no slide title · russia, ukraine, kazakhstan, uzbekistan and belarus as the diagrams below show...

“We Accelerate Growth”

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

Confidential to SMMT/DEG 2

Geographic Scope :

The project focussed on Russia and the CIS countries of Belarus,

Ukraine, Kazakhstan and Uzbekistan.

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.”

Pro

jec

t a

ims

, O

bje

cti

ve

s a

nd

Sc

op

e

Vehicle Segments:

The project focuses on the following vehicle segments, namely:

• Passenger Cars,

• Light and Heavy Commercial Vehicles,


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 .

Phase 1

Initial Market

Intelligence

Exercise

Nov „07 – Feb „08 Feb – May „08

Interim

Report

Delivery

and

Feedback

Session

Delivery of Final

Report &

Presentation of

Results

Presentation 11th

June „08

Phase 2

Additional Market

Intelligence

Exercise

Presentation 20th

February „08

Current Status

Th

e P

roje

ct

Ap

pro

ac

h

Confidential to SMMT/DEG

Interview Schedule

Russia

73%

Ukraine

15%

Kazakhstan

1%Uzbekistan

11%

Russia

90%

Belarus

7%Ukraine

3%

Russia

93%

Ukraine

5%

Belarus

2%Uzbekistan

0.01%

Passenger Cars Light and Heavy CV‟s Buses and Coaches

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

Th

e P

roje

ct

Ap

pro

ac

h


In total, 26 companies were spoken to throughout the project

Pro

jec

t In

terv

iew

s

Complete interviews were held with the following companies in the project

Partial interviews were held with the following companies in the project. Information from these

interviews was used to validate market information.

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

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


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


1. Executive Summary

• Overview of the Russian and CIS Automotive

Industry

• Position of the Russian and CIS D&E Market

• Key Market Drivers, Restraints and Challenges

• Key Market Trends

• Strategic Conclusions and Recommendations

• Willingness to Cooperate by OEM

Slide 8

Slide 9

Slide 10

Slide 11

Slide 12

Slide 13


D&E Budget in Russia and CIS Automotive Markets Represents

Only 2 per cent of the Global D&E Spends

Ex

ec

uti

ve

Su

mm

ary

• High market growth rates and attractive investment climate

in Russia and CIS countries are forcing rapid entry of

leading EU, US, Japanese, Korean and Chinese OEM’s.

• Increasing oil and raw materials prices have negative

impact on the competitive advantages of local vehicle

manufacturers and components producers.

• Gradual shift in consumer demand towards higher quality

and service level changes the consumption preferences

and patterns.

Market opportunities are rapidly identified

Mass entry of foreign OEM’s

Local OEM’s look for potential

partnership/collaboration

Global D&E Markets, 2007

4,050

540

86

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Global D&E Market Indian D&E Market Russia and CIS D&E Market

Mill

ion

Eu

ro

86%

12% 2% • While global market for D&E services is

estimated to reach €4 billion in 2007, D&E

spend in the Russian and CIS market

reached €85.7 million for the same period.

• Lower D&E spends in Russia and CIS

markets are the reflection of the difficult

times the Russian and CIS automotive

industries are facing.

• Russian and CIS companies are expected

to increase budgets devoted to D&E in the

next 8 years.


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

• 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 D&E 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.

Ex

ec

uti

ve

Su

mm

ary

Russian and CIS

Outsourced D&E

Market

€ 85.7

million

€ 38.5

million

Russian and CIS

D&E Market

45% of

D&E

market

Russian and CIS D&E Markets, 2007

Design30%

Product Engineering

45%

Test & Validation10%

Manufacturing Engineering

15%

Russian and CIS Outsourced D&E Markets, 2007

• Efforts of the Russian and CIS OEMs and

suppliers in expansion of the product lines and

modernisation of the existing products are

reflected in the D&E budget allocation across

different D&E sectors.

• Design of the new products (virtual

modelling, interior and exterior design) and

product engineering take 75 per cent of the

overall outsourced D&E market in Russia and

CIS.

Dri

ve

rsR

es

tra

ints

Key Market Drivers, Restraints and Challenges

Source: Frost & Sullivan


Probability

Low

Medium

Medium

Low

Low

Ma

rket

Ch

allen

ge

s


Lack of in-house

technological expertise by OEMs and Suppliers

Government

supports

investments into

D&E

Increasing sales allows increase

financing of outsourced projects

Expansion of OEM‟s product lines

requires new D&E approach

Language barriers

still negatively

affect

communication

between

organisations

Partnership with

foreign OEMS and

suppliers slows

penetration of the

foreign D&E

providersLow D&E

spends

compared to

the other

developed

markets

Complicated

organisational

processes raise

barriers for efficient

collaboration

Russian and CIS OEMS and suppliers

increase collaboration with foreign OEMs

and suppliers.

Possibility of market turmoil similar to the

Russian government default of 1998.

Lack of professionals in industry would

persist.

Investment climate would worsen due to

non-competitive and questionable steps

followed by the State Authorities in

regulating business environment.

Absence of market transparency and

administrative barriers limiting

development of the Russian and CIS

outsourced D&E market.

Ex

ec

uti

ve

Su

mm

ary


Outsourced D&E Services Have Strong Potential for Growth in the

Next 4-5 Years

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.

Consolidation of the market

General improvement of business environment and normative

legislarure.

Tightening of competition across the segments

Market transparency improvement.


Key Market Trends in D&E Market (Russia and CIS), 2007-2015

11

Ex

ec

uti

ve

Su

mm

ary

Strength of the trend


DEG Member Should Consider Active Search for Collaboration with

Russian and CIS Companies

Passenger Car

OEMs

Tier 1 & 2

Suppliers

Ex

ec

uti

ve

Su

mm

ary

• 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.

• Primary focus should be given to offering

solution in exterior and interior design, face-

lifting and new models design.

• Modernisation of the existing vehicles is

required.

• Product engineering has strongest demand

from all the Tier 1 & 2 suppliers.

• Expertise in low cost components engineering

is required.

• Local companies need support in

modernisation of the production processes.

• Support in implementation of the D&E

software.

• Existing expertise of the DEG members in

cabin exterior and interior design is required by

the local OEMs.

• Modernisation of the existing vehicles in

required.

Commercial

Vehicle OEMs

Success Factors

Adaptation to the local business

environment

Complex solution

Ability to show

expertise and technological

superiority

Proactive

business

development


GAZ = 3

AvtoKOM = 4

● Nizhniy Novgorod

Moscow

RUSSIA

KAZ

UZB

UKR

BELMinsk

● Zaporozhie

ZAZ = 2

Location of Organisations Willing to Cooperate with SMMT DEG

Scale used for willingness to co-operate

0= No Interest, 4 = High Interest

ZIL = 0

MAZ = 2

● Miass

●Kremenchu

g

● Ulyanovsk

● Vladimir

● Tolyatti● Skopin

KAMAZ = 4

Avtopribor = 3

AvtoVAZ Aggregat = 3.5

ZMZ = 3

AvtoKraz = 1

UMZ = 3

SAAZ = 4

● Naberezhnyje Chelny

Ural (GAZ) = 3

Asia Auto = 1

NAAZ =1

Ex

ec

uti

ve

Su

mm

ary

KZAE = 1

YaMZ = 2 UAZ = 2


2. Overview of the Russian and CIS Automotive Markets

• Analysis of the Russian and CIS Automotive

Industry

• Overview of the Vehicle Production and Sales in

Russian and CIS countries

• Map of Russian and CIS Passenger Car OEMs

• Map of Russian and CIS CV and BUS OEMs

• Overview of the Key Holding Groups

Slide 15

Slide 17

Slide 20

Slide 21

Slide 22


Russian and CIS Market Have Large Number of Automotive OEMs and

Suppliers Across All Segments• High growth rates of CIS automotive markets and

attractive investment climates especially in the

Russian automotive industry are forcing rapid entry of

leading EU, US, Japanese, South Korean and Chinese

OEM’s.

• Russian and CIS automotive industries feature more

than 40 local OEMs and more than 2,000 Tier 1 and

Tier 2 suppliers.

• Increasing oil and raw material prices have a negative

impact on the competitive advantages of local vehicle

manufacturers and components producers.

• A gradual shift in consumer demand towards better

quality and service level change consumption

preferences and patterns.

Russian and CIS OEMs are focused on the creation of

JV with foreign OEM‟s, assembly of foreign brands, re-

branding, creation of new models and/or general

business reorientation.

Number of Local OEMs per Sector, 2007

Ru

ss

ian

an

d C

IS A

uto

mo

tive

Ma

rke

ts O

ve

rvie

w

17

21 1

0

5

10

15

20

Russia Ukraine Belarus Uzbekistan

Passen

ger

Cars

Lig

ht

an

d H

eav

y C

V‟s

Bu

ses a

nd

Co

ach

es

14

3 4

1

0

5

10

15

20

20

4

1 1

0

5

10

15

20


Russian OEMs in Truck, Buses & Coach Segments Hold More than 90%

of All Production in CIS

Passenger

Cars

Commercial

Vehicles

Buses and

Coaches

• AvtoVAZ

• GAZ

• Severstal Avto (UAZ)

• Izh-Auto

• Avtokom (SeAZ)

• TagAZ

• Avtotor

• GM-AvtoVAZ

• Others

• GAZ

• Kamaz

• ZIL

• URAL

• UAZ

• Others

• Kamaz

• GAZ Group (5

OEMs)

• Bogdan

• Others

• ZAZ

• Bogdan

• Anto-Rus

• Evrokar

• LuAZ

• LAZ

• AutoKrAZ

• Rotor

• ZAZ

• BelAZ

• MAZ

• MoAZ

• MZKT

• MAZ

• UzDaewoo

Auto

• SamKochAuto

• SamKochAuto

UkraineRussia UzbekistanBelarusOEM‟s

Russia

73%

Ukraine

15%

Kazakhstan

1%Uzbekistan

11%

Russia

90%

Belarus

7%Ukraine

3%

Russia

93%

Ukraine

5%

Belarus

2%Uzbekistan

0.01%

Ru

ss

ian

an

d C

IS A

uto

mo

tive

Ma

rke

ts O

ve

rvie

w

https://www.cia.gov/library/publications/the-world-factbook/flags/bo-flag.html

https://www.cia.gov/library/publications/the-world-factbook/flags/uz-flag.html

https://www.cia.gov/library/publications/the-world-factbook/flags/up-flag.html

https://www.cia.gov/library/publications/the-world-factbook/flags/rs-flag.html


Russia Demonstrates 16.9% Growth in Sales of All Passenger

Vehicles reaching 2.07 million Units Sold

• Russian and Ukraine demonstrate outstanding performance in terms of production of the

passenger cars and corresponding sales.

