Vladimir Putin's opening remarks:
Good afternoon,
Today we will discuss the current situation in the Russian auto industry and the long-term plans and strategy for the development of the automobile industry in Russia until 2020.
The industry is recovering and we can move on from crisis response to long term planning, especially the securing of investment and technological modernization.
Let me remind you that our assembly lines employ about 600,000 workers and another 3 million are employed in related industries. We must do all we can to make sure that the industry develops in a sustainable manner, meets internal market demand, creates new jobs and orders for the steel and other sectors and, most importantly, preserves and strengthens its competitiveness in light of the forthcoming accession to the WTO.
Last September we held a meeting on the development of the auto industry and discussed some issues regarding domestic content. Foreign auto makers are ever more active in expanding their presence in the Russian market. In fact their business in Russia has become an inseparable part of the domestic industry. They already produce one in every two cars assembled in this country.
Foreign investment and technology are driving the development of three new major automobile clusters in Russia: Togliatti, Kaluga and St Petersburg. We open a new car plant practically every year -- literally almost every year –and these are plants that produce some of the best brands in the world. A large-scale programme for renovation at AvtoVAZ has been developed in partnership with Renault-Nissan. You know that on December 17 Sberbank, AvtoVAZ and the state corporation Rostekhnologii signed a memorandum of understanding on a long-term project to develop and modernize another major manufacturer, Izh-Avto. As a result Izh-Avto may produce about 126,000 cars as early as 2011, half of them being Renault and Nissan products.
Generally, I have to say that even at the worst of the crisis not a single major auto industry project was scrapped. And I hope the existing enterprises have felt the government support.
I well remember the discussion about GAZ when serious and even insistent demands were raised to rehabilitate, i.e. effectively bankrupt the business. Today, the state of GAZ shows that the decision to support it was right.
I must say that in general, state support for the automobile industry was timely and effective. More than 44 billion roubles were spent in 2010 to stimulate domestic demand. Incidentally, we were just now talking with the workers and I think that if one takes into account all the channels of support for GAZ, it amounts to 8 billion roubles. I mean stimulation demand, scrapping, subsidizing credit, state guarantees for certain enterprises, procurement of cars and vehicles for state needs and so on. As I said, 13 billion was spent under the scrap and reduced cost credit programmes.
A further 30 billion roubles were spent to buy vehicles and road building machinery for federal and regional administrations. In addition, the cost of transporting Russian-made cars to the Far East and of cars assembled in the Far East to other regions by rail was subsidized to the tune of 1.1 billion roubles. As a result, auto production this year almost doubled.
More than 1.2 million cars were made in the first 11 months of 2010 compared to 723,000 in all of 2009.
Vehicle sales are growing in all segments – cars, light commercial vehicles, trucks and buses. The sales of new vehicles have increased by an average 30%.
Car sales increased by 330,000, year-on-year, sales of light commercial vehicles by 38,000, trucks by 40,000 and buses by 3,000.
Experts believe this rate of growth will be sustained next year. And yet we thought it was necessary "to give a leg up" to the market and create a buffer until demand is fully restored.
So, in 2011 we will continue our programmes to stimulate demand for vehicles. The federal budget will allocate 17 billion roubles for this purpose, including 13.5 billion for the scrap programme, 2.8 billion for subsidised credit and another billion for the transportation of cars to and from the Far East.
I would like to touch on several other topics that are critical for the sustained development of the auto industry. First, during our meetings in the regions, frequent requests were made to expand the scrap programme to include trucks and buses. We all know that scraping cars and trucks or buses are different things. But considering the success of the programme to scrap cars, we can think about various schemes to support the sales of trucks and buses. So for now, just think about it. I ask the Ministry of Industry and Trade, the Finance Ministry, and the Ministry of Economic Development to plan and present a proposal in the first quarter of next year.
Next point. Today investors and major auto makers are planning to expand production considering the favourable market conditions. It is incumbent upon us to provide clear benchmarks and lay down the rules for the long term. I urge you to speed up the decision on using the industrial assembly regime. It was introduced five years ago on the condition that industrial capacity be created for the production of at least 25,000 cars. Today, that bar of courses needs to be raised. We would like to see the creation of large modern plants with high domestic content that would include their own engineering centres.
