1) Decree 166 is a Russian government policy that aims to incentivize automakers to increase local production in Russia. It requires carmakers to produce minimum volumes and meet local content rules to receive tax benefits. 2) Renault-Nissan has invested heavily in AvtoVaz, Russia's largest carmaker, and has made more progress than rivals in raising local content and developing local suppliers in Russia. 3) However, the policy faces challenges as it will be difficult for automakers to meet high local content targets without sufficient investment from local tier 1 and 2 suppliers in Russia. This could hamper efforts to expand local production and meet goals of Decree 166.

1. LogisticsLeaders
www.logisticsleaders.org
166 and its effects on the
automotive supply chain
Alexander Rogan commentates on the possible ramifications of the
Russian government’s plans to incentivise local production.
Last week saw a milestone in slow to change, uniform in character and difficult to deal with
Russian automotive history on a human level” was particularly apt following the break-
as the AvtoVaz car factory up of the Soviet Union.
celebrated its 45th birthday.
On the 20th July 1966 the AvtoVaz suffered badly in the global crisis. In October 2008
Politbureau of the USSR it sat on 100,000 unsold cars or nearly two months full
ordered construction of a new production. With 130,000 workers and the possibility of
car plant to build a ‘peoples civil unrest it became the beneficiary of vocal support from
car,’ a collaboration between Prime Minister Putin, deemed too important socially to
Italy and the Soviet Union. A fail. In summer 2009, Prime Minister Putin drove a canary
new town, Togliatti, named yellow Lada Sports across the Russian Far East boosting its
after the Italian Communist appeal to Russian buyers. Cash injections, low interest loans,
Party leader Palmiro Togliatti, was built around the factory. plus being the major beneficiary of the Russian government
scrappage scheme boosted AvtoVaz sales. This enabled a
AvtoVaz is one of Europe’s biggest car manufacturers with turnaround, as sales grew by more than 30% year on year
over 130,000 employees building one million cars a year. All compared with 2009-2010.
AvtoVaz models were sold under the Lada brand, although
previously the Zhiguli name was used in the USSR and However, the brands long term prosperity lies with its
the Lada brand was reserved for export. The Zhiguli brand strategic alliance with Renault-Nissan. Renault-Nissan paid
was ‘borrowed’ from the famous Czech sewing machine $1 billion for a 25% stake in AvtoVaz in 2008, outbidding
manufacture, in a move that today would have intellectual both Fiat and GM. Since then, AvtoVaz has been the
property lawyers reaching for their Mont Blancs. beneficiary of hundreds of millions of Renault-Nissan euros
and technology-sharing.
The Togliatti plant, one of the biggest in the world with over
90 miles of production lines, has made more than 26 million In November last year, in a major policy turnaround, Prime
cars since it started production and today its brand shares Minister Putin gave his blessing to Renault-Nissan taking
23% of the Russian market. Typically in the USSR but unusual a majority stake in AvtoVaz which could see the alliance
in a global context, it made most components in-house, not investing a further $600 million in the once ailing Russian
requiring the extensive supply chains we see now. The plant giant. Renault-Nissan is now being lauded for its foresight
produced the iconic Fiat 124, albeit especially adapted for the in 2008, and is widely touted as the leading foreign car
extreme Russian conditions. If the AvtoVaz production was manufacturer in Russia.
included with the original Fiat production run, the 124 was
one of the best selling automotive designs ever, with over 15 Putin’s u-turn, allowing Renault-Nissan to control AvtoVaz,
million cars sold worldwide AvtoVaz symbolizes the nascent will see a major restructuring, but the government will ensure
manufacturing capabilities of post-Soviet monoliths. The there won’t be mass lay-offs. This reflects Russian Rules and a
definition of monolith, “something massive and unchanging, different approach to doing business in Russia by OEMs. They
especially a large and long-established organisation that is must accept and abide by the stringent social prerequisites

2. laid down by Prime Minister Putin. Unlike the bloody fallout Quite how this positive discrimination, in favour of the
in the West where car plants were closed, thousands of jobs investing OEMs, will stand against the World Trade
lost and communities laid waste, Prime Minister Putin is Organisation and Russia’s accession (later this year?) is
adamant that jobs stay. questionable. Russia’s actions have already been attacked by
the EU and the US Government. Putin was reported earlier
Sergei Chemezov, head of the Russian Technologies state this month as saying that he will not approve any change to
corporation, owner of the blocking stake in AvtoVaz, said government policies of attracting inward investment.
that the purchase deal would conclude in two or three years
allowing the company time to jettison some of its non-core “The dialogue with Euro commission and American partners
resources. AvtoVaz, whilst divesting assets, reported a $39 is being continued in the process of entering the WTO. They
million spend on growing vegetables in September 2010. A insist that we removed the requirement about production
return to its core manufacturing base is thought to be integral of 300,000 cars and localisation by 60%. We said that our
to the development with Renault-Nissan. position in this part could not be changed, that it is a red line,
which could not be stepped over, as we could not disregard
Behind the ongoing OEM Russian investment is Government the interests of our producers,” he said.
Decree 166 and, according to former First Deputy Prime
Minister and current Minister of Industry Viktor Khristenko, In February this year, the Russian Ministry of Industry and
Russia’s strategic objective is “to create full competence in all Trade and the Ministry of Economic Development further
segments.” 80% of all cars sold in Russia by 2020 should be strengthened Decree 166 (originally introduced in 2005) and,
manufactured within Russia. Russia wants to improve local whilst the new conditions didn’t abolish existing agreements,
manufacturing capability by ensuring that local content they offered a more seductive regime to OEMs , incentivising
should make up 50% of the market volume by 2020. Note them to further increase production and the development of
that this is not production but market volume, “not less modern industry in Russia. And that is what Decree 166 is
than 50% of the value added of the total market size should all about. Not the production of cars or allowing OEMs to
be in Russia”. Thus Tier 1 and Tier 2 suppliers will have to profit from a burgeoning new car market, but the long term
set up shop in Russia in a serious way to supply the already security of Russian workers and the introduction of high tech
committed additional million plus cars per year to be inward investment to Russia, to balance the income Russia
manufactured by the combined efforts of Ford, GM, Renault generates from her natural resources. Currently 600,000
and Volkswagen. workers are employed on the automotive assembly lines and
another three million are employed in related industries.
This represents an increase of 350% in absolute terms by
2020, and from the current 1% of GDP to 2.5%. Compare Under the modified regime, foreign producers can import
the billions invested by the car manufacturers to expand components at a zero import tax rate if they commit to
output in Russia with the relatively little their component producing 300,000 cars (in the case of a new producer) and
manufacturing partners have invested so far. Decree 166 350,000 cars (in the case of an existing producer) per year
means that the Tier1 and Tier 2 investment plans will have within three years of signing the accord.
to embrace Russia, as much as the other emerging market
destinations of Brazil, China and India. The localisation level is increased to a minimum of 60% within
five years, including engine and drive chain production and
As an example, Valeo with one Russian production facility the opening of R&D sites.
and 16 Chinese plans to open one new plant this year for
Renault-Nissan and AvtoVaz. So far AvtoVaz/Renault/Nissan, IzhAuto, KAMAZ/Mercedes,