-500,0001,000,0001,500,0002,000,000 - 500,000 1,000,000 1,500,000 2,000,000

Russia

Ukraine

Belarus

Uzbekistan

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

Sales Production

+16.9%

+36.1%

+19%

+5.9%

+25.0%

+38.7%

Ukraine demonstrates

outstanding performance

both in sales and

production of the vehicles

Ru

ss

ian

an

d C

IS A

uto

mo

tive

Ma

rke

ts O

ve

rvie

w


975.0910.3 877.9 886.0

756.7 741.6 733.7

606.1 622.3

87.8

122.8 142.3

178.2 198.2 220.5

292.1346.5

52.178.3

113.9 152.1 168.5216.8

269.041.8 72.1

111.3153.4

182.1196.8 212.0

225.5

0.3 9.9

32.3

95.5 125.8

144.2

41.148.7

50.2

85.714.857.3

25.3

33.3

2004 2005 f2006 f2007 f2008 f2009 f2010 f2011 f2012

Others

China

Japan

Korea

EU

USA

Russia

Production Forecast of Passenger Cars in Russia by Manufacturer Country of Origin: 2005 - 2012

Based on JD Powers Estimations for Vehicle Manufacturers in Russia

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

potential.

1,068 thousand

units

1,658 thousand

units

Pro

ductio

n, th

ousand u

nits

Ru

ss

ian

an

d C

IS A

uto

mo

tive

Ma

rke

ts O

ve

rvie

w


Current Capacities Versus Projected: Autokom and Roslada Might Seize Production of Passenger Vehicles

0

5,000

10,000

15,000

20,000

25,000

2004 2005 2006 2007 2008 2009 2010

Roslada Production Volumes

0

50,000

100,000

150,000

200,000

250,000

300,000

Autok

om

Avtot

or

AZ Alta

i

FordG

AZG

M

GM

-Avt

oVAZ

Gre

at W

all

Izh-

Auto

Oth

er

Ren

ault

Ros

lada

Sever

stal

Aut

o

TagAZ

Toyota

Volks

wagen

2005 f2012

Tre

nd

Production of vehicles Roslada to

be seized

Capacity, units

Ru

ss

ian

an

d C

IS A

uto

mo

tive

Ma

rke

ts O

ve

rvie

w

• While majority of the foreign OEMs in

Russia are expected to increase

production capacities in the next 8

years, Russian and CIS OEMs still

have extra capacities


Ma

pp

ing

of

the

Pa

ss

en

ge

r C

ar

OE

Ms

20

Production/ assembly Clusters are Located Around Moscow, St Petersburg and Samara

Uliyanovsk● ● Izhevsk

GM - AvtoVAZ

AvtoVAZ

IZH-Avto

GAZ

GM Avtoframos

FORD

Hyundai

AvtoKOM

OpelRenault

PSA

Samara ●


● Kaluga Moscow

● Taganrog

Toyota

Nissan

BYD

VW● St. Petersburg

Kaliningrad ●

Chery

● Cherkesk

Dadi

Novouralsk ●

Geely

AvtoVAZ-Magna

● Asaka

GM

Tata

RUSSIA

KAZ

UZB

UKR

BEL

AvtoVAZ

Ust-Kaminogorsk●

Skoda

● ElabugaNab. Chelny ●

Fiat

Great Wall

KIA

LADA

Ssang Yong

BAIC

UAZ

Minsk Samand

● Zaporozhie

ZAZ

LADA

Chevrolet

OPEL

Mercedes Benz

Chery

● Uzhgorod

VW

● Lutsk

KIA

Hyundai

LADA

BMW

KIA

Existing OEM’s (2008) Planned places for OEM’s (2008)

FAW

* PSA and Mitsubishi are expected to have a joint production in Kaluga

Hyundai

Mitsubishi


Uliyanovsk● ● Izhevsk

URAL

GAZ

ZIL

Samara ●


● Kaluga Moscow

● Taganrog

Volvo

● St. Petersburg

Kaliningrad ●

● Cherkesk

Novouralsk ●

● Asaka

Tata

RUSSIA

KAZ

UZB

UKR

BEL

AvtoVAZ

Ust-Kaminogorsk●

● ElabugaNab. Chelny ●

KAMAZ

UAZ

Minsk

MAZ

● Zaporozhie

Hyundai

● Uzhgorod

AvtoKRAZ

● Lutsk

Existing CV OEM’s (2008)* Planned places for OEM’s (2008)

Production/ Assembly Clusters are Located Around NaberezhnieChelny and Nizhny Novogorod

Miass ●

● Kremenchug

Hyundai

Ma

pp

ing

of

the

CV

an

d B

us

OE

Ms

Existing BUS OEM’s (2008)*

PAZ

LiAZ

Bogdan

● Kurgan

KAVZ

Kanash●

KAAZ

Huyndai

Hyundai

IVECO

● Bryansk

BZKT

BelAZ

MoAZ

Cherk. Avt. Zav

ZAZCherk. Avt. Zav

NEFAZ

Scania Semar

Evo Bus

ZAZ * Companies that have minor production volumes are not included


4 large Holding Groups are Currently Present in Russia, which

Control 46 per cent of the Sales in the Russian Automotive Market

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 the assembly of SUV under joint brand. The government of Russia is the company’s biggest shareholder. AvtoVAZ experiences continuous top management rotation.

ZMA company is the base of Severstal Avto operations. Severstal group produces 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 determination toward partnership both with Korean (ISUZU) & Chinese OEM’s (SsangYoung) and with FIAT group. Severstal Avto was renamed to Sollers in 2008

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 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.

“GAZ” Group

Severstal Avto

/ Sollers

AvtoVAZ

Ove

rvie

w o

f R

us

sia

n H

old

ing

Gro

up

s

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

KAMAZ


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. 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.

UkrAvto

Ove

rvie

w o

f U

kra

inia

n a

nd

Bye

loru

ss

ian

Co

mp

an

ies

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 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.

MAZ

Other CIS Markets are Dominated by Smaller Number of the Holding

Groups or Large Companies Compared to Russia

Bogdan is privately operated automotive group that is focused on the production of the buses, commercial vehicles and passenger cars in Ukraine. Company localised 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.

Bogdan


3. Overview of the Russian and CIS Design and Engineering

Market

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

• Roadmap of D&E Market Development

• Understanding of Currents Needs by Local Companies

• Analysis of Structural Changes in D&E Sector

• D&E Market Drivers and Restraints

• Key Market Trends

• Key Market Challenges for D&E Sector

• Idiosyncrasy of Doing Business in Russia

• Market Size and Forecast for D&E Sector in Russia and

CIS Countries

Slide 25

Slide 27

Slide 28

Slide 29

Slide 30

Slide 33

Slide 34

Slide 35

Slide 36


Key Features of the Russian and CIS D&E Market

De

sig

n a

nd

En

gin

ee

rin

g M

ark

et

Ove

rvie

w

Tier 1&2

Suppliers

OEMs Minor position

of Russian

independent

D&E

companies

Automotive

Research

Institutes

Universities with

Automotive &

Transportation

Departments

D&

E In

flu

en

ce

Market position

for DEG members

R&D departments

of AvtoVAZ, GAZ,

KAMAZ, UAZ

and others

R&D departments

of Tier 1&2

suppliers

Specialised

laboratories

and research

centres

D&

E In

ve

stm

en

ts

Specialised

research

centres

• Russian & CIS OEMs and suppliers play leading

roles in the market for the D&E services.

• For the past 3 years, Russian and CIS OEMs and

Tier 1&2 suppliers were forced to pay closer

attention to their market position as foreign

transplants start to dominate in the market.

• Sluggish sales in the 90s and beginning of new

millennium constrained the development of Design

and Engineering services due to significant

underinvestment into D&E and loss of skilled

personnel (transfer to other industries).

• Russia traditionally holds the strongest position on

the CIS market and is the current leader in terms of

investments into new product development, test and

validation as well as manufacturing engineering.

• Currently, Russian and CIS D&E market players

have 10-15 years lag behind the expertise level

developed by the foreign providers.


Strong Sales of OEMs and Tier 1&2 Suppliers Facilitate

Development of the Russian and CIS D&E Market

• 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.

• 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.

2007 . . . 2015

Total turnoverVehicle Sales

1,650 thousand vehicles

Russian CIS

D&E Market

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


€ 31.40

billion

Russian and CIS Automotive

Market

€ 85.7

million

Russian and

CIS D&E

Market

€ 65.10 billion

Russian and CIS Automotive

Market

€ 157.5

million

0.27% of

market

0.24% of

market

De

sig

n a

nd

En

gin

ee

rin

g M

ark

et

Ove

rvie

w


Russian and CIS D&E Market Undergoes Structural Changes

1991 2015

1990

1991

1993

1998

• Collapse of the Soviet Union separates the unified automotive industry.

• OEMs and Tier 1&2 suppliers become widely dispersed across newly

independent countries with independent D&E departments.

2003

• Inflation and general economic downturns quickly disrupt sales of the

new vehicles in Russia and other CIS markets.

• OEMs and suppliers refocus their business activities; lack of financing.

Phase One

1991 - 2002

• Competition and legislative environment forces companies to

invest into development of D&E.

• Outsourced D&E market peaks.

Phase Two

2003 -2006

Phase Three

2007 - 2015

• Automotive industry begins to refocus on the core business activities.

• Large industrial companies are spliced into number of the smaller

businesses, companies started to invest into D&E including outsourcing.

2010

2006

• Economic crisis in Russia leads to collapse of the largest corporations

including automotive sector.

• Economic revival increases market sales for both passenger cars and

commercial vehicles.

• Mass entry of the foreign OEMs and Suppliers.

2015 • Despite domination of the foreign OEMs, Russian

OEMs hold their niche with help of foreign partners

and through active development.

• Large industrial parks with developed infrastructure.

• Full support by the state of D&E activities and grants to OEMs.

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Understanding of the Current Needs

in D&E in Russia and CIS countries

“Outsourcing is

always in demand

in any company.

It’s impossible to

do everything by

ourselves”

Widening Gap Between Russian & CIS and Foreign Companies Forces

Local Players to Look For Partnerships in D&E

• Develop in-house D&E capabilities?

• Partner with foreign OEMs and Suppliers?

• Collaborate with foreign D&E service providers?

• 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

side of in-house D&E departments.

”Well, I may only say that Russian OEM will not pay

for engineering, its clear and simple - no way!”

“In the

emergency

case, we may

ask for help and

still if we do it

we would ask

mainly Russian

companies”“In Russia, every

company has its own

D&E centre. They are

mostly very small and

are not powerful

enough for the tasks

to be completed”

GAZ Group

Tier 1 Supplier

Strategic Decisions

AMO ZIL

“Outsourcing is

in demand now

and this

tendency will

grow”

Kamaz

Tier 1 Supplier

High value for money

Expertise level for each Product Domain

Understanding of the local needs of the suppliers

IT expertise

Complex solution

Presence of the Russian speaking representative

Expectations of the local companies toward

D&E services

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Universities

Structural Changes in the Russian Automotive Market Impact D&E

Sector

DEG members

Russian OEMsIns

titute

s

Technology Complexity

Ap

plic

atio

n S

co

pe

Generic

Problems

Specific

Problems

• SMMT/DEG companies are positioned as a

providers of complex technological solutions

that could be used both for specific problem

solving (E.g. testing for EURO4 of gasoline

engine) as well as for enhancing the existing

product lines.

• The larger Russian OEMs such as

AvtoVAZ, GAZ, and Kamaz have large D&E

departments, however they lack critical

knowledge in certain D&E areas.

