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 Executive Summary Key Market Drivers, Restraints and Challenges Restraints Drivers technological compared to expertise by developed Lack of in OEMs OEMs and Suppliers Low Low D&E the other markets spends house outsourced projects barriers barriers for efficient Increasing sales processes raise allows allows increase organisational collaboration Complicated financing of - Expansion of OEM‟s requires new D&E Language barriers Language barriers communication still still negatively product lines organisations approach between between affect affect Source: Frost & Sullivan Source:Frost investments into foreign foreign OEMS and Government penetration of the Partnership with suppliers slows supports foreign foreign D&E D&E providers Confidential to SMMT/DEG

Market Challenges outsourced market. D&E development of the Russianand CIS administrative barriers limiting Absence of market transparency and persist. Lack of professionals in industry would and suppliers. increase collaboration with foreign OEMs Russian and CISOEMS and suppliers Russian government default of 1998. Possibility of market turmoil similar to the regulating regulating businessenvironment. followed by the State Authorities in non Investment climate worsenwoulddue to - competitive and questionable steps Source: Frost & Sullivan Source:Frost Probability Medium Medium Low Low Low 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 to lifting and new models design. show OEMs • Modernisation of the existing vehicles is expertise and required. technological Complex superiority solution • Existing expertise of the DEG members in cabin exterior and interior design is required by Commercial the local OEMs. Vehicle OEMs Adaptation to • Modernisation of the existing vehicles in the local required. business environment • Product engineering has strongest demand from all the Tier 1 & 2 suppliers. • Expertise in low cost components engineering

Tier 1 & 2 is required. Executive Summary Executive Suppliers • Local companies need support in modernisation of the production processes. • Support in implementation of the D&E software. Success Factors

• While Russian and CIS OEMs and Tier 1&2 suppliers search for the solutions in the all design and engineering areas, SMMT/DEG members should start planning visits to local companies.

Confidential to SMMT/DEG 12 Location of Organisations Willing to Cooperate with SMMT DEG

Scale used for willingness to co-operate 0= No Interest, 4 = High Interest Avtopribor = 3

NAAZ =1 RUSSIA

ZIL = 0 GAZ = 3 AvtoKOM = 4 UMZ = 3 YaMZ = 2 UAZ = 2

MAZ = 2 KAMAZ = 4 ● Ulyanovsk ● Nizhniy Novgorod Ural (GAZ) = 3 ● Vladimir ● Miass ● Naberezhnyje Chelny  Moscow Minsk  ● Tolyatti Executive Summary Executive BEL ● Skopin Asia Auto = 1

SAAZ = 4 UKR●Kremenchu ● Zaporozhie KZAE = 1 g KAZ

UZB

AvtoKraz = 1 ZAZ = 2 AvtoVAZ Aggregat = 3.5

ZMZ = 3

Confidential to SMMT/DEG 13 2. Overview of the Russian and CIS Automotive Markets

• Analysis of the Russian and CIS Automotive Industry Slide 15

• Overview of the Vehicle Production and Sales in Russian and CIS countries Slide 17 • Map of Russian and CIS Passenger Car OEMs Slide 20 • Map of Russian and CIS CV and BUS OEMs Slide 21 • Overview of the Key Holding Groups Slide 22

Confidential to SMMT/DEG 14 Russian and CIS Market Have Large Number of Automotive OEMs and

Suppliers Across All Segments Number of Local OEMs per Sector, 2007 • High growth rates of CIS automotive markets and 20 attractive investment climates especially in the 20

Russian automotive industry are forcing rapid entry of 15

leading EU, US, Japanese, South Korean and Chinese 10 OEM’s. 4 5

Passenger Cars Passenger 1 1 • Russian and CIS automotive industries feature more 0 than 40 local OEMs and more than 2,000 Tier 1 and Tier 2 suppliers. 20 14 15

• Increasing oil and raw material prices have a negative 10 4 impact on the competitive advantages of local vehicle 5 3 1

manufacturers and components producers. CV‟s andLightHeavy 0

• A gradual shift in consumer demand towards better 20 17 quality and service level change consumption 15 preferences and patterns. 10 Russian and CIS OEMs are focused on the creation of

5 2 Russian and CIS Automotive MarketsOverview Automotive CIS and Russian JV with foreign OEM‟s, assembly of foreign brands, re- andCoaches Buses 1 1 0 branding, creation of new models and/or general Russia Ukraine Belarus Uzbekistan business reorientation.

Confidential to SMMT/DEG 15 Russian OEMs in Truck, Buses & Coach Segments Hold More than 90% of All Production in CIS

OEM‟s Russia Ukraine Belarus Uzbekistan Kazakhstan Uzbekistan 1% • AvtoVAZ 11% Ukraine • GAZ 15% • Severstal Avto (UAZ) • ZAZ • UzDaewoo • Bogdan Auto Passenger • Izh-Auto • Anto-Rus Cars • Avtokom (SeAZ) • TagAZ • Evrokar • Avtotor Belarus • GM-AvtoVAZ Russia Ukraine 7% • Others 73% 3% • GAZ • AutoKrAZ • BelAZ • SamKochAuto • Kamaz • Rotor • MAZ • ZAZ • MoAZ Commercial • ZIL • MZKT Vehicles • URAL • UAZ • Others Russia Belarus Uzbekistan 90% • Kamaz • LuAZ 2% 0.01% • MAZ • SamKochAuto • GAZ Group (5 • LAZ Ukraine OEMs) 5%

Russian and CIS Automotive MarketsOverview Automotive CIS and Russian Buses and • Bogdan Coaches • Others

Russia 93%

Confidential to SMMT/DEG 16 Russia Demonstrates 16.9% Growth in Sales of All Passenger Vehicles reaching 2.07 million Units Sold

Light Vehicles Sales vs Production (Russia, Ukraine, Belarus and Uzbekistan), 2006

2,000,000 1,500,000 1,000,000 500,000 -- 500,000 1,000,000 1,500,000 2,000,000

+16.9% Russia +5.9%

Ukraine demonstrates outstanding performance +36.1% Ukraine +25.0% both in sales and production of the vehicles

Belarus Sales Production

+19% Uzbekistan +38.7%

Russian and CIS Automotive MarketsOverview Automotive CIS and Russian • Russian and Ukraine demonstrate outstanding performance in terms of production of the passenger cars and corresponding sales.

Confidential to SMMT/DEG 17 Production Forecast of Passenger Cars in Russia by Manufacturer Country of Origin: 2005 - 2012 1,658 thousand units

50.2 144.2 48.7 41.1 125.8 1,068 thousand 33.3 95.5 225.5 32.3 units 25.3 0.3 9.9 196.8 212.0 111.3 182.1 Others 153.4 41.8 72.1 269.0 57.3 78.3 87.8 52.1 168.5 14.8 113.9 152.1 216.8 China 85.7 122.8 142.3 178.2 198.2 220.5 346.5 Japan 292.1

Korea

975.0 EU 910.3 877.9 886.0 756.7 741.6 733.7

Production, thousand thousand Production, units 606.1 622.3 USA

Russia

Russian and CIS Automotive MarketsOverview Automotive CIS and Russian 2004 2005 f2006 f2007 f2008 f2009 f2010 f2011 f2012

• Mass entry of foreign OEM’s will support increasing market sales and long term market

potential. Based on JD Powers Estimations for Vehicle Manufacturers in Russia

Confidential to SMMT/DEG 18 Current Capacities Versus Projected: Autokom and Roslada Might

Seize Production of Passenger Vehicles Trend

300,000

Production of vehicles Roslada to 250,000 be seized

200,000

150,000 Capacity, units Capacity, 100,000

50,000

0

GAZ GM Ford Other Avtotor AZ Altai TagAZ Toyota Autokom Izh-Auto Renault Roslada Great Wall GM-AvtoVAZ Volkswagen 2005 f2012 Severstal Auto

• While majority of the foreign OEMs in 25,000 Roslada Production Volumes Russia are expected to increase 20,000 15,000

Russian and CIS Automotive MarketsOverview Automotive CIS and Russian production capacities in the next 8 10,000

years, Russian and CIS OEMs still 5,000 have extra capacities 0 2004 2005 2006 2007 2008 2009 2010

Confidential to SMMT/DEG 19 Production/ assembly Clusters are Located Around Moscow, St Petersburg and Samara Hyundai Planned places for OEM’s (2008) FORD Existing OEM’s (2008) Toyota UAZ Nissan BAIC RUSSIA Opel Renault KIA GM - AvtoVAZ BYD GAZ BMW AvtoKOM AvtoVAZ GM Avtoframos Ssang Yong Chery PSA KIA ● St. Petersburg VW IZH-Avto ● Nizhniy Novgorod Kaliningrad ● Mitsubishi LADA Uliyanovsk● ● Izhevsk Tata Samand Nab. Chelny ● ● Elabuga FAW Geely Moscow Minsk   Samara ● BEL ● Kaluga Fiat Novouralsk ● LADA Hyundai Great Wall ● Lutsk UKR Hyundai ● Uzhgorod ● Zaporozhie AvtoVAZ-Magna Ust-Kaminogorsk●

Mapping of the Passenger Car OEMs Car Passenger the of Mapping ● Taganrog KIA KAZ VW Mercedes Benz ● Cherkesk AvtoVAZ Dadi UZB OPEL Skoda ● Asaka Chevrolet ZAZ GM Chery LADA * PSA and Mitsubishi are expected to have a joint production in Kaluga

Confidential to SMMT/DEG 20 Production/ Assembly Clusters are Located Around Naberezhnie Chelny and Nizhny Novogorod

Planned places for OEM’s (2008) Existing CV OEM’s (2008)* Existing BUS OEM’s (2008)* RUSSIA Scania KAAZ Semar Hyundai Volvo PAZ GAZ IVECO Evo Bus UAZ URAL LiAZ ● St. Petersburg KAMAZ KAVZ ZIL ● Nizhniy Novgorod NEFAZ Kaliningrad ● BZKT Kanash● Uliyanovsk● ● Izhevsk Tata MAZ Miass ● ● Kurgan Nab. Chelny ● ● Elabuga  Moscow Samara ● BelAZ Minsk  ● Bryansk ● Kaluga Novouralsk ● MoAZ BEL ● Lutsk UKR ● Uzhgorod ● Zaporozhie Ust-Kaminogorsk●

Mapping of the CV and Bus OEMs Bus and CV the of Mapping Bogdan ● Kremenchug ● Taganrog KAZ Huyndai ● Cherkesk UZB AvtoVAZ AvtoKRAZ Hyundai Cherk. Avt. Hyundai ● Asaka Zav Cherk. Avt. ZAZ Zav ZAZ * Companies that have minor production volumes are not included

Confidential to SMMT/DEG 21 4 large Holding Groups are Currently Present in Russia, which Control 46 per cent of the Sales in the Russian Automotive Market

One of the largest holding groups in Russia. After restructuring of the original company. In 2005, RusPromAvto separated GAZ as well as a set of interrelated “GAZ” Group automotive companies into separate entity as GAZ group. Group “GAZ” is now engaged in the production of passenger vehicles, LCV, buses, auto components, trucks, and specialised CV’s.

ZMA company is the base of Severstal Avto operations. Severstal group produces Severstal Avto LCV’s, segment “A” vehicles (e.g. OKA), SUV both as local brands and foreign brands (e.g. SsangYoung), and powertrains. Severstal Avto has strong / Sollers determination toward partnership both with Korean (ISUZU) & Chinese OEM’s (SsangYoung) and with FIAT group. Severstal Avto was renamed to Sollers in 2008

AvtoVAZ is the biggest Russian passenger car and SUV car manufacturer whose sales exceed 620 thousand units annually. AvtoVAZ has formed a JV with GM for AvtoVAZ the assembly of SUV under joint brand. The government of Russia is the company’s biggest shareholder. AvtoVAZ experiences continuous top management rotation.

Located at Naberezhny Chelny, Kamaz is one of the largest heavy-commercial Overview of Overview of Holding Groups Russian vehicles manufacturers in Russia. Kamaz has formed several partnership with KAMAZ foreign suppliers (ZF, Cummings and others) who supply Kamaz with high quality components.

Confidential to SMMT/DEG 22 Other CIS Markets are Dominated by Smaller Number of the Holding Groups or Large Companies Compared to Russia Ukraine UkrAvto is the largest automotive holding groups in Ukraine that owns number of the Ukranian automotive companies both OEM (ZAZ) and Tier 1 & 2 Suppliers. UkrAvto Mercedes Benz, GM, Chery are assembling their vehicles in Ukraine in the facilities of the UkrAvto. At the same time, UkrAvto is involved into active negotiation with other foreign OEMs in localization of vehicle production in Ukraine. Bogdan is privately operated automotive group that is focused on the production of the buses, commercial vehicles and passenger cars in Ukraine. Company localised Bogdan production of several foreign brands on its facilities (VW, Hyundai group). Bogdan is expected to expand its operation in Russia by developing new production location for the assembly of the number of foreign brands in Russia.