3. Ford/Sollers, Volkswagen and General Motors have signed the cost by sharing production and suppliers. Nissan will
agreements with the Ministry of Economic Development. introduce a Russian-built car based on the Renault Logan
range in 2012, and AvtoVaz plan to make engines and
This is, by any stretch of the imagination, an enormous gearboxes for all three brands in 2013.
undertaking by the OEMs given their dependence upon their
Tier 1 and Tier 2 suppliers. The scariest aspect of this is not AvtoVaz accounted for 45% of Russia’s 2010 production
that it is questionable whether the Tier 1 and 2s will invest of 1.21 million vehicles, with the Lada brand having a 23%
(in time) in Russia, but who in turn will supply the Tier 1 market share. According to Carlos Ghosn, Renault, Nissan
and 2s? and AvtoVaz will together manufacture 1.6 million cars by
2016, for a 40% share of the market.
The Tier 1 and Tier 2 manufacturers need to develop their
own domestic supplier base and to create a workable supply Russian-made parts account for 56% of the components
chain within the existing Russian infrastructure. They also used to assemble Renault models on the Moscow assembly
need to compete for their employees. If they are unsuccessful, lines and the company expects to increase local content to
the agreements will be breached. 74% by 2013 by increasing the number of Russian suppliers.
Renault-Nissan’s main rivals are closer to 30% so it shows a
OEMs have already had to come to agreements, within the clear advantage.
manufacturing clusters, not to poach staff from each other,
as it is difficult to employ, train and keep staff. If newcomers The Renault-Nissan strategy demonstrates the competitive
follow the existing pattern of staying close to the existing edge AvtoVaz offers as competitors with less volume and
manufacturing clusters (Kaliningrad, Kaluga, Nizhny market share would find it hard to achieve a return on
Novgorod and St Petersburg) it remains to be seen how they, investment and perhaps exemplifies why, so far, the Tier 1
as a Tier 3 or 4 manufacturer, are to compete against Tier 1, and 2 manufacturers have been slow off the mark.
2 and OEMs, in the job market. Especially when the market
heats up and the OEMs come on stream, producing 30,000 Under the old regime of a 25,000 car per year commitment
cars per month each. it wasn’t worth while setting up new plants. A commitment
by four manufacturers to each produce 300,000+ cars per
A recent conversation regarding a new assembly plant in Russia annum is a whole new ball game.
raised concerns about the viability of such high localisation.
SupplyChain
One suggestion was to sign up to the agreement, push Tier 1 automotive
and Tier 2 suppliers into investing in Russia, recommending
that they, in return for their Russian investment , ‘buy time’
by getting the same eight year window offered to OEMs and conference
push the problem further downstream.
20-21 September - Swissotel Moscow
This is possibly two cultures on a collision course, given All eyes are once again on Russia as car sales forecasts
western big business propensity to look at the next quarter’s blossom. The Automotive Supply Chain Conference, Russia
result and Russia looking for success with her pyatiletka will allow delegates the opportunity to drive their businesses
plans over the next five to ten years. forward by listening to supply chain management and
logistics experts, networking with decision makers from
It has to be said that not all OEMs are experiencing difficulty inside and outside the market and building relationships with
with localisation or a slowness in its implementation, and one the resurgent manufacturing sector.
certainly is speeding ahead in terms of developing suppliers
from scratch and managing the quality control issue faced The Automotive Supply Chain Conference, Russia will
when introducing new suppliers, systems and products into examine the ramifications of the new measures for all sectors
a new production assembly. of the industry. OEMs, component manufacturers and supply
chain service providers will all vie for the new opportunities
Renault-Nissan recently outlined its strategy to increase its which domestic expansion will provide. Capacity, both
Russian supplier network. It plans to invest in a powertrain in manufacturing and transportation, may be an issue as
plant to produce gearboxes and engines for Renault, Lada will the never-ending confusion surrounding the Russian
and Nissan models. Plant production is 400,000 engines per customs system. There will be increased demands on the
annum compared with the 200,000 per annum capacity of a transportation infrastructure which will need to keep pace
powertrain facility planned by Ford and Sollers. with the market growth.
Find out more at www.automotivesupplychain.org
The Renault- AvtoVaz relationship allows Renault to reduce