• Through Governmental support, automotive

research institutes and universities are

involved into specific problem solving for

automotive industry such development of the

competitive diesel engines.

Russian and CIS companies are looking for

complex technological solutions for both

solving specific problems and providing full

scope support in developing/enhancing

product lines.

Local independent Design and Engineering

companies are focused in providing support in:

• Exterior design: cabin design, face lifting

etc.

• Interior design: instrumental

clusters, interior lighting etc.

• Specific systems design and engineering.

Low

High

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Key Market Drivers and Restraints for Development of D&E Sector in Russia and CIS

Dri

ve

rsR

estr

ain

ts

Undeveloped

auto

component

industry

Close nature of

the Russian and

CIS automotive

industry

Intensification

of competition

(passenger car

segment)

Extension of existing product

lines

Favourable conditions for

OEM‟s

Increasing demand for new vehicles

Macroeconomic Stability

Potential

growth of

investments

into R&D

Demand for

local

components

Resistance

from in-house

D&E

departments

Lack of

experience of

collaboration

with foreign

partners

Ke

y M

ark

et

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ve

rs a

nd

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str

ain

ts f

or

D&

E M

ark

et

Large

investments

into

modernisation

of production

facilities


Key Market Drivers

Demand Growth for the New Vehicles Spurs Market DevelopmentD

rive

rs

Extension of existing product

lines

Favourable conditions for

OEM‟s

Increasing demand for new vehicles

Macroeconomic Stability

Potential

growth of

investments

into R&D

Demand for

local

components

• 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.

• 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.

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or

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E M

ark

et


Close Nature of the Russian and CIS Companies Limits Growth of the D&E Sector

Restr

ain

ts

Undeveloped

auto

component

industry

Close nature of

the Russian

and CIS

automotive

industry

Intensification

of competition

(passenger car

segment)

Resistance

from in-house

D&E

departments

Lack of

experience of

collaboration

with foreign

partners

Ke

y M

ark

et

Re

str

ain

ts f

or

D&

E M

ark

et

• 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.

Large

investments

into

modernization

of production

facilities



Entry of foreign D&E providers to the Russian and CIS

markets; intensification of collaboration with local OEMs and

suppliers.

High High Medium

Accelerated growth of design and engineering sector. High High Medium

Modernisation of the production facilities to support market

sales.

Medium High High

Consolidation of the market. Medium Medium High

General improvement of business environment and normative

legislarure.

Medium Medium High

Tightening of competition across the segments. Low Medium High

Market transparency improvement. Low Medium High


Key Market Trends (Russia and CIS), 2006-2015

33

Ke

y M

ark

et

Tre

nd

s in

D&

E i

n R

us

sia

an

d C

IS C

ou

ntr

ies

Outsourced D&E Services Have Strong Potential for Growth in the

Next 4-5 Years


Absence of Market Transparency Restricting Development of Competition in the Russian and CIS D&E Market

Non-competitive measures undertaken by the local government toward

foreign suppliers and D&E service providers.

Probability

Low

Medium

Possibility of market turmoil similar to the Russian government default

of 1998.

Lack of professionals in industry would persist.

Investment climate would worsen due to non-competitive and questionable

steps followed by the State authorities in regulating business environment.

Medium

Low

Absence of market transparency and administrative barriers limiting

development of the Russian and CIS outsourced D&E market.


D&E Market Challenges (Russia and CIS), 2007

34

Low

D&

E M

ark

et

Ch

all

en

ge

s in

Ru

ss

ia a

nd

CIS

Co

un

trie

s


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

companies slows down

business development.

Relaxed attitude of

Russian companies

toward market

measurements and

forecasts.

Insufficient transparency of

Russian companies leads

to unreliable self-

representation of existing

contracts, capacities and

financial resources.

High beauracracy in

Governmental bodies

increase time spans and

financial expenses.

Possible delays with

financial payments while

Russian companies are

interested in

prepayments on

contracts.

Relative reluctance of

investing in tooling,

equipment, or

engineering by local tier

1&2 suppliers.

Presence of talented

young engineers

however strong training

is required.

• Russia becomes more open

economy, which spurs

today‟s entry of foreign

enterprises despite existing

negative obstacles .

• Efforts of Russian

Governments to facilitate

the development of

Automotive industry

create attractive

conditions for foreign

companies to set up local

presence.

Poor command of

foreign languages

(English) in particular

regions.

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Investments into Design and Engineering Services Expected to Grow

7.9 per cent by 2015

• 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.

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Investments into D&E by Key OEMs, 2015

85.7 million EURO

157.5 million EURO

2007 20150

5

10

15

20

25

30

35

40

45

50

Avtovaz GAZ KAMAZ Others

Investm

ents

(M

illio

n E

UR

O)

90.7%

1.8%

5.8%0.5%

91.3%

1.8%

6.8%

0.1%

CAGR : 7.9%


4. Strategic Analysis of the Outsourced D&E Market

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

• Key Market Features

• Key Market Drivers and Restraints

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

• Key Market Challenges

• Outsourced D&E Market Size and Forecast

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

• Features of Outsourced D&E Market By Sector

• Process of Product Development at AvtoVAZ

• Competitive Forces Analysis

• Mapping of Local Needs

Slide 38

Slide 39

Slide 40

Slide 43

Slide 44

Slide 45

Slide 47

Slide 48

Slide 52

Slide 53

Slide 55


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

• 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 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.

2007 . . . 2015

Total turnoverVehicle Sales

1,650 thousand vehicles

Russian and CIS

Outsourced D&E

Market

CIS D&E Markets Size (CIS), 2007 and 2015


Ou

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ign

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€ 85.7

million

€ 38.5

million

€ 157.5 million

Russian and CIS

D&E Market

€ 92.1 million

Russian and CIS

Outsourced D&E

Market

Russian and CIS

D&E Market

45% of

market

58% of

market


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).

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39

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


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

Dri

ve

rsR

estr

ain

ts

Lack of in-house technological

expertise by OEMs and Suppliers Increasing quality

concerns and requirements for

suppliers

Government

supports

investments

into D&E


financing of outsourced

projectsExpansion of OEM‟s

product lines requires new D&E

approach

Language barriers

still negatively

affect

communication

between

organisations

Partnership with

foreign OEMS and

suppliers slows

penetration of the

foreign D&E

providersLow D&E spends

compared to the

other developed

markets

Complicated

organisational

processes raise

barriers for

efficient

collaboration

Lack of experience

in collaboration

with foreign

partners

Ke

y M

ark

et

Dri

ve

rs a

nd

Re

str

ain

ts f

or

Ou

tso

urc

ed

D&

E M

ark

et


• 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

Dri

ve

rsLack of In-House Expertise is a Key Driver for Outsourced D&E Market Growth

Ke

y M

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et

Dri

ve

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nd

Re

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ain

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or

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E M

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et

Lack of in-house technological

expertise by OEMs and Suppliers

Increasing quality concerns and

requirements for suppliers

Government

supports

investments

into D&E


financing of outsourced

projects Expansion of OEM‟s product lines

requires new D&E approach


• 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.

Restr

ain

tsGeneral D&E Spends By Russian and CIS Companies Remain Low

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et

Dri

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nd

Re

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or

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ed

D&

E M

ark

et

Language barriers

still negatively

affect

communication

between

organisations

Partnership with

foreign OEMS and

suppliers slows

penetration of the

foreign D&E

providersLow D&E spends

compared to the

other developed

markets

Complicated

organisational

processes raise

barriers for

efficient

collaboration

Lack of experience

in collaboration

with foreign

partners


Outsourced D&E Market is Expected to Accelerate its Growth in the

Next 3-4 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

technological gain.

High High Medium

Increase in scope and size of the project carried out by

independent D&E companies.

High High Medium

General improvement in operational and administative

spheres of the local companies.

Medium Medium High

Tightening of competition across the segments. Low Medium High

Market transparency improvement. Low Medium High


Key Market Trends (Russia), 2006-2015

43

Ke

y C

ha

lle

ng

es

fo

r O

uts

ou

rce

d D

&E

Ma

rke

t


DEG Members Activities in Russia are Challenged by Increasing

Cooperation of OEMs and Suppliers with Foreign Producers

44

Ke

y C

ha

lle

ng

es

fo

r O

uts

ou

rce

d D

&E

Ma

rke

t

Slow development

of the local OEMs

and suppliers

General business

and legislative

environment

Shift to assembly

of the foreign

brands in Russia

and CIS countries

Challenges for

DEG members

Slipping sales of

the Russian

companies

Expansion of

cooperation with

foreign OEMs and

Suppliers


Scenario Analysis – Key Assumptions

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

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.

Str

ate

gic

An

aly

sis

of

the

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D&

E M

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Weak economy with

lower potential growth.

Shift to assembly of the

foreign brands by

Russian OEMs.

Economic growth rates will

remain unchanged.

Development of

automotive industry will

follow current plans.

Substantial

structural/qualitative

changes in the economy

will be achieved.

OEMs will accelerate D&E

spends.

Frost & Sullivan

Scenarios

Conservative

ScenarioOptimistic

Scenario

CAGR 7%

scenario

CAGR 12%

scenario

CAGR 16%

scenario


-

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014 2015

Mill

ion

s EU

RO

Conservative Scenario Frost & Sullivan Scenario Optimistic Scenario

Scenario Analysis – Russian and CIS Outsourced D&E Market

CAGR :16%

CAGR : 7%

CAGR : 12%

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

Growth Phase

• 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

26 per cent growth for that period.

Str

ate

gic

An

aly

sis

of

the

Ou

tso

urc

ed

D&

E M

ark

et


Overview of Outsourced D&E Market by Area

Design30%

Product Engineering

45%

Test & Validation

10%

Manufacturing Engineering

15%

• 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.

Design

• Exterior and interior design of the Russian made vehicles

has been traditionally week area for the Russian and CIS

OEMs.

• Expansion of the product lines requires significant

investment into redesign of existing products (face-

lifting), interior, comfort and others.

Product Engineering:

• Need to follow market development forces OEMs and

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:

• Tightening ecological requirements requires local companies

to look for the support in preparation for EURO 4-5

implementation.

• Strong demand for the test-beds.

Manufacturing engineering:

• Expansion of the product lines or reorganisation of the

existing production facilities, restructuring of organizational

processes is required by local players.

Design and product engineering valued €28.8 million in 2007

“Foreign design and engineering

service providers have to consider

what Russian companies about to

do to understand the areas for

potential cooperation”

Industry Expert, Russia

Str

ate

gic

An

aly

sis

of

the

Ou

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ed

D&

E M

ark

et


Russian and CIS Companies are Primarily Interested in Interior and

Exterior Design

Ove

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f O

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ou

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d D

es

ign

Se

cto

r • Exterior and interior design of the Russian made vehicles

has been traditionally week area for the Russian and CIS

OEMs.

• Expansion of the product lines requires significant

investment into redesign of existing products (face-

lifting), interior, comfort and others.

• Russian and CIS companies across all segments (passenger

cars, commercial vehicles and suppliers) show interest in

cooperation with foreign providers with strong experience in

design.

• Market for outsourced design services in Russian and CIS

countries is estimated to reach €11.5M in 2007.

