NAPAK

Non-commercial organization

Moscow 2012 Contents: 1. Russian automotive market 4. Industrial assembly regime 1.1. Overview of major OEM in Russia 4.1. Industrial assembly regime: for car 1.2. Market volume development (PC) manufacturers 1.3. Market shares long-term development (PC) 4.2. Industrial assembly regime: or 1.4. Passenger cars sales in Russia 2009-2011 component manufacturers 1.5. Passenger car park 2011 1.6. Estimated structure of Russian automotive 5. Foreign Component industry by 2020 1.7. Specific features of Russian automotive manufacturers in Russia industry 5.1. NAPAK support of foreign suppliers 5.2. Foreign component manufacturers in Russia 2. Russian automotive component 5.3. Strategy for development of a supplier market manufacturing footprint in Russia 2.1. Automotive component market structure 2.2. Trends of Russian automotive component market development

3. Foreign companies on the Russian market 3.1.Why does Russia need the presence of foreign suppliers? 3.2. Options for entering Russian market. Cons and Pros. 3.3. Making decision to come to Russia: main factors

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.1. Overview of major OEM (PC)

740,000

2008 2016 Cluster St. Petersburg:

170,000

790,000

1,040,000

St. Petersburg 150,000 Cluster Moscow:

Moscow 588,000

Samara Cluster Samara:

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.2. Market volume development (PC) Market volume development

3 000 000 2 613 000 13% Market volume 2007: 2 500 000 2 310 000 1,329,000 units 2 000 000 152%

1 500 000 1 329 000 Market volume 2016: -31% 1 000 000 915 000 2,613,000 units

500 000 + 96%

- Source: JDPowers 2009 2007 2009 2013 2016 Q2 • Sales went down dramatically in 2009. • Main growth expected as of 2013 further to 2016 (+152%)

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.3. Market shares long-term development (PC) 2009 (in %) 2016 (in %)

• Avtovaz will remain market leader in 2016 but on a lower level. • Global OEMs will strenghten their market position and gain more shares. • Renault-Nissan, PSA and Toyota are increasing their market shares above average.

National Association of Automotive Component Manufacturers

1. RUSSIAN AUTOMOTIVE MARKET Market shares longterm development (PC) 2009 (pcs) 2016 (pcs)

• Avtovaz remains OEM with the highest volume in total in 2016. • Importance of Global OEMs steadily growing. • Important volume increase with VW, Renault-Nissan, PSA and Toyota.

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET

1.4. Passenger cars: sales in Russia 2009 –2010

Changes in sales in monetary terms

CATEGORIES Billion $ USD OF CARS 2009 2010 Change

Russian brands 3,4 5,0 +47%

Foreign brands produced 5,9 11,8 +100% in Russia New cars import 16,5 16,9 +2%

TOTAL 25,8 33,7 +31%

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.4. Passenger cars: sales in Russia 1st half 2010 - 1st half 2011 Changes in sales in monetary terms

CATEGORIES Billion $ USD OF CARS January – June January – June Changes 2010 2011 Russian brands 2,3 3,5 +52%

Foreign brands produced 5,0 10,2 +104% in Russia New cars import 7,4 13,5 +82%

TOTAL 14,7 27,2 +85%

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.5. Passenger car park 2011

№ Measure mln. pcs. % Comments Numbers of passenger 34,0 Exceeds figures of cars including 2010 by 4,1% 1 Younger than 3 years old 5,2 15,3% 2 From 3 to 12 years old 14,0 41,1% 3 Older than 12 years old 14,9 43,6% 4 Russian makes 19,5 57,2% 4.1 Including VAZ cars 14,2 41,6% 4.2 Other Russian makes 5,3 15,6% GAZ, AZLK, IZH etc. 5 Foreign makes 14,6 42,8 Toyota is the most popular make

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.6. Estimated structure of Russian automotive industry up to 2020

Manufacturer Function Domestic International level OEM Manufacturing of vehicles full full

R&D Development of platforms and vehicles partial full

T1 Development and production/supply to n/a full OEM of completed modules T2 Production and supply to T1 of full partial components, sometimes development by requirements of T1 T3 Production of subcomponents and full n/a elements for T2 Raw and Supply of materials for Т1-Т3. full n/a processed materials

