Boris Firsov Principal Roland Berger Strategy Consultants Russian-Japanese_Investment _Forum-E.ppt 1 Situation in the Russian automotive market and opportunities for the automotive suppliers 1st Russian-Japanese Investment Forum Round table Investments into Russian automotive industry St.Petersburg, 07.09.2006
Content Page A. Booming economy in Russia Automotive industry as one of major drivers 3 B. Russia A promising market for the international automotive industry 9 C. Chances for automotive suppliers 15 D. Roland Berger Strategy Consultants 23 Russian-Japanese_Investment _Forum-E.ppt 2
A. Booming economy in Russia Automotive industry as one of major drivers Russian-Japanese_Investment _Forum-E.ppt 3
Source: EIU, Goskomstat Russian-Japanese_Investment _Forum-E.ppt 4 Booming Russian economy: stable growth and positive outlook Russia s macroeconomic development Economic growth Macroeconomic stability GDP growth [USD bn] Inflation [%] Forecast 9.340 7.600 6.060 1.314 2.640 4.040 1.078 1.750 1.780 2.400 895 582 391 8,3% 257 346 260-3,4% -4,9% 4,3% 7,1% 5,7% 4,6% 4,2% 1996 1998 2000 2002 2004 2006 2008 2010 Nominal GDP Real GDP growth Nominal GDP per capita 100 50 0 85,7 20,8 15,8 Forecast 11,7 9,6 8,3 2000 2002 2004 2006 2008 7,2 2010 Trade balance 1995-2010, [USD bn] Foreign currency reserves [USD bn] 150 Forecast 126,2 102,6 95,6 100 76 58 50 31 32 42 0 1995 1997 1999 2001 2003 2006 2008 2010 182,2 124,5 76,9 28,0 36,6 47,8 17,8 12,2 12,5 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 5 Russia managed to improve major macroeconomic indicators significantly in just 7 years after the crisis in 1998 Development of macroeconomic indicators 1998 Δ 7years 2005 2006e GDP [USD bn] Inflation rate Budget profit/deficit +/- [as % of GDP] Currency reserves [USD bn] International trade [USD bn] Annual FDI [USD bn] Annual FDI [as % of GDP] 257 x 3 741 895 84,4% 1/8 10,9% 9,6% - 6,0% +12% + 6% 4,2% 12,2 x 15 182,2 290 115 x 3 332 374 2,8 x 6 16,1 15,0 1,1% x 2 2,1% 1,7%
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 6 Despite some drawbacks Russia currently has a good investment climate Business environment 1 Economic problems 1 Stable policy + 2 Old industrial structure and necessity of restructuring Dependence on oil prices Insufficient international competitiveness and integration into global economy Administration and image Increasing political stability Western orientation Broad support among population 2 Increasing legal security Stronger investor and shareholder rights Creation of clear business framework More open and transparent Sluggish and inefficient administration Bureaucracy and corruption Russia s bad image 3 Liberalization of the economy Lower monopolization and higher liberalization Financial stability WTO talks in final stage
Source: Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 7 Foreign investments have been showing an impressive growth in the recent years: automotive industry among major growth drivers Foreign investments in Russia, 1998-2005 [USD bn] Development of selected industries 2000-2010e Production indices [2000=100%] CAGR [1998-2005] : 24 % 53,7 250 230 210 Forecast 212 Construction 11,8 9,6 11,0 14,3 19,8 29,7 40,5 190 170 150 130 110 90 70 100 152 138 110 Machine-building 175 Automotive 1) 146 50 1998 1999 2000 2001 2002 2003 2004 2005 2000 2005 2010 Investments without fleeing capital Fleeing capital 1) Passenger cars
International comparison shows that the potential of automotive industry for Russia s economy is far from being exhausted Automotive industry share of GDP, 2004 [as % of GDP] 1) Automotive industry potential share of GDP in Russia [USD m] 1) 13,0 Average: 8,5% +550% 7,9 7,8 3,9 3,8 2,0 DE CN USA UK PL RU 1) If reaching average level, based on nominal GDP of USD 741 bn in 2005 Source: EIU, Roland Berger Potential 1) : USD 48 bn 14.820 RU +325% 62.985 Average share of GDP 96.330 Share of GDP D 2,0% 8,5% 13,0% Russian-Japanese_Investment _Forum-E.ppt 8
B. Russia A promising market for the international automotive industry Russian-Japanese_Investment _Forum-E.ppt 9