Key Areas for Collaboration:

Passenger Cars

• Dashboards

• Exterior and interior lights

• Face-lifting

• Concept design and virtualization

Commercial Vehicles

• Interior cabin design

• Cabin concept design

Components Suppliers

• Virtualization of the systems

• CAD

KAMAZ: Cabin interior and exterior design, complex support in CAD

GAZ: Concept design, 4x4 LCV platform design

URAL: Truck design, cabin design

UAZ: SUV exterior and interior design for the new vehicle

SAAZ: Virtualization of the suspension elements

Main areas of interest

for collaboration with

DEG members:


Tightening Ecological Requirements in Russian and CIS Countries

Force Local Companies to Focus on Engineering of New Engines

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eri

ng

Se

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r

• Russian and CIS OEMs and suppliers are involved into

expansion of the product range in order to overcome

increasing competition from the foreign OEMs and suppliers.

• Local companies realize that there is no time left for gradual

improvement of existing products and components thus

relying on potential support from D&E providers.

• 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

technology transfer from the foreign collaborators.

• Market for outsourced product engineering services in

Russian and CIS countries has the largest potential and is

estimated to reach €17.3M in 2007.

Key Areas for Collaboration:

Passenger Cars

• Re-engineering of the existing components to improve quality

Commercial Vehicles

• Chassis engineering

Components Suppliers

• Suspension systems

• Steering systems

• Braking systems

• Exhaust system

• Electric and electronic systems

• Gasoline and diesel engines

• Hybrid engines

SeAZ: Chassis modernization, braking and steering systems

UMZ: Gasoline engine modernization, hybrid engine

AvtoVAZagregat: Low cost exhaust systems and converters

SAAZ: Suspension elements

ZMZ: Engines

URAL: Car and chassis modernization with EURO 3-4 engines



DEG members:


Shift to EURO 5 in 2014 Requires Significant Resources in Testing

Engines Developed Locally

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d T

es

t &

Va

lid

ati

on

Se

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r

• 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

UMZ: Testing for EURO 4-5 engines

SAAZ: Test & Validation of suspension elements

GAZ: Test & Validation on the component level

KAMAZ: Testing for EURO 4-5 engines



DEG members:


Detailed Features of the Manufacturing Engineering Market

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an

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• 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.

Defects PPM level for the

automotive components

systems produced in Russia

and CIS countries is very high

compared to the foreign

standards


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*

1970 2005 200?-20??Mass production

Product Development VAZ 2101 …

• AvtoVAZ took design from

Fiat 124

• Minor restyling was made

• Successor models followed

design line of VAZ 2101

Project length: 4 years

VAZ 2108 “Samara”…

• AvtoVAZ decided to

revive product line

• New model was

designed together with

Porsche

Project length: 6-7 years

1984

• Initial work started

jointly with foreign D&E

company but was

cancelled

• AvtoVAZ redesigned

model independently in

beg. of 2000

Project length: 9 years

Lada Kalina…

• Number of independent and joint (Magna Int) projects were announced

• Via collaboration with Renault, AvtoVAZ is expected to benefit through technology and expertise transfer

Started in 2006, but

currently put on hold

Project C and others…

Str

ate

gic

An

aly

sis

of

the

Ou

tso

urc

ed

D&

E M

ark

et


Competitive Forces Analysis of the Russian Outsourced D&E Market

TechnologyEnvironment

Economic

Development

Political

Situation

Legal System

Suppliers:

1. Restructuring of their own design &

engineering departments

2. Low qualitative and technological levels

3. Lack of expertise

4. Poor technological base

Buyers (OEMs and Suppliers):

1. Price sensitivity

2. Support from the Government

3. Strong need for cooperation

4. Lack of modern technologies

Substitutes:

1. Direct cooperation with foreign OEMs and suppliers

2. Licencing and technology transfer

3. Acquisition of foreign companies

4. Cooperation with other industries such as

Aerospace and Defense

Entrants:

1. Favorable economic climate

2. Increasing experience of collaboration with

Russian companies

3. Complexity of working environment

4. High knowledge and experience level

Industry Competitors:

1. Lack of visibility on the market

2. Focus on the design and tooling

3. Small volumes

4. Absence of complex approach

Socio-Cultural

Features

Str

ate

gic

An

aly

sis

of

the

Ou

tso

urc

ed

D&

E M

ark

et


Strategic Attractiveness Analysis

Suppliers Bargaining

Power

Buyers Bargaining

Power

Threat of Substitutes

Threat of New Entrants

Industry Rivalry

Threat Score: 3 Treat Score: 3

Treat Score: 3

Threat Score: 2

Threat Score: 5

Factor Scoring

Threat of New Entrants 3

Threat of Substitutes 2

Buyers Bargaining Power 3

Suppliers Bargaining Power 3

Industry Rivalry 5

Average 3.2

Overall Score: 16 points

• Russian Outsourced Design & Engineering market score of 16 out of

a maximum 25 can be considered attractive market place for DEG

members.

Scoring System:

High Threat 1 points

Medium Threat 3 points

Low Threat 5 points

Str

ate

gic

An

aly

sis

of

the

Ou

tso

urc

ed

D&

E M

ark

et


Design of the New Vehicles and Systems Along With Product

Engineering Are in Greatest Demand from DEG Members

55

• 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.

Str

ate

gic

An

aly

sis

of

the

Ou

tso

urc

ed

D&

E M

ark

et


5. Demand Side Overview

• Key Features of the Russian and CIS Automotive Industry

by Market Segment

• Structure of D&E Market

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

• Competitive Position of the Key OEMs in Russia and CIS

Slide 57

Slide 58

Slide 59

Slide 60


Russian and CIS OEMs and Supplier are Looking for Collaboration

with Foreign D&E Providers

Passenger Car

OEMs

Tier 1 & 2

Suppliers

Ove

rvie

w o

f th

e D

em

an

d S

ide

• 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

reconsider their business strategies and focus on expansion of the product lines.

• Expansion of the product lines requires significant investment into redesign of existing

products (face-lifting), interior, comfort and others.

• Product engineering has strongest demand from all the

Tier 1& 2 suppliers.

• Foreign transplants require significant improvement of the

quality and number of defects (PPM).

We have range of

Russian companies

which are competing for

design and engineering

but as far as I know

there are no integrated

solutions for the time

being.

• Intensification of competition in Russia and CIS countries

requires local companies to reconsider their business

strategies and focus on expansion of the product lines.

Commercial

Vehicle OEMs

KAMAZ


Structure of the Russian and CIS D&E Market

100%

Ru

ssia

n a

nd

CIS

D&

E

Mark

et

(€85.7

millio

n)

AvtoVAZ

GAZ Group

Kamaz

75.9%

Top 3

Rest of industry

stakeholders22.5%

3 Companies has the

largest budget for D&E

in Russia and CIS

countries

2007

• Largest Russian OEMs such

as AvtoVAZ, GAZ, and Kamaz

have large D&E departments

and capable to generate

substantial financial resources

to support them.

• Tier 1&2 suppliers are facing

difficult times as local OEMs

are tightening quality

requirements.

• In Russia, Government

supports research done by

specialised automotive

research institutes (NAMI)

and provides financial

support.

• Share of the local

independent D&E companies

is relatively small and does

not have strong impact on the

market.

Ove

rvie

w o

f th

e D

em

an

d S

ide


Overview of the Demand Side for Outsourced D&E Services

• 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 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.

- 5 10 15 20

AvtoVAZ

GAZ Group

KAMAZ

MAZ

Others

Millions EURO

AvtoVAZ39.0%

GAZ Group26.0%

KAMAZ18.2%

MAZ6.5%

Others10.3%

Ove

rvie

w o

f th

e D

em

an

d S

ide


Budgets of the Selected OEMs for the Outsourced D&E

Ove

rvie

w o

f th

e D

em

an

d S

ide

AvtoVAZ

GAZ Group

KAMAZ

MAZ

UAZ

-1,000.0

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

-10% 0% 10% 20% 30% 40% 50% 60%

AvtoVAZ GAZ Group KAMAZ MAZ UAZ

Growth Rate

Ma

rke

t Tu

rno

ve

r

• 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.

Note: Bubble size represents the allocated budgets for outsourced D&E; Arrows indicates expected development

of the companies in the market


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


OJSC “SeAZ” (AvtoKOM Group), OEM

Background Information:

• Before 2005, SeAZ was part of the AvtoVAZ group.

• SeAZ produces OKA passenger car with Tian Jin FAW, Chinese

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

for the low cost car segment with total production capacity increase

up to 50,000 - 100,000 vehicles.

OJSC “SeAZ” Capacities: 2007

4,510 (-60%)Production

34,400Capacity

3,454 (-70%)Sales Others,

99.80%

SeAZ,

0.20%

Ownership Structure

Avtokom

100%

Market Position

SeAZ

Moscow ●

Employees: 1,400

Turnover: €8.6 M

Growth Rate: -70% pa

Location and PerformanceQuality certification:

• ISO 9001:2000

Business segments:

• Passenger cars

• Automotive components

• Others

Key Products:

• SEAZ 11116 – “A” class passenger car

• Bumpers, plastic parts


• SeAZ is a niche player that focuses on the development of low

cost car for the Russian and CIS markets.

• Currently none of their design and engineering is outsourced.

• 9 people are involved into D&E at SeAZ.

• Only in 2002 completed transition to CAD (only 6 people familiar

with the system).

• 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

OJSC “SeAZ” (AvtoKOM Group), OEM

Implications and Opportunities for DEG Members

Chassis modernisation

Development of steering systems

Development of braking system

Modernization assembly line test beds

Main areas of

interest for

collaboration with

DEG members:

Image source: SeAZ

Figures:

D&E Budget: €0.3M

Outsource D&E: €0.18M

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Challenges in development of existing and new models by SeAZ create opportunities for DEG

members

http://upload.wikimedia.org/wikipedia/commons/9/9d/Oka.JPG

http://www.holidaysolutions.co.uk/tickmark.gif





OJSC “Avtopribor”, Tier 1&2 Supplier

Avtopribor

Vladimir●

Employees: 4,000

Turnover: €62M

Growth Rate:10% pa

Avtohold

100%

Ownership Structure

Location and Performance

Market Position

Business segments:

• Instrument Clusters & Dashboards

• Wipers

• Mechatronics

• Speedometers & Tachometers

• Technological equipment

Key Clients:

• Russia: All passenger and CV OEMs

• Foreign: ZAZ, MAZ

Quality certification:

• ISO TS 16949

• ISO 14001:2004


• Avtopribor is focused on the further improvement of its

market share in Russia and CIS countries.

• Expansion of the Avtopribor’s business segment offer

strong market opportunities for the company.

Aftermkt

20%

Ford

5%

GAZ

8%

KAMAZ

7%

UAZ

6%

Others

18% AvtoVAZ

36%

One of the leading suppliers of

instrumental clusters and

wiper systems in Russia


OJSC “Avtopribor”, Tier 1&2 Supplier


• Company has its own D&E facilities employing 60 people.

• Tightening quality requirements of the local OEMs force company to

focus on the product quality improvement.

• Avtopribor is implementing system of the “Lean Production”.

• Targeting foreign OEMs in Russia, Avtopribor collaborates with

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.