National Association of Automotive Component Manufacturers 1. RUSSIAN AUTOMOTIVE MARKET 1.7. Specific features of Russian automotive industry • Presence of home full circle automotive manufacture at the time when foreign car manufacturers came into Russian market • Presence in almost all segments of the automotive market • High degree of vertical integration (up to 80%) • Focusing on Home market • Limited number of models while producing all classes of vehicles -> absence of competition as a motivation for improving of quality • Level of quality corresponding with technological level of vehicle construction • Absence of long-term strategies of communication with suppliers: car-makers and component manufacturers exist in “parallel worlds”

National Association of Automotive Component Manufacturers 2. RUSSIAN AUTOMOTIVE COMPONENT MARKET

2.1. Automotive component market structure

General world practice: Russia:

• ОЕ (Original Equipment – • Absence of clear supplies to assembly line) differentiation between OE,  Tier 1 OES/OESS and AM  Tier 2

• Quality level of • OES/OESS (supplies to official automotive components dealers under automotive might be lower than that of manufacturer’s brand) AM

• Intermixture of OE and • AM (Aftermarket – market of AM production at the level spare part under manufacturer’s brand) of manufacturer

National Association of Automotive Component Manufacturers 2. RUSSIAN AUTOMOTIVE COMPONENT MARKET 2.2. Trends of Russian automotive component market development WORLD TREND: Assembly manufacture is separated from automotive component manufacture (GM-Delphi, Ford-Visteon, etc.)

Foreign manufacturers come to Russia as independent component manufacturers or joint ventures

Russian automotive component manufacturers develop, becoming more competitive

National Association of Automotive Component Manufacturers 2. RUSSIAN AUTOMOTIVE COMPONENT MARKET

2.2. Trends of Russian automotive component market development

ADVANTAGE FACTOR: interpenetration of Russian and foreign automotive component manufacturers into Russian and foreign automotive manufactures

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.1. Why does Russia need the presence of foreign suppliers?

• Benchmark for creating of a new type of relations “customer – supplier” • New quality criteria for local manufacturers • Application of progressive technologies • Key role of Tier-1: – “filling in the gap” • New stage of development of local automotive component manufacturers – Tier 2, 3 suppliers • Local automotive manufacturers become more competitive • Introducing of ecological and safety standards

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.2. Options for entering Russian market: PROS

Option 1: Option 2: Option 3: Own manufacture Joint Venture Postponed appearance

•100% ownership • Small financial • Absence of current participation financial risks

• Full control of • Profitable and safe automotive component location, acceptable cost • Appearance of foreign sales and equipment of public facilities, automotive manufacturers for primary furnishing qualified personnel

• Reliable partner • Time to estimate • Opportunity to choose probable business location • Support of local potential authorities

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.2. Options for entering Russian market: CONS Option 1: Option 2: Option 3: Own manufacture Joint Venture Postponed appearance •100% liability for • Dependence on a • Losses in the market probable risks certain location share • Total financial risk • Insufficient budget for • OE customers organize • Investments in full-scale business their own manufacture or equipment, personnel, expansion cooperate with other training, etc. • Limited timelines for suppliers – no need in your company • Full payment for making decision public facilities • Probable management • Heavy expenses as a difficulties result of late appearance on the market • Advantage can be taken by competitors

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.2. Options for entering Russian market Purchase of an existing manufacture PROS CONS • Business opacity • In-depth analysis of the business • Brand/manufacturer is well- “from inside” is necessary –danger of know on the market reality confrontation • Fast access to a market share • Deteriorated equipment park • Ready-made steady business • Insufficient quality of personnel is “compensated” with its number excessiveness • Strong links with suppliers and • Retraining personnel according to customers new standards is necessary

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.2. Options for entering Russian market

Joint venture or own manufacture?

