Design and Engineering Service Opportunity within Russia and the CIS “Evaluation of the Outsourced Product Development Market and Identification of Potential Opportunities for UK Design and Engineering Companies” FINAL REPORT Prepared for SMMT June 2008 “We Accelerate Growth” Aims and Objectives of the Project: The project objectives were to establish the size and potential of the Outsourced Product Development market in Russia &CIS countries and to identify areas which will require UK Engineering Consultancy support allowing the DEG to: “Identify Russian Market Potential and Evaluate Growth Opportunities for British companies in the Russian Design and Engineering Services Market.” Geographic Scope : The project focussed on Russia and the CIS countries of Belarus, Ukraine, Kazakhstan and Uzbekistan. Vehicle Segments: The project focuses on the following vehicle segments, namely: Project aims, Objectives and Scope and Objectives aims, Project • Passenger Cars, • Light and Heavy Commercial Vehicles, Confidential to SMMT/DEG 2 Project Approach Frost & Sullivan followed a three phase approach for the SMMT. In the first phase, the aim was to create a fact foundation to evaluate the market across the regions in order to target OEMs and Tier 1 suppliers. Also the aim was to understand the potential for outsourced engineering services. The interim report was presented to the SMMT where key findings were be presented where queries and feedback was discussed. Phase 2 then finalised the market intelligent exercise and this document is the final report which will be presented to the SMMT and DEG group members on the 11th June 2008 . Interim Phase 1 Report Phase 2 Delivery of Final The Project Approach Project The Initial Market Delivery Additional Market Report & Intelligence and Intelligence Presentation of Exercise Feedback Exercise Results Session Presentation 11th th Nov „07 – Feb „08 Presentation 20 Feb – May „08 June „08 February „08 Current Status Confidential to SMMT/DEG 3 Interview Schedule The research has been gathered through primary interviews. Frost & Sullivan focussed the scope on Russia, Ukraine, Kazakhstan, Uzbekistan and Belarus as the diagrams below show that it is in these countries that Passenger Cars, Light and Heavy Commercial Vehicles and Buses and Coaches are produced. 2006 Vehicle Production for Russia and the CIS Passenger Cars Light and Heavy CV‟s Buses and Coaches Kazakhstan Belarus Belarus Uzbekistan Uzbekistan 1% Ukraine 7% 2% 0.01% 11% 3% Ukraine Ukraine 15% 5% The Project Approach Project The Russia 93% Russia Russia 73% 90% Confidential to SMMT/DEG In total, 26 companies were spoken to throughout the project Complete interviews were held with the following companies in the project Companies Interviewed Segment Position in the company ZAZ OEM Chief Designer Asia Auto OEM Technical Development Director GAZ Group OEM Passenger Car Competence Centre Product Planning Development Director Kamaz OEM Director of Product Development Department Deputy Chief Engineer ZIL OEM Deputy Chief Engineer Ural (GAZ) OEM Product Planning Director SeAZ (Avtokom) OEM Chief Designer Skopinsky Agregatniy Zavod Supplier Technical Director Avtopribor Supplier Deputy to the technical director AutoKrAZ OEM Deputy Chief Engineer AvtoVAZ Aggregat Supplier Deputy Director NAAZ Supplier General Director ZMZ Supplier Director of the Technical Department UMZ Supplier Chief Designer Project Interviews Project Partial interviews were held with the following companies in the project. Information from these interviews was used to validate market information. Companies Referenced Segment Position at the company UAZ (Sollers) OEM Chief Designer Bogdan OEM Chief Designer AvtoVAZ OEM Deputy Chief Designer Izh-Avto OEM Technical Director KZAE Supplier Main Engineer YaMZ Supplier Development Director MAZ OEM Market Research Director Autodesign D&E Provider Director Avtoprostor D&E Provider Commercial Director Novgorod State University D&E Provider Head of the Vehicle Department Confidential to SMMT/DEG 5 1. Executive Summary Slide 8 2. Overview of the Russian and CIS Automotive Markets Slide 14 3. Overview of the Russian and CIS Design and Slide 24 Engineering Market 4. Strategic Analysis of the Outsourced Design and Engineering Market Slide 37 5. Demand Side Analysis Slide 56 6. Profiles of Key OEMs and Suppliers Slide 61 7. Strategic Conclusions and Recommendations Slide 98 Appendix 1. Russian and CIS Automotive Markets Slide 104 2. PESTLE Analysis Slide 110 Confidential to SMMT/DEG 6 1. Executive Summary • Overview of the Russian and CIS Automotive Industry Slide 8 • Position of the Russian and CIS D&E Market Slide 9 • Key Market Drivers, Restraints and Challenges Slide 10 • Key Market Trends Slide 11 • Strategic Conclusions and