DEG members:

• Avtopribor is interested in partnering with DEG members

through creation of the joint ventures (JV)

• Technology transfer

Figures:

D&E Budget: €0.27M

Outsource D&E: NA

Frost & Sullivan expects that Avtopribor could be potentially interested in modernization of

equipment and reorganization of the manufacturing processes

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: Avtopribor



OJSC “Ulyanovsky Engine Plant” (UMZ), Tier 1 Supplier

OJSC “UMZ” Capacities: 2006

61,018Production

NACapacity

60,978Sales

UMZ

Ulyanovsk●

Employees: 4,375

Turnover: €52.9M

Growth Rate: NA

GAZ

Group

100%

Ownership Structure


Market Position

NA

Business segments:

• Engines (gasoline)

• Engine components

• Boat engines and components

• Consumer goods

Key Clients:

• Supply UAZ and GAZ


• ISO 9001:2000

• ISO 16949 (in progress)


• In 2005, UMZ went bankrupt and was acquired by GAZ Group

• Company produces range of gasoline engines for passenger

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

11%

UAZ

69%

Others

2%

Aftermkt

18%


OJSC “Ulyanovsky Engine Plant” (UMZ), Tier 1 Supplier


• UMZ partially outsource engine engineering and testing to

the local companies (names are not disclosed).

• UMZ has experience in collaboration with foreign D&E

companies; UMZ works with Ultramotive on enhancing UMZ-

4216 engine range.

• Company needs to acquire new design and engineering

software (CAD/CAE) along with its support and training.

• 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).

• Gasoline engine modernization

• Development of the new products and systems

• Hybrid engine development

• Test & validation for EURO 4 and EURO 5

Figures:

D&E Budget: €0.05M (2006)

Outsource D&E: NA

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: UMZ



DEG members:

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





OJSC “AvtoVAZagregat”, Tier 1 Supplier


• Company has strong links with AvtoVAZ, being part of AvtoVAZ

group before 2000.

• Supplies the final assembly lines of AvtoVAZ with an extended

range of components (400 items).

• The most important items are seats (67% from total output)

and exhaust systems (18%). The remaining 15% are made up

by fuel and brake tubes (8%), catalytic converters (5%) and

other components.

• Company expects to cover all range of the new models

produced by AvtoVAZ (Lada Kalina and Lada Priora).

• Eberspaecher (Germany) is expected to launch production of

exhaust systems for Lada “Project C” on the facilities of

AvtoVAZagregat.

AvtoVazAgregat

Togliatti●

Employees: 5,257

Turnover: €230.8M

Growth Rate: 9.5% pa

ZAO

Rusinkor

NA

Lada

Inter

Service

NA

Ownership Structure


Market Position

NA

Business segments:

• Seats

• Exhaust systems

• Catalytic converters

• Components for fuel and braking

systems

Key Clients:

• Primary customer is AvtoVAZ


• ISO 9001:2001

• ISO 9001:2000 (in progress)

• ISO 16949 (in progress)

Others

5%

AvtoVAZ

95%


OJSC “AvtoVAZagregat”, Tier 1 Supplier


• Primary focus is given to the extension of the product line in

particular for catalytic converters and exhaust systems.

• Key consideration factor for AvtoVAZagregat in partnering with

foreign D&E company is impact on the final price of the

systems developed.

• Product development is closely monitored by AvtoVAZ.

• 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.



DEG members:• Engineering of low cost exhaust systems and catalytic converters

Figures:

D&E Budget: NA

Outsource D&E: NA

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: AvtoVAZagregat

DEG members could benefit AvtoVAZagregat by providing existing solutions for improving

quality of the AvtoVAZagregat products


http://avtovazagregat.ru/neytr_make2.jpg

http://avtovazagregat.ru/neytr_make3.jpg


OOO Novgorod Autoaggregate Plant (NAAZ), Tier 1 Supplier


• NAAZ manufactures silencers for the wide range of the Russian

models including AvtoVAZ, GAZ, Moskvich, IZH-Auto and

others.

• Silencers are made using both stamp-welding and rolled

technologies.

• NAAZ plans to expand the product range to target new models

produced by GAZ Group.

NAAZ Capacities: 2007

N/AProduction

N/ACapacity

N/ASales

Novogorod

Autoagregat Plant

Veliky Novgorodi●

Employees: 4,000

Turnover: N/A

Growth Rate: N/A

Ownership Structure


Market Position

Business segments:

• Silencer for passenger cars and

CV

Key Clients:

• Company is focused on aftermarket sales


• ISO 9001:2000

NA

NA


OOO Novgorod Autoaggregate Plant (NAAZ), Tier 1 Supplier


• NAAZ has its own D&E facilities including 2 qualified

designers employed.

• Most of D&E is done in-house with assistance of

NAMI and Nizhnegorodsky University.

• Company is investing into development of the new

technologies for silencers.

• Software in use at NAAZ includes Auto CAD 13th;

visualization is done in 3D Studio Max.



DEG members:

• Company is not interested in collaboration at the moment as in-

house D&E department has sufficient capacities

• NAAZ would consider D&E proposals

Figures:

D&E Budget: NA

Outsource D&E: NA

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: NAAZ

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


OJSC “KZAE”, Tier 1&2 Supplier

KZAE

Kaluga●

Employees: 3,992

Turnover: €53.3M


Ownership Structure


Market Position

NA

Business segments:

• Electric motors

• Wiper systems

• Mechatronics

• Ignition systems

Key Clients:

• Russia: GAZ, URAL, SeAZ, UAZ, AvtoVAZ, Vazinter-

service and others

• CIS: MAZ, ZAZ


• ISO 9001:2000

• ISO 9001:2001

• ISO 16949


• OJSC KZAE focuses on design and manufacturing of

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

• Increasing prices for the raw materials increase product price

and thus negatively affect the competitive position of the

company


OJSC “KZAE”, Tier 1&2 Supplier


• KZAE targets to extend product line by designing and

manufacturing new products:

• HVAC systems

• Wiper systems

• For the existing product line, KZAE is focused on:

• Re-design and modernisation of the product line

• Quality improvement

Figures:

D&E Budget: NA

Outsource D&E: NA

Interest in

Collaboration

- +

Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: KZAE



DEG members:Company is not interested in collaboration at the moment

Design


OJSC "Skopinskiy Avtoagregatniy Zavod” (SAAZ), Tier 1 Supplier

Background Information

• SAAZ is the largest manufacturer of struts, shock absorbers and gas

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.

• From 2008, SAAZ will produce automotive components for GAZ’s new line

up of Maxus and Siber models.

Ownership Structure


Market Position

Quality certification:ISO 16949

ROS RU MT 25B09909

ISO 9001:2000

Key Clients 2007 annual report:• JSC ”AvtoVAZ” (shock

absorbers, telescopic stanchions)

• JSC ”IzhAuto” (telescopic

stanchions, struts)

• JSC "GM AvtoVAZ”

Business segments:• Shock absorbers

• Telescopic stanchions

• Struts, gas supports

Employees: 3,072

Turnover: € 77,9M

Net profit in: € 0,038M

More than 70% of native cars in Russia

and the CIS countries exploit shock

absorbers made by JSC "SAAZ "8,5 ml piecesProduction

OJSC “SAAZ” Capacities: 2007

Skopinsky Agregatniy

● Skopin

CRA "Bank of Moscow" (JSC) 100%

Others, 34.2%

“AvtoVAZ”, 63.2%

Export, 2.6%

Others include IzhAuto and

GM-AvtoVAZ


OJSC "Skopinskiy Avtoagregatniy Zavod“ (SAAZ), Tier 1 Supplier


• SAAZ " is an independent manufacturer with engineering facilities of its own

(Designing Service, Research Laboratory Group, Quality Control Department).

• Their R&D facility includes 10 designers (30% with good experience) with further

plans for expansion.

• The only Design and Engineering that is outsourced is from AvtoVAZ and two

foreign companies – further information not available.

• 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.

• Test and validation (including virtual T&V)

• Design and development of suspension elements

• Mathematic modelling for risk estimations, calculations

and construction optimization



DEG members:

Frost & Sullivan expects that the most interest for collaboration with DEG members is area of test

and validation of the existing product line

- +Interest in

Collaboration

Figures:

D&E Budget: Not Available

Outsource D&E: *

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: www.z-saaz.ru

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






OJSC "Zavolzhsky Engine Plant” (ZMZ), Tier 1 Supplier


• ZMZ produces over 80 models of engines.

• In 2007 the first experimental-industrial batch of 4 cylinder gasoline

engines at Euro-3 standard were produced for UAZ and GAZ.

• 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.

• Since 2005 ZMZ have implemented the Toyota Production System to

improve their production process including Kanban system.

JSC “ZMZ” Capacities: 2007

251,741 enginesProduction

375,000 enginesCapacity


Market position

Quality certification:• ISO 9001:2000

• ISO 9001:2001

• ISO 14001

Employees: 7,807

Turnover: € 425M

Growth Rate:13.3% pa

Business segments:• Engines (2.2L up to 4.67L)


Key Clients:• JSC ”GAZ” (more than 50% of total output)

• JSC ”UAZ”

• JSC ”Pavlov Bus”

Ownership Structure

ZMZ

● Tolyatti

Spare parts production in Russia in 2007

Lindsell Ent Ltd.,

4.67%

Others, 7.57%

Severstal Auto, 87.76%


OJSC "Zavolzhsky Engine Plant“ (ZMZ) , Tier 1 Supplier


• R&D personnel includes 10 people (60% with excellent 3D skills). Company has

its own design and test facilities.

• 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.

• 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.



DEG members:

• Internal combustion engine

• Engine systems

• 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

Figures:

D&E Budget: €1,89 mln

Outsource D&E: Not Available

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source: www.zmz.ru





OJSC "Ural Automobile Plant“, OEM


• "Ural Automobile Plant" JSC belongs to GAZ Group and is the major

enterprise in "Heavy vehicles" division.

• Ural started road car production in 2006.

• Partnership: DÜRR (industry engineering), Camano, Magna Int, Edak.

• Toyota Production System has been implemented to reduce production

cost.

• Ural plans to increase production of natural gas engines rather than

petrol.

Ownership Structure

The share of Ural in competitors in the total production


Market Position

Quality certification:ISO 9001:1994/EN 29001

ISO 9001:1996

ISO 9001:2000

Business segments:• Trucks

• Chassis

• Special equipment

• Special and cargo buses

• Spare parts and diversify products

Key Clients:• TD URAL-avto

• Ministry of Defense of the

Russian Federation

Foreign Markets: • CIS counties

• South-Eastern Asia and Africa

Employees:12,892 (2007)

Net income :€10,4 mln (2006)

Ural (GAZ)

● Miass

OJSC “Gaz Group” 100%

South-Eastern

Asia and Africa,

5.5%

Russian market, 70.1%

Ministry of

Defense, 20.0

%

CIS counties,

4.3%

Maz, 0.02%

Ural, 54.90%Kamaz, 41.30%

Kraz, 3.85%


OJSC "Ural Automobile Plant”, OEM


• Ural’s R&D department has only one year of experience. They do

outsource some of their Design and Engineering however would

not state further details during interview.