Belarus

MAZ is state controlled enterprise in Belarus that is focused on the production of the heavy commercial vehicles, buses and special vehicles. MAZ controls a number of MAZ tier 1 & 2 suppliers in Belarus. Currently, the future of the MAZ is not clear as the company is expected to go public and number of companies (Russian OEMs) are

expected to take over the company in the next 8 years. Overview of Ukrainian and Byelorussian Overview of Ukrainian Byelorussian and Companies

Confidential to SMMT/DEG 23 3. Overview of the Russian and CIS Design and Engineering Market

• Key Features of the Russian and CIS D&E Market Slide 25

• Roadmap of D&E Market Development Slide 27

• Understanding of Currents Needs by Local Companies Slide 28

• Analysis of Structural Changes in D&E Sector Slide 29

• D&E Market Drivers and Restraints Slide 30

• Key Market Trends Slide 33

• Key Market Challenges for D&E Sector Slide 34

• Idiosyncrasy of Doing Business in Russia Slide 35

• Market Size and Forecast for D&E Sector in Russia and Slide 36 CIS Countries

Confidential to SMMT/DEG 24 Key Features of the Russian and CIS D&E Market

• Russian & CIS OEMs and suppliers play leading Market position roles in the market for the D&E services. for DEG members

• For the past 3 years, Russian and CIS OEMs and R&D departments of AvtoVAZ, GAZ, Tier 1&2 suppliers were forced to pay closer Minor position KAMAZ, UAZ OEMs attention to their market position as foreign of Russian and others transplants start to dominate in the market. independent Investments D&E D&E Tier 1&2 companies • Sluggish sales in the 90s and beginning of new R&D departments millennium constrained the development of Design of Tier 1&2 Suppliers and Engineering services due to significant suppliers underinvestment into D&E and loss of skilled personnel (transfer to other industries). Specialised Automotive laboratories Research and research • Russia traditionally holds the strongest position on Institutes centres the CIS market and is the current leader in terms of investments into new product development, test and validation as well as manufacturing engineering. Universities with

Design and Engineering Market Overview Market Engineering and Design Automotive & • Currently, Russian and CIS D&E market players Specialised Transportation have 10-15 years lag behind the expertise level research Departments

developed by the foreign providers. centres Influence D&E

Confidential to SMMT/DEG 25 Strong Sales of OEMs and Tier 1&2 Suppliers Facilitate Development of the Russian and CIS D&E Market

2007 . . . 2015

Russian and CIS Automotive and D&E Markets Size (CIS), 2007 and 2015 € 65.10 billion

€ 31.40 € 157.5 billion 1,650 million € thousand85.7 vehicles million 0.24% of 0.27% of market market

Russian and CIS Russian and CIS Russian and Total turnoverRussianVehicle CIS Sales Automotive Automotive Market CIS D&E Market D&E Market Market Source: Frost & Sullivan • By 2006, the total turnover of the Russian and CIS Automotive market exceeded €31.40 billion, while

D&E market turnover reached €85.7 million. Design and Engineering Market Overview Market Engineering and Design • Development of the Russian Design and Engineering market strongly correlated with market growth of the key Russian and CIS OEMs and Suppliers. • Increasing sales of the foreign OEMs in Russia and CIS is expected to decrease the proportion of D&E spends compared to the total market turnover from 0.27 per cent in 2007 to 0.24 per cent by 2015.

Confidential to SMMT/DEG 26 Russian and CIS D&E Market Undergoes Structural Changes

2015 • Despite domination of the foreign OEMs, Russian OEMs hold their niche with help of foreign partners and through active development. 2010 • Competition and legislative environment forces companies to invest into development of D&E. • Outsourced D&E market peaks. Phase Three • Economic revival increases market sales for both passenger cars and commercial vehicles. 2007 - 2015 2006 • Mass entry of the foreign OEMs and Suppliers. • Automotive industry begins to refocus on the core business activities. 2003 • Large industrial companies are spliced into number of the smaller businesses, companies started to invest into D&E including outsourcing. Phase Two • Economic crisis in Russia leads to collapse of the largest corporations including automotive sector. 2003 -2006 1998 • Inflation and general economic downturns quickly disrupt sales of the 1993 new vehicles in Russia and other CIS markets. • OEMs and suppliers refocus their business activities; lack of financing. • Collapse of the Soviet Union separates the unified automotive industry. 1991 • OEMs and Tier 1&2 suppliers become widely dispersed across newly Design and Engineering Market Overview Market Engineering and Design independent countries with independent D&E departments. Phase One 1990 • Large industrial parks with developed infrastructure. 1991 - 2002 • Full support by the state of D&E activities and grants to OEMs.

1991 2015

Confidential to SMMT/DEG 27 Widening Gap Between Russian & CIS and Foreign Companies Forces Local Players to Look For Partnerships in D&E • While most of the local companies realizse there is a need to collaborate with foreign D&E service providers, there is some resistance found from the “Outsourcing is “In the side of in-house D&E departments. in demand now emergency and this case, we may ”Well, I may only say that Russian OEM will not pay tendency will ask for help and for engineering, its clear and simple - no way!” grow” still if we do it Tier 1 Supplier we would ask Kamaz mainly Russian “In Russia, every companies” Expectations of the local companies toward company has its own D&E centre. They are D&E services mostly very small and AMO ZIL are not powerful enough for the tasks Strategic Decisions High value for money to be completed” • Develop in-house D&E capabilities? Expertise level for each Product Tier 1 Supplier • Partner with foreign Domain OEMs and Suppliers? “Outsourcing is Understanding of the local needs of • Collaborate with the suppliers always in demand foreign D&E service in any company. providers? IT expertise

Design and Engineering Market Overview Market Engineering and Design It’s impossible to do everything by ourselves” Complex solution

GAZ Group Presence of the Russian speaking representative Understanding of the Current Needs in D&E in Russia and CIS countries

Confidential to SMMT/DEG 28 Structural Changes in the Russian Automotive Market Impact D&E

Sector • SMMT/DEG companies are positioned as a providers of complex technological solutions Technology Complexity that could be used both for specific problem High solving (E.g. testing for EURO4 of gasoline engine) as well as for enhancing the existing DEG members product lines.

• The larger Russian OEMs such as

Institutes Russian OEMs AvtoVAZ, GAZ, and Kamaz have large D&E departments, however they lack critical Specific Generic knowledge in certain D&E areas. Problems Problems

Universities Scope Application • Through Governmental support, automotive research institutes and universities are involved into specific problem solving for automotive industry such development of the Low competitive diesel engines.

Local independent Design and Engineering companies are focused in providing support in:

Design and Engineering Market Overview Market Engineering and Design Russian and CIS companies are looking for • Exterior design: cabin design, face lifting complex technological solutions for both etc. solving specific problems and providing full • Interior design: instrumental scope support in developing/enhancing clusters, interior lighting etc. product lines. • Specific systems design and engineering.

Confidential to SMMT/DEG 29 Key Market Drivers and Restraints for Development of D&E Sector in Russia and CIS Increasing demand for new vehicles Favourable conditions for OEM‟s Macroeconomic Stability Extension of existing product lines Potential growth of Demand for investments local

into R&D components Drivers

Lack of Resistance experience of Undeveloped from in-house collaboration auto Large D&E with foreign Restraints investments component departments Intensification partners

Key Market Drivers and Restraints for D&E MarketD&E for Restraints and Drivers Market Key into industry of competition Close nature of modernisation (passenger car of production the Russian and segment) CIS automotive facilities industry

Confidential to SMMT/DEG 30 Demand Growth for the New Vehicles Spurs Market Development

Increasing demand for new vehicles Favourable conditions for OEM‟s Macroeconomic Stability Extension of existing product lines Potential growth of Demand for investments local

into R&D components Drivers

Key Market Drivers • Slowly increasing prosperity of the Russian and CIS population facilitates market sales for new vehicles thus allowing OEMs and Tier 1&2 Supplier to devote large budgets for D&E. • State policy toward further development of Russian and CIS automotive industry creates attractive investment conditions for vehicle and components manufacturers.

Key Market Drivers for D&E MarketD&E for Drivers Market Key • Russian and CIS economy has left behind turbulent state and has reached stable growth stage. • Increasing competition from the side of the foreign OEMs and suppliers, force Russian and CIS companies to expand their product lines to tackle consumer demand. • Introduction of EURO3 requirements forces technological advancement of local OEM’s and make Russian and CIS automotive industry healthier. • Increasing production volumes of vehicles both by Russian and CIS OEMS and foreign transplants require corresponding development of the Tier 1 & 2 suppliers.

Confidential to SMMT/DEG 31 Close Nature of the Russian and CIS Companies Limits Growth of the D&E Sector • Most of the Russian and CIS companies remain to be very close and non transparent for their foreign partners. • Intensification of the competition from the side of the foreign transplants negatively affect growth of the Russian and CIS automotive companies. • Russian and CIS companies have significant production facilities with high wear rate that require quick modernisation to match business needs thus limiting investments into D&E. • There is a large number of the components suppliers in Russia and CIS countries that have limited resourced for D&E. • Russian and CIS companies still follow complicated approach in administration and management of the companies thus causing confusion in collaboration with foreign partners.

Lack of Resistance experience of Undeveloped from in-house collaboration auto D&E Key Market Restraints for D&E MarketD&E for Restraints Market Key with foreign

Restraints Large component departments partners Intensification investments industry of competition into Close nature of (passenger car modernization the Russian segment) of production and CIS facilities automotive industry

Confidential to SMMT/DEG 32 Outsourced D&E Services Have Strong Potential for Growth in the Next 4-5 Years Key Market Trends (Russia and CIS), 2006-2015

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 High High Medium suppliers.

Accelerated growth of design and engineering sector. High High Medium

Modernisation of the production facilities to support market Medium High High sales.

Consolidation of the market. Medium Medium High

General improvement of business environment and normative Medium Medium High legislarure.

Tightening of competition across the segments. Low Medium High

Key Market Trends in D&E in Russia and CIS Countries CIS and Russia in D&E in Trends Market Key Market transparency improvement. Low Medium High

Source: Frost & Sullivan

Confidential to SMMT/DEG 33 Absence of Market Transparency Restricting Development of Competition in the Russian and CIS D&E Market D&E Market Challenges (Russia and CIS), 2007 Probability

Possibility of market turmoil similar to the Russian government default Low of 1998.

Lack of professionals in industry would persist. Low

Investment climate would worsen due to non-competitive and questionable steps followed by the State authorities in regulating business environment. Low

Absence of market transparency and administrative barriers limiting Medium development of the Russian and CIS outsourced D&E market.

Non-competitive measures undertaken by the local government toward

foreign suppliers and D&E service providers. Medium D&E Market Challenges in Russia and CIS Countries CIS and Russia in Challenges Market D&E

Source: Frost & Sullivan

Confidential to SMMT/DEG 34 Idiosyncrasy of Doing Business in Russia and CIS: Local Business Environment Features to Be Aware Of

Mutual misunderstanding of business cultures both in Russian and Foreign Relaxed attitude of • Russia becomes more open companies slows down Presence of talented Russian companies economy, which spurs business development. young engineers toward market today‟s entry of foreign however strong training measurements and enterprises despite existing is required. forecasts. negative obstacles .

Insufficient transparency of Poor command of Russian companies leads foreign languages to unreliable self- (English) in particular representation of existing regions. contracts, capacities and financial resources.

Relative reluctance of • Efforts of Russian High beauracracy in investing in tooling, Governments to facilitate Governmental bodies equipment, or Possible delays with the development of

Design and Engineering Market Overview Market Engineering and Design increase time spans and engineering by local tier financial payments while Automotive industry financial expenses. 1&2 suppliers. Russian companies are create attractive interested in conditions for foreign prepayments on companies to set up local contracts. presence.

Confidential to SMMT/DEG Investments into Design and Engineering Services Expected to Grow 157.5 million EURO 7.9 per cent by 2015 0.1% 6.8% 85.7 million EURO CAGR : 7.9% 1.8% 0.5% 5.8% Investments into D&E by Key OEMs, 2015 1.8% 50 45 40 35 91.3% 30 90.7% 25 20 15 10 5 Investments (Million Investments(Million EURO) 0

2007 Avtovaz GAZ KAMAZ Others 2015 Design and Engineering Sector Overview Sector Engineering and Design • In 2006, the total turnover of the Russian and CIS Automotive markets exceeded €31.40 billion while D&E market turnover reached €85.7 million. • CAGR growth for the next 8 years of D&E market in Russian and CIS countries is expected to account for 7.9 per cent.

Confidential to SMMT/DEG 36 4. Strategic Analysis of the Outsourced D&E Market

• Overview of the Russian and CIS Outsourced D&E Market Slide 38

• Key Market Features Slide 39

• Key Market Drivers and Restraints Slide 40

• Key Trends for Outsourced D&E Market in Russia and CIS Slide 43

• Key Market Challenges Slide 44

• Outsourced D&E Market Size and Forecast Slide 45

• Structure of Outsourced D&E Market in Russian and CIS Slide 47

• Features of Outsourced D&E Market By Sector Slide 48

• Process of Product Development at AvtoVAZ Slide 52

• Competitive Forces Analysis Slide 53

• Mapping of Local Needs Slide 55

Confidential to SMMT/DEG 37 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

2007 . . . 2015

CIS D&E Markets Size (CIS), 2007 and 2015 € 157.5 million € 85.7 million 1,650 € 92.1 million €thousand38.5 vehicles million 45% of 58% of market market

Russian and CIS Russian andTotal CIS turnoverRussianVehicle and SalesCIS Russian and CIS Outsourced D&E D&E Market Outsourced D&E D&E Market Market Market Source: Frost & Sullivan

• Outsourced D&E market has strong potential in Russian and CIS countries being capable to potentially generate up to €38.5 million in turnover by the results of 2007.

Outsourced Design and Engineering Sector Overview Sector Engineering and Design Outsourced • Outsourced Design and Engineering services have strong growth potential in the next 8 years reaching €92.1 million in turnover that represents almost 140 per cent increase compared to the level of 2007.

Confidential to SMMT/DEG 38 Intensification of the Competition in the Industry Forces OEMs and Suppliers in Russia and CIS to Consider Outsourcing D&E Services

• Slipping sales of the local OEMs forces companies to look for potential areas of improvement (in particular in Design and Engineering sphere) as well as to expand existing product line.

• Changes in perception of quality and service level transform consumer preferences and patterns thus forcing OEMs to increase quality requirements for local suppliers (ISO certification in production and management, decrease number of defect items in the shipments).