Source: ASM-Holding, Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 10 In 2016 Russian automotive market will reach 2,6 m units B and C classes will enjoy the highest growth rates Development of the Russian automotive market 2005-2016 Market volume by vehicle origin, [m units] CAGR +5% Market volume by segments, [m units] + 73% 1,5 0,5 0,2 2,6 2,1 1,0 0,7 0,7 0,9 Import Foreign brands produced in Russia 1,5 0,2 0,1 1,0 2,1 0,3 0,3 1,0 2,6 0,4 0,4 1,2 Rest SUV E D C 0,8 0,7 0,7 2005 2010 2016 Russian brands 0,1 0,5 0,6 2005 2010 2016 B A
Source: ASM-Holding, Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 11 Asian brands are currently the leaders among foreign companies in Russia - European OEMs have yet to catch up Sales distribution by brand origin Shares of regions [%] Comments 100% > Mostly Japanese OEMs invested into 90% 25% brand and network development in Russia 80% 70% 60% 50% 40% 30% 20% 10% 49% 9% 10% 32% Russia North America Europe Asia 9% 21% 45% 0% 2006 2007 2008 2009 2010 2014 2015 2016 > Korean OEMS increased their sales thanks to the contract assembly by local industrial partners > Market development and local production should go in parallel > Big question the future AVTOVAZ strategy
Total production capacity of foreign OEMs in Russia will reach 1 m units by 2010 Plans of foreign OEMs in Russia 2005 2010 2005 2010 11.780 8.000 33.038 72.000 2.293 1.918 0 0 10.246 2.000 St. Petersburg 40.000 150.000 1) Kaliningrad Kaluga Moscow 115.000 Nab. Izhevsk Tchelny 120.000 Taganrog Togliatti Elabuga 0 0 0 3.031 22 50.000 50.000 25.000 65.000 15.000 42.451 100.000 0 40.000 51.819 50.000 0 45.000 SOP planned for 2007-2008 Source: ASM-Holding, Roland Berger in Partnership with a Russian company 1) Low probability Russian-Japanese_Investment _Forum-E.ppt 12
Source: SEZ federal law, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 13 There are already several economic incentives existing, which can be used by foreign manufacturers Overview of state economic incentives Regional incentives without special economic zones Special economic zones (SEZ) Profit tax up to 4% exemption Property tax partial or full exemption (2,2% of property value) Rent low percentage of the cadastre price Infrastructure possible investments on behalf of regional authorities St. Petersburg Lipetsk region Moskow N. Nowgorod Import Duty: 0% Izhevsk SEZ Sales into Russia: Duty: Components 8% 1) Export is duty free Further incentives (Profit tax, property tax, rent etc.) St.-Petersburg Nissan- and Toyota-factories city covers infrastructure investments Taganrog Togliatti Elabuga SEZ Automotive centers 1) Average calculated for a C segment car
Decree 166 is the most crucial incentive for OEMs, however it is not yet applicable to suppliers Legal environment 2004 2005 2006 Comments Decree 166 1) (since 2005) Decree 135 (since 1998) or no special conditions Application has been approved End of application reception > Decree 166 is much more attractive for OEMs every assembly plant switches to it > End of application reception planned for the end of 2006 > Decree 166 is not yet applicable to suppliers a similar rule is being prepared 1) Only for industrial production: welding, painting and final assembly Source: legal documents, Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 14
C. Chances for automotive suppliers Russian-Japanese_Investment _Forum-E.ppt 15
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 16 Products and know-how of Russian suppliers are not state-of-theart modernization of the industry is necessary Supplier industry situation and problems in Russia Situation on the local supplier industry Russian OEMs have quite high vertical integration for this reason there is no developed supplier industry yet Products for Russian OEMs don t correspond to western standards Actual environmental guidelines (EURO-3 etc.) are partially not yet implemented Western OEMs determine the growth of the car market, however their production volume is still too low Import duties for component (5-20% without any special conditions) are already quite low Problems of the supplier industry Traditional close ties with one OEM Uncompetitive products Modernization is necessary to reach western production standards Insufficient know-how for the production of modern and complex components Investments into modern production capacities and products for western OEMs are still very often unprofitable because of low volumes Import of western components for local assembly is still a reasonable alternative
