Made in Russia's Far East

By bne IntelliNews March 26, 2012

Artem Zagorodnov in Vladivostok -

At the peak of the economic crisis in 2009, Russia's Far Eastern city of Vladivostok erupted in protests after a decision by the Kremlin to raise import duties on cars. Residents took to the streets to defend a major source of revenue for the entire Far East - driving Japanese second-hand autos to the country's more Western territories for resale at a hefty profit. Following the introduction of new tariffs, the number of cars imported annually was expected to plummet from well over 200,000 to around 60,000.

As thousands of riot police were flown in from Moscow to restore order, Prime Minister Vladimir Putin pitched a canny solution - assemble the cars in the Far East, thereby making the Japanese and Korean brands domestically manufactured and not subject to the same duties. By the end of the year, the Sollers automobile plant in Vladivostok, which currently manufactures five models of the Sang-Yyong SUV, was launched. "It was a political decision," explains Vasily Avchenko, author and Vladivostok correspondent for daily Novaya Gazeta. "It was part of a broader carrot-and-stick strategy for localising car production in Russia."

After two years of work, the project is being hailed as a major success by the management of Sollers, which is quick to deny any political connection. "Sollers is a private company with an independent board of directors; the government doesn't decide our development strategy," says Sollers' Far East director, Alexander Korneychuk, from his swanky office on the 3rd floor of the factory overlooking Vladivostok's harbour.

In March, Sollers Far East - a division of the Sollers Group, formerly known as Severstal-Auto - launched production of its fifth model, the Actyon, which is the first with a non-diesel engine. Production of the Actyon alone is expected to exceed 15,000 units this year, while the total number of cars produced is expected to hit 35,000 versus 25,000 in 2011. "We were thinking of relocating production of the Ssang Yong models from our plant in Tatarstan to the sea coast for some time, but we needed a political decision to justify the required infrastructure investments," explains Korneychuk.

Location, location, location

The new Vladivostok facility now employs 650 mostly young workers (average age, 27), 200 of them in either management or training positions in the offices that occupy the upper floors.

Sollers built the factory nearly from scratch in record time on the territory of a defunct ship repair station. Its bright orange-and-blue facility stands in stark contrast to the brick detritus and broken windows of neighbouring buildings. When the company moved in, water was available for two hours a day. Some $60m has been spent on infrastructure at the plant so far, with a gas connection still 800 painful metres away. "When we get the gas hooked up later this year, we'll be able to start painting and sweltering the cars here on the spot. We'll have a full-scale vehicle production by 2014," says Korneychuk.

Currently, 100% of the components are imported from South Korea. Each model is assembled piece-by-piece until, at the end of one of the two types of assembly lines, a process workers call "the wedding" attaches the frame to the body of the car. The automobiles then undergo safety testing before being shipped by railroad to Western Russia. Currently, under 5% of the autos produced at the Sollers' Vladivostok plant are purchased in the Far East. Exports to neighbouring countries are not being considered, as Russia "has the second-fastest growing market of off-road vehicles in the world, after the United States," says Korneychuk.

Yet despite the depressing view from the window, the location has been ideal for the operation Sollers is running. "We take the assembly kits off the docks right here," says Korneychuk, gesturing behind him, "and put them on the railroad over there. Everything is within one kilometre. Our factory has no warehouse because we don't need one. If a shipment is delayed, we are forced to stop production."

Moving the assembly line to the Vladivostok facility allowed Sollers to lower the price of the Ssang Yyong models throughout Russia, which currently range in prices in the Far East from between $24,000 and $40,000 (add another $2,000 for sales in the rest of Russia - transporting them from the terminus of the world's longest railway adds to the cost).

Critics point out that the operation has been profitable thanks to federal subsidies that give Sollers a huge discount on shipping the cars by rail across Russia - subsidies that will eventually run out. But Korneychuk has his sights set higher: "Over the last two decades, Japanese cars have developed a certain reputation throughout all of Siberia. People know and like them so much that they don't require any advertising, a huge savings in costs," he explains.

Sollers is currently in negotiations with Mazda and Toyota to set up an assembly line for some of their models in Vladivostok (the Toyota Land Cruiser Prado may be launched later this year). "The original phase of this project was done to convince major international partners that it was possible to assemble cars here, and we did that," says Korneychuk, adding that once Japanese cars are assembled here in Vladivostok, "we're going to make a huge dent in the second-hand car market."

The new assembly lines will be launched in neighbouring empty buildings - property disputes notwithstanding. "Those buildings may be abandoned, but they still have an owner," he emphasizes.

Local parts

Meanwhile, Sollers is under an obligation by the federal government to localise auto parts production with each passing year. By 2015, no fewer than 10% of the components going into the Vladivostok-made cars will have to come from Russian producers. "We've found partners willing to invest in setting up such operations in the region," claims Korneychuk.

Yet the author Avchenko is sceptical about a full-scale design and manufacturing automobile hub for export to other countries forming in the Far East anytime soon. "I reckon the politics of some nearby countries may prevent them from opening factories here, while the barriers to doing business would probably offset any savings in labour costs," he argues.

For all of the successes of the Sollers Far East plant, it still only assembles foreign-made cars at its facility. Russians frequently lament the absence of a reputable domestic car brand. The time to make one, says Korneychuk, is now. "Russia's got about five years until domestic demand is satiated and the market begins to grow at normal rates. Lexus showed that you can build a reputable global auto brand amid a normal domestic market, but it will be a lot harder than if we do it now."

Made in Russia's Far East

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