• Despite current level investments into design and engineering, local OEMs and Tier 1 suppliers are expected to increase the financing of R&D, including outsourced Design and Engineering services in the upcoming years.

• Main Russian and CIS OEMs, such as AvtoVAZ, GAZ, and KAMAZ, have large teams engaged into development of the new products.

• There is high utilisation of CAE/CAD systems (CATIA v4 and V5) by major OEMs in Russia, however there is a lack of integrated approach (PLM) in D&E.

• Russian OEMs and Tier 1 suppliers are aware of potential benefits of cooperation with DEG members (e.g. UltraMotive – project with GAZ Group).

Outsourced Design and Engineering Sector Overview Sector Engineering and Design Outsourced In the next 1-2 years, Russian Governments plans to allow local companies to allocate D&E expenses into the costs thus increasing growth of D&E sector

Confidential to SMMT/DEG 39 Despite Presence of the Large In-house D&E Departments, Russian and CIS Companies Lack Up-to-Date Expertise Level

Lack of in-house technological expertise by OEMs Increasing sales and Suppliers allows increase Increasing quality financing of concerns and outsourced requirements for projects suppliers Expansion of OEM‟s product lines Government requires new D&E supports approach investments

into D&E Drivers

Lack of experience Partnership with in collaboration Language barriers foreign OEMS and with foreign Restraints still negatively suppliers slows partners Complicated affect penetration of the organisational communication foreign D&E Low D&E spends processes raise compared to the between providers

Key Market Drivers and Restraints for Outsourced D&E MarketD&E Outsourced for Restraints and Drivers Market Key barriers for organisations other developed efficient markets collaboration Confidential to SMMT/DEG 40 Lack of In-House Expertise is a Key Driver for Outsourced D&E Market Growth Lack of in-house technological Increasing sales expertise by OEMs allows increase Increasing quality and Suppliers financing of concerns and outsourced requirements for projects suppliers Expansion of OEM‟s product lines Government requires new D&E supports approach investments

into D&E Drivers

Key Market Drivers

• Russian and CIS OEMs and suppliers lack up-to-date expertise in D&E (latest technologies in particular). • Gradual sales growth of the Russian and CIS companies allows companies to allocate large budgets for outsourced D&E. • Increasing competition in the OE sector increases pressure on the local supplier for quality of the product thus driving needs of the suppliers for D&E and outsourced D&E in particular • To tackle competitive pressure from the side of the foreign transplants, Russian and CIS OEMs realise not only the need in the product line expansion but also the need in qualitative change of the products

produced. Key Market Drivers and Restraints for Outsourced D&E MarketD&E Outsourced for Restraints and Drivers Market Key

Confidential to SMMT/DEG 41 General D&E Spends By Russian and CIS Companies Remain Low

• While foreign OEMs spend around 4-5 per cent of the revenues on D&E, only largest Russian and CIS companies can afford large D&E spends but not exceeding 0.5-1 per cent of their revenues. • Local administration and management practices create confusion and misunderstanding between foreign and local partners thus leading to inefficiencies. • Language skills remains one of the barriers that limit efficient communication between partners and lead to longer project times. • Russian and CIS companies are actively involved into creation of the partnerships with foreign OEMs and suppliers in order to improve their technological level.

Lack of experience Partnership with in collaboration Language barriers foreign OEMS and with foreign

Restraints still negatively suppliers slows partners Complicated affect penetration of the organisational communication foreign D&E Low D&E spends processes raise between providers compared to the barriers for organisations other developed efficient Key Market Drivers and Restraints for Outsourced D&E MarketD&E Outsourced for Restraints and Drivers Market Key markets collaboration

Confidential to SMMT/DEG 42 Outsourced D&E Market is Expected to Accelerate its Growth in the Next 3-4 Years Key Market Trends (Russia), 2006-2015

Market Trend 1-2 Years 3-4 Years 5-6 Years

Increasing budgets allocated by Russian and CIS OEMs and

suppliers for outsourcing D&E services. High High Medium

Accelerated growth of Design and Engineering sector. High High Medium

Partnership with foreign OEMs and supplier to achieve High High Medium technological gain.

Increase in scope and size of the project carried out by High High Medium independent D&E companies.

General improvement in operational and administative Medium Medium High spheres of the local companies.

Key Challenges for Outsourced D&E D&E Market Outsourced for ChallengesKey Tightening of competition across the segments. Low Medium High

Market transparency improvement. Low Medium High

Source: Frost & Sullivan

Confidential to SMMT/DEG 43 DEG Members Activities in Russia are Challenged by Increasing Cooperation of OEMs and Suppliers with Foreign Producers

Slipping sales of the Russian companies

Expansion of Shift to assembly cooperation with of the foreign foreign OEMs and brands in Russia Suppliers and CIS countries Challenges for

DEG members Key Challenges for Outsourced D&E D&E Market Outsourced for ChallengesKey Slow development General business of the local OEMs and legislative and suppliers environment

Confidential to SMMT/DEG 44 Scenario Analysis – Key Assumptions

CAGR 7% CAGR 12% CAGR 16% scenario scenario scenario

. Weak economy with . Economic growth rates will . Substantial lower potential growth. remain unchanged. structural/qualitative . Shift to assembly of the . Development of changes in the economy foreign brands by automotive industry will will be achieved. Russian OEMs. follow current plans. . OEMs will accelerate D&E spends.

Conservative Frost & Sullivan Optimistic Scenario Scenarios Scenario

Pestle Assumptions: • Increasing purchasing power of the population of Russia and CIS market drive the development of the automotive market. • Tightening ecological requirements (EURO 4 in 2010) put tremendous pressure on the capabilities and production plans of the Russian OEMs. • In Russia, stable political situation and general economic growth facilitates positive changes in economic and legislative environment. Demand side Assumptions: • Highest budgets for outsourced D&E services are expected to come from the largest Russian OEMs in passenger and

Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic CV segments. • Russian OEMs are expected to continue production of the local brands and further expansion of the product line. Supply side Assumptions: • Market share of the local independent D&E companies is expected to remain low.

Confidential to SMMT/DEG Scenario Analysis – Russian and CIS Outsourced D&E Market 140

120 Growth Phase CAGR :16%

Millions EURO 100

80 CAGR : 12%

60 CAGR : 7% 40

20

- 2007 2008 2009 2010 2011 2012 2013 2014 2015 Conservative Scenario Frost & Sullivan Scenario Optimistic Scenario

• Frost & Sullivan expects that stable growth of the outsourced D&E market in Russia and CIS countries will continue .

• CAGR growth from 2007 to 2015 is expected to account for 12 per cent (Frost & Sullivan scenario) as no major disturbances on the market are expected.

• Russian and CIS market for outsourced D&E services is expected to reach highest growth in the next 3 years averaging Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic 26 per cent growth for that period.

Note: Base Year is 2007. CAGR calculated only for the forecast period between 2007 and 2015

Confidential to SMMT/DEG Overview of Outsourced D&E Market by Area

Design • Exterior and interior design of the Russian made vehicles Manufacturing has been traditionally week area for the Russian and CIS OEMs. Engineering • Expansion of the product lines requires significant 15% Design investment into redesign of existing products (face- Test & 30% lifting), interior, comfort and others. Validation Product Engineering: • Need to follow market development forces OEMs and 10% suppliers to invest into product engineering. • In the areas such powertrain, chassis, transmission and braking systems, local companies require assistance from foreign partners. Test and Validation: Product • Tightening ecological requirements requires local companies Engineering to look for the support in preparation for EURO 4-5 implementation. 45% • Strong demand for the test-beds. Manufacturing engineering: • Expansion of the product lines or reorganisation of the Design and product engineering valued existing production facilities, restructuring of organizational €28.8 million in 2007 processes is required by local players.

“Foreign design and engineering

• Situation in the Russian automotive industry forces service providers have to consider Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic local OEMs and Tier 1&2 suppliers to search for the what Russian companies about to do to understand the areas for solutions in the all design and engineering areas. potential cooperation”

Industry Expert, Russia

Confidential to SMMT/DEG 47 Russian and CIS Companies are Primarily Interested in Interior and Exterior Design Key Areas for Collaboration: • Exterior and interior design of the Russian made vehicles has been traditionally week area for the Russian and CIS Passenger Cars OEMs. • Dashboards • Exterior and interior lights • Expansion of the product lines requires significant • Face-lifting investment into redesign of existing products (face- • Concept design and virtualization lifting), interior, comfort and others. Commercial Vehicles • Russian and CIS companies across all segments (passenger • Interior cabin design cars, commercial vehicles and suppliers) show interest in • Cabin concept design cooperation with foreign providers with strong experience in design. Components Suppliers • Virtualization of the systems • Market for outsourced design services in Russian and CIS • CAD countries is estimated to reach €11.5M in 2007.

Overview of Outsourced Design Sector Design Outsourced of Overview KAMAZ: Cabin interior and exterior design, complex support in CAD Main areas of interest GAZ: Concept design, 4x4 LCV platform design for collaboration with URAL: Truck design, cabin design DEG members: UAZ: SUV exterior and interior design for the new vehicle SAAZ: Virtualization of the suspension elements

Confidential to SMMT/DEG 48 Tightening Ecological Requirements in Russian and CIS Countries Force Local Companies to Focus on Engineering of New Engines Key Areas for Collaboration: • Russian and CIS OEMs and suppliers are involved into expansion of the product range in order to overcome Passenger Cars increasing competition from the foreign OEMs and suppliers. • Re-engineering of the existing components to improve quality • Local companies realize that there is no time left for gradual improvement of existing products and components thus Commercial Vehicles relying on potential support from D&E providers. • Chassis engineering • DEG members activities in Russia and CIS are expected to be challenged by the increasing collaboration between local and foreign OEMs and suppliers as local companies rely on Components Suppliers technology transfer from the foreign collaborators. • Suspension systems • Steering systems • Market for outsourced product engineering services in • Braking systems Russian and CIS countries has the largest potential and is • Exhaust system estimated to reach €17.3M in 2007. • Electric and electronic systems • Gasoline and diesel engines • Hybrid engines SeAZ: Chassis modernization, braking and steering systems Main areas of interest UMZ: Gasoline engine modernization, hybrid engine for collaboration with AvtoVAZagregat: Low cost exhaust systems and converters DEG members:

Overview of Outsourced Product Engineering Sector Engineering Product Outsourced of Overview SAAZ: Suspension elements ZMZ: Engines URAL: Car and chassis modernization with EURO 3-4 engines

Confidential to SMMT/DEG 49 Shift to EURO 5 in 2014 Requires Significant Resources in Testing Engines Developed Locally • Increasing quality requirements increase demand from OEMs in purchase the test beds. Frost & Sullivan estimates that in the next 5 years Russian and CIS OEMs will require acquisition of 20- 25 specialised test beds for their production lines.

• Need to increase product line expansion requires local companies to shift to virtual testing of the products, however, local OEMs and suppliers are lacking expertise and knowledge of working in virtual environment.

• Along with virtual testing, mathematics and structural calculations are needed to be implemented by the local players.

• Implementation of EURO 4 and 5 in the next 6 years requires both powertrain suppliers and OEMs (involved in production of engines) to test their products for compliance. Foreign D&E providers with expertise in this domain are expected to actively engage in collaboration with Russian and CIS companies.

SeAZ: Test beds Main areas of interest UMZ: Testing for EURO 4-5 engines for collaboration with

Overview of Outsourced Test & Validation Sector Validation & Test Outsourced of Overview SAAZ: Test & Validation of suspension elements DEG members: GAZ: Test & Validation on the component level KAMAZ: Testing for EURO 4-5 engines

Confidential to SMMT/DEG 50 Detailed Features of the Manufacturing Engineering Market

Defects PPM level for the automotive components systems produced in Russia and CIS countries is very high compared to the foreign standards

• High defects level negatively effects perception of the local components suppliers. • Foreign OEMs entering Russian and CIS markets are looking not only for the reliable partners but also for corresponding quality level. • Situation in the Russian and CIS automotive industries forces local OEMs and Tier 1&2 suppliers to search for the solutions in the all design and engineering areas including manufacturing

engineering. Overview of the Outsourced Manufacturing Engineering Sector Engineering Manufacturing Outsourced the of Overview

Confidential to SMMT/DEG 51 Process of Product Development at AvtoVAZ

• AvtoVAZ being one of the largest manufacturers of the passenger cars in Russia and CIS countries with annual output of more than 680,000 vehicles offers significant opportunities for the outsourced D&E market. • AvtoVAZ has a long history of the collaboration with foreign companies in D&E of the new vehicles. • Acquisition of the 25 per cent stake of the AvtoVAZ by Renault is expected to improve the technological level of the company in the long run.

