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. Last Updated: 07/27/2016

A Lot of Car Plants but Not Enough Parts

A delayed shipment of parts recently set off a chain of events that highlight, car giants say, the risk of doing business here.

When the shipment got stuck in customs, the waiting Western supplier had to stop the conveyor belt at its local plant for three days. As it ran short on components, Ford, in turn, was forced to scale back production of cars at its plant near St. Petersburg.

"We were certainly not happy, that's for sure," said the head of the Western supplier's Russian operations. "There have been a number of problems with customs clearance."

He spoke on the condition that his name and the name of his company be withheld to avoid antagonizing the authorities.

The problem with the spare-parts shipment to Ford is being replicated at other car plants across the country and is poised to get worse. Foreign carmakers rushed to build plants after the government rolled out the red carpet two years ago. But now that the announcements of multimillion-dollar investments have been made and the fanfare has died down, the car giants are becoming increasingly aware that there are not enough good parts for the assembly of their Camrys, Logans and Passats.

For now, carmakers are bringing in components by sea, rail and road from abroad. But they have an obligation to source more components locally in the near future -- and that's the catch. The foreign parts makers are just starting to open up shop, while most Russian-produced components don't pass muster, industry executives say.

The local car industry "is handicapped by the quality of local suppliers, who are far below world standards," said Carl Hahn, chairman emeritus of Volkswagen.

"That's the most challenging part for our team in Kaluga," Skoda chairman Detlef Wittig said.

Volkswagen is building a plant in Kaluga, about 120 kilometers south of Moscow, that will assemble both Skoda and Volkswagen models.

Hahn, who was charged with helping Volkswagen enter Russia, said the carmaker recently chose a site near Moscow for a future Volkswagen plant because the area had the most suppliers. But he indicated that there were not enough suppliers, even in the Moscow region.

Hahn and Wittig spoke at a recent Moscow conference to an audience consisting primarily of suppliers.

Ford Motor, Renault and Kia Motors are assembling cars in Russia, while Volkswagen, General Motors, Toyota and Nissan have announced plans to build plants. With sales in saturated Western markets stagnating, the carmakers are placing their bets on Russia, where nearly any foreign car sells well these days. Last year, the Ford Focus was Russia's best-selling foreign model, and the Chevrolet Niva, built by General Motors in partnership with AvtoVAZ, was the second best-selling vehicle, according to the Association of European Businesses in Russia.

The government in 2005 scrapped tariffs on key car components for carmakers that assemble vehicles here. The carmakers, in return, must gradually increase the proportion of domestically produced parts that they use to 30 percent within 4 1/2 years. So far, nine foreign and domestic carmakers have agreed to the arrangement, and they will invest more than $2.2 billion to produce more than 700,000 vehicles per year, according to figures from the Industry and Energy Ministry.

Getting components from abroad can be troublesome, but obtaining them domestically can be even harder.

Carmakers are already facing problems, but the biggest are expected once all the plants have been built and assembly lines hit full capacity.

Vadim Shvetsov, CEO of Severstal-Avto, whose company is gearing up to assemble Fiats and other models, said the company had to ship in many parts from abroad but could not use the St. Petersburg port, which is now working at over-capacity. Instead, it sends parts via ports in Arkhangelsk, Novorossiisk and the Far East.

"This can't last forever," Shvetsov said.

"The delivery of components to Russia will collapse within the next two years," he said. "It is impossible to support the large volume with the existing logistics and bad infrastructure."

Chronic delays at the St. Petersburg port have forced other shippers to send cargo overland via Finland.

"Major port development is needed for vehicle and components importation ... in Russia," said Henrik Nenzen, Ford president for Russia.

On the bright side, he noted, global components manufacturers who had been waiting for demand to grow are starting operations on Russian soil. Seeking to entice more components makers, the government recently granted them tax breaks similar to those enjoyed by carmakers.

Renault, which every week brings about 100 truckloads of parts to Russia from Romania and receives roughly the same amount by rail, said last month that it planned to increase its number of Russian-based suppliers to around 30 from the current 18 over the next two years. Among them will be four Western parts makers that plan to start production here within two years, said Jean-Michel Jalinier, Renault's director for Russia. The suppliers include Belgium's Bosal, which makes exhaust systems, and Paris-based Inergy, a maker of plastic fuel tanks.

It remains to be seen whether the foreign carmakers will be able to team up with Russian carmakers on parts, but some doubts are already being expressed.

"The available quality usually excludes the possibility of an industrial partnership," said L'Auto Franco-Russe, a quarterly newsletter for foreign carmakers operating in Russia, in its first issue.

"The lack of local suppliers has already caused Ford some tax problems and could affect other manufacturers in the future, when the time comes to prove that local industry is involved," it said.

Ford said in January that the company was trying to recover more than $20 million that it had paid in penalties imposed for purportedly not adhering to the terms of the government's tax incentive program.

Foreign carmakers like Renault are securing parts from domestic suppliers such as ZiL, Severstal and Amtel, but those parts are limited to relatively simple items such as glass, carpets and seats. Renault only will consider buying more sophisticated components like transmissions and engines from local suppliers in two years, Jalinier said.

Local suppliers will mature rapidly over the next five years, said Stadco, a major supplier of panels and pressings.

Some are already adopting elements of the Toyota Production System, the philosophy that organizes the carmaker's manufacturing and logistics, said Andrei Frolov, vice president of SOK Group.

The head of Ford's Western supplier whose parts got stuck at customs said the best way to avoid snags was to buy locally. He also expressed hope that the situation should improve once more big carmakers start full-fledged operations here.

"It's really a question of critical mass," he said.