Recommendations Slide 12 • Willingness to Cooperate by OEM Slide 13 Confidential to SMMT/DEG 7 D&E Budget in Russia and CIS Automotive Markets Represents Only 2 per cent of the Global D&E Spends • High market growth rates and attractive investment climate Market opportunities are in Russia and CIS countries are forcing rapid entry of rapidly identified leading EU, US, Japanese, Korean and Chinese OEM’s. • Increasing oil and raw materials prices have negative Mass entry of foreign OEM’s impact on the competitive advantages of local vehicle manufacturers and components producers. • Gradual shift in consumer demand towards higher quality Local OEM’s look for and service level changes the consumption preferences potential and patterns. partnership/collaboration Global D&E Markets, 2007 4,500 • While global market for D&E services is 4,050 12% 2% 4,000 estimated to reach €4 billion in 2007, D&E Executive Summary Executive 3,500 spend in the Russian and CIS market 3,000 86% reached €85.7 million for the same period. Million Euro Million 2,500 • Lower D&E spends in Russia and CIS 2,000 markets are the reflection of the difficult 1,500 times the Russian and CIS automotive 1,000 540 industries are facing. 500 86 0 • Russian and CIS companies are expected Global D&E Market Indian D&E Market Russia and CIS D&E to increase budgets devoted to D&E in the Market next 8 years. Confidential to SMMT/DEG 8 Outsourced D&E Market Is Expected to Increase in the Next 8 Years and Reach 58 per cent of Overall D&E Market In Russia and CIS Russian and CIS D&E Markets, 2007 • Outsourced D&E market has strong potential in € 85.7 million Russian and CIS countries being capable to € 38.5 potentially generate up to €38.5 million in turnover million by the results of 2007. 45% of D&E • Outsourced D&E services have strong growth potential in the next 8 years reaching €92.1 million market in turnover that represents almost 140 per cent increase compared to the level of 2007. Russian and CIS Russian and CIS Russian and CIS Outsourced D&E Markets, 2007 D&E Market Outsourced D&E Market Manufacturing Engineering • Efforts of the Russian and CIS OEMs and 15% Executive Summary Executive suppliers in expansion of the product lines and Design modernisation of the existing products are Test & Validation 10% 30% reflected in the D&E budget allocation across different D&E sectors. • Design of the new products (virtual Product modelling, interior and exterior design) and Engineering product engineering take 75 per cent of the 45% overall outsourced D&E market in Russia and CIS. Confidential to SMMT/DEG 9 Key Market Drivers, Restraints and Challenges Probability Lack of in- Possibility of market turmoil similar to the Low house Expansion of OEM‟s technological product lines Russian government default of 1998. expertise by requires new D&E OEMs and approach Suppliers Government Increasing sales supports Lack of professionals in industry would Low allows increase investments into financing of persist. outsourced projects D&E Drivers Investment climate would worsen due to non-competitive and questionable steps Low followed by the State Authorities in regulating business environment. Partnership with Complicated foreign OEMS and Executive Summary Executive organisational suppliers slows Absence of market transparency and processes raise Medium penetration of the administrative barriers limiting barriers for efficient foreign D&E development of the Russian and CIS collaboration providers Low D&E outsourced D&E market. spends Language barriers Restraints still negatively compared to Market Challenges Russian and CIS OEMS and suppliers the other affect increase collaboration with foreign OEMs developed communication Medium and suppliers. markets between organisations Source: Frost & Sullivan Source: Frost & Sullivan Confidential to SMMT/DEG 10 Outsourced D&E Services Have Strong Potential for Growth in the Next 4-5 Years Key Market Trends in D&E Market (Russia and CIS), 2007-2015 Market Trend 1-2 Years 3-4 Years 5-6 Years Entry of foreign D&E providers to the Russian and CIS markets; intensification of collaboration with local OEMs and suppliers. Accelerated growth of design and engineering sector. Modernisation of the production facilities to support market sales. Executive Summary Executive Consolidation of the market General improvement of business environment and normative legislarure. Tightening of competition across the segments Market transparency improvement. Strength of the trend Source: Frost & Sullivan Confidential to SMMT/DEG 11 DEG Member Should Consider Active Search for Collaboration with Russian and CIS Companies Proactive business development • Primary focus should be given to offering solution in exterior and interior design, face- Passenger Car Ability