American and German firms have been quick off the mark to form partnerships in Russia, smelling profit in the vast population with cash to splash and a penchant for brand names.
Oleg Deripaska, the majority shareholder of Basic Element, the industry-focused group that owns Russia’s leading van manufacturer Gaz and aluminium giant Rusal, says that there is a growing demand for high quality consumer products.
After acquiring Gaz ten years ago the man who ranks as one of Russia’s richest says, “No one believed that Russia would be the biggest automotive market in Europe but it will be in three years.”
Profit through partnerships
But with the market growing at great speed, it is now Western and Japanese car-makers that are benefitting as they represent quality. Gaz invested over $800m in the design and manufacture of a new car between 2005 and 2007 but racked up a scary £1bn loss after the new model didn’t take off, partly as its launch coincided with the economic crash of 2007.
With all the facilities in place and the big players looking to leap into the market, Gaz was quick on its toes and adopted a subcontracting business model in the passenger car sector while continuing to make its light and medium-duty commercial vehicles, in which it has a 50% share of the Russian market.
The eight-year deals to produce vehicles for Volkswagen and General Motors (GM) at the Gaz facility in Nizhny Novgorod, which lies about 250 miles east of Moscow, puts the firm back in touch with its Western roots. It was born out of a partnership between Henry Ford, Stalin and Lenin in the 1920s. For Gaz, the deals make use of the capacity and investment within a site more than two times the size of Monaco.
Bo Andersson, CEO at Gaz, says that such partnerships are a good way for manufacturers to quickly enter a market with high import taxes, while continuing corruption and bureaucracy issues make setting up a factory a costly and laborious process.
While there are skills gaps in the UK the level that does exist is still very high, so British firms can offer technical ability to firms in BRIC nations, and elsewhere, as a carrot with which to gain quick entry into lucrative markets.
Mr Deripaska comments that “Gaz has learnt a lot through its manufacturing partnerships. They are good opportunity for us to train people with the support of global OEMS.”
Gaz has adopted new manufacturing principles that have brought massive efficiency savings, enabling it to slash over 50,000 jobs at its site in Nizhny Novgorod alone over the last two years while simultaneously doubling output.
The percentage of vehicles to pass every quality test on the manufacturing line for the manufacture of the GAZelle van has risen from 16.7% at the beginning of 2010 to 66.2% in May 2012, under the guidance of Bo Andersson.
Mr Andersson stepped into role of CEO in 2009 after holding the role of vice president of global purchasing and supply chain at American car giant General Motors. Not only has he led remarkable turnaround in the company’s fortunes with the a change in strategy to take on subcontract manufacturing, which will account for 25% of the company’s profits by 2014, but he has built the relationship between GAZ, other car-firms and suppliers.
Whereas once upon a time virtually everything was vertically integrated and supplied through the Basic Element empire, there are now opportunities for overseas suppliers in Russia, with Gaz and others willing to outsource for quality while maintaining the Russian features that its employees are so proud to make.
Click here to view The Manufacturer’s guide on exporting into Russia.