The logistics challenge of getting Western automobiles to Russian customers - An immense, yet specific

Report The logistics challenge of getting Western automobiles to Russian customers An immense, yet specific Almost daily, there is news about Russia’s new su- Photo: CMP per-rich elite buying football clubs, luxury cars and extravagant, multi-million dollar cell phones. I n the shadow of these headlines, the economic boom in the former communist country has led to the emergence of a grow- ing middle class, which is fuelling one of the fastest growing au- tomotive markets on the globe. Russia will eventually become the largest automotive market in Europe. Serving customers in the world’s largest country is an immense opportunity for com- panies that are willing to tackle the logistical challenge. High sales, heavy investments With the GDP having more than tripled since 2001 and with total sales of new cars up by approximately 60% since 2004, the market for new cars is projected to continue to grow by around 17.5% per year. At the same time, sales of foreign brands have increased by a total of 338% (2004-2007) and are expected to grow by roughly 25% per year during the next three years, clearly outperforming Russian manufacturers’ sales. Foreign brands will gain, it is expected, a market share of more than 75% by 2010. Western European By 2010 foreign brands should gain 75% share in the Russian market and American manufacturers supply around 40% of all imported new cars and have a particularly strong presence in the upper and lower middle class ers to use alternative land and sea routes. Currently, the best example segments. The remaining imports are served mostly by Korean and Japanese is Ford’s production site in St. Petersburg, where Schenker is in charge competitors. Chinese brands are only beginning to enter the market. of the entire inbound logistics supply chain. As Richard Hartmann, With their growing sales, major companies have started to heavily in- CEO of Schenker Russija AG points out, his company’s experience, its vest in their own production infrastructures in Russia to further strength- professional approach and its large range of services are the main fea- en their positions on the market. Ford, GM, Renault, and Volkswagen tures that differentiate his company from local competitors. Companies already operate their own production sites in Russia and other compa- like Schenker Russija also have a core competency in problem-solving nies, such as Toyota, Nissan and Daimler, are working on plans to begin and often create the impression of normality. Richard Hartmann often production in the future. With these developments continuing into the points out that, although Russia is different, it is as normal as any other future, sales of Western brands are expected to continue to grow strongly. logistics market in the world for him. According to Business Monitor, the production of foreign brands in Rus- While inbound logistics require logistics service providers to be very sia is projected to outpace the production of Russian brands before 2014. knowledgeable about the client firms themselves, the logistics for complete cars rely heavily on an in-depth knowledge of the country, local authorities, Automotive logistics customs and business environment. This applies to outbound shipments from production sites in Russia, as well as to the delivery of imported cars. The structures for outbound automotive logistics in Russia have The difficulty, when importing cars to Russia, begins with the dif- come a long way from the first direct imports of foreign cars, where the ferent routes that are being used to ship cars to Russia. Most European dealers or customers had to organize almost everything by themselves. and North-American companies send their automobiles by ship. Due to Small and non-specialized logistics companies dominated the market in the large demand for cars and the fact that St. Petersburg has a harbour, the 1990s. Although some large specialized companies have emerged, this city has developed into the main hub for the imports of Western car the market today still remains fragmented and common standards, as in manufacturers. Unfortunately, the port is struggling with inadequate or- Western Europe, are just beginning to develop. ganization, capacity limitations and a lack of storage. To circumvent this When comparing the outbound logistics market to inbound logis- problem, as many as 70% of automobile imports are initially shipped to tics, it becomes apparent that the outbound market is almost entirely Finland, from where they are delivered to Russia by truck. For both op- in the hands of local companies, while foreign companies work very tions, however, the poor infrastructure and enormous distance between closely with international logistics service providers to organize their cities (especially in the Southern and Eastern areas of the country), con- inbound supply chains. The Western European car manufacturers are stantly changing regulations and corruption create a vast array of prob- trying to ensure their production flow. In this regard, secure inbound lems that the logistics service providers, as well as manufacturers, face in logistics are a prerequisite in Russia, due to the absence of local exper- their daily business. The successful companies have found ways to cope tise of foreign car manufacturers. The parts are transported mainly by with the situation and are able to differentiate themselves from other com- ship to St. Petersburg/Finland or by truck across Poland and Ukraine. petitors, who might not have the necessary experience. They just go ahead The capacity constraints at Russian ports force logistics service provid- and do the job where others only see problems. These structures make a 36 | Baltic Transport Journal | 2/2008 Report At the moment, the quality of overall logistics services in Russia market is not up to the standard of developed countries. Nevertheless, in the long run, logistics structures in the automotive industry will become as well organized and standardized as they are in other countries. Lo- cal companies, however, will likely still play an important role in the development, since local expertise will remain the key to successfully delivering cars in Russia. significant entry into the market increasingly difficult. Some large carriers Conclusion are also working hard to consolidate the market and set standards that might serve as barriers to entry. Autologistics OOO is one of the com- The opportunities that the Russian market offers are immense. panies well positioned to conquer the market. Already one of the largest With growth in the regions outside of Moscow and St. Petersburg pro- trucking companies in the Russian market, it has increased its capacity by jected at twice as high as in the two cities themselves, the logistics more than 300 trucks in 2007 alone, and is planning to follow in 2008 with structures will become even more important and offer enormous op- an investment of at least the same amount. Alexander Malishko, CEO of portunities for logistics service providers, strengthening their position Autologistics explains that his company is, “setting a high standard in in the value chain. The car manufacturers will require developed and the market and is going to offer the same quality of service that the car efficient solutions for inbound and outbound logistics that can only be manufacturers are accustomed to from Western Europe.” This approach established with experience. The adaptability of the strategy and daily seems to pay off, as Autologistics was fast to win customers like Mercedes, business to the specifics of the Russian market is a key issue for suc- Ford, BMW and Porsche. Even though the goal of “normality” might still cess. There are many challenges and chances for logistics service pro- seem distant, the market is definitely starting to value not only competi- viders in the future. Companies that want to participate in the Russian tive prices, but also service quality. logistics market for automobiles need to start preparing today in order This development is especially apparent when looking at the con- to benefit from the growing demand in the future. Entry barriers are tracts to deliver goods that the logistics service providers are receiving. increasing. Some have already achieved a high performance and will Even though contracts for single journeys are becoming rare, short con- certainly profit greatly from the Russian market.