• In 2008, company is focused on the following areas:

• Product development (expansion of the existing product lines),

• Euro 4 certification

• 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



DEG members:

•Truck development

•Truck cabin planning, development and engineering

•Car and chassis development with Euro-3, Euro-4 engines

•Mastering chassis production of the large and middle class buses

•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

Figures:

D&E Budget in 2006: €0,81M

Outsource D&E: Not Available

Interest in

Collaboration

- +

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Image source:

www.uralaz.ru




OJSC “AMO ZIL”, OEM

Business segments:• Light, medium and heavy-duty trucks in

4x2, 4x4, 6x4 and 6x6 wheel arrangement

• Buses, specialized vehicle, passenger cars

• Auto aggregates, spare parts

JSC “ZIL” Capacities: 2007

9323 trucks, 26 busesProduction

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


• In 2009 a planned Joint Venture between AMO ZIL (51%) and the

Japanese company IHI (49%) will deliver metal parts (doors and bonnets)

for Renault’s Russian Dacia Logan production.

• 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.

Market Position

Ownership Structure


Employees in 2008: 7,936

Turnover in 2006: €148,6

mln

ZIL

Moscow

Joint Stock Commercial Bank

"Bank of Moscow“, 64.38%

Others, 35.62%


OJSC “AMO ZIL”, OEM


• ZIL’s R&D facilities includes only 2 persons which is viewed as more than

enough. There is a lack of investment into R&D.

• ZIL have a poor impression of foreign D&G companies and the trend would

be that if they were to outsource, they would work with Russian

companies.

• In 2008 ZIL plans an exterior modernization of traditional mass-produced

cars. They will also improve reliability levels and environmental safety (to

Euro 3 and Euro 4). Testing certification shall be mandatory and there will

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.



DEG members:

Not interested in collaboration

None of their design and engineering is outsourced

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

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.amo-zil.ru

* Following an information from the interview with main designer


OJSC “AZIA AVTO”, OEM

Business segments:• Car assembly (Lada -2 models, Skoda 2

models, Chevrolet-3 models)

• Automotive components: decorative

arch, strings of electric wires, tuning

• Automotive component assembly



• 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

Asia Auto to increase production capacity from 800 thousand to 1.5 million

cars per year.

Quality certification:ISO 9001: 2000

Azia Avto Capacities: 2007

6,311 cars (Euro-2)Production

KAZ

Azia Avto

Image source: www.aziaavto.kz

Ust-Kamenogotsk●

Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

At the moment, Azia Avto is involved only in the vehicle

assembly


ZAO "Zaporizhzhia Automobile Building Plant “ (ZAZ), OEM

CJSC ”ZAZ” Capacities: 2007

282 310 carsProduction


Ownership Structure

Market Position


• ZAZ is the only company in the Ukraine that possesses the full skill set

of passenger cars manufacturing.

• 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.

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

ZAZ belongs to Ukravto Corporation

Business segments:• Press production

• Body welding

• Painting

• Engine production

• Assembly, final assembly

• Tests and logistics

ZAZ

Zaporozhie ●

UKR

JSC 'ZAZ's share of the Ukrainian car

production market amounted to 67.2

percent in 2006

Employees:16,000


ZAO "Zaporizhzhia Automobile Building Plant “, OEM


• In-house R&D facility includes 25 people.

• Last new model was developed in the 1990’s (Slavuta).

• ZAZ performs important test and validation work (including crash

tests, toxicity) in Russia and Poland.

• Testing is based on analogy lines on which General Motors tests its

cars.

• In assembly, ZAZ uses high-tech conveyor systems that allow lump

assembly of several cars model and modifications.



DEG members:

• No present requirements but open to discuss potential areas

that can provide cost savings and increase their profitability.

• If companies have ideas that will be profitable will be open to

discuss.

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

projects

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.zaz.ua



Minsk Automobile Plant (MAZ), OEM


• Company’s target for next decade is annual production of 50,000

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.

• MAZ heavy vehicles cars meet Euro-2, Euro-3 and Euro-4 standards.

MAZ Capacities: 2007

25,000 vehiclesProduction

Can sell 35,000Sales


Ownership Structure

Market Position

Key Regions:• CIS countries-90%, Turkmenistan, Poland, Serbia,

Vietnam, Latin America

Employees in 2008:

Turnover for first 6 months

in 2007: €820 mln

Production Growth

Rate:15%pa

Business segments:• Trucks

• Passenger vehicles

• Towed vehicles

• Special purpose vehicles

No financial data is available (neither

from secondary sources, nor from

primary interviews)

Quality certification:ISO 9001:2001

State of Belarus 100%

Minsk

MAZBEL


Minsk Automobile Plant (MAZ), OEM


• MAZ has own R&D department which develops cabins, chassis,

car bodies, designs.

• Minsk Motor Factory has developed a new generation of EURO-4

engines (production start in 2009) using Bosch technology.

• Exchange of experience (system integration, production and

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.



DEG members:

• Not interested at the current moment

• D&E proposal will be reviewed

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

Director

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.maz.ru



OSJC AVTODIZEL “Yaroslavl Motor Plant” (YaMZ), Supplier

Key Clients: Russia:“ “Ural “, "Rostselmash“, "Krasnoyarsk plant

harvesters", JSC "Chelyabinskie construction machinery",

"Bryansky arsenal", "Promtractor" Ltd. "Likinsky Bus“

Foreign:"MAZ", "Gomselmash", "Minsk plant

wheeled tractors“, "AvtoKraz", "Kharkiv Tractor Plant"


• In 2007 "Avtodizel“ moved to the Euro-3 engines production.

• All YaMZ products are Euro-1 and Euro-2 standards.

• In 2007 "Avtodizel" launched in a new production a heavy-cylinder engine YaMZ-

650 on "Renault Trucks” license.

• "Avtodizel" (YaMZ) GAZ Group is working with the Austrian engineering company

AVL List GmbH on new family row engines YaMZ-530 establishing.

• In February 2008 Avtodizel started the first Russian Euro-4 cylinder engine YaMZ-

534 testing.


ISO 9001:2000 Location and Performance

Ownership Structure

Market Position

Business segments:• Diesel engines

• Car coupling, gearboxes and spare parts

• Aggregates YMZ

●Yaroslavl

YMZ Capacities: 200777610

engines, 30753

gearboxes

Production

Employees in 2005: 16,974

Turnover in 2008: € 144mln

Production Square: 645182

м2

MMZ, 18%

Avtodizel,

43,3%

Kamaz Dizel, 34%

Others, 4,7%

Avtodizel market share in 2007

JSC”Gaz”, 55.00%,

The Federal Agency

of Federal Property

Management, 41.3%Others, 3.7%


OJSC AVTODIZEL “Yaroslavl Motor Plant” (YaMZ), Supplier


• "Avtodiesel" includes engineering center with advanced research

and experimental base.

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

innovative costs, 18,3% in R&D (new family YaMZ-530 engine).

• Focus area in 2008 is on:

• Development of the Euro-3 engines V6, V8 power range from

230-420 hp with gearboxes.

• 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.



DEG members:

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

Development Director

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www. avtodizel.gaz.ru

YaMZ-534

• Euro-3 engine development



OJSC ”UAZ”, OEM

OJSC “UAZ” Capacities: 2007

72 163 carsProduction

;

Market Position


Ownership Structure

Key Regions:More than 90% of export were delivered in CIS

countries (mainly in Kazakhstan, Belarus and

Ukraine)

Quality certification:GОSТ RВ 15.002-2003

ISO 9001:2001

ISO 9001:2000

Employees in 2007: 11 808

Net profit in 2007: € 36,3 mln

Growth Production Rate:

13%

Business segments:• SUV: UAZ Hunter, Simbir, Patriot

• LCV: UAZ-2206, UAZ-3962

• MPV: UAZ-3303(6), UAZ-3741


• Company aims to be the leader in producing and selling reliable light

duty cross-country vehicles in CIS countries.

• In 2006 Stadco optimised stamping processes at UAZ to improve the

quality of the bodywork.

• Stadco undertakes small-scale production of stamping on UAZ.Severstal Auto,

66.00%

Other Shareholders,

34.00%

●Ylyanovsk

UAZ

70 825 carsSalesImported cars,

63.50%

Second hand

imported cars,

26.00%

UAZ, 5% VAZ, 5.5%

SUV sales on Russian market in 2007


OJSC “UAZ”, OEM


• The budget for investment projects in 2008 is € 18,91 mln (in 2007:

€ 12,48 mln).

• In 2008 “UAZ” plans Euro-3 & Euro-4 production on their existing

line up of passenger cars and freight series.

• In 2008 UAZ intends to develop experimental R&D facilities.

• 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.



DEG members:

• Interior and exterior modernization of Patriot 2009

MG

Frost & Sullivan expects that the most perspective area for cooperation with DEG members is

interior and exterior modernization

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.uaz.ru


OJSC “GAZ”, OEM


• GAZ produces a variety of minibuses, buses, LCVs and trucks with 4x2

and 4x4 wheel arrangement (EURO-2).

• GAZ is one of the largest holding groups in Russia and CIS countries.

• 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).

• Aim of the GAZ Group is to expand its presence in the international

markets, Western Europe in particular by obtaining new technologies and

entering into alliances with foreign automotive corporations.

• GAZ continues restructuring and modernization of the facilities and

equipment.

Employees: 110,700

Turnover: €3,283M*


Ownership Structure

Location and Performance*

Market Position

GAZ is Russia's biggest manufacturer of LCVs,

Trucks, and Minibuses (market shares in Russian

Federation 2006: LCVs 45.7%, light trucks (<3.8t)

50.4%, medium trucks (<10t) 58.2%, AWD heavy

trucks 57%, 6x4 heavy trucks 5%)

Key Regions:• Russia remain key market for the products of the GAZ group


Business segments:• Passenger Cars (GAZ)

• LCV (GAZ, LDV)

• MCV & HCV (URAL)

• Buses & Special vehicles

(PAZ, LiAZ, GolAZ, KAVZ, KAAZ and others)

• Powertrain (YaMZ, UMZ, Nizhegorodskie

Motori, YaZDA)

GAZ**

● Nizhiy Novgorod

* Note: Data is provided for all GAZ Group for 2006

** Indicated location of Zavod GAZ


OJSC “GAZ”, OEM




DEG members:

• Concept design

• Active and passive safety systems

• Security systems

• Development of 4x4 LCV platform

• Various systems engineering (electrics, braking systems, exhaust

systems, engines, steering systems and others)

• Testing and validation (components level, vehicle level and comfort)

Figures:

D&E Budget: Est €20.8M

Outsource D&E: Est €10M

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.sostav.ru

GAZ group is one the most attractive players in Russia and CIS with significant opportunities for

the DEG group

• According to GAZ plans to invest $1 billion in R&D during the next 5

years, however the precise plan is not disclosed.

• GAZ is focused on the upgrade of up to 90% of the product line in the next 5

years.

• Company cooperates with number international companiesEdek

Engineering, Plus Design AG, AVM, Goepel, General Service, IDIADE

(Spain), UltraMotive and others.

• Through large scale investments, GAZ aims to develop own

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).