Case Study: Product Development Approach by AvtoVAZ* • Number of independent and joint (Magna Int) • AvtoVAZ took design from • AvtoVAZ decided to • Initial work started projects were announced Fiat 124 revive product line jointly with foreign D&E • Via collaboration with • Minor restyling was made • New model was company but was Renault, AvtoVAZ is expected to benefit through • Successor models followed designed together with cancelled technology and expertise design line of VAZ 2101 Porsche • AvtoVAZ redesigned model independently in transfer beg. of 2000 Started in 2006, but Project length: 4 years Project length: 6-7 years Project length: 9 years currently put on hold Product Development

VAZ 2101 … VAZ 2108 “Samara”… Lada Kalina… Project C and others… Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic

1970 1984 2005 200?-20?? Mass production

Confidential to SMMT/DEG 52 Competitive Forces Analysis of the Russian Outsourced D&E Market Buyers (OEMs and Suppliers): Substitutes: 1. Price sensitivity 1. Direct cooperation with foreign OEMs and suppliers 2. Support from the Government 2. Licencing and technology transfer 3. Strong need for cooperation 3. Acquisition of foreign companies 4. Lack of modern technologies 4. Cooperation with other industries such as Aerospace and Defense

Environment Industry Competitors: Technology 1. Lack of visibility on the market 2. Focus on the design and tooling 3. Small volumes 4. Absence of complex approach

Economic Legal System Development

Entrants: 1. Favorable economic climate 2. Increasing experience of collaboration with Russian companies Political 3. Complexity of working environment Socio-Cultural 4. High knowledge and experience level

Situation Suppliers: Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic Features 1. Restructuring of their own design & engineering departments 2. Low qualitative and technological levels 3. Lack of expertise 4. Poor technological base

Confidential to SMMT/DEG 53 Strategic Attractiveness Analysis Scoring System:

High Threat 1 points Threat of New Entrants Medium Threat 3 points

Low Threat 5 points Treat Score: 3

Suppliers Bargaining Buyers Bargaining Power Industry Rivalry Power

Threat Score: 5 Threat Score: 3 Treat Score: 3

Overall Score: 16 points Threat Score: 2 Factor Scoring

Threat of New Entrants 3

Threat of Substitutes 2 Threat of Substitutes

Buyers Bargaining Power 3 Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic Suppliers Bargaining Power 3 • Russian Outsourced Design & Engineering market score of 16 out of

Industry Rivalry 5 a maximum 25 can be considered attractive market place for DEG Average 3.2 members.

Confidential to SMMT/DEG 54 Design of the New Vehicles and Systems Along With Product

Engineering Are in Greatest Demand from DEG Members Strategic Analysis of the Outsourced D&E D&E Market Outsourced the of Analysis Strategic • Despite current level investments into D&E, local OEMs and Tier 1 suppliers are expected to increase the financing of R&D, including outsourced Design and Engineering services in the upcoming years.

Confidential to SMMT/DEG 55 5. Demand Side Overview

• Key Features of the Russian and CIS Automotive Industry by Market Segment Slide 57

• Structure of D&E Market Slide 58

• Overview of the Selected Companies’ Budgets for D&E Slide 59

• Competitive Position of the Key OEMs in Russia and CIS Slide 60

Confidential to SMMT/DEG 56 Russian and CIS OEMs and Supplier are Looking for Collaboration with Foreign D&E Providers • Situation in the Russian automotive industry forces local OEMs and Tier 1&2 suppliers to search for the solutions in the all design and engineering areas • Primary focus is given to the product engineering which hold 45 per cent of the outsourced D&E market

• Intensification of competition in Russia and CIS countries requires local companies to Passenger Car reconsider their business strategies and focus on expansion of the product lines. OEMs • Expansion of the product lines requires significant investment into redesign of existing products (face-lifting), interior, comfort and others.

• Intensification of competition in Russia and CIS countries Commercial We have range of requires local companies to reconsider their business Vehicle OEMs strategies and focus on expansion of the product lines. Russian companies which are competing for design and engineering • Product engineering has strongest demand from all the

Overview of the Demand Side Demand the of Overview but as far as I know Tier 1& 2 suppliers. Tier 1 & 2 • Foreign transplants require significant improvement of the there are no integrated Suppliers quality and number of defects (PPM). solutions for the time being.

KAMAZ

Confidential to SMMT/DEG 57 Structure of the Russian and CIS D&E Market

• Largest Russian OEMs such as AvtoVAZ, GAZ, and Kamaz 100% have large D&E departments and capable to generate Rest of industry substantial financial resources stakeholders to support them. 22.5% • Tier 1&2 suppliers are facing Top 3 difficult times as local OEMs are tightening quality requirements.

• In Russia, Government

supports research done by 85.7 85.7 million)

€ specialised automotive AvtoVAZ 3 Companies has the GAZ Group research institutes (NAMI) Kamaz largest budget for D&E and provides financial

Overview of the Demand Side Demand the of Overview in Russia and CIS support. Market ( countries Russian and and Russian CIS D&E • Share of the local independent D&E companies is relatively small and does 75.9% not have strong impact on the market. 2007

Confidential to SMMT/DEG 58 Overview of the Demand Side for Outsourced D&E Services

Millions EURO Others - 5 10 15 20 MAZ 10.3% 6.5% AvtoVAZ AvtoVAZ 39.0% GAZ KAMAZ Group 18.2%

KAMAZ GAZ Group 26.0%

MAZ

Others

• Despite current level investments into Design and Engineering, local OEMs and Tier 1 suppliers Overview of the Demand Side Demand the of Overview are expected to increase the financing of R&D, including Outsourced D&E services in the upcoming years.

• Main Russian CIS OEMs, such as AvtoVAZ, GAZ, and KAMAZ, have large teams engaged into development of the new products.

Confidential to SMMT/DEG 59 Budgets of the Selected OEMs for the Outsourced D&E

5,000.0

AvtoVAZ 4,000.0

GAZ Group

Market Turnover Market 3,000.0

2,000.0 KAMAZ

1,000.0 MAZ UAZ Growth Rate 0.0

-10% 0% 10% 20% 30% 40% 50% 60% Overview of the Demand Side Demand the of Overview -1,000.0

AvtoVAZ GAZ Group KAMAZ MAZ UAZ Note: Bubble size represents the allocated budgets for outsourced D&E; Arrows indicates expected development of the companies in the market • Key Russian and CIS OEMs are expected to continue growth in the upcoming years with corresponding increase in the budgets allocated for Outsourced D&E.

Confidential to SMMT/DEG 60 6. Profiles of Key OEMs and Suppliers

1. SeAZ (AvtoKOM) 2. Avtopribor 3. UMZ 4. AvtoVAZagregat 5. Novgorod Autoagregat Plant 6. KZAE 7. Skopinsky Agregatniy Zavod 8. ZMZ 9. URAL 10.ZIL 11.Asia Auto 12.ZAZ 13.MAZ 14.YaMZ (Avtodiesel) 15.UAZ 16.GAZ Group 17.KAMAZ 18.KrAZ 19.NAMI 20.Autodesign 21.Avtoprostor

Confidential to SMMT/DEG 61 OJSC “SeAZ” (AvtoKOM Group), OEM

Business segments: Quality certification: Location and Performance • Passenger cars • ISO 9001:2000 • Automotive components SeAZ • Others Key Products: • SEAZ 11116 – “A” class passenger car Moscow ● • Bumpers, plastic parts

Background Information: Employees: 1,400 Turnover: €8.6 M • Before 2005, SeAZ was part of the AvtoVAZ group. Growth Rate: -70% pa • SeAZ produces OKA passenger car with Tian Jin FAW, Chinese Ownership Structure engine. • Main challenge for SeAZ is to revive production of OKA brand through design of the new model. • SeAZ is focused on the development/upgrade of the A class vehicle Avtokom 100% for the low cost car segment with total production capacity increase up to 50,000 - 100,000 vehicles. Market Position OJSC “SeAZ” Capacities: 2007 SeAZ, 0.20% Production 4,510 (-60%) Capacity 34,400 Sales 3,454 (-70%) Others, 99.80%

Confidential to SMMT/DEG 62 OJSC “SeAZ” (AvtoKOM Group), OEM Implications and Opportunities for DEG Members - + Interest in • SeAZ is a niche player that focuses on the development of low Collaboration

cost car for the Russian and CIS markets. Design Product Test & Manuf. Eng. Validation Eng. Other • Currently none of their design and engineering is outsourced.

• 9 people are involved into D&E at SeAZ. Figures: • Only in 2002 completed transition to CAD (only 6 people familiar D&E Budget: €0.3M with the system). Outsource D&E: €0.18M

• In 2004, joint project with Multipass Business Ltd on the redesign of OKA vehicles was unsuccessful and was cancelled.

• Very receptive for collaboration with DEG members and company is ready to outsource 60% of its budget (€0.18M Euro). annually Image source: SeAZ Main areas of Chassis modernisation interest for Development of steering systems collaboration with Development of braking system DEG members: Modernization assembly line test beds Challenges in development of existing and new models by SeAZ create opportunities for DEG members

Confidential to SMMT/DEG 63 OJSC “Avtopribor”, Tier 1&2 Supplier

Business segments: Quality certification: Location and Performance • Instrument Clusters & Dashboards • ISO TS 16949 • Wipers • ISO 14001:2004 Avtopribor • Mechatronics • Speedometers & Tachometers • Technological equipment Vladimir●

Others Key Clients: 18% Ford AvtoVAZ Employees: 4,000 36% • Russia: All passenger and CV OEMs 5% Turnover: €62M • Foreign: ZAZ, MAZ UAZ Growth Rate:10% pa 6% KAMAZ GAZ 7% Aftermkt Ownership Structure 8% 20% Background Information: • Avtopribor is focused on the further improvement of its

market share in Russia and CIS countries. Avtohold 100% • Expansion of the Avtopribor’s business segment offer strong market opportunities for the company. Market Position

One of the leading suppliers of instrumental clusters and wiper systems in Russia

Confidential to SMMT/DEG OJSC “Avtopribor”, Tier 1&2 Supplier Implications and Opportunities for DEG Members - + Interest in • Company has its own D&E facilities employing 60 people. Collaboration

Design Product Test & Manuf. • Tightening quality requirements of the local OEMs force company to Eng. Validation Eng. Other focus on the product quality improvement.

• Avtopribor is implementing system of the “Lean Production”. Figures: • Targeting foreign OEMs in Russia, Avtopribor collaborates with D&E Budget: €0.27M Outsource D&E: NA foreign suppliers Bosch, Magneti Marelli, Visteon, Valeo, and Mako.

• Interested in contract production or organisation of the production at Avtopribor’s facilities. • Company might outsource up to 5 per cent of the annual turnover. • Open for cooperation and are interested in DEG members visit. Image source: Avtopribor

Main areas of interest • Avtopribor is interested in partnering with DEG members for collaboration with through creation of the joint ventures (JV) DEG members: • Technology transfer

Frost & Sullivan expects that Avtopribor could be potentially interested in modernization of equipment and reorganization of the manufacturing processes

Confidential to SMMT/DEG OJSC “Ulyanovsky Engine Plant” (UMZ), Tier 1 Supplier

Business segments: Quality certification: Location and Performance • Engines (gasoline) • ISO 9001:2000 • Engine components • ISO 16949 (in progress) UMZ • Boat engines and components • Consumer goods Others Aftermkt 2% 18% ● GAZ Ulyanovsk Key Clients: 11% • Supply UAZ and GAZ

UAZ Employees: 4,375 69% Turnover: €52.9M Background Information: Growth Rate: NA • In 2005, UMZ went bankrupt and was acquired by GAZ Group • Company produces range of gasoline engines for passenger Ownership Structure cars (UAZ) and CV (GAZ). • UMZ is focused on enhancing existing range of the products through improvement of the quality, engine features and adaptation to the tightening environmental standards. GAZ Group 100% Market Position OJSC “UMZ” Capacities: 2006 Production 61,018 NA Capacity NA Sales 60,978

Confidential to SMMT/DEG OJSC “Ulyanovsky Engine Plant” (UMZ), Tier 1 Supplier Implications and Opportunities for DEG Members - + • UMZ partially outsource engine engineering and testing to Interest in Collaboration the local companies (names are not disclosed). Design Product Test & Manuf. • UMZ has experience in collaboration with foreign D&E Eng. Validation Eng. Other companies; UMZ works with Ultramotive on enhancing UMZ- 4216 engine range. • Company needs to acquire new design and engineering Figures: D&E Budget: €0.05M (2006) software (CAD/CAE) along with its support and training. Outsource D&E: NA • Poor own test & validation facilities force company to search for assistance of the D&E service suppliers. • Company is not satisfied with current level of cooperation with foreign D&E companies. • UMZ is interested in collaboration with DEG members in engine engineering/modernisation and test & validation areas (to match EURO 4 requirements). Image source: UMZ Main areas of interest • Gasoline engine modernization for collaboration with • Development of the new products and systems • Hybrid engine development DEG members: • Test & validation for EURO 4 and EURO 5

UMZ offers number of opportunities for DEG members in preparation of the existing products for EURO 4&5 certification along with modernization of the existing product range

Confidential to SMMT/DEG OJSC “AvtoVAZagregat”, Tier 1 Supplier Business segments: Quality certification: Location and Performance • Seats • ISO 9001:2001 • Exhaust systems • ISO 9001:2000 (in progress) • Catalytic converters • ISO 16949 (in progress) • Components for fuel and braking Others AvtoVazAgregat systems 5%

Key Clients: Togliatti● • Primary customer is AvtoVAZ AvtoVAZ Employees: 5,257 95% Turnover: €230.8M Background Information: Growth Rate: 9.5% pa • Company has strong links with AvtoVAZ, being part of AvtoVAZ group before 2000. Ownership Structure • Supplies the final assembly lines of AvtoVAZ with an extended Lada ZAO range of components (400 items). Inter Rusinkor Service • The most important items are seats (67% from total output) NA NA and exhaust systems (18%). The remaining 15% are made up by fuel and brake tubes (8%), catalytic converters (5%) and other components. Market Position • Company expects to cover all range of the new models produced by AvtoVAZ (Lada Kalina and Lada Priora). NA • Eberspaecher (Germany) is expected to launch production of exhaust systems for Lada “Project C” on the facilities of AvtoVAZagregat.

Confidential to SMMT/DEG OJSC “AvtoVAZagregat”, Tier 1 Supplier Implications and Opportunities for DEG Members - + • Primary focus is given to the extension of the product line in Interest in Collaboration particular for catalytic converters and exhaust systems. Design Product Test & Manuf. Eng. Validation Eng. Other • Key consideration factor for AvtoVAZagregat in partnering with foreign D&E company is impact on the final price of the systems developed. Figures: • Product development is closely monitored by AvtoVAZ. D&E Budget: NA Outsource D&E: NA • Company uses AvtoVAZ’s testing facilities. • Through assembly of Eberspaecher’s products company expects to improve current quality and technological level. • AvtoVAZagregat is interested in product engineering of low cost catalytic converters and exhaust systems.

