Much of Russias turnaround has come from Kremlin initiatives which have triggered a year-long recovery

Much of Russia's turnaround has come from Kremlin initiatives which have triggered a year-long recovery

Volkswagen Group Rus says it has learned from the crisis years not to rely too heavily on imported components as a weak rouble made imports uncompetitive.

Russia is trying to square the circle of a low rouble making domestic production more attractive, but at the same time raising quality to that of overseas components and has had some success in the field as competencies are increasingly sourced at home.

The automaker is also calling for a more integrated approach to the supply chain as well as a market-centric push from those in government in Moscow as The Kremlin considers its future strategy for the automotive sector.

The Russian administration has taken a forensic interest in the country's car sector in the past few years. This coincided with the virtual collapse of the domestic market as a potent cocktail of punitive interest rates, soaring inflation, credit access problems and wide-ranging economic sanctions from an international community outraged at what it perceived as Moscow's annexation of Crimea and involvement in Eastern Ukraine, combined to depress the market.

But in remarkable contrast – and despite those sanctions remaining firmly in place – Russia has posted almost 12 months of unremittingly positive sales figures – clawing back some of the lost market – albeit from an industry on the floor.

Some of the challenges of this fast-recovering market were outlined by Volkswagen Group Rus purchasing director, Patrick Huseman at the recent Russian Automotive Forum organised by Adam Smith Conferences in Moscow.

JA: How are you seeing the Russian market evolving at the moment?

PH: After some years of depression we have a turnaround especially in the second half of last year with volume up 20% - maybe back to the level of pre-crisis in 2012/2013.

We believe in the Russian automotive market and the recovery of the Russian economy. During the crisis we learned high dependency on imports of components has almost broken our neck, because prices in Russia could not increase as fast as the exchange rate. Sometimes we were selling cars with almost zero margin.

JA: The Kremlin seems very keen to encourage localisation – how does VW Group Rus address this and are there certain sectors you focus on?

PH: We are trying to increase localisation. In the past our main focus was with conventional plastic parts and now it is concerned with localised high-tech components; electronics, chassis parts [for example] to enlarge our variety of products. Therefore it is essential to develop Russian suppliers because there is currently not all product available in Russia.

Not all Russian suppliers fulfil our requirements so this is an effort to increase the potential of localisation. We call it within our company, regionalisation, which means our headquarters gives responsibility to us; we will increase our technological capability in order to be near the domestic market.

JA: Volkswagen is in discussions with Russian suppliers in areas such as clutches, HVAC systems and radiators among other segments and is running a series of tenders. Are there any more tricky segments?

PH: Stainless steel is always a problem. That is something we can all do together with the government to increase capabilities.

[There] is always a very long process to homologate models and finally in most cases we succeeded because we did a good job and our Russian partners did a good job.

At the Russian Automotive Forum, Simon Warburton also spoke to Volkswagen Group Rus general director, Marcus Osegowitsch to gauge his impressions of the market and what The Kremlin might be able to do to continue the recovery.

JA: What is your view of Russian government initiatives for the automotive sector?

MO: What is worrying me a little bit is they [government] want to do everything themselves. How does the government make sure what we invested in all the years continues in the future? For us it must be a further and full integration into the global supply chain of car manufacturers. Russia for Russia was the first phase and Russia for the world must be the next phase.

JA: Should Russian suppliers try to concentrate on developing excellence in targeted sectors, rather than spread themselves widely? What other factors are at play financially?

MO: We have to make sure Russia is very good at a few things like engines [for example]. This isolation discussion, that is the wrong discussion for Russia. We have production over-capacity [and] we have still limited localised supply. Yes, we have Tier 1 suppliers, but unfortunately only mostly for each kind.

There is also a low rouble localisation which makes us exposed to the high fluctuation of the currency [and] the market will stay volatile. The government wants further localisation, wants to increase exports, wants to do more investment. When is the new investment, new factories, new plants, when is the end? We need to stop – for Russia it is simply too much.

JA: Which approach do you suggest the Russian government should follow as it develops auto policy for the future?

MO: Can the government steer this, keeping a fair and even playing field? That is why market mechanism is still the best system in the world.

A gearbox is very hard to justify economically – the global gearbox capacity will be empty in around five years because the world moves to electric. The government needs to seriously think about the economic background further [rather] than saying we want this gearbox production [for example].

If you want ECUs, please tell Delphi, Bosch, to motivate them, the government needs to take a stake in this. We need to be careful by localising too much.

"It is time to work – in 2020 the current support mechanisms are running out. We are talking to [VW] HQ about 2021/22 – we need quick decisions. Make it simple, make it market-based.

Somehow, localisation must be economically feasible and please, to the government, attract some of the suppliers because we are producing cars not gearboxes.