Obviously, if annual car production is at 25,000, localization makes no economic sense and no one will opt for it.
At the same time I would like to stress that changes in the industrial assembly regime will not affect the contracts signed earlier. All the newly created enterprises will continue operating under the former plan.
And the last thing. During the crisis many automobile industry related businesses were issued loans, partly through the use of state guarantees. Most of that money was used to shore up the finances of the auto companies and replenish capital. Servicing these loans costs money and saps financial resources from development programmes.
What could be a way out of this situation? The 2011 federal budget earmarks 6 billion roubles to subsidise the interest on auto manufacturer debt. But that benefit applies only to so-called investment credit taken out for the purpose of production expansion and modernization. Let's see what we can do to spread interest rate subsidies to the credit obtained during the crisis through the state guarantee mechanism, i.e. the credit obtained during the crisis.
Today we had a talk with GAZ management and I sensed your concern about the difficult financial situation of some of the suppliers. Of course, the same programme could be extended to component vendors.
Again, we have reserved 6.1 billion in budget money, and corresponding changes must be made to the rules of using that money and this form of support should be made available to automakers including the component producers.
Let's use this video conference format to review what's happening with the manufacturers in different parts of the country. And then I would like Viktor Khristenko to comment on what to expect and what to discuss for the outlook for the future.
Viktor Khristenko: Mr Putin! Colleagues! You should have presentation materials on your tables for the sake of convenience during the report. Concurrently, I will not mention many of the items presented on the slides in order to save time.
First of all, I would like to confirm that the development of the auto industry is under lasting control, more than any other one. Mr Putin was correct when he quoted the number of people working in this industry at the beginning of this session; of course, this is unique in terms of labour concentration both in general and in certain locales, and only a few other industries can be compared to it. In this respect, it has been and will remain the focus of our attention.
Of course, these considerations cannot but influence the results of 2010. Starting this April, month-on-month market growth has invariably registered in two-digit figures. This November, market growth reached 68% compared to November of 2009. The figures speak for themselves: the market is overcoming the crisis and, in fact, we can see growth spread out over all its segments. The stable trend of the passing year has been that nine out of ten leading models are produced in Russia. This has become possible thanks to an effective system of the most versatile measures for supporting car manufacturers in Russia.
By the end of the year, we expect the new car market to grow by 28.5% to 1.75 million vehicles. And if we add to that the import market on used cars, which still persists, the figure will approach 1.9 million in 2010.
One can also consider the return of consumers to dealerships, which sometimes even have queues, as an indicator of overcoming the crisis.
The next slide depicts the market situation for light commercial vehicles. In addition to other growth trends, this market clearly shows quality changes in its structure. Businessmen, who have now become thriftier, largely form the demand for foreign models that reliable and inexpensive in terms of maintenance, including those produced in Russia. It is clear even from the slide that, given support, imported new car supplies have risen considerably. There is little doubt that today's event – the signing of an agreement on the production of Mercedes-Benz-Sprinter vehicles – is also indicative. I am sure that with competent planning, this project and this product will be in high demand among Russian private and corporate customers.
As for the key companies and alliances commanding the market for passenger cars and light commercial vehicles, AvtoVAZ still has a clear lead. Nevertheless, major foreign manufacturers are gradually increasing their market shares, while gross output viewed in the context of sales statistics reveals significant differences in the policies of foreign players on the Russian market.
In this case, Volkswagen and Toyota provide the most vivid examples: the share of vehicles they produced in Russia accounts for 80% and 20%, respectively, of thetotal sales in 2010.
Besides, for a number of manufacturers, like Sollers, Peugeot, and Renault-Nissan, greater localisation has become a key factor in Russian sales increase. On the other hand, Avtotor is operating under special circumstances. It works in a special economic zone as an assembly facility for five foreign manufacturers. Currently, it assembles most foreign cars in Russia – over 170,000 a year.
More than 90% of those cars are produced using either Semi Knocked Down (SKD) assembly, which is currently rousing such heated debate, or through simple assembly operations using painted car bodies (as, for example, with BMW). And, in fact, the Complete Knocked Down (CKD) method is practiced on only one model, the Chevrolet Lacetti.