Image source: AvtoVAZagregat

Main areas of interest for collaboration with • Engineering of low cost exhaust systems and catalytic converters DEG members:

DEG members could benefit AvtoVAZagregat by providing existing solutions for improving quality of the AvtoVAZagregat products

Confidential to SMMT/DEG OOO Novgorod Autoaggregate Plant (NAAZ), Tier 1 Supplier

Business segments: Quality certification: Location and Performance • Silencer for passenger cars and • ISO 9001:2000 CV Novogorod Autoagregat Plant Key Clients: Veliky • Company is focused on aftermarket sales Novgorodi●

Background Information: Employees: 4,000 • NAAZ manufactures silencers for the wide range of the Russian Turnover: N/A Growth Rate: N/A models including AvtoVAZ, GAZ, Moskvich, IZH-Auto and others. Ownership Structure

• Silencers are made using both stamp-welding and rolled NA technologies.

• NAAZ plans to expand the product range to target new models produced by GAZ Group. Market Position NAAZ Capacities: 2007 NA Production N/A Capacity N/A Sales N/A

Confidential to SMMT/DEG OOO Novgorod Autoaggregate Plant (NAAZ), Tier 1 Supplier Implications and Opportunities for DEG Members - + Interest in Collaboration • NAAZ has its own D&E facilities including 2 qualified Design Product Test & Manuf. designers employed. Eng. Validation Eng. Other

• Most of D&E is done in-house with assistance of NAMI and Nizhnegorodsky University. Figures: D&E Budget: NA • Company is investing into development of the new Outsource D&E: NA technologies for silencers.

• Software in use at NAAZ includes Auto CAD 13th; visualization is done in 3D Studio Max.

Image source: NAAZ

Main areas of interest • Company is not interested in collaboration at the moment as in- for collaboration with house D&E department has sufficient capacities DEG members: • NAAZ would consider D&E proposals

Despite lack of interest in collaboration with DEG members, increasing competition and tightening quality requirements is expected to lead NAAZ for collaboration in product and manufacturing engineering

Confidential to SMMT/DEG OJSC “KZAE”, Tier 1&2 Supplier

Business segments: Quality certification: Location and Performance • Electric motors • ISO 9001:2000 • Wiper systems • ISO 9001:2001 KZAE • Mechatronics • ISO 16949 • Ignition systems

Key Clients: Kaluga● • Russia: GAZ, URAL, SeAZ, UAZ, AvtoVAZ, Vazinter- service and others • CIS: MAZ, ZAZ Employees: 3,992 Turnover: €53.3M Background Information: Growth Rate: 26.6% pa

• OJSC KZAE focuses on design and manufacturing of Ownership Structure electrical equipment and appliances for the automotive industry • Following general trends in the Russian automotive supplier industry, company is working on improvement of the product quality, production facilities modernization • Company expands its operation both as Tier 1 and Tier 2 supplier Market Position

• Increasing prices for the raw materials increase product price NA and thus negatively affect the competitive position of the company

Confidential to SMMT/DEG OJSC “KZAE”, Tier 1&2 Supplier

Implications and Opportunities for DEG Members - + Interest in Collaboration

• KZAE targets to extend product line by designing and Design Product Test & Manuf. Eng. Validation Eng. Other manufacturing new products: • HVAC systems Figures: • Wiper systems D&E Budget: NA Outsource D&E: NA • For the existing product line, KZAE is focused on: • Re-design and modernisation of the product line • Quality improvement

Image source: KZAE

Main areas of interest for collaboration with Company is not interested in collaboration at the moment DEG members:

Confidential to SMMT/DEG OJSC "Skopinskiy Avtoagregatniy Zavod” (SAAZ), Tier 1 Supplier

Business segments: Quality certification: • Shock absorbers ISO 16949 Location and Performance • Telescopic stanchions ROS RU MT 25B09909 • Struts, gas supports ISO 9001:2000 Skopinsky Agregatniy Key Clients 2007 annual report: “AvtoVAZ”, 63.2% • JSC ”AvtoVAZ” (shock Others, 34.2% ● Skopin absorbers, telescopic stanchions) • JSC ”IzhAuto” (telescopic stanchions, struts) Employees: 3,072 Export, 2.6% • JSC "GM AvtoVAZ” Turnover: € 77,9M Others include IzhAuto and Net profit in: € 0,038M Background Information GM-AvtoVAZ • SAAZ is the largest manufacturer of struts, shock absorbers and gas Ownership Structure supports in Russia. • The level of product defects per year is relatively low compared to other Russian companies at 50 РРМ. • To improve cost structure SAAZ is developing and upgrading its own machine tools. Investment levels unknown however a positive sign to be improve efficiencies. CRA "Bank of Moscow" (JSC) 100% • From 2008, SAAZ will produce automotive components for GAZ’s new line up of Maxus and Siber models. Market Position

More than 70% of native cars in Russia OJSC “SAAZ” Capacities: 2007 and the CIS countries exploit shock absorbers made by JSC "SAAZ " Production 8,5 ml pieces

Confidential to SMMT/DEG OJSC "Skopinskiy Avtoagregatniy Zavod“ (SAAZ), Tier 1 Supplier Implications and Opportunities for DEG Members - + Interest in Collaboration • SAAZ " is an independent manufacturer with engineering facilities of its own (Designing Service, Research Laboratory Group, Quality Control Department). Design Product Test & Manuf. Eng. Validation Eng. Other • Their R&D facility includes 10 designers (30% with good experience) with further plans for expansion. Figures: • The only Design and Engineering that is outsourced is from AvtoVAZ and two D&E Budget: Not Available foreign companies – further information not available. Outsource D&E: * • In 2008 SAAZ plans technical re-equipment, new products lines and R&D testing development to improve the quality of the production.

• The company shows positive interested in cooperation with DEG members and are willing to share more details about their outsourced design and engineering at that time.

Image source: www.z-saaz.ru • Test and validation (including virtual T&V) Main areas of interest • Design and development of suspension elements for collaboration with • Mathematic modelling for risk estimations, calculations DEG members: and construction optimization Frost & Sullivan expects that the most interest for collaboration with DEG members is area of test and validation of the existing product line

* Further details not available during interview however will provide during further discussion with DEG members

Confidential to SMMT/DEG OJSC "Zavolzhsky Engine Plant” (ZMZ), Tier 1 Supplier Business segments: Quality certification: Location and Performance • Engines (2.2L up to 4.67L) • ISO 9001:2000 • Automotive components • ISO 9001:2001 ZMZ • ISO 14001

Key Clients: ● Tolyatti • JSC ”GAZ” (more than 50% of total output) Employees: 7,807 • JSC ”UAZ” Turnover: € 425M • JSC ”Pavlov Bus” Growth Rate:13.3% pa Background Information: Ownership Structure • ZMZ produces over 80 models of engines. • In 2007 the first experimental-industrial batch of 4 cylinder gasoline Others, 7.57% engines at Euro-3 standard were produced for UAZ and GAZ. Lindsell Ent Ltd., 4.67% • The level of production defects in 2007 were very high at 1,201 РРМ. • In 2007 ZMZ invested €7.6M in 8 projects that focused on Euro- 3 petrol and diesel engine development. Severstal Auto, 87.76% • Since 2005 ZMZ have implemented the Toyota Production System to improve their production process including Kanban system. Market position Spare parts production in Russia in 2007 JSC “ZMZ” Capacities: 2007

Production 251,741 engines

Capacity 375,000 engines

Confidential to SMMT/DEG OJSC "Zavolzhsky Engine Plant“ (ZMZ) , Tier 1 Supplier Implications and Opportunities for DEG Members - + Interest in • R&D personnel includes 10 people (60% with excellent 3D skills). Company has Collaboration its own design and test facilities. Design Product Test & Manuf. Eng. Validation Eng. Other • 5 years ago had unsuccessful project with Russian company focused on new engine development. It was found that there was no market demand for the development. Figures: D&E Budget: €1,89 mln Outsource D&E: Not Available • In 2008 ZMZ plans to upgrade their engines and a arrive at pre-production stage for petrol and diesel Euro-4 engines for GAZ and UAZ.

• ZMZ’s focus is to concentrate on their three key clients (GAZ, UAZ and Pavlov Bus) and shape their product line based on their requirements.

Image source: www.zmz.ru Main areas of interest • Internal combustion engine for collaboration with • Engine systems DEG members: • ZMZ have vehicle assembly and production space to sell

Frost & Sullivan expects that the most interest for collaboration with DEG members is surrounding Euro-4 engine development and testing

Confidential to SMMT/DEG OJSC "Ural Automobile Plant“, OEM Business segments: Quality certification: Location and Performance • Trucks ISO 9001:1994/EN 29001 • Chassis ISO 9001:1996 • Special equipment ISO 9001:2000 Ural (GAZ) • Special and cargo buses • Spare parts and diversify products ● Miass

Key Clients: South-Eastern Asia and Africa, Employees:12,892 (2007) • TD URAL-avto CIS counties, Ministry of 5.5% Net income :€10,4 mln (2006) • Ministry of Defense of the Defense, 20.0 4.3% Russian Federation % Ownership Structure Foreign Markets: • CIS counties Russian market, 70.1% • South-Eastern Asia and Africa

Background Information: OJSC “Gaz Group” 100% • "Ural Automobile Plant" JSC belongs to GAZ Group and is the major enterprise in "Heavy vehicles" division. Market Position

• Ural started road car production in 2006. The share of Ural in competitors in the total production • Partnership: DÜRR (industry engineering), Camano, Magna Int, Edak. • Toyota Production System has been implemented to reduce production Maz, 0.02% Kamaz, 41.30% cost. Ural, 54.90% • Ural plans to increase production of natural gas engines rather than petrol. Kraz, 3.85%

Confidential to SMMT/DEG OJSC "Ural Automobile Plant”, OEM Implications and Opportunities for DEG Members - + • Ural’s R&D department has only one year of experience. They do Interest in Collaboration outsource some of their Design and Engineering however would not state further details during interview. Design Product Test & Manuf. Eng. Validation Eng. Other • In 2008, company is focused on the following areas: • Product development (expansion of the existing product lines), Figures: • Euro 4 certification D&E Budget in 2006: €0,81M Outsource D&E: Not Available • Modernisation of the existing production facilities and equipment • Cabin comfort improvement • Development and implementation of the new generation full power commercial vehicles on the base of the road vehicles

aggregates and axles Image source: www.uralaz.ru •Truck development Main areas of interest •Truck cabin planning, development and engineering •Car and chassis development with Euro-3, Euro-4 engines for collaboration with •Mastering chassis production of the large and middle class buses DEG members: •Increase durability of vehicles and their components

Frost & Sullivan expects that the most perspective area for collaboration with DEG members is truck cabin planning, development and engineering

Confidential to SMMT/DEG OJSC “AMO ZIL”, OEM Location and Performance Business segments: • Light, medium and heavy-duty trucks in 4x2, 4x4, 6x4 and 6x6 wheel arrangement • Buses, specialized vehicle, passenger cars ZIL • Auto aggregates, spare parts

 Moscow Key Clients: On the external market AMO ZIL supplies products through company-commissioner Ltd. "FTF ZIL AMO ZIL-export“ 100% of vehicle and 99% of components export in CIS countries Employees in 2008: 7,936 Turnover in 2006: €148,6 Background Information: mln

• In 2009 a planned Joint Venture between AMO ZIL (51%) and the Ownership Structure Japanese company IHI (49%) will deliver metal parts (doors and bonnets) for Renault’s Russian Dacia Logan production. Others, 35.62% • All production of ZIL meets Euro 2 standards, however between 2008 and 2010 ZIL will transfer to Euro-3 engine production. • ZIL develop all components in house except engines. Joint Stock Commercial Bank "Bank of Moscow“, 64.38%

Market Position JSC “ZIL” Capacities: 2007

Production 9323 trucks, 26 buses

Confidential to SMMT/DEG OJSC “AMO ZIL”, OEM Implications and Opportunities for DEG Members - + Interest in • ZIL’s R&D facilities includes only 2 persons which is viewed as more than Collaboration enough. There is a lack of investment into R&D. Design Product Test & Manuf. • ZIL have a poor impression of foreign D&G companies and the trend would Eng. Validation Eng. Other be that if they were to outsource, they would work with Russian companies. • In 2008 ZIL plans an exterior modernization of traditional mass-produced Figures: cars. They will also improve reliability levels and environmental safety (to D&E Budget: NA Euro 3 and Euro 4). Testing certification shall be mandatory and there will Outsource D&E: NA be development of the new vehicle modes with load capacity 4.5 tons ZIL- 4362SO and new family cab over engine ZIL cars. • Possible growth areas are in implementing disc brake mechanisms with a pneumatic brakes system and car production with new outlook and technical characteristics. • Modernisation of transmission units, gearboxes and leading bridges is also a priority. Image source: www.amo-zil.ru Main areas of interest for collaboration with Not interested in collaboration DEG members: None of their design and engineering is outsourced

Frost & Sullivan states that ZIL is not interested in outsourcing*

* Following an information from the interview with main designer

Confidential to SMMT/DEG OJSC “AZIA AVTO”, OEM Business segments: Quality certification: Location and Performance • Car assembly (Lada -2 models, Skoda 2 ISO 9001: 2000 models, Chevrolet-3 models) Azia Avto • Automotive components: decorative KAZ arch, strings of electric wires, tuning • Automotive component assembly Ust-Kamenogotsk● Background Information:

• Azia Auto is purely an assembly plant, and plans to reach full capacity production cycle in 2-3 years and produce 35 thousand vehicles a year.

• Azia Avto cooperates with Avtovaz, Skoda, General Motors, and Deo Automotive Technologies.

• Asia Avto does not have R&D and uses existing solutions.