OJSC “KAMAZ Inc”, OEM


• KAMAZ Group of Companies is leading Russian heavy truck

manufacturer. It produces a wide range of trucks (over 30 models, more

than 400 kits, right-hand vehicles), trailers, buses, tractors, engines,

power units and different tools.

• KAMAZ is expected to expand production capacities for CV to reach

85,000 units a year by 2010

• Company collaborates with the number of the foreign suppliers such as

«ZF», «Bosch», «Gummins», «Deutz», «Schwitzer», «Knorrbremse»,

«Wabco», «GWB», «RBL»

Employees: 16,134

Turnover: €1,609M


Ownership Structure


Market Position*

Key Regions:• Russia is key market for KAMAZ

• Export to CIS, Asia, Africa and South America


ISO 9001:2001

Business segments:• MCV & HCV

• Buses and special vehicles

(Nefaz, Tumaziyskiy Zavod Avtobetonovozov)

• Diesel engines (Kamaz-Diesel)

KAMAZ

● Naberezhnie Chelny

OJSC "KAMAZ Inc.“ Capacities: 2007

53,000 trucksProduction

65,000 trucksCapacity

52,700 trucksSales

Export

26%

Russia

74%

Others,

65.7%

Kamaz,

34.3%

*Note: Trucks GVW 14-40 t

Rosimuschestvo,

37.8%

Vneshtorgbank,

11.5%

Others, 6.8% ZAO DDK, 43.9%


OJSC “KAMAZ Inc.”, OEM




DEG members:

• Cabin interior and exterior design

• New vehicles design for MCV and HCV, modernization of existing product range

• Product engineering of engines and systems, quality improvement

• Testing and validation for EURO 4-5

• Hybrid engine development for Kamaz chassis (bus and city car)

• Support in CAD/CAE implementation

Figures:

D&E Budget: -

Outsource D&E: Est €8M

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: www.kamaz.net

KAMAZ is one the most attractive players in Russia and CIS with significant opportunities for the

DEG group

• KAMAZ is actively involved into modernization of the existing product line

and development of the new products to support market growth of the

company

• 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,

however lacks the experience in the efficient and full scope use of the

products. Company requires support in the virtual testing and validation

(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






Holding company "AvtoKrAZ“, OEM


• Leading Ukrainian manufacturer and supplier of heavy-duty trucks and

special-purpose vehicles (10 do 30 ton).

• Company plans to increase production of the CV by more than 20 per

cent to exceed 5,000 unit mark.

• 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.

“AvtoKraz” Capacities: 2007

4,206Production

Est. 10,000Capacity

4,100Sales

Employees: 6,800

Turnover: €121M (2005)

Growth Rate: Not Available

Ownership Structure


Market Position

AvtoKrAZ is the largest

Ukrainian manufacturer of the

heavy commercial vehicles

AvtoKrAZ

Kremenchug ●

UKRKey Regions:• Russia is the key market for the

company


Business segments:• MCV and HCV

• Military trucks


Not available


Holding company "AvtoKrAZ“, OEM


• AvtoKrAZ develops most of the components and systems in-house

(chassis, transmission, axles etc).

• Design and Engineering is done at AvtoKrAZ at the Engineering

centre.

• Company does not outsource D&E service, however would be willing

to discuss areas for potential collaboration due to current

engagement of AvtoKrAZ in development of the new truck (cab over

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).



DEG members:

• Design of the new vehicles

• Cabin design

• Engineering of the key systems

Figures:

D&E Budget: NA

Outsource D&E: NA

Design Product Eng.

Test & Validation

Manuf. Eng. Other

Interest in

Collaboration

- +

Image source: AvtoKrAZ

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




NAMI (State Research Center of the Russian Federation)

Location and PerformanceScope of Services:

• Automotive industry market measurements and research.

• Design & Engineering services.

• Creating, testing and refinement of promising samples of

automotive technology.

• Applied research for industry plants and related industries.


• 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.

●Moscow

NAMI

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.

Image source: NAMI


OOO “Autodesign”, D&E Service Provider

Business segments:• Design & Engineering

• Development and production of:

• Auto components

• Special vehicles

• Body and Van

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.


• Autodesign works in the field of automobile manufacturing and

automotive technology since 1990.

• Total production for 12 years: more than 15 thousand cabins.


Autodesign

Scope of Services:• Project development

• Automotive components development

• Manufacture of small and medium series

• Prototypes manufacturing

• Certification


ISO 9001:2001

Technologies:• CAD / CAM modelling (Icem Surf, SolidEdge)

• The vacuum-forming of large parts

• RIM-casting polyurethanes in the enclosed form (Tartler

MDM 6)

• Measurements using Baces 3D coordinate machines

• Rapid prototyping at the Dimension SST 768

● Naberezhnie Chelny

Image source: www.sostav.ru

Employees: 120

Turnover: €0,9M

Growth Rate: NA


OOO "Avtoprostor“, D&E Service Provider


• Avtoprostor was involved into several large project with

Russian OEMs such as GAZ group.

• Company provided product engineering services to the

Belarusian tractor manufacturer BelAZ.

• Detailed scope of the services and annual turnover is not

available.


Scope of Services:

• Development of style and layout of vehicles.

• Engineering of ergonomic interior solutions.

• Strength calculations.

• Design and production of metal structures and assembly.

• Prototyping and manufacturing engineering.

• Preparation for mass production.

Avtoprostor

● Vladimir

Employees: NA

Turnover: NA

Growth Rate: NA

Ownership Structure

Market Position

Not Available

Not Available


7. Strategic Conclusions and Recommendations


DEG Member Should Consider Active Search for Collaboration with

Russian and CIS Companies

Passenger Car

OEMs

Tier 1 & 2

Suppliers

Str

ate

gic

Co

nc

lus

ion

s a

nd

Rec

om

men

da

tio

ns

• 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.

• Primary focus should be given to offering

solution in exterior and interior design, face-

lifting and new models design.

• Modernisation of the existing vehicles is

required.

• Existing expertise of the DEG members in

cabin exterior and interior design is required by

the local OEMs.

• Modernisation of the existing vehicles in

required.

Commercial

Vehicle OEMs

Success Factors

Adaptation to the local business

environment

Complex solution

Ability to show

expertise and technological

superiority

Proactive

business

development

• Product engineering has strongest demand

from all the tier 1 & 2 suppliers.

• Expertise in low cost components engineering

is required.

• Local companies need support in

modernisation of the production processes

• Support in implementation of the D&E

software.


GAZ = 3

AvtoKOM = 4


Moscow

RUSSIA

KAZ

UZB

UKR

BELMinsk

● Zaporozhie

ZAZ = 2

Location of Organisations Willing to Cooperate with SMMT DEG

Scale used for willingness to co-operate

0= No Interest, 4 = High Interest

ZIL = 0

MAZ = 2

● Miass

●Kremenchu

g

● Ulyanovsk

● Vladimir

● Tolyatti● Skopin

KAMAZ = 4

Avtopribor = 3

AvtoVAZ Aggregat = 3.5

ZMZ = 3

AvtoKraz = 1

UMZ = 3

SAAZ = 4

● Naberezhnyje Chelny

Ural (GAZ) = 3

Asia Auto = 1

NAAZ =1

Ex

ec

uti

ve

Su

mm

ary

KZAE = 1

YaMZ = 2 UAZ = 2


APPENDIX

• Overview of the Russian Automotive Market

• PESTLE Analysis

Slide 104

Slide 110


Total Capacity Growth in Russia: Production Capacity will Increase to Support Market Sales

-7.5%

9.7%

3.4%

1.6%

3.0%

12.0%

9.6%

5.1%

0.0%

0

500

1,000

1,500

2,000

2,500

3,000

2004 2005 f2006 f2007 f2008 f2009 f2010 f2011 f2012

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Total Capacity

Growth Rate

AvtoVAZ decreased

their production

capacity

Toyota and Great Wall would

reach their max. production

capacities

Cap

acity,

th

ou

sa

nd

un

its

Ru

ss

ian

an

d C

IS M

ark

ets

Ove

rvie

w

Note: Based on 2006 market estimations


Current and Projected Capacity Utilization by OEM in Russia: Average Capacity Utilization is expected to increase by 25.1%

0

10

20

30

40

50

60

70

80

90

100

Autoko

m

Avtofra

mos

Avtoto

rFor

dG

AZG

M

GM

-AvtoV

AZ

Gre

at Wall

Izh-A

uto

Oth

er

Renaul

t

Rosl

adaZM

A

TagAZ

Toyota

UAZ

VW

Avtova

z

2005 2012

Average capacity utilization, 2012

Average capacity utilization, 2005

34.6%

59.7%

+ 25.1 %

• 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).

Ru

ss

ian

an

d C

IS M

ark

ets

Ove

rvie

w


Domination of the Russian OEMs Comes to the

End

• Russian automotive players have reached a situation when increasing prices for raw materials as well as auto components diminishes their exclusivecompetitive advantage such as low prices.

• Wider introduction in the CIS market of foreign vehicles with comparable pricing to local models (Daewoo Lanos, Renault Logan, Hyundai Accent among others) and creation of joint-ventures (which assembly foreign low priced brands) change the customers’ attitude toward passenger cars.

• With increasing demand for passenger vehicles, more importance is given to the quality of a vehicle and post-sale services.

• Domestic manufacturers experience structural problems, but not cyclical as at may seem, due to high wear of equipment, assembly quality, human resources and brand perception.

• Diminishing sales and profit margins force Russian OEM’s to look for strategic partnership with foreign manufacturers in order to revitalise their production, gain technological insights and survive on the market.

Decreasing number of the Russian models produced.

Steadily decreasing market share.

Technological stagnation.

Unsuccessful strive to improve quality.

State protection of several domestic manufacturers.

Well-developed distribution system.

Low financial and operational transparency.

No experience of working under global competition.

Domination on the markets of former USSR for both new and used vehicles.

Features

Domination of the Russian OEM‟s products on the territory of the former USSR is still significant. However such domination would

fall apart as soon as other OEM‟s would establish good distribution networks for vehicles and auto components.

Ove

rvie

w o

f R

us

sia

n a

nd

CIS

Au

tom

oti

ve

Ma

rke

t


Prevailing Ownership Structures of Foreign Producers in Russia D

ire

ct

Inve

stm

en

ts Greenfield

Regions with Particular

Investment Conditions

100 % Greenfield

Brownfield

Special Economic Zones

Existing Facilities

Jo

int

Ve

ntu

re

JV with Auto Manufacturer

JV with Components Manufacturer

Local Distributors & Dealers

FORD Motor Russia successfully launched their

own production facility and assembly line for Ford

Focus near St. Petersburg.

The first JV in Russian Automotive industry was

established in 2002 between GM and AvtoVAZ.

Based in Kaliningrad, Avtotor benefits from special

economic conditions applied to enterprise working

in this particular region.

Avtoframos together with Renault produces Renault

Logan on the facilities of “Moskvich” manufacturer

that went bankrupt earlier.

Severstal Auto initiates assembly of FIAT vehicles

in Alabuga, region which has being given a status of

Special Economic Zone.

Another option to be considered by new entrants is

establishing JV with either their global or local

supplier.

One of the largest independent distributors of

passenger vehicles “IRITO” organizes assembly of

BYD Flyer in the Moscow Region.

