GAZelle leaps ahead of its competition

Russia’s automotive industry was given a significant boost in February this year with the launch of the production of the Chevrolet Aveo at the Gorky Automobile Plant, or GAZ plant. Situated in Nizhny Novgorod, Russia, the plant is the second largest in Europe and is owned by the Russian diversified conglomerate Basic Element. GAZ is the core company of GAZ Group holding, a part of the Basic Element business group. It is Russia’s leading manufacturer of light commercial vehicles and has strategic partnerships with various auto manufacturers including General Motors, Volkswagen and Daimler. Over its 80 year history, these partnerships have helped GAZ open new chapters in its development and introduce the world’s best practices and technologies. Total investments in joint projects are about half a billion Euros. In December 2012, Volkswagen Group and GAZ announced the launch of the SKODA Yeti in a complete knockdown (CKD) production at the Nizhny Novgorod plant. This year, a full-cycle production of the new SKODA Octavia and Volkswagen Jetta will commence at GAZ. A total of more than 100,000 vehicles will be produced annually.

Automotive Industries spoke to Bo Inge Andersson, President and CEO of GAZ Group and asked him what makes Russia a good option for automotive OEMs? Andersson: The Russian automotive market has huge growth potential. Today there are 271 cars per 1,000 people in Russia and in the U.S. it is 802 cars per 1,000 people. So Russia will continue to grow. Analysts expect that Russia will eventually become the largest car market in Europe. In addition to the market scale, the driving factors for OEMs include new expansion opportunities and a predictable business environment. This is supported by Russia’s accession to the World Trade Organization (WTO) and measures taken by the Russian Government to encourage localization of foreign-brand vehicles in Russia.

AI: Are vehicles manufactured at the Gorky Automobile Plant meant for the domestic market, or for export?

Andersson: Our main sales markets include Russia and the Commonwealth of Independent States (CIS). Our share in the commercial vehicles market in Russia is about 50% and about 45% in the Ukraine and Belarus. We export about 13% of our LCV’s to the CIS and elsewhere and we have plans for further export expansion. All our new products conform to the requirements of foreign markets. We have Euro 5 and Euro 5+ buses. This year we are launching a new generation light commercial vehicle, called GAZelle NEXT, which conforms to Euro-4 and will in future conform to Euro-5 and Euro-6 emission standards.

AI: What about manufacturing outside of Russia?

Andersson: Last year we opened an LCV assembly facility in Turkey. It is the first production facility of Russian light commercial vehicles outside the CIS and developing countries. Turkey is a highly competitive market: all the major OEMs are present there. Our primary task in Turkey is to set up a flawless production process and to provide an excellent service to our Turkish customers. By the end of 2013 we plan to open 16 dealerships (one in each region of Turkey) and 32 service stations (in all cities where over 500,000 people live). We expect that our operations in Turkey will serve as a basis for export expansion into the neighboring countries and will become the first step to promoting GAZelle abroad.

AI: How does GAZ manage the production of vehicles for competing OEMs (Volkswagen, GM and Daimler) – how do you avoid conflict of interest?

Andersson: These vehicles belong to different product segments: light commercial vehicles for Daimler and passenger cars for General Motors and Volkswagen. Production of cars for Volkswagen and GM is set up in different facilities, so their operations don’t overlap. There are also two separate teams, including managers and production workers. Training is also organized differently. GAZ workers involved in the GM project are trained at GM facilities in South Korea and in Saint-Petersburg, Russia. While Volkswagen opened a training center at GAZ, the main production staff have been trained at Volkswagen plants in the Czech Republic.

AI: Tell us a little about the company’s automotive component manufacturing – how big is this business compared to vehicle manufacture?

Andersson: Historically Russian automotive companies were vertically integrated with all components produced in-house. We restructured our automotive component business by implementing a new strategy three years ago. Following the international trends, we divided our automotive components businesses into three segments depending on our competences and business significance. Our strongest competences are focused on axles, suspension modules and stampings that are used mainly for in-house needs. These are the key components making up the main part of the vehicle cost, and we develop this segment on our own. We also produce iron castings, forgings, wheels, exhaust systems, springs and tooling. We are strong here, but at the same time we do not rule out the possibility of developing this segment with partners. Our third segment is one which we are prepared to sell provided that there is a good offer. It is only about 10% of the total automotive component business revenue and includes production of clutches, braking and fuel systems. As for the scale of our whole automotive component business, it’s about 4% of the total Group’s revenue. Its main purpose is to provide our own production facilities with high-quality and affordable components.

AI: What made you decide to concentrate on the GAZelle?

Andersson: The GAZ Group is focused on three segments: light commercial vehicles, trucks and buses. We made a decision to move away from passenger cars into the commercial segments in the crisis period of 2008-2009 when our Volga Siber project turned out to be loss-making. Our key competences are in the commercial vehicle market. We now hold about 50% in the light commercial vehicle segment, 58% in the medium-duty trucks segment and 65% in the bus segment. In these segments we’ve always had a very loyal customer base. There are over 1.8 million GAZelle owners in Russia. We know what they want and we meet their requirements. Our vehicles are affordable and they feature high reliability and quality.

AI: Tell us a little about the GAZelle-BUSINESS model – what went into making the manufacturing facility a profitable venture?

Andersson: When I came to GAZ in 2009 my main task was to recover the company from the crisis. We owed huge debts to our banks and suppliers, had massive unutilized production space, we were losing our market share as our passenger car project was unsuccessful and the commercial range was outdated. We took a whole set of measures to shape GAZ into a competitive business. One of them was to upgrade our core product – the GAZelle light commercial vehicle. We asked our customers what they wanted, and we met their needs as we upgraded the vehicle. But due to the streamlined production and a new quality system, the vehicle had only a slight increase in cost – about US$800. Initially we expected that we would sell 60% of the new GAZelle and 40% of the old one. In the end, market demand saw the new GAZelle fully replace the old model range.

AI: How do you compete with lower cost manufacturing destinations such as India and China?

Andersson: First of all, GAZelle, which is our core product, is the most affordable commercial vehicle in Russia. The vehicles coming from China are not cheaper. What is more important is our developed service network. In Russia, with its huge distances, it is a vital issue. The same goes for spare parts. We have the most developed service network (about 250 stations) and the most developed network of spare parts shops (about 1,200 outlets) in Russia. Moreover, we offer a wide range of specialty vehicles on the GAZelle platform: box vans and refrigerator vans, dump trucks, tow trucks, fuel and food tanks, hydraulic hoists, fire-fighting vehicles, school buses and ambulances.