How to organize production in Russia – Opportunities and restraints Business Park Vyborg How to organize production in Russia – Opportunities and restraints Timo Koivumäki Gothenburg 04.04.2013

Company Finnish mother company Business Park Vyborg Ltd, Russian daughter ZAO Business Park Vyborg Assists foreign manufacturing companies to establish in North West Russia A service concept covering full range from planning and budgeting through ramp up to full production Based on 18 years experience about production in Russia Alliance with Integria SCM

Russian Vehicle Industry Market development Light vehicles Creation of new production capacity, changes in the industrial assembly regime Development strategy and trade policy promoting domestic production Recovery of the Russian economy and, to lesser extent the US and EU development Heavy vehicles General economic recovery and improved financial situation in Russia releasing credit resources Need to upgrade the commercial vehicles fleet and bus fleet Expansion of the lending and leasing markets 22.11.2018

Russian Vehicle Industry Requirements and local response Logistics requirements The severe shortage of capable component manufacturers Excessive lead times and unusual safety stocks in production Distant and inflexible inbound supply chain inhibits adaptive production planning Regulation on domestic origin The regulation of domestic origin favors local production or refining The supply of Russian vehicle is heavily directed by Industrial Assembly Regime This act requires a 50-60 % level of domestic supply in 5-6 years. Capability of local supply Very few Russian vehicle component manufacturers meet the industry’s requirements This is verified by several supplier analyses performed by foreign OEM’s operating in Russia 22.11.2018

Match of demand and supply

Match of demand and supply Huge market (7 Billion Eur) Limited/no competition Profitability better than in EU (if cost control ok) Political support in Russia OEM’s forced to do something

Opportunities Huge market (7 Billion Eur) Limited/no competition Profitability better than in EU (if cost control ok) Political support in Russia OEM’s forced to do something

Where to go OEM’s and Tier 1’s scattered OEM driven supplier parks 3 or 4 clusters OEM driven supplier parks Nissan, Hyundai, GAZ, Sollers, Kamaz J/v’s / partnerships with OEM’s, Kamaz Sequencing requirement? Talk to customer

Issues to consider Problems appear back home, rather than in Russia Russian operations define time frame and usage, Responsible people are away from domestic operation Russians do not intend to become ”Finns” or ”Swedes” Must to find Russian partners/employees whom is posible to trust to

Issues in setting up operation Time from decision to start up Permits, inspections and authority clearances Recruiting/Staffing Middle management Choosing location Asian mentality

Cost drivers High property prices / rental fees Local banking terms Taxation value / market price Local banking terms High interest, short payback times Relatively low salary level Huge variation between regions Accounting and taxation bureaucracy 4 times more staff than in Nordics

Hints Structures are not an issue Premises are an issue, but not a problem Focus on people, knowledge and culture Emphasis on middle management training Make sure you know the law and order Ensure all documentation to be properly in place Customers know local business, ask for start up support Networking helps problem solving Alliances for cost saving

Twin hub model Sourcing Distribution Capital Information Material BORDER CROSSING Capital Information Sourcing Distribution Material Admin practices Kouvola / Imatra Logistics Hubs Vyborg business park

Service structure Business Park Vyborg provides production support services Premises are provided by property developer, but a sublease arrangement via Business park Vyborg is possible depending on agreement model

Services Planning phase services Start up phase services Running phase local services Running phase trans-border services Exit phase services

Examples of available services Planning phase services Market studies trial sales Operations planning & budgeting Start up planning and budgeting Start up phase services Site reconstruction Recruitment Personnel background surveys Data systems development Permissions acquisition Equipment import and installation

Examples of available services Running phase trans-border services Warehousing (Finland) Customs clearance services Transport services Exit phase services revenues and cost Premises vacation and equipment relocation Employment termination and personnel relocation Permissions and responsibilities transfers Logistics and customs clearance transfer

Examples of available services Running phase local services Authority clearance Staffing Local maintenance Small purchases Personnel transport Canteen Back office Security services Forwarding and transport services Company health care Waste removal

Business Park Vyborg 2013 - 2014

Production premises standard sample

Timo Koivumäki Managing Director Vanha Talvitie 11 C, 6th fl. FI-00580 HELSINKI timo.koivumaki@businessparkvyborg.com Mobile +358 40 524 4411