This cannot but put us on guard. Especially such a volatile dynamic. It is my conviction that we will not be able to establish common rules for the auto industry while such oases remain. I believe that it is necessary to support Kaliningrad as a production site, but only inasmuch as its practices are as close as possible to the new standards for assembly.
Over the first eleven months of this year, imports on passenger cars and light commercial vehicles totaled 713,000! The import structure shows a clear division of supply channels: legal entities such as corporations import new vehicles, while individuals primarily purchase used cars.
Growing imports provide another confirmation that in terms of customer preferences, the Russian market has long been developed. One of the basic tasks of foreign corporations seeking to preserve their market share is to offer broader model availability.
The Far East remains the core channel for used car imports. Three major import brands are Japanese. More than 60% of all imported used cars have less than 1.5-litre engines, which makes them competitive on the secondary market. In fact, the Far East is still the main, or even only, gateway for used cars entering the market.
In 2009, the secondary market in Russia receded much less than the new car market. In other words, the fundamental demand for cars as such remained high, despite the crisis. Increased import duties on used cars caused a drop in the sale of imported used cars as a share of the secondary market. Before the crisis, the figure was a consistent 18–20%. It has now become 3%. This only means that the measures taken by the government have proved absolutely successful.
Lorries and trucks. The sale of lorries has materially increased this year, in part thanks to the government procurement programme. Domestic manufacturers of lorries have managed to preserve their control of the market. The imports growth should be attributed to a higher demand for tractors used in cross-border transport and medium-duty trucks. The diagrams clearly show that the growth of new vehicle imports has reached 300%.
Of course, the question posed by Volvo Truck deserves attention. On the one hand, the company properly pointed out that the national strategy for auto industry development in the field of trucks is aimed at fostering a top national company, which also implies a position as a major exporter. So, "national champion" and "major exporter" are synonyms in our strategic planning, which means that the game is not played in the dark (as if one just turns out the lights and raises the hurdles in the gym), but on the grounds of the global market. A major exporter on the global market should maintain its competitiveness. In this respect, our market is fairly open and the barriers we are erecting are not as high as those even in some other BRIC countries. The truck industry is experiencing a substantial commercial load and substantial commercial pressure.
And in this sense, one of the proposals that Mr Corneliusson made regarding increased fees to enter our market, in this case, just turns out the lights and raises the hurdles in the gym. In any case we are now unable to do this, with trucks –due to a number of conditions including WTO accession requirements that have already been negotiated which say we will retain the level that we have today, which in our view, is extremely important.
Nevertheless, the commercial vehicles segment requires special attention. As for Volvo Truck, even in the new environment, I think, within the alliances, we can find a solution to this issue – as part of an alliance with manufacturers of other segments. In this case, we only need to approach this creatively, so to speak, and find similar solutions.
There is a similar situation in the bus segment. Here, the programme implemented with the support of the federal budget to upgrade the regional motor pool plays a significant role in increasing sales, and we also see a significant increase in imports of used buses – nearly 100%. And in this respect, we believe that the time has come for a tougher approach to assessing the safety of used buses in Russian markets, because it is no secret that the sources for used buses includes China, Korea, and the countries nearer to us. In this sense, it does not, of course, create the best situation on the passenger transport market – for the transport of passengers first of all.
The role and results of state support. I have already mentioned that in 2010, this role has been crucial to absolutely all segments. State support for passenger vehicles added up to 25%-30% of annual sales, and the scrapping programme and low rate loans have become the most effective approaches. By the way, we completed the second phase of the scrappage programme, and literally two or three days ago, the 400,000th certificate since March 8 was granted. Nevertheless, because we determined all the conditions and resources for 2011 for this purpose, we are not stopping even for a moment; we are continuing this program. And now, at this point, more than 402,000 certificates have been issued – i.e. 2,000 in terms of "a new story", from programme allocations for 2011.
In addition, the popularity of low rate new car loans has made the programme, which we extended to 2011, another catalyst for demand, and this year, more than 160,000 loans were granted out of 340,000 requests. And that's double the 2009 figure. This means that the market is really recovering and this leverage is supported.