• AvtoVAZ-RENAULT-NISSAN intends to purchase 25% +1 of shares of Image source: www.aziaavto.kz Asia Auto to increase production capacity from 800 thousand to 1.5 million cars per year.

- + Azia Avto Capacities: 2007 Interest in Production 6,311 cars (Euro-2) Collaboration Product Test & Manuf. Eng. Validation Eng. Other At the moment, Azia Avto is involved only in the vehicle assembly

Confidential to SMMT/DEG ZAO "Zaporizhzhia Automobile Building Plant “ (ZAZ), OEM Business segments: • Press production Location and Performance • Body welding • Painting ZAZ • Engine production • Assembly, final assembly UKR • Tests and logistics Zaporozhie ● Background Information:

• ZAZ is the only company in the Ukraine that possesses the full skill set Employees:16,000 of passenger cars manufacturing. Ownership Structure • ZAZ cooperates with General Motors Daewoo Auto & Technology, Adam Opel, DaimlerChrysler, Automobile Daces S.A, FSO, ТАТА and AvtoVAZ.

• Since 2005 "ZAZ" has been exporting its products to Russia Federation. ZAZ belongs to Ukravto Corporation

• In 2008 ZAZ plans to produce 77 000 Chevrolet Lanos for Russia. Market Position

CJSC ”ZAZ” Capacities: 2007 JSC 'ZAZ's share of the Ukrainian car production market amounted to 67.2 Production 282 310 cars percent in 2006

Confidential to SMMT/DEG ZAO "Zaporizhzhia Automobile Building Plant “, OEM Implications and Opportunities for DEG Members - + Interest in • In-house R&D facility includes 25 people. Collaboration

Design Product Test & Manuf. • Last new model was developed in the 1990’s (Slavuta). Eng. Validation Eng. Other

• ZAZ performs important test and validation work (including crash

tests, toxicity) in Russia and Poland. Figures: D&E Budget: NA • Testing is based on analogy lines on which General Motors tests its Outsource D&E: NA cars.

• In assembly, ZAZ uses high-tech conveyor systems that allow lump assembly of several cars model and modifications.

Image source: www.zaz.ua

Main areas of interest • No present requirements but open to discuss potential areas for collaboration with that can provide cost savings and increase their profitability. • If companies have ideas that will be profitable will be open to DEG members: discuss.

Frost & Sullivan states that Zaporizhzhia Automobile Plant is open to cooperate in profitable projects

Confidential to SMMT/DEG Minsk Automobile Plant (MAZ), OEM Location and Performance Business segments: Quality certification: • Trucks ISO 9001:2001 • Passenger vehicles BEL MAZ • Towed vehicles • Special purpose vehicles Minsk 

Key Regions: • CIS countries-90%, Turkmenistan, Poland, Serbia, Employees in 2008: Vietnam, Latin America Turnover for first 6 months in 2007: €820 mln Production Growth Background Information Rate:15%pa

• Company’s target for next decade is annual production of 50,000 Ownership Structure trucks and 2- 3,000 buses per year.

• MAZ is planning to build new bus factory which will be able to produce 3,000 buses annually. State of Belarus 100% • MAZ heavy vehicles cars meet Euro-2, Euro-3 and Euro-4 standards. Market Position MAZ Capacities: 2007 No financial data is available (neither from secondary sources, nor from Production 25,000 vehicles primary interviews) Sales Can sell 35,000

Confidential to SMMT/DEG Minsk Automobile Plant (MAZ), OEM Implications and Opportunities for DEG Members - + Interest in • MAZ has own R&D department which develops cabins, chassis, Collaboration

car bodies, designs. Design Product Test & Manuf. Eng. Validation Eng. Other • Minsk Motor Factory has developed a new generation of EURO-4 engines (production start in 2009) using Bosch technology. Figures: • Exchange of experience (system integration, production and D&E Budget: NA Outsource D&E: NA strategic organization) with Deutz, Knorr Bremse, Bosch, Wabco to improve solutions and increase efficiency.

• Joint venture MAZ-MAN established in 1997.

• Not interested at present moment. Will contact in the future. Now have to speak with General Director. Image source: www.maz.ru

Main areas of interest for collaboration with • Not interested at the current moment DEG members: • D&E proposal will be reviewed

Frost & Sullivan expects that more information will be available after an interview with General Director

Confidential to SMMT/DEG OSJC AVTODIZEL “Yaroslavl Motor Plant” (YaMZ), Supplier

Business segments: Quality certification: Location and Performance • Diesel engines ISO 9001:2000 • Car coupling, gearboxes and spare parts • Aggregates YMZ Key Clients: Russia:“ “Ural “, "Rostselmash“, "Krasnoyarsk plant harvesters", JSC "Chelyabinskie construction machinery", ●Yaroslavl "Bryansky arsenal", "Promtractor" Ltd. "Likinsky Bus“ Foreign:"MAZ", "Gomselmash", "Minsk plant Employees in 2005: 16,974 wheeled tractors“, "AvtoKraz", "Kharkiv Tractor Plant" Turnover in 2008: € 144mln Background Information Production Square: 645182 м2 • In 2007 "Avtodizel“ moved to the Euro-3 engines production. Ownership Structure • All YaMZ products are Euro-1 and Euro-2 standards. The Federal Agency Others, 3.7% of Federal Property • In 2007 "Avtodizel" launched in a new production a heavy-cylinder engine YaMZ- Management, 41.3% 650 on "Renault Trucks” license. • "Avtodizel" (YaMZ) GAZ Group is working with the Austrian engineering company JSC”Gaz”, 55.00%, AVL List GmbH on new family row engines YaMZ-530 establishing. Market Position • In February 2008 Avtodizel started the first Russian Euro-4 cylinder engine YaMZ- Avtodizel market share in 2007 534 testing. Others, 4,7% MMZ, 18%

YMZ Capacities: 2007 Avtodizel, 77610 43,3% Production engines, 30753 Kamaz Dizel, 34% gearboxes Confidential to SMMT/DEG OJSC AVTODIZEL “Yaroslavl Motor Plant” (YaMZ), Supplier Implications and Opportunities for DEG Members - + Interest in • "Avtodiesel" includes engineering center with advanced research Collaboration Design Product Test & Manuf. and experimental base. Eng. Validation Eng. Other

• Investment costs in 2005 amounted to €10,2 million, 56,8%-

innovative costs, 18,3% in R&D (new family YaMZ-530 engine). Figures: D&E Budget: NA • Focus area in 2008 is on: Outsource D&E: NA • Development of the Euro-3 engines V6, V8 power range from 230-420 hp with gearboxes. YaMZ-534 • Electric power installations and new family of engines to power range of 100-300 hp with gearboxes development.

• Euro-3 engines and YMZ 530 engine production organising. Image source: www. avtodizel.gaz.ru

Main areas of interest for collaboration with • Euro-3 engine development DEG members:

Frost & Sullivan expects that more information will be available after an interview with Development Director

Confidential to SMMT/DEG OJSC ”UAZ”, OEM Business segments: Quality certification: Location and Performance • SUV: UAZ Hunter, Simbir, Patriot GОSТ RВ 15.002-2003 • LCV: UAZ-2206, UAZ-3962 ISO 9001:2001 • MPV: UAZ-3303(6), UAZ-3741 ISO 9001:2000 UAZ

Key Regions: ●Ylyanovsk More than 90% of export were delivered in CIS countries (mainly in Kazakhstan, Belarus and Employees in 2007: 11 808 Ukraine) Net profit in 2007: € 36,3 mln Growth Production Rate: Background Information 13% Ownership Structure • Company aims to be the leader in producing and selling reliable light Other Shareholders, duty cross-country vehicles in CIS countries. 34.00% • In 2006 Stadco optimised stamping processes at UAZ to improve the

quality of the bodywork. ; Severstal Auto, • Stadco undertakes small-scale production of stamping on UAZ. 66.00% Market Position

SUV sales on Russian market in 2007 OJSC “UAZ” Capacities: 2007 UAZ, 5% VAZ, 5.5%

Production 72 163 cars Second hand imported cars, 26.00% Imported cars, Sales 70 825 cars 63.50%

Confidential to SMMT/DEG OJSC “UAZ”, OEM Implications and Opportunities for DEG Members - + Interest in • The budget for investment projects in 2008 is € 18,91 mln (in 2007: Collaboration € 12,48 mln). Design Product Test & Manuf. Eng. Validation Eng. Other • In 2008 “UAZ” plans Euro-3 & Euro-4 production on their existing line up of passenger cars and freight series. Figures: • In 2008 UAZ intends to develop experimental R&D facilities. D&E Budget: NA Outsource D&E: NA • R&D work on the relevant norms of Euro-4 UAZ-Patriot 2010 M.G.

• Organizing Pikap and Hunter Euro-4 production with a diesel engine ZMZ-5143 with a system of "Common Rail“.

• Organizing UAZ Hunter with ZMZ 409 Euro-4 engine production.

Image source: www.uaz.ru

Main areas of interest • Interior and exterior modernization of Patriot 2009 for collaboration with MG DEG members:

Frost & Sullivan expects that the most perspective area for cooperation with DEG members is interior and exterior modernization

Confidential to SMMT/DEG OJSC “GAZ”, OEM Business segments: Quality certification: Location and Performance* • Passenger Cars (GAZ) ISO 9001:2000 • LCV (GAZ, LDV) GAZ** • MCV & HCV (URAL) • Buses & Special vehicles (PAZ, LiAZ, GolAZ, KAVZ, KAAZ and others) • Powertrain (YaMZ, UMZ, Nizhegorodskie ● Nizhiy Novgorod Motori, YaZDA) Key Regions: • Russia remain key market for the products of the GAZ group Employees: 110,700 Background Information: Turnover: €3,283M* Growth Rate: 46.4% pa • GAZ produces a variety of minibuses, buses, LCVs and trucks with 4x2 * Note: Data is provided for all GAZ Group for 2006 and 4x4 wheel arrangement (EURO-2). ** Indicated location of Zavod GAZ • GAZ is one of the largest holding groups in Russia and CIS countries. Ownership Structure • Company is expected to continue strengthening of the core activities while automotive components division to be transferred to RM Systems. • In order to improve its market position, GAZ actively cooperates with foreign companies (Magna Int) and acquired LDV (UK). • In passenger car sector, GAZ rolled out production of Volga Sibir design of which was developed jointly with UltraMotive (UK). Market Position • Aim of the GAZ Group is to expand its presence in the international markets, Western Europe in particular by obtaining new technologies and GAZ is Russia's biggest manufacturer of LCVs, Trucks, and Minibuses (market shares in Russian entering into alliances with foreign automotive corporations. Federation 2006: LCVs 45.7%, light trucks (<3.8t) • GAZ continues restructuring and modernization of the facilities and 50.4%, medium trucks (<10t) 58.2%, AWD heavy equipment. trucks 57%, 6x4 heavy trucks 5%)

Confidential to SMMT/DEG OJSC “GAZ”, OEM Implications and Opportunities for DEG Members - + Interest in • According to GAZ plans to invest $1 billion in R&D during the next 5 Collaboration years, however the precise plan is not disclosed. Product Test & Manuf. Design Other • GAZ is focused on the upgrade of up to 90% of the product line in the next 5 Eng. Validation Eng. years. • Company cooperates with number international companiesEdek Engineering, Plus Design AG, AVM, Goepel, General Service, IDIADE Figures: (Spain), UltraMotive and others. D&E Budget: Est €20.8M • Through large scale investments, GAZ aims to develop own Outsource D&E: Est €10M design, manufacturing and technological competencies in Russia through creation of the Unified Engineering Centre. • Growing sales of the GAZ group allows company to devote increasing financing to D&E including outsourced D&E services. • GAZ has experience in cooperation with foreign D&E companies however due to further intensification of the collaboration with Magna International some outsourced projects were suspended (ex. Ricardo). Image source: www.sostav.ru • Concept design Main areas of interest • Active and passive safety systems • Security systems for collaboration with • Development of 4x4 LCV platform DEG members: • Various systems engineering (electrics, braking systems, exhaust systems, engines, steering systems and others) • Testing and validation (components level, vehicle level and comfort) GAZ group is one the most attractive players in Russia and CIS with significant opportunities for the DEG group

Confidential to SMMT/DEG OJSC “KAMAZ Inc”, OEM

Business segments: Quality certification: Location and Performance • MCV & HCV ISO 9001:2000 • Buses and special vehicles ISO 9001:2001 KAMAZ (Nefaz, Tumaziyskiy Zavod Avtobetonovozov) • Diesel engines (Kamaz-Diesel) Export 26% Key Regions: ● Naberezhnie Chelny • Russia is key market for KAMAZ • Export to CIS, Asia, Africa and South America Russia Background Information: 74% Employees: 16,134 Turnover: €1,609M • KAMAZ Group of Companies is leading Russian heavy truck Growth Rate: 43.5% pa manufacturer. It produces a wide range of trucks (over 30 models, more Ownership Structure than 400 kits, right-hand vehicles), trailers, buses, tractors, engines,

power units and different tools. Others, 6.8% ZAO DDK, 43.9% Vneshtorgbank, • KAMAZ is expected to expand production capacities for CV to reach 11.5% 85,000 units a year by 2010 • Company collaborates with the number of the foreign suppliers such as «ZF», «Bosch», «Gummins», «Deutz», «Schwitzer», «Knorrbremse», Rosimuschestvo, «Wabco», «GWB», «RBL» 37.8%

OJSC "KAMAZ Inc.“ Capacities: 2007 Market Position* Kamaz, Production 53,000 trucks 34.3%

Capacity 65,000 trucks Others, Sales 52,700 trucks 65.7% *Note: Trucks GVW 14-40 t