Source: ASM Holding, Goskomstat, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 17 Supplier market for local production grows at 20% p.a. increasing localization and outsourcing share as major growth drivers Development of the car supplier market 2005-2014 Supplier market for local production [EUR bn] Growth forces [%] Comments 0,9 0,1 0,8 + 20% p.a. 2,7 1,6 2005 2010 4,8 3,6 1,1 1,2 For foreign OEMs For Russian OEMs 26 43 2014 Russ. OEMs Outsourcing 66 70 Int. OEMs 2005 2010 91 Local content 80 Russ. OEMs 12 36 Int. OEMs > Supplier market for local production grows at 20% p.a. on average > Supplier industry will take over a greater share of value creation from OEMs in the future > Triple growth of local procurement volumes of foreign OEMs
Source: Company information, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 18 Until now only few large international suppliers set up local production in Russia Overview of foreign OEM suppliers in Russia Seats Clients: Ford, Hyundai Tiers Clients: Aftermarket Production volume in 2005: 2.1m units St. Petersburg Moskow Ryazan Seats Clients: GAZ, PAZ N. Novgorod Instrumental panels, Tachometer Clients: AvtoVAZ, GM- AvtoVAZ, KamAZ Windows/Glass Clients: Ford Engels Togliatti Tschistopol Samara Exhaust systems Clients: GM-AvtoVAZ Lights Clients: AvtoVAZ, GM- AvtoVAZ, GAZ, UAZ Injection systems Clients: AvtoVAZ, GM- AvtoVAZ Wiring Clients: AvtoVAZ, GM- AvtoVAZ, Ford
For many components, critical volume is still available at the local OEMs only Critical mass of annual car production is necessary [ 000 units]1) 1.000 500 500 500 Possible clients: Russian OEMs Possible clients: foreign OEMs 400 250 200 200 200 200 150 150 125 100 80 40 25 Pistons Chassis Clutch Complex plastic components Radiators Cylinder sealing Injection systems Castings Safety belts Manual transmission Steering systems Air conditioners Bumper Ceiling upholstery Exhaust systems Seats Head-rests 1) Selected examples Source: Interviews, Roland Berger Russian-Japanese_Investment _Forum-E.ppt 19
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 20 Clear plans of international OEMs give the suppliers necessary security for planning and decision making Market entry of foreign OEMs and suppliers OEMs Suppliers OEMs Suppliers Comments > Considering disclosed plans of foreign OEMs global suppliers have a very good chance now >Manysuppliers will follow their major clients, such as Toyota, Nissan, Volkswagen 2006 2010 Preparing for SOP
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 21 In case of a thorough analysis, market entry risk in Russia can be well managed and significantly reduced Steps of the market entrance strategy development 1 2 3 4 5 Market analysis Products and target clients Development of the business model Evaluation of different sites Preparation for implementation Development of the client markets (OEMs) Development of the own market (suppliers) Competitor activities Definition of the launch product portfolio Identifying target clients and best ways of approach Sales volume forecast Development of the Marketing and Sales strategy Definition of the procurement strategy (incl. localization) Definition of the added value share/production flow Development of the logistics concept long distances to be considered Personnel and F&E concept Evaluation of alternatives considering following issues: Infrastructure Duties and taxes Business incentives/sub sidies Business Case (rough) as a basis for decision making Selecting market entrance form based on the experience of other companies Development of the action plan Clarification of legal issues