There has been more active public procurement of commercial freight vehicles, and it has provided up to 20%-25% of the sales in the respective segments.
The results of state support in relation to the main players in 2010. Given the growth of commercial sales, we certainly need to focus on a smooth transition from state programmes of demand stimulation. According to our estimates, this transition should become evident in the spring of next year. At the same time, the state will continue to largely shape the demand for trucks and buses. This is dictated by the need to upgrade the motor pool. One statistic – according to the Transport Ministry, over 50% of all buses must be replaced due to obsolescence and physical deterioration.
Here, the main beneficiaries of the measures taken this year are presented for the first time. I must say, for example, that both Renault and Ford are at the top of the scrap programme. They are taking advantage of market demand and are using the corresponding increase in funds to support both scraping and car loans.
Turning to the next stage – the stage of industrial assembly regime No. 2. Vladimir Putin mentioned it in his opening speech. I can say that as of today, we have completed the negotiation of this phase. And since the end of September until today, we have been able to settle all the details on the new regime of industrial assembly No. 2 between the agencies and producers. The order is tripartite – the Economic Development Ministry, the Ministry of Industry and Trade and the Finance Ministry have all signed – and now Alexei Kudrin is the last to sign it – and it will generally take effect. In this regard, we hope that our companies and shareholders will have an opportunity to proceed with the signing of the new agreements very soon – we're counting on the signing before the end of February.
Thus, in making the transition to this regime, I would like to backtrack a bit to the history of this issue. Our main objective in the long run is to maximise the value chain in the Russian Federation's automobile industry. This chain runs from raw materials suppliers to the dealer network. A significant portion of the elements of the value chain is the direct responsibility of automakers and assemblers. Their indirect liability or indirect impact includes other segments associated with the components business and dealer network; alongside the subcontractors are the raw and other materials suppliers.
The Russian market has passed through several stages of development. The initial stage was in the early 1990s through 2000. This was, in fact, a chaotic period for commercial policies in the Russian market, where, to a large extent, admittedly, sales were conducted through grey market schemes. Subsequently, the quantitative and qualitative growth of these sales led to the centralisation of sales and the formation of clear, transparent dealer networks by the end of this period.
The next stage saw the first attempts of the state to attract foreign companies to manufacture in Russia, because one way or another, Russian business' attempts to establish joint ventures or implement independent projects had ended in failure by this time.
Government resolutions adopted in 1998 changed the situation to some extent – they allowed duty-free import of components in a regime of free customs warehouses in exchange for investment in the construction of assembly plants. Consequently, three automakers – GAZ, Renault and Ford – planned to take advantage of this system. Only Ford has operated under the plan since 2001.
Another support mechanism for the auto industry was the federal law creating the free zone in Kaliningrad. It still only applies to one maker – Avtotor, but nevertheless, all of these measures had an impact on the market despite the 1998 crisis.
But, of course, Resolution No. 166 has had the greatest impact on the establishment of assembly sites and the introduction of a mechanism for assembly in 2004. This new tool has given real impetus to global investors interested in establishing production facilities in Russia. The result is the opening of 18 car assembly production complexes.
The production capacity of these complexes exceeds current market demand, and they remain underutilised. In part, this is the result of the maturity and openness of the market. I should clarify that there are 370 models sold in the Russian market. Of these, only 130 are mass produced, in other words, those that sell over 1,000 units in our market. Our total market volume does not exceed two million units so far and, as a consequence, the localisation of production has been slower than we would like, and the proposed new assembly regime will help resolve these problems and support those manufacturers who not only declared, but in fact perceive Russia as a strategic market. In this case, we have always advocated a level playing field in the industry for all makers. And it is clear that only companies with intellectual property rights, the rights to the product and key competencies for development, are capable of creating the backbone of the industry.
I am convinced that support for just assembly projects outside the perimeters of the global automakers will yield an effect exactly for the period of eligibility of reduced fees. Once these benefits are repealed, interest in these projects will wane. In terms of strategy, these actions offer little long term results.