Confidential to SMMT/DEG OJSC “KAMAZ Inc.”, OEM Implications and Opportunities for DEG Members - + • KAMAZ is actively involved into modernization of the existing product line Interest in and development of the new products to support market growth of the Collaboration company Design Product Test & Manuf. Eng. Validation Eng. Other • KAMAZ has its own D&E center employing 900 people • Company needs to adapt to upcoming EURO 4-5 requirements • KAMAZ acquired number of CAD/CAE solutions in the past 4 years, Figures: however lacks the experience in the efficient and full scope use of the D&E Budget: - products. Company requires support in the virtual testing and validation Outsource D&E: Est €8M (currently testing is based on the road testing) • Contract was signed with Ricardo for euro 4/5 engines development and with n/a company for new cabin development. Hybrid engine development is one of new projects • KAMAZ collaborates with German and Korean companies in D&E • In Scientific Technical Centre are employed 900 specialists • KAMAZ Inc. is very interested in collaboration with DEG members and is looking for the opportunities for cooperation Image source: www.kamaz.net

• Cabin interior and exterior design Main areas of interest • New vehicles design for MCV and HCV, modernization of existing product range for collaboration with • Product engineering of engines and systems, quality improvement • Testing and validation for EURO 4-5 DEG members: • Hybrid engine development for Kamaz chassis (bus and city car) • Support in CAD/CAE implementation KAMAZ is one the most attractive players in Russia and CIS with significant opportunities for the DEG group

Confidential to SMMT/DEG Holding company "AvtoKrAZ“, OEM Business segments: Quality certification: Location and Performance • MCV and HCV ISO 9001:2000 • Military trucks AvtoKrAZ • Automotive components

Key Regions: UKR • Russia is the key market for the Kremenchug ● company

Employees: 6,800 Background Information: Turnover: €121M (2005) • Leading Ukrainian manufacturer and supplier of heavy-duty trucks and Growth Rate: Not Available special-purpose vehicles (10 do 30 ton). Ownership Structure • Company plans to increase production of the CV by more than 20 per cent to exceed 5,000 unit mark. Not available • Major partners of AvtoKrAZ are YaMZ, Cummins, Deutz, Volvo, Knorr Bremse and Schmidt. • AvtoKrAZ is expected to expand its operation outside of Ukraine by establishing assembly lines in Cuba and India. Market Position “AvtoKraz” Capacities: 2007 AvtoKrAZ is the largest Production 4,206 Ukrainian manufacturer of the Capacity Est. 10,000 heavy commercial vehicles Sales 4,100

Confidential to SMMT/DEG Holding company "AvtoKrAZ“, OEM Implications and Opportunities for DEG Members - + Interest in • AvtoKrAZ develops most of the components and systems in-house Collaboration (chassis, transmission, axles etc). Design Product Test & Manuf. Eng. Validation Eng. Other • Design and Engineering is done at AvtoKrAZ at the Engineering centre.

• Company does not outsource D&E service, however would be willing Figures: to discuss areas for potential collaboration due to current D&E Budget: NA engagement of AvtoKrAZ in development of the new truck (cab over Outsource D&E: NA engine). • From 2008 plan, AvtoKrAZ plans to roll out production of this new truck with EURO 3 engine. • Company plans to complete face-lifting for the existing models as well as to make cardinal cabin changes (new instrumental clusters and dashboards, seats etc). Image source: AvtoKrAZ

Main areas of interest • Design of the new vehicles for collaboration with • Cabin design DEG members: • Engineering of the key systems

Though AvtoKraz is not explicit about strong interest in outsourced D&E services, DEG members could propose existing solutions in cab design and systems engineering

Confidential to SMMT/DEG NAMI (State Research Center of the Russian Federation)

Scope of Services: Location and Performance • Automotive industry market measurements and research. NAMI • Design & Engineering services. • Creating, testing and refinement of promising samples of automotive technology. ●Moscow • Applied research for industry plants and related industries. Project Completed: • Electric power plants with combined electric generator based on fuel cells "hydrogen - the air" on the chassis ZIL-5301. • Prototype car type VAZ-21130 for drivers with disabilities. • Samples of ATS ambulance based on “Gazelle" chassis. • Samples of ATS ambulance based on "Sable“ 4x4 car. • Modification and redesign of “small sized commercial vehicles”. • Development of the school bus based on GAZ-33104 "Valdai“. • Adaptation of the automatic transmission to locally produced cars.

Background Information • State-owned NAMI is actively involved into development of “ Concept of Automotive Industry Development in Russia“. • Automotive D&E department includes 28 people. • Provides regulation of the Russian automotive industry in respect to standardization and certification of D&E activities of OEMs and suppliers in Russia. • NAMI was granted €7.5M in 2001 for the development of the new generation diesel engine. Image source: NAMI

Confidential to SMMT/DEG OOO “Autodesign”, D&E Service Provider Location and Performance Business segments: Quality certification: • Design & Engineering ISO 9001:2000 Autodesign • Development and production of: ISO 9001:2001 • Auto components ● Naberezhnie Chelny • Special vehicles • Body and Van Scope of Services: Employees: 120 Turnover: €0,9M • Project development Growth Rate: NA • Automotive components development • Manufacture of small and medium series • Prototypes manufacturing • Certification Projects Completed: • ZIL: Restyling projects of cabins ZIL-4368 and 4331 (2003). • KAMAZ: Design and components production of KAMAZ-4308 exterior (2003,2006). • GAZ: restyling project for GAZ 3110 (2001). • A series of restyling projects of serial model GAZ 3110 (2001). • Project for off-road vehicles design. Image source: www.sostav.ru Background Information: Technologies: • CAD / CAM modelling (Icem Surf, SolidEdge) • Autodesign works in the field of automobile manufacturing and • The vacuum-forming of large parts automotive technology since 1990. • RIM-casting polyurethanes in the enclosed form (Tartler MDM 6) • Total production for 12 years: more than 15 thousand cabins. • Measurements using Baces 3D coordinate machines • Rapid prototyping at the Dimension SST 768

Confidential to SMMT/DEG OOO "Avtoprostor“, D&E Service Provider Location and Performance Scope of Services: Avtoprostor • Development of style and layout of vehicles. ● Vladimir • Engineering of ergonomic interior solutions. • Strength calculations. • Design and production of metal structures and assembly. • Prototyping and manufacturing engineering. Employees: NA Turnover: NA • Preparation for mass production. Growth Rate: NA

Background Information: Ownership Structure Not Available • Avtoprostor was involved into several large project with Russian OEMs such as GAZ group.

• Company provided product engineering services to the Market Position

Belarusian tractor manufacturer BelAZ. Not Available • Detailed scope of the services and annual turnover is not available.

Confidential to SMMT/DEG 7. Strategic Conclusions and Recommendations

Confidential to SMMT/DEG 100 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 to lifting and new models design. show OEMs • Modernisation of the existing vehicles is expertise and required. technological Complex superiority solution • Existing expertise of the DEG members in cabin exterior and interior design is required by Commercial the local OEMs. Vehicle OEMs Adaptation to • Modernisation of the existing vehicles in the local required. business environment • Product engineering has strongest demand from all the tier 1 & 2 suppliers. • Expertise in low cost components engineering Tier 1 & 2 is required. Suppliers • Local companies need support in modernisation of the production processes • Support in implementation of the D&E

software. Success Factors Strategic Conclusions and Recommendations and Conclusions Strategic • While Russian and CIS OEMs and Tier 1&2 suppliers search for the solutions in the all design and engineering areas, SMMT/DEG members should start planning visits to local companies.

Confidential to SMMT/DEG 101 Location of Organisations Willing to Cooperate with SMMT DEG

Scale used for willingness to co-operate 0= No Interest, 4 = High Interest Avtopribor = 3

NAAZ =1 RUSSIA

ZIL = 0 GAZ = 3 AvtoKOM = 4 UMZ = 3 YaMZ = 2 UAZ = 2

MAZ = 2 KAMAZ = 4 ● Ulyanovsk ● Nizhniy Novgorod Ural (GAZ) = 3 ● Vladimir ● Miass ● Naberezhnyje Chelny  Moscow Minsk  ● Tolyatti Executive Summary Executive BEL ● Skopin Asia Auto = 1

SAAZ = 4 UKR●Kremenchu ● Zaporozhie KZAE = 1 g KAZ

UZB

AvtoKraz = 1 ZAZ = 2 AvtoVAZ Aggregat = 3.5

ZMZ = 3

Confidential to SMMT/DEG 102 APPENDIX

• Overview of the Russian Automotive Market Slide 104

• PESTLE Analysis Slide 110

Confidential to SMMT/DEG 103 Total Capacity Growth in Russia: Production Capacity will Increase to Support Market Sales

3,000 15.0%

12.0% 2,500 9.7% 9.6% 10.0%

2,000

5.1% 5.0% 3.4% 1,500units 3.0% 1.6% 0.0%

Capacity, thousand Capacity, 0.0% 1,000

-5.0% 500 -7.5%

0 -10.0% Total Capacity Russian and CIS Markets CIS Overview and Russian 2004 2005 f2006 f2007 f2008 f2009 f2010 f2011 f2012 Growth Rate Note: Based on 2006 market estimations AvtoVAZ decreased Toyota and Great Wall would their production reach their max. production capacity capacities

Confidential to SMMT/DEG 104 Current and Projected Capacity Utilization by OEM in Russia: Average Capacity Utilization is expected to increase by 25.1%

Average capacity utilization, 2012 Average capacity utilization, 2005 100

90

80

70

60 59.7% 50 + 25.1 % 40 34.6% 30

20

10

0

GM VW Ford GAZ ZMA UAZ Other TagAZ Avtotor Renault Toyota Avtovaz Autokom Izh-Auto Roslada Avtoframos Great Wall

GM-AvtoVAZ 2005 2012 Russian and CIS Markets CIS Overview and Russian

• Low current capacity utilization of production facilities by manufacturers in Russia will be raised up 25.1% due to entry of new OEM’s and increasing demand for vehicles (including produced domestically).

Confidential to SMMT/DEG 105 Domination of the Russian OEMs Comes to the Features End • Russian automotive players have reached a situation when increasing prices  Decreasing number of the for raw materials as well as auto components diminishes their exclusive Russian models competitive advantage such as low prices. produced.  Steadily decreasing • Wider introduction in the CIS market of foreign vehicles with comparable market share. pricing to local models (Daewoo Lanos, Renault Logan, Hyundai Accent among others) and creation of joint-ventures (which assembly foreign low  Technological stagnation. priced brands) change the customers’ attitude toward passenger cars.  Unsuccessful strive to improve quality. • With increasing demand for passenger vehicles, more importance is given to the quality of a vehicle and post-sale services.  State protection of several domestic manufacturers. • Domestic manufacturers experience structural problems, but not cyclical as at may seem, due to high wear of equipment, assembly quality, human  Well-developed resources and brand perception. distribution system.  Low financial and • Diminishing sales and profit margins force Russian OEM’s to look for strategic operational transparency. partnership with foreign manufacturers in order to revitalise their production, gain technological insights and survive on the market.  No experience of working under global competition. Domination of the Russian OEM‟s products on the territory of the  Domination on the

Overview of Russian and CIS Automotive Automotive Market Overview of CIS and Russian former USSR is still significant. However such domination would markets of former USSR fall apart as soon as other OEM‟s would establish good for both new and used distribution networks for vehicles and auto components. vehicles.

Confidential to SMMT/DEG 106 Prevailing Ownership Structures of Foreign Producers in Russia

Prevailing Ownership Structures (Russia), 2006

FORD Motor Russia successfully launched their 100 % Greenfield own production facility and assembly line for Ford Focus near St. Petersburg. Greenfield Based in Kaliningrad, Avtotor benefits from special Regions with Particular economic conditions applied to enterprise working Investment Conditions in this particular region.

Avtoframos together with Renault produces Renault Existing Facilities Logan on the facilities of “Moskvich” manufacturer that went bankrupt earlier. Brownfield Direct Investments Direct Severstal Auto initiates assembly of FIAT vehicles Special Economic Zones in Alabuga, region which has being given a status of Special Economic Zone.

The first JV in Russian Automotive industry was JV with Auto Manufacturer established in 2002 between GM and AvtoVAZ.

Another option to be considered by new entrants is JV with Components Manufacturer establishing JV with either their global or local supplier.

Joint Venture Joint One of the largest independent distributors of

Overview of the Russian and CIS Automotive Automotive Markets Overview of CIS Russian the and Local Distributors & Dealers passenger vehicles “IRITO” organizes assembly of BYD Flyer in the Moscow Region. Source: Frost & Sullivan

Confidential to SMMT/DEG 107 What the OEM‟s say about opportunities in Russia

"Customer demand for non-Russian brands is growing at a rate which exceeds our projections. It is also clear that customers choose brand taking into consideration the "Total Cost Equation": it is no longer a low purchase price that is important for them but residual value, running and repair costs, plus quality and value that now decide which

brand to choose…” Quote

One of the Foreign OEM‟s Representative in Russia

Confidential to SMMT/DEG 108 Potential of Hybrid Cars Sales in Russia: Future is not that Green

• No tax incentives to spur the interest of • First hybrid vehicle, which appeared in Russian in buying hybrid vehicles. Russia was Lexus RX400h. • Absence of required infrastructure

• Imported unofficially, Toyota Prius also (service stations) and technical appears on the Russian market, however in knowledge. very limited quantities. • Majority of Russians are not able to • While sales of RX400h reached 268 afford buying hybrid vehicle due to high vehicles for the year 2007, representative price. office of Toyota Motor admitted that: • Despite presence of prototypes developed by Russian OEMs “ Russians are not ready yet for (AvtoVAZ), local companies focused on

perception of hybrid vehicles” facilitation of sales in traditional

segments. Overview of the Russian and CIS Automotive Automotive Markets Overview of CIS Russian the and

Confidential to SMMT/DEG 109 PESTLE Analysis: Introduction

• Development of the Russian POLITICAL economy drives the growth across all industries including automotive sector. ENVIRONMENTAL • Automotive industry in Russia is ECONOMIC on the top list of priorities for the development for the current Government of the Russian Russian Federation. Automotive Industry • Russian automotive industry should be considered within nexus of internal and external factors. SOCIAL LEGAL

• Currently, Russia is the state where the political and economic priorities are setup for the next 10- TECHNOLOGICAL 15 years thus it determines the scenarios for automotive industry development and attractiveness for foreign investors.