Ove

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ts Prevailing Ownership Structures (Russia), 2006



"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…”

What the OEM‟s say about opportunities in Russia

One of the Foreign OEM‟s Representative in Russia

Qu

ote


Potential of Hybrid Cars Sales in Russia: Future is not that Green

• First hybrid vehicle, which appeared in

Russia was Lexus RX400h.

• Imported unofficially, Toyota Prius also

appears on the Russian market, however in

very limited quantities.

• While sales of RX400h reached 268

vehicles for the year 2007, representative

office of Toyota Motor admitted that:

• No tax incentives to spur the interest of

Russian in buying hybrid vehicles.

• Absence of required infrastructure

(service stations) and technical

knowledge.

• Majority of Russians are not able to

afford buying hybrid vehicle due to high

price.

• Despite presence of prototypes

developed by Russian OEMs

(AvtoVAZ), local companies focused on

facilitation of sales in traditional

segments.

“ Russians are not ready yet for

perception of hybrid vehicles”

Ove

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PESTLE Analysis: Introduction

POLITICAL

ECONOMIC

ENVIRONMENTAL

SOCIAL

TECHNOLOGICAL

LEGAL

Russian

Automotive

Industry

• Development of the Russian

economy drives the growth across

all industries including automotive

sector.

• Automotive industry in Russia is

on the top list of priorities for the

development for the current

Government of the Russian

Federation.

• Russian automotive industry

should be considered within nexus

of internal and external factors.

• Currently, Russia is the state

where the political and economic

priorities are setup for the next 10-

15 years thus it determines the

scenarios for automotive industry

development and attractiveness

for foreign investors.


Russian Economy

4 per cent of

GDP of the

Russian

Federation

6 per cent out of

total number

employed

3 per cent of

taxes collected

by the

government

Russian Automotive Industry is Important Part of Russian Economy and has Strong Supported from the Government

Value Added Employment Tax Collection

Assembly

Components

Raw Materials

Russian Government is the largest shareholder of the biggest Russian automotive

manufacturers and considers automotive industry as one of the key national interest points.

45%

25%35%

20%

35%25%

35% 40% 40%

Imp

ort

an

ce o

f th

e R

ussia

n A

uto

mo

tive I

nd

ustr

y


Political Environment – Main Questions

• Political stability of the Russian Federation in next 10-15 years

is one of the key questions, which bothers all industry players.

• Government of Russia have to show the willingness to provide

foreign capital with reassurance that political forces and

interests will not impede development of automotive market.

• Existing preferences for creation of automotive production

(assembly) lines would remain until accession of the Russian

Federation to WTO (already in 2008?).

• Changes in political balance might force investors to flee the

Russian market as those changes might provoke protective

measures for domestic auto and components manufacturers.

Will political course remain

unchanged?

Will be there any other

„Yukos‟ cases?

For how long favorable

investment conditions

would remain?

Would Government protect

domestic players?


• Ruling political party will change and Russian parliament will have no majority (but non-permanent unions during elections).

• Previously made decisions will be revised, modified or canceled.

• Legislature chaos will come back.

• Certain inclinations toward remnants of centralised economy will persist.

• Government will keep pursuing nationalisation of main industries.

• Strong dependence of economic agents on State decisions.

• “Edinaya Rossiya” party will keep following publicly announces strategy of economic development of the country.

• Prioritized areas of economic development (including automotive sector) will remain unchanged.

• Further improvements of regional support to OEMs.

Political Environment – Development Scenarios

Existing political environment could develop under 3 main scenarios:

Stable Future

Back to 90‟s

Centralization

Scenario

Best

Acceptable

Bad


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


Macroeconomic Overview: Russian Economy has Positive Growth Prospects

15.1%

7.3%

4.7%

7.2%6.4% 6.0%

5.5% 5.3%

12.0% 11.7%10.9%

9.0% 8.5% 8.2%

0

5000

10000

15000

20000

25000

30000

35000

2002 2003 2004 2005 2006 2007 2008

0%

2%

4%

6%

8%

10%

12%

14%

16%Actual Forecast

GDP growth rates

Inflation rates

• Although high oil prices and a

relatively cheap Ruble are

important drivers of this economic

rebound, since 2000 investment

and consumer-driven demand

have played a noticeably

increasing role.

• Real GDP growth in the Russian

Federation of 4.0-to-5.0 percent is

assumed for the medium term

(2012), falling towards three per

cent in the longer term (2025).

• Economic downturn of US

economy as well as high oil prices

on the international market drove

the average exchange rates of

US$/RUR is expected to reach

the lowest level since 2000.

• Nevertheless, the increasing trend

in US$/RUR exchange for up 2009

has negative impact on the

Russian automotive market

GD

P, bill

ion r

ubble

s Gro

wth

Rate

, %

26.00

27.00

28.00

29.00

30.00

31.00

32.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Actual Forecast

Exch

an

ge

Rate

, ru

bb

les p

er

$1

do

llar


Comparison with Other Emergent Economies: Russia is One of Growth Poles in the World

• Favorable economic conditions in Russia will

spur further economic development of the

country and prosperity of the population of the

Russian Federation.

• Annual wage growth of 6.5 per cent facilitates

demand for passenger cars in general and in

low-priced segment in particular.

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%

Annual Inflation 4.2% 1.8% 6.9% 2.2% 10.9% 13.5%

India

Brazil

Russia

China

Poland

Ukraine

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1 10 100 1,000 10,000

Population, million

GD

P G

row

th R

ate

In comparison to “Big Boom” countries, Russian economy growth rates are one of the highest in the group along with constantly growing GDP

per capita, which indicates about possible growth of consumer incomes


International Trade of Russia: Economic Revival Will Boost Export of Industrial Products

• 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.

26.6

21.8

18.8

15.7

9.9 9.2 9.0 9.0 8.8 8.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Germ

any

Net

herla

ndsIta

ly

China

Turkey

Poland U

K

Switz

erla

ndUSA

Finland

Main Trade Partners of the Russian Federation in 2005, bil. dollars

Trade turnover with China will

increase in the long term

• For the next 6 years till year 2012, the

change of existing structure of the trade

balance toward export of industrial

products is expected.

• The structure of the main trade partners

of Russia would remain unchanged

except trade turnover with China, which

growth 25-30 per cent annually.B

illio

ns o

f U

S d

olla

rs


Increasing Car Penetration in Russia is Supported by the Gradually Increasing Prosperity of the Russian Population

Car Penetration: Cross-Country Perspective,

Cars per 1,000 People

0

100

200

300

400

500

600

Germany USA Russia Ukraine Brasil China India

2005 2010

Besides of the growth of the car

penetration rate per 1000 people

(from 175 currently to 235 in

2010), structural changes in the

automotive market will occur such as

substitution of old Russian

brands, which are not satisfying

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).


Russian Federation: Income Growth Dynamics

17.39.9 6.2 3.2

65.5

61.955.4

46.9

14.3

21.6

27.1

32.2

2.9 6.6 11.317.7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005

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

• Personal income growth is spurred

by general economic growth of the

Russian Federation.

• Raising prosperity of the Russian

population as well as development of

banking/financial services become

one of the most important factors of

Russian automotive industry growth.

Exchange Rate: 1 USD ~ 27 RUR

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

2005 f2006 f2007 f2008 f2009

RU

R

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

• Given growth estimations are not adjusted for inflation.

• Average income level does not consider unreported (hidden) salaries and monetary allowances.


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.


Import to the Russian Federation of the following vehicles produced before the

date indicated below is prohibited:

Technology & Environment: Introduction of New Tech. Regulations Creates Additional Opportunities for Foreign OEM‟s

Production new vehicles as well as import of foreign cars in the

Russian Federation should satisfy new technological

requirements, introduced on 1st of January, 2008.

Foreign OEM’s should pass existing

certification norms for EURO2

EURO 2

EURO 3

EURO 4

EURO 5

22nd of April, 2006

1st January, 2008

1st January, 2010

1st January, 2014

Emission

Standard

Introduction

Date

Introduction of emission standards provide foreign OEM’s with strong

opportunities in capturing market share of Russian OEM’s and part of market

of used foreign vehicles

Country of

Origin

Production year, including

Do no satisfy emission

requirements

Satisfying ecological requirements:

EURO2 EURO3 EURO4

EU, gasoline Before 1996 1997-2000 2001-2004 С 2005

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 -

Malaysia Before 2002 From 2003 - -

China Before 2003 2004-2007 From 2008 -

Korea Before 2000 2001-2002 2003-2005 From 2006

Ukraine Before 2005 From 2006 - -


Legal System Development: Russian Government Supports Establishment of Production Facilities by Foreign Automotive OEM‟s in Russia

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

• 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.


Legal System: Decree #166 Creates Attractive Economic Incentives to Set Up Automotive Business in Russia

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.

• Tax benefits provided by local authorities are restricted.• 10 percent of initial capital investments (in fixed assets)

could be acknowledged as expenses.Relevant

Tax

Reforms

Profit Tax

Reforms

• Possibility of crediting input VAT on invoice acceptance. • Capital construction: Input VAT is offset in the period

when the costs are attained.

VAT

Reforms

• Additions to Tax Code are made to regulate procedures for costs accruals and payment of assets tax.

• Inventory is not included into the assets tax base.

Asset Tax

Reforms

Tax reforms aim to improve investment attractiveness for

foreign partners and provide warranties of

stability of existing legislature

Relevant

Customs

Duties

Reforms

Measurements:

25,000 unitsbody assembly, welding and painting

18 months for existing plant30 months for constructed plant24 months: 10% less of components imported42 months: 10% less of components imported54 months: 10% less of components imported0-5% for exclusive components used in manufacturing (standard rate – 15%)

Features: • Minimum annual production

capacity ………………………..• Operations to be performed…..

• Time for production set-up …...

• Restrictions on import ………...

• Applicable duty tax ……………

Decree #166

Concept of Industrial Assembly


Special Economic Zone “Alabuga”

SEZ “Alabuga”, Republic of Tatarstan

Aim: Facilitate the development of autocomponents production

Features: 20,000 sq. meters Duty free zone Tax preferences Development of the full infrastructure, required for manufacturing

Russian government introduced

the law, which regulates creation

of Special Economic Zones

(SEZ) on the territory of the

Russian Federations in order to

spur industrial and technological

development.

The main goal of passing SEZ law is to support local

manufacturers and, in particular of automotive industry, to

support creation of competitive autocomponents industry

in Russia.

The main positive impact of SEZ Alabuga operations

would be experience by KAMAZ and UAZ, which are

closely located and have troubles with autocomponents.

Great Wall agreed with Russian Government to open

assembly in Alabuga and get tax and import preferences

for 10 years time.

Table of comparative tax rate for SEZ “Alabuga” and the rest of

Russia

Tax Rate

1. Profit Tax 24.00%

For SEZ Residents 20.00%

2. VAT 18.00%


3. Assets Tax 2.20%

For SEZ Residents 0%

4. Land Tax 1.50%


5. Transport Tax

Depending on type and power rating of a

vehicle


6. Duties Depending on the product type

For SEZ Residents Depending on the product type

7. Uniform Social Tax 26.00%


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