The current mode of industrial assembly has fulfilled its task, and the next stage is the creation of effective tools to implement the strategic partnership scenario. This will enable closing the value chain, incorporating modular factories and engineering units within it; in other words, resolving the issues raised in the strategy – creating a full-fledged automotive industry in Russia. I must say that the leftmost segment – raw materials and supplies – has not remained indifferent to what is happening in the auto industry, and starting in 2005-2006, the chemicals and steel industries became involved and have invested in programmes associated with the production of products for the emerging automotive industry. This does not mean that we have eradicated the problems in the relationship between the subcontractors and the consumers of these products. But this means that, for example, that in recent years, the steel industry has invested several billion dollars in production facilities related to the automotive industry. This means that despite the crisis, a wide range of projects is now being implemented. It means that these projects found enough support during the crisis, including state support, to be continued.
And, of course, in resolving the current problems between the vendors of raw materials and supplies and the automakers, we need to keep in mind the strategic objective – to create full competence in all segments. In the figures, recall that our strategic objectives are as follows – 80% of all cars sold in Russia by 2020 should be manufactured within Russia. The added value created in the country (or the localisation of production) should at least make up 50% of the market volume by 2020. This is important! Not production but market volume – not less than 50% of the value added of the total market size should be in Russia.
This added value should grow at least 350% in absolute terms by 2020, and from the current 1% of GDP to 2.5%.
According to the strategy, car and Light Commercial Vehicle (LCV) segments will grow through partnerships with foreign manufacturers, such as production alliances or joint ventures. Foreign manufacturers will produce up to 50% of cars at their Russian facilities.
As I have said, we plan to implement the co-called major exporter (national champion) scheme for the truck and bus segments. A key factor in this area will be to keep the markets accessible and protected, especially at the initial stage.
With foreign cars assembled in Russia, the main goal is to reduce the number of platforms used while boosting the number of vehicles manufactured for each platform. This means introducing the technology provided by a partner and setting up an effective component industry, as well as Russia’s integration into the global R&D industry. This latter goal is the most important one.
Having completed the analysis, we drafted, discussed and, as I said, signed a joint order to grant [foreign automakers] additional component imports privileges for eight years, but no later than through the end of 2020. In exchange, we want the companies to make a commitment to build or modernise facilities to manufacture at least 300,000-350,000 vehicles per year, as well as engines and/or gearboxes, of which at least 30% should be installed in the vehicles produced.
The percentage of locally manufactured components will be calculated based on the added value; at the same time, additional reporting requirements will be introduced to make it easier to prove that a specific component is really manufactured in Russia.
Foreign automakers will have to achieve a required added value of their products, and use at least 60% of Russian-made components no later than five years from the signing of an additional agreement. This arrangement will allow the producers to choose which models will be made with Russian-made components and to what extent. The manufacturers who strictly comply with their contracts to produce vehicles in Russia will be entitled to take part in this arrangement.
We will somewhat limit the volumes and terms of Semi Knock-Down. The choice of the specific technology and models will be up to the producer; the only condition will be to ensure the required share of Russian-made components across the model range. If companies form a consortium, which is an option under the new rules, one legal entity will have to be made responsible for fulfilment of the requirements by all the members.
We have one example here that involves different proportions of Russian-made components. The key indicators have to be weighted against the cost of the vehicles produced and the proportion of Russian-made components and locally performed operation.
There is also a change in the rules concerning the assignment and transfer of rights to intellectual products. Therefore, engineering competence and technology development centres are also important at this stage of the industry’s development. However, companies that do not wish to change their arrangements for assembling vehicles in Russia can choose to continue working within the framework of their old contracts. They will have every chance to complete their current projects, and there is nothing wrong or controversial about it.
All the 18 current contracts are presented here; it is easy to see their respective progress status and the exact proportion of vehicle components manufactured in Russia in each case.
In fact only two projects got into the alarming “red” or “yellow” zones at this chart. They have gone off schedule, so to speak. One of them, IzhAvto, will have to be transformed or replaced. All the rest are operating smoothly.
Now I would like to go over to the third part of the 2011-2013 strategy – to the policies for its implementation. The second-stage plan has been recently submitted to the government. I would like to tell you briefly what has been done and what still needs to be done here.