Confidential to SMMT/DEG 110 Russian Automotive Industry is Important Part of Russian Economy and has Strong Supported from the Government

Raw Materials 35% 40% 40%

Components 20% 25% 35%

45% Assembly 35% 25%

Value Added Employment Tax Collection

4 per cent of 3 per cent of GDP of the 6 per cent out of taxes collected Russian total number by the Federation employed government

Russian Economy Importance of the Russian Automotive Automotive Importance Industry of the Russian Russian Government is the largest shareholder of the biggest Russian automotive manufacturers and considers automotive industry as one of the key national interest points.

Confidential to SMMT/DEG 111 Political Environment – Main Questions

Will political course remain • Political stability of the Russian Federation in next 10-15 years unchanged? is one of the key questions, which bothers all industry players.

• Government of Russia have to show the willingness to provide Will be there any other foreign capital with reassurance that political forces and „Yukos‟ cases? interests will not impede development of automotive market.

For how long favorable • Existing preferences for creation of automotive production investment conditions (assembly) lines would remain until accession of the Russian would remain? Federation to WTO (already in 2008?).

Would Government protect • Changes in political balance might force investors to flee the domestic players? Russian market as those changes might provoke protective measures for domestic auto and components manufacturers.

Confidential to SMMT/DEG 112 Political Environment – Development Scenarios

Existing political environment could develop under 3 main scenarios: Scenario • “Edinaya Rossiya” party will keep following publicly announces strategy of economic development of the country. Best Stable Future • Prioritized areas of economic development (including automotive sector) will remain unchanged. • Further improvements of regional support to OEMs.

• Certain inclinations toward remnants of centralised economy will persist.

Centralization • Government will keep pursuing nationalisation of main Acceptable industries. • Strong dependence of economic agents on State decisions. • Ruling political party will change and Russian parliament will have no majority (but non-permanent unions during elections). Back to 90‟s • Previously made decisions will be revised, modified or Bad canceled. • Legislature chaos will come back.

Confidential to SMMT/DEG 113 Russian Government‟s Vision on Development of the Russian Automotive Industry

“Our vision of the further development of automotive industry (meaning: Russian) is in cooperation with large foreign manufacturers. They are also investors. And create jointly with them assembly and production lines of auto components”

Deputy Director Ministry of Economic Development and Trade

Confidential to SMMT/DEG 114 Macroeconomic Overview: Russian Economy has Positive Growth Prospects

Actual Forecast 35000 16% • Although high oil prices and a 15.1% relatively cheap Ruble are 30000 14% important drivers of this economic 12.0% 11.7% 12% 25000 10.9% Growth% Rate, rebound, since 2000 investment GDP growth rates 9.0% 8.5% 10% and consumer-driven demand 20000 Inflation rates 8.2% 7.2% 7.3% 8% have played a noticeably 6.4% 6.0% 15000 5.5% 5.3% increasing role.

4.7% 6% GDP, billion rubbles billion GDP, 10000 4% • Real GDP growth in the Russian 5000 2% Federation of 4.0-to-5.0 percent is

0 0% assumed for the medium term 2002 2003 2004 2005 2006 2007 2008 (2012), falling towards three per cent in the longer term (2025). Actual Forecast 32.00 • Economic downturn of US

31.00 economy as well as high oil prices on the international market drove 30.00 the average exchange rates of US$/RUR is expected to reach 29.00 the lowest level since 2000. 28.00 • Nevertheless, the increasing trend

27.00 in US$/RUR exchange for up 2009 Exchange Exchange Rate, rubbles per $1 dollar

26.00 has negative impact on the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Russian automotive market

Confidential to SMMT/DEG 115 Comparison with Other Emergent Economies: Russia is One of Growth Poles in the World

India China Brazil Poland Russia Ukraine

GDP, $ billion $719.8 $2,225.0 $619.7 $246.2 $799.0 $75.1

GDP per capita, $ $3,400 $6,800 $8,300 $13,100 $5,571 $7,000

Population, millions 1,095 1,313 188 38 143 46

Growth Rate 8.4% 10.2% 2.3% 3.4% 6.4% 2.6% In comparison to “Big Boom” countries, Russian Annual economyInflation growth rates4.2% are one of the 1.8%highest in 6.9% 2.2% 10.9% 13.5% the group along with constantly growing GDP per capita, which indicates about possible 12.0% growth of consumer incomes

10.0% China

India 8.0%

Russia • Favorable economic conditions in Russia will 6.0% spur further economic development of the Poland

country and prosperity of the population of the Rate Growth GDP 4.0% Russian Federation. 2.0% Brazil

• Annual wage growth of 6.5 per cent facilitates Ukraine demand for passenger cars in general and in 0.0% low-priced segment in particular. 1 10 100 1,000 10,000 Population, million

Confidential to SMMT/DEG 116 International Trade of Russia: Economic Revival Will Boost Export of Industrial Products

• For the next 6 years till year 2012, the change of existing structure of the trade Main Trade Partners of the Russian Federation in 2005, bil. dollars balance toward export of industrial 30.0 26.6 Trade turnover with China will products is expected. 25.0 21.8 18.8 20.0 increase in the long term 15.7 15.0 9.9 9.2 9.0 9.0 8.8 8.7

• The structure of the main trade partners 10.0 Billions of US dollars Billions of Russia would remain unchanged 5.0 0.0

UK Italy USA except trade turnover with China, which China Turkey Poland Finland Germany Switzerland growth 25-30 per cent annually. Netherlands

• Further development of transport corridor “East-West”, which connects Asia-Pacific region with Western Union, creates addition opportunities for foreign OEMs.

• Russian Automotive Industry occupies on the biggest chunks in the import structure of the Russian Federation.

Confidential to SMMT/DEG 117 Increasing Car Penetration in Russia is Supported by the Gradually Increasing Prosperity of the Russian Population

Besides of the growth of the car Car Penetration: Cross-Country Perspective, penetration rate per 1000 people Cars per 1,000 People 600 (from 175 currently to 235 in 500 400 2010), structural changes in the 300 200 automotive market will occur such as 100 substitution of old Russian 0 brands, which are not satisfying Germany USA Russia Ukraine Brasil China India 2005 2010 EURO2 by new domestic or foreign brands.

• Increasing difference in average income level of the biggest cities of Russia such as Moscow, St. Petersburg, Ekaterinburg etc. creates certain social tensions among Russian population but it has low impact on automotive industry players. • Despite positive changes in preferences for foreign OEM’s, general demographic situation is unpleasant: • Fast aging population. • Great gap in income distribution across the regions of Russian Federation. • Small middle class in the total population structure (majority is low income class).

Confidential to SMMT/DEG 118 Russian Federation: Income Growth Dynamics

100% 2.9 6.6 11.3 90% 14.3 17.7

80% 21.6 • Personal income growth is spurred 27.1 70% by general economic growth of the 32.2 60% Russian Federation. 50% 65.5 40% 61.9 • Raising prosperity of the Russian 55.4 30% 46.9 population as well as development of 20% banking/financial services become 10% 17.3 9.9 one of the most important factors of 0% 6.2 3.2 Russian automotive industry growth. 2002 2003 2004 2005

Below 1,500 RUR 1,500 - 6,000 RUR 6,000 - 12,000 RUR Above 12,000 RUR

Exchange Rate: 1 USD ~ 27 RUR

18 000 • According to estimations of Ministry of Economic 16 000 Development and Trade the average income 14 000 would reach 16,686 RUR by 2009. 12 000

10 000 RUR • Given growth estimations are not adjusted for 8 000 inflation. 6 000 4 000 2 000 • Average income level does not consider 0 unreported (hidden) salaries and monetary 2005 f2006 f2007 f2008 f2009 allowances.

Confidential to SMMT/DEG 119 Technology Development: Russian Government Encourages Manufacturing of Technologically Oriented Products

• Tightening ecologic restriction (EURO 2 already started in 2006) put under strong pressure local manufacturers who need to adapt their products to EURO2 standard.

• Development of hydrogen cars and electric cars is seriously limited by absence of required infrastructure.

• Only possible market for hydrogen cars are the biggest cities of Russia such as Moscow or St. Petersburg.

• Russian Government exert substantial effort to revitalise technological level of the Russian Federation by creating various technopark, which aim to develop IT, telecommunications and automotive sectors among others.

Confidential to SMMT/DEG 120 Technology & Environment: Introduction of New Tech. Regulations Creates Additional Opportunities for Foreign OEM‟s

Emission Introduction Production new vehicles as well as import of foreign cars in the Standard Date Russian Federation should satisfy new technological requirements, introduced on 1st of January, 2008.

nd EURO 2 22 of April, 2006 Foreign OEM’s should pass existing certification norms for EURO2 1st January, 2008 EURO 3 Import to the Russian Federation of the following vehicles produced before the date indicated below is prohibited:

1st January, 2010 Production year, including EURO 4 Country of Satisfying ecological requirements: Origin Do no satisfy emission requirements EURO2 EURO3 EURO4

1st January, 2014 EU, gasoline Before 1996 1997-2000 2001-2004 С 2005 EURO 5 EU, diesel Before 1996 1997-2001 2002-2004 С 2005 USA Before 1995 1996-2000 2001-2003 С 2004 Japan Before 1997 1998-2004 2005-2010 С 2011 Canada Before 2000 2001-2003 From 2004 - India Before 2004 2005-2009 From 2010 - Introduction of emission standards Malaysia Before 2002 From 2003 - - provide foreign OEM’s with strong China Before 2003 2004-2007 From 2008 - opportunities in capturing market share of Russian OEM’s and part of market Korea Before 2000 2001-2002 2003-2005 From 2006 of used foreign vehicles Ukraine Before 2005 From 2006 - -

Confidential to SMMT/DEG 121 Legal System Development: Russian Government Supports Establishment of Production Facilities by Foreign Automotive OEM‟s in Russia

• According to opinions of the Russian automotive market participants, customs regulations of the Russian Federation create substantial obstacles for both international operations and operational efficiency.

• From 1st of January, 2006, the additions to customs code has come into force making international operations with the Russian Federation easier by lowering the number of customs procedures.

• Government of Russia provides substantial legal incentives for international automotive manufacturers by offering them simplified requirements.

• One of the serious drawbacks of the Russian automotive companies is lack of their transparency which imposes high uncertainty on the behaviour of those companies both in short and long run.

Though Russian legal system is very complicated, the “political” decision have been made by Government of the Russian Federation to support establishment of partnerships or 100% foreign capital production (assembly) facilities both for vehicles and components manufacturers in Russia

Confidential to SMMT/DEG 122 Legal System: Decree #166 Creates Attractive Economic Incentives to Set Up Automotive Business in Russia

Profit Tax • Tax benefits provided by local authorities are restricted. • 10 percent of initial capital investments (in fixed assets) Tax reforms aim to Reforms could be acknowledged as expenses. improve investment Relevant VAT • Possibility of crediting input VAT on invoice acceptance. attractiveness for Tax • Capital construction: Input VAT is offset in the period foreign partners and Reforms Reforms when the costs are attained. provide warranties of stability of existing Asset Tax • Additions to Tax Code are made to regulate procedures for costs accruals and payment of assets tax. legislature Reforms • Inventory is not included into the assets tax base.

Features: Measurements: • Minimum annual production capacity ……………………….. 25,000 units Relevant Decree #166 • Operations to be performed….. body assembly, welding and painting Customs Concept of • Time for production set-up …... 18 months for existing plant Duties Industrial 30 months for constructed plant Assembly • Restrictions on import ………... 24 months: 10% less of components imported Reforms 42 months: 10% less of components imported 54 months: 10% less of components imported • Applicable duty tax …………… 0-5% for exclusive components used in manufacturing (standard rate – 15%)

. Introduction of Decree #166 creates favorable conditions for the development of the Russian automotive market. . Establishment of local production allows local OEM’s cutting down their costs and providing customers vehicles with lower prices comparing to imported cars.

Confidential to SMMT/DEG 123 Special Economic Zone “Alabuga” Russian government introduced SEZ “Alabuga”, Republic of Tatarstan the law, which regulates creation Aim: of Special Economic Zones Facilitate the development of autocomponents production (SEZ) on the territory of the Features: Russian Federations in order to . 20,000 sq. meters . Duty free zone spur industrial and technological . Tax preferences development. . Development of the full infrastructure, required for manufacturing

Table of comparative tax rate for SEZ “Alabuga” and the rest of Russia Tax Rate . The main goal of passing SEZ law is to support local 1. Profit Tax 24.00% manufacturers and, in particular of automotive industry, to For SEZ Residents 20.00% 2. VAT 18.00% support creation of competitive autocomponents industry For SEZ Residents 18.00% in Russia. 3. Assets Tax 2.20% For SEZ Residents 0% . The main positive impact of SEZ Alabuga operations 4. Land Tax 1.50% For SEZ Residents 0% would be experience by KAMAZ and UAZ, which are Depending on type and power rating of a closely located and have troubles with autocomponents. 5. Transport Tax vehicle For SEZ Residents 0% . Great Wall agreed with Russian Government to open 6. Duties Depending on the product type assembly in Alabuga and get tax and import preferences for 10 years time. For SEZ Residents Depending on the product type 7. Uniform Social Tax 26.00% For SEZ Residents 26.00%

Confidential to SMMT/DEG 124