluminum and come from the “Nemak” plant in Ulyanovsk. In the manufacturing process sand from the local field will be used. The supplier of wiring will be the Fujikura company.

 Any localization of production in Russia usually raises a lot of questions from consumers regarding the effect on the quality. Volkswagen notes that the engines of the local assemblies are manufactured in compliance with international quality standards of Volkswagen AG. The factory is under quality control, conducting numerous trials and tests. Control of parts at the most critical parameters is performed directly at the production process using the sensors built into the processing equipment. For continuous control of product quality the plant organized the laboratory of purity and a measurement laboratory.

Marcus Osegowitsch

As noted by the General Director of “Volkswagen group Rus” Marcus Osegowitsch, despite the continuing decline in the Russian automotive market, the investment program of the Volkswagen group not only did not stop, but also implies significant additional investments in the future. With a total investment of 1.3 billion euros, the company became one of the largest investors in the Russian automotive industry.

The interest in Russia was noted by a member of the management group Thomas Schmal, “The increased presence of Volkswagen in Kaluga – the first a car plant, and now – engine factory – indicates a strong position of the region. We want to continue this process, because we believe in the potential of the Russian automotive industry”.

Volkswagen plans to invest 1.2 billion Euros more by 2018 in the development of their car production in Russia. 

Kaluga Volkswagen plant (225 thousand cars per year) produces Volkswagen Polo Sedan, Volkswagen Tiguan and Skoda Rapid. In Kaluga, the company has been producing cars since November 2007 (the number of employees is 5 thousand people).

Russian President Vladimir Putin is satisfied with the work of Volkswagen in Russia, and its leader in particular. “Well done, a real solid person and businessman, follows through with all of our arrangements” – the head of state praised the Chairman of the Board of Volkswagen AG, Martin Winterkorn, reports TASS.

The day before was the opening of a $274 million Ford engine plant in the special economic zone district in Tatarstan, which also produces a 1.6-liter engines designed for Fiesta, Focus and EcoSport. The level of its localization will reach 60%.

In addition to Ford and Volkswagen, engines in Russia are manufactured by Renault. Mazda also announced about the plans to establish export production of power units in Russia in the coming years.

Izvestia reported that the vehicles of the Volkswagen group, assembled on the territory of Russia may be exported abroad. This was announced by the head of the Russian division of the company, Marcus Osegowitsch. Such a decision is necessary because of the falling demand in Russia. VW production is only at 50% capacity. The flip side of the weak national currency — is the ability to offer a competitive product in new markets. Osegowitsch noted that the Russian government needs to do more work to improve logistics, to change the law and expand agreements on mutual trade.

The volume of VW exports from Russia will reach 150-200 thousand vehicles per year.

Hyundai also announced that the plant in St. Petersburg started assembling Solaris models for Egypt and Lebanon. The car received better ventilation and a new battery. By the end of the year 4 thousand such cars will be produced. Director of the Russian office of Hyundai Choi Dong El noted that entering new markets is a contribution to the development of exports of Russian goods. 

Foreign management took a fresh look at the Russian crisis, says the independent automotive expert Igor Morzharetto.

Калужские Volkswagen Polo могут начать экспортировать в Западную Европу

“The foreigners finally realized that, despite global problems in the world economy, the Russian crisis is local and, unfortunately, is here for a long haul. Apparently, they have calculated the costs of wages, taxes, energy and so on and realized that given the current fall of the ruble it offers a significant prospect for exports. In addition, we have a model of the Volkswagen Polo sedan, which is produced only in Russia, says Morzharetto. Among the regions, which can import such budget cars, is possibly Western Europe.” 

The sights on the European market were also confirmed by the acting governor of Kaluga in conversation with Vladimir Putin.

According to the Association of European businesses for the first half of the year the sales of Volkswagen cars in Russia fell by 44%, which is even worse than the overall decline of the auto industry. Skoda is doing much better, models of which are assembled at the factory in Kaluga – just minus 34%.

Chief representative of the Japanese Association for trade with Russia and the newly independent states, Nakai Takafumi said that Japanese automakers are ready for long-term relations with Russia, reported RIA Novosti.

He noted that the long-term forecasts of the Russian automotive market are encouraging, and Japan, in turn, plans to increase car production in Russia (likely in Vladivostok, Far East).

It should be noted that in the spring the Russian Ambassador to Japan Yevgeny Afanasyev said that the carmaker Mazda is not going to follow the example of other automakers which left the Russian market due to lower sales caused by the economic situation in the country.

In the spring, the U.S. General Motors has announced the closure of the plant in St. Petersburg and the recall of its brand Opel from the Russian auto-market. In addition, it was announced that the assembly of Chevrolet Aveo will soon be halted at the factory in Nizhny Novgorod. As stated by the representatives of the American company, the situation in Russia does not justify investment in increasing the level of localization.