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 22 PROJECT EXAMPLE Russian suppliers are very interested in joint production with a foreign partner Company Big German automotive supplier Russian companies are highly interested in a strategic partner Project aim Finding a partner for license production in Russia Results 3 partners after 8 weeks Research results 100% 65% 52% 23 Approached companies 8 Not interested or insufficient resources 15 Plant visits by Roland Berger 3 12 Companies suitable for licensed production Project flow and results Defining criteria for a Russian partner Selecting the site Selecting companies for the long-list and detailed research Prescreening by Roland Berger Joint client visits Business-concept
D. Roland Berger Strategy Consultants Russian-Japanese_Investment _Forum-E.ppt 23
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 24 Roland Berger Strategy Consultants is the leading strategy consultancy with global presence Amsterdam Barcelona Bahrain Berlin Brussels Bucharest Budapest Warsaw Vienna Hamburg Detroit Düsseldorf Zagreb Frankfurt Kiev Lisbon London Madrid Milan Moscow Munich New York Paris Beijing Prague Riga Rome Sao Paulo Shanghai Stuttgart Tokyo Zurich Sales 550 m EUR 1 700 employees 32 offices in 23 countries 30% out of Top 1 000 companies worldwide and 40% of leading European companies are our clients
Russian-Japanese_Investment _Forum-E.ppt 25 Main goal of Roland Berger developing a complete strategic solutions for top management Specialization of Roland Berger Strategy Consultants R&D, Production, Logistics, Purchasing, Quality Strategy, Marketing, Restructuring Reorganization Personnel strategy Organization Controlling and IT Concept development and implementation Environmental issues Privatization Strategic goals of top managers: competitive advantages, efficiency and growth
Russian-Japanese_Investment _Forum-E.ppt 26 Key to success: interdisciplinary teams of experts from global functional and industrial competence centers Industrial experts Competence Centers Automotive Energy and Chemicals Consumer Goods and Retail Engineered Products and High Tech Financial Services Infocom Pharma and Healthcare Public Sector Transportation Functional experts Regional experts Competence centers Corporate Development Information Management Operations Strategy Marketing and Sales Restructuring and Corporate finance Western Europe Central and Eastern Europe USA South America Japan, China CIS and Baltic States South-Eastern Asia Regions
Russian-Japanese_Investment _Forum-E.ppt 27 Competence center Automotive serves the leading companies of the industry Selected clients OEMs Suppliers Service providers Key facts Roland Berger automotive One global pool of professionals (~120) Automotive experts in 22 offices worldwide Serving more than 100 clients across the globe since 2000 More than 300 projects since 2000
Source: Roland Berger Russian-Japanese_Investment _Forum-E.ppt 28 Roland Berger has gathered wide-ranging experience in the automotive sector in Russia, Ukraine and the Baltic States Selected clients and projects in Russia, Ukraine and the Baltic States SELECTED CLIENTS SELECTED PROJECTS Developing a competitive Russian automotive supplier industry Partner search to set up license production for a large European automotive supplier Company strategy for one of the leading automotive producers in Russia Screening vehicle producers in Russia Market potential and partner search for Austrian automotive supplier Marketing and sales strategy for a large Russian tire producer Business strategy for a large Russian petrochemical holding company Market entry strategy for the Russian steel cord market Russian market test for trucks assembled in a third country Russia strategy for the truck sector Market potential for commercial vehicles in Uzbekistan, Kazakhstan, Ukraine Market entry strategy for leading European car financing bank Asset sales in Eastern Europe and China
Russian-Japanese_Investment _Forum-E.ppt 29 Your contacts for the issues related to automotive business in Russia Contacts Dr. Uwe Kumm Managing partner Russia, CIS, Baltics Member of Managing Committee CEE Moscow Tel.: +7 495 721-19-51 Fax: +7 495 721-19-54 uwe_kumm@de.rolandberger.com Boris Firsov Principal Moscow Tel.: +7 495 721-19-51 Fax: +7 495 721-19-54 boris_firsov@ru.rolandberger.com Alexei Grigoriev Project manager Moscow Tel.: +7 495 721-19-51 Fax: +7 495 721-19-54 alexei_grigoriev@ru.rolandberger.com