There are three objectives pertaining to a renewal of the vehicle park: The first one is to introduce tax incentives to encourage acquisitions of modern environmentally friendly and energy efficient vehicles.
Mr Prime Minister, the directive you gave at the meeting of the budget commission in late July has been partly fulfilled. We developed several proposals and coordinated them with the Ministry of Finance, but they haven’t yet been included in the amendment to the tax code due to be introduced in 2011. We believe this work should be continued so as to create economic incentives, including tax breaks, to foster the process of replacing older cars with environmentally friendly and energy-efficient cars.
Regarding the replacement of trucks and buses, market research shows that we cannot blindly copy the procedure we are using to scrap cars since these two segments differ a great deal from each other. We can address this issue in a different way, for example, replacing specific types of vehicles. We should take advantage of the experience we gained through our joint programme with the Ministry of Regional Development, which involved upgrading municipal transport pools. We set a limit on the use of outdated buses, which helped to improve road safety and encouraged transport companies to buy new vehicles. We can use similar measures to implement your recent directive. I think we will be ready with our plan in the first quarter of the next year.
One of the strategy’s priorities is to boost exports. This slide features our plans for particular regions. We can also take advantage of the experience we gained through other programmes, in particular the programme for supplying vehicles to Cuba. In addition, we can introduce export subsidies, which manufacturers expect from us.
We’ll need to pay special attention to the export insurance agency, which the government plans to create. We would like to get it involved in several projects as soon as possible, not only projects for commodity export but also investment projects outside Russia, without which it will be very difficult, if not impossible, to realise the government strategy to make Russia a major player in the international truck and bus market. We need to create and expand our service network and purchase more service facilities abroad, which will require that we use the same market instruments as all developed economies.
Once Russia becomes a WTO member, we’ll have to set fixed prices on many commodities. Given this, I believe that we should use non-tariff market regulators more extensively. We need to take it into account while developing new customs regulations for the Customs Union. I would like to note that a series of technical requirements, including car certification requirements, have been relaxed for Russia, so we just need to bring our national requirements in compliance with them, as is done in Europe and other developed countries.
At the same time, I have to admit that the governments of the United States and several other countries have practically closed their markets to used foreign-made vehicles imposing strict requirements on imported trucks and buses, and I think Russia could adopt similar measures.
Moving on, the Industry and Trade Ministry, the Interior Ministry, the Customs Service and the Prosecutor General’s Office have set up a working group which is successfully dealing with counterfeit, non-certified and low-quality products in the Russian market. It has recently revoked nine import permits after finding that manufacturers supplied vehicles of lower quality than the vehicles they had provided for tests, and those failed to meet our national requirements. The working group investigated these cases and revoked the permits.
The scope of government support for the industry depends on the amount budgeted for these purposes. Today you mentioned your directive to subsidise loans taken out to upgrade pools of vehicles, including through the use of state guarantees. I’d like to say that we can do it since this measure will not require additional funds. We have discussed this issue with all parties involved and as there have been no objections so far, subsidies can be introduced already in 2011, which will certainly benefit manufacturers.
The second set of measures is intended to foster research and development in the industry, which several speakers, including the representative of Kamaz, have already touched on. Incidentally, Kamaz makes significant contributions to joint projects with the government, in particular projects for new engines. That is very important. In 2009 and 2010 hybrid buses were developed through one such project, and we plan to use them during the Sochi Olympics in 2014 and in big cities today. Another new type of vehicles developed with our support is hybrid urban trucks. We expect that the issue of funding for R&D projects will be revisited in the future and new sources will be found.
Finally, I’d like to touch on the issue of training professionals for the industry. So far 17 institutes and universities have relevant study programmes. Together, they have 150 graduates annually, and only every 10% of those graduates get jobs in the auto industry. This shows that academic programmes and standards fall short of new realities and requirements and need overhauling.
Our ministry and car manufacturers have agreed to finance 50/50 a programme for new educational standards and professional requirements in the industry. In addition, our ministry and the Education Ministry will hold consultations with universities to coordinate details of particular academic programmes.
Overall, the plan submitted to the government is an essential part of the strategy for the auto industry. It will help us to create a strong auto industry over the next few years.