ANALYSIS OF THE REASONS IN FAVOR OF OWN MANUFACTURE SET UP AGAINST ENTERING A JOINT VENTURE:

• Fundamental differences in technological level of production • Potential partners opacity (according to foreign standards) • Mutual adjustment of business processes at all levels is necessary --> expenses can’t be predicted • Potential difficulties when managing a joint venture • Foreign companies have predominating negative experience of setting up a joint venture with Russian partners. • Difference in business development strategies

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.3. Making decision to come to Russia: main factors

POSITIVE • Big market potential • Comparative conformity of a model range • Absence of serious competition in a number of criteria • Appearance of foreign automotive manufacturers with a well-known component nomenclature • Existing market share • Well-established links with local automotive manufacturers • Guaranteed business capacity

National Association of Automotive Component Manufacturers 3. FOREIGN COMPANIES ON THE RUSSIAN MARKET

3.3. Making decision to come to Russia: main factors NEGATIVE • Low price of Russian analogues • Mismatch of quality control systems • Small short-term business capacity (at the stage of start-up) due to foreign manufacturers • Absence of encouragement of investments mechanism • Quality assurance problem • Structure opacity • Organization of marketing and sales • Economical efficiency in conditions of fair competition

National Association of Automotive Component Manufacturers 4. INDUSTRIAL ASSEMBLY REGIME

4.1. Industrial assembly regime: OEM

COMPARATIVE Industrial Assembly Industrial Assembly ANALYSIS Decree No. 166 Decree No. 166 OLD NEW The agreement 8 years Up to 2020 duration period

Overall production 25 000 per year 300 000 per year

10% - after 4,5 years 30% - 4th year Localization th conditions 20 % - after 6 years 40% - 5 year 30 % - the 8th year 55% - 6th year

Technological SKD percentage is not SKD – 5% of vehicles operations specified (?) during 36 months

National Association of Automotive Component Manufacturers 4. INDUSTRIAL ASSEMBLY REGIME

The new agreement concluded by

VOLKSWAGEN - GAZ GROUP JSC FORD SOLLERS RENAULT-NISSAN -“AVTOVAZ” GENERAL MOTORS

National Association of Automotive Component Manufacturers 4. INDUSTRIAL ASSEMBLY REGIME

4.2. Industrial assembly regime: OES

Order № 533/№1018/137n of 17.12.2009 Order №678/№1289/184n of 24.12.2010 (old) (new)

The Agreement duration period For manufacturers of engines 7 years The new Agreement is concluded For manufacturers of speed gearboxes before December 31st, 2011 and is and axels 7 years valid up to December 31st, 2020 For manufacturers of other components 5 years

National Association of Automotive Component Manufacturers 5. FOREIGN OES IN RUSSIA

5.1. NAPAK support of foreign suppliers

 ANALYSIS OF THE PROJECTS

 CONTACTS WITH FIELD-ORIENTED INSTITUTIONS

 INDUSTRIAL ASSEMBLY

“TURN-KEY” PROJECTS: - Selection of design organizations and subcontracting enterprises - Selection of a site and partners

 RECOMMENDATIONS OF SUPPLIERS

National Association of Automotive Component Manufacturers 5. FOREIGN OES IN RUSSIA

5.2. Foreign component manufacturers in Russia

• ASAHI - glass production (Bor Glass Works) • JCI – seat production for Ford Motor Company (Vsevolozsk) • LEAR – seat production for GAZ (N.Novgorod) • TENNECO – exhaust system production for GM / AutoVAZ, Ford • DELPHI – wire harnesses production (Samara) • BOSCH –sparkplugs Saratov • MAGNETI MARELLI – lighting systems production, Ryazan • TRW – switches production for Audi and VW (under license agreement) • ARCELOR – galvanized automotive steel production (JV with Severstal) • Siemens VDO (now Continental) – cluster and electric components production • ZF – transmission assembly JV (Naberezhnye Chelny) • TUDOR / EXIDE – batteries production under license agreement • TOYOTA BOSHOKU – seat production (St.Petersburg)

National Association of Automotive Component Manufacturers

5. FOREIGN OES IN RUSSIA

5.3. Strategy for development of a supplier manufacturing footprint in Russia • GO FOR Business incremental! >>> shaping the Russian component industry’s tomorrow – NOW • Development of local components suppliers base – TAKE ADVANTAGE • Production of aftermarket products • Creation of local engineering pool of experts • Expanding the range of manufactured products • Survey and use of export potential of the local production • Gradual integration of a Russian enterprise into the global business process and supply chain

National Association of Automotive Component Manufacturers CONTACTS

Web site: http://napak.ru E-mail: [email protected] [email protected] Tel.: +7 (499) 973 01 76 Fax: +7 (499) 973 13 49 Address: 127018, Russia, Moscow, Sushevsky val, 5, bld. 2

National Association of Automotive Component Manufacturers