***

A surprise for the participants of the international forum “Autoevolution”, which began in Kaluga on September 8, was the absence of the representatives of “Volkswagen group Rus”.

According to the deputy chief editor of “Vedomosti” Alexander Gubsky, the founder of the forum, “a few days ago they opened an engine plant, and now they were urgently called to Wolfsburg”.

The reasons for the absence of company executives was not named. But the General Director of “Volvo Group” in Russia Peter Andersson cheered the participants of the forum that the company will resume production of automotive components from October 1st.

To the question, what is the reason for the resumption of production, Andersson replied that the crises begin, end, and then arise again. And that’s not a reason to lose optimism.

The resumption of production of trucks is not expected, although earlier it was reported that it may begin by the end of this year.

Factory workers will not be laid off, Andersson added, they are on leave with partial pay. And the staff will be preserved, because it is a very qualified staff.

Another important statement was made by General Director of PSMA Rus Jean-Pierre Marchal. According to him, PCA and MMC reached a consensus that the company will not leave the Russian market, and continue measures to adapt to the situation.

“We’ve dedicated huge investments into Russian production. We have reached a consensus,” – said Marchal.

He added that the company will continue to work on deepening localization. They found Russian partners, Marchal shared a secret, but did not yet name them.

A significant portion of the forum was dedicated to the problems of the car industry in the conditions of an unprecedented collapse of the automotive market.

The head of analytical agency “Avtostat” Sergey Tselikov, said when he predicted last year that the market will drop by 25 %, he was called a pessimist.

“Now I say, and consider myself to be excessively optimistic, about the same 25% that is awaiting us,” – said Tselikov.

He also said that he hopes that the giants of the car industry in Kaluga, as well as in other regions, will withstand the pressure of the crisis and remain on the Russian market.

One of the main themes suggested by the first vice-president and executive director of “Ford Sollers” Adil Shirinov (by the way, the factory of this company in Elabuga thanks to the deep localization and measures of state support, increased production of “Ford Fiesta” by 17%), was the problem of localization of materials from which the cars are produced.

Steel, other metals, all plastics from materials for interior finish to rubber, must be produced in Russia, and it will give a significant boost to the stabilization of the industry.

Shirinov was supported by the President of the “Avtodor Holding” Valery Draganov, who stated that a state program is needed to support domestic companies producing such materials.

At the end of the meeting Sergey Tselikov asked everyone to think about what will happen next.

“The profits are gone, many are in limbo, and it is important to understand, how much is left to wait. There will be departures of brands from the market. Not on a scale of GM, but many brands will be curtailed,” – made a sad conclusion the head of “Avtostat”.

***

Meanwhile the Russian government intends to allocate an additional seven billion rubles for the maintenance of domestic autoprop.

According to the Industry and Trade minister Denis Manturov, after the Russian car companies will get $7 billion in support, the total amount contributed in current year will reach 20 billion rubles.

Five billion will be directed into a program that is designed to update the entire auto fleet of the country. The remaining 2 billion will be distributed in equal parts to the program of preferential car leasing and preferential car loans.

***

According to the analytical Agency “Avtostat”, the ownership of passenger cars in Russia on average now stands at 284 units per 1000 residents.

In comparison, in such European countries as Iceland, Italy, Lithuania, this indicator is more than two times higher: more than 600 cars per thousand inhabitants. Russia takes the 28th place in car ownership on the European ranking. The leader of the rating is Iceland – 650 units per 1000 residents.

Closest to Russia’s neighbor and fellow of the CIS – Belarus is ahead of Russia by one position in this rating. Russia is trailed only by Serbia, Romania, Ukraine, Turkey and Albania.

***

The Ministry of Industry and Trade expects a decline of the Russian car market in 2015 by 24% to 1,98 million cars. This forecast takes into account measures of state support of the automotive market. Excluding measures of state support, according to the Ministry of Industry and Trade, the Russian market would drop by 50% to 1.3 million units.

It was also reported that sales of new passenger cars and SUVs in seven months of 2015 decreased by 35.3% compared with the same period of 2014 to 913,181 thousand. In July 2015, the market decreased by 27,5% compared with July of last year to 131,087 thousand cars.

***

KR: It should be noted that Russia has an expansive public transport network left from the Soviet days and a car is not a necessity, but still a luxury for many. Most compact neighborhoods in Soviet towns and cities were designed for walking and not driving. Under the current economic downturn the savvy Russians naturally cut their spending on non-essentials (and cars are first on that list) and are less likely to renew their vehicles resorting to tuning, the second-hand market, public transportation or walking. Therefore the seemingly alarming drop in new car sales is mitigated by local factors.

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