1. Role of PR in the development of Automobile and Automotive Industry in Russia. Dmitry Osipov AEB Auto components Manufacturers Committee, Chairman 2006-2008 European Association of Communication Directors (EACD) Round Table 04 June 2008 Moscow Russia

2. What’s AEB? Association of European Businesses in Russian Federation Founded in 1995, an independent non-commercial association with a membership of over 550 companies from across the European Union and Russia. Our members range from large multi-national corporations to SMBs and are united by their commitment to forging stronger economic ties between the EU and Russia, as well as improving the business environment here in Russia. Conducts lobbying activity through its 26 committees and working groups, which cover a wide spectrum of industries and sectors, including Energy, Customs & Transport, Automobile Manufacturers, Automotive Components, Taxation and Banking – to name but a few. The committees work closely with the Russian authorities. Offers informational support to the European business community via its website and publications, surveys and legislative and business alerts. Works hard to support its members wherever they are located in Russia by hosting regional presentations, business missions and maintaining regional representations. www.aebrus.ruwww.aebrus.ru

3. Development of world’s automotive manufacturing industry fully depends on the strategies of OEMs (car manufacturers). Russia is not an exclusion. Prospective

4. What is automotive industry? What existed in Russia: structure –Vertical integration –Limited models –High production volume –Manufacturer’s market (not seller’s, not consumer’s by far) What is the international structure? –Clear roles: OE, OES, AM; OE, T1, T2, T3… –Independent auto and component manufacturers

5. What was the change? Market demand was 2 times above capacity of domestic production  IMPORTS! Cheap second-hand cars Top-range expensive cars Seemed no place for domestic localized production of mid-class mass models  cheaper second-hand is beyond competition Low potential for local production of international mass models

6. How to deal with it? Option 1 – increase import sales to meet the growing demand Problem: borders, customs, logistics, planning, high costs Option 2 – move production to where it is demanded Problem: how to substitute cheap second- hand imports?

7. Materials Transfer Cycle in automotive manufacturing Export of raw materials Import of processed and reworeked materials, components, finished products Raw materials extraction Black metal; steel; aluminium; gas Internal production (Russia) Hi-tech alloys; plaqued aluminium; synthetic materials External production Basic materials Hi-tech materials Materials processing, new materials production Development of materials Cars and components mfg Autocomponents Cars assy 4

8. Solution: STEP 1 Objective: substitute second-hand imports by new mid- class imports Implementation: explain to the government the necessity of changing the rules to stimulate new cars import –Safety –Ecology –Transparent pricing –Civilized market

9. Solution: STEP 2 Objective: move from imports to locally assembled vehicles to gain competitive advantage vs imports Implementation: explain to the government the necessity to give incentives for locally assembled cars –Investments –Local taxes –Employment –Local competence

10. Solution: STEP 3 Objective: move from simple assembly (SKD, CKD) to production from locally produced components to gain advantage from localization Implementation: explain to the government the necessity to give incentives for locally produced components –More investments, taxes, employment, competence –Automotive industry as one of key drivers of economic growth (USA) –1 working place in automotive industry creates 8 working places in complementing industries

11. New stage of development Significant growth of new car assembly facilities and gradual stepping down from leadership positions of traditional Russian OEMs.

12. What did Russian government think? The world rests on 3 elephants (i.e. car manufacturers and components manufacturers are interdependent, “master-servant” relations, rigid vertical integration) Foreign car and component manufacturers will compete with Russian manufacturers and eventually will kill them Russian manufacturers will get out of business  unemployment, social tension, loss of competence Russia will lose its industry to foreign corporations

13. Higher investments in mfg in russia Lower customs duties on components for industrial assy projects Minimum production volume requirements and list of required operations Gradual decrease of imported components Agreement for assembly foresees: But reality, as usual, is somewhat more complicated…

14. What did we (AEB) do?  complex approach PR inside Russia to public: –explain the advantages of the civilized market –Promotion of quality and responsibility message –Foreigners “not competitors but supporters” GR: –government understanding how international industry works PR through organizations: –ensure professional support by industrial associations (OAR, NAPAK, …) PR outside Russia: –Promote Russia to foreign auto industry decisionmakers as high- potential market (BRIC concept etc) –Presentations at international professional fairs –Presentations to Industrial groups inside and outside Russia –Specialized events at foreign embassies (France, Spain, etc) –Missions into the Russian regions, meetings with regional authorities –Acquaintance with local manufacturers, potential partners –Organization of seminars/conferences with Russian officials for local and foreign businesses (joint conference with RosOEZ, chaired by AEB)

15. Cost structure in automobile production 19902006 6

16. Industrial Assembly projects: potential in Russia Steering module assy Instrument cluster assy Electronic management system Rear axle beams Seat modules Door locks modules NAVI ABS Brake system Front axle module assy Lighting equipment Cooling module; aircon module engine Exhaust systems

17. International component manufactures are interested to help survive Russian automotive industry Not competitors but supporters additional business is only provided by Russian customers – foreign OEMs in Russia only re- distribute existing business Huge specialized experience of development and production of components and modules with full final responsibility for the product 9

18. Russian automotive industry still has big potential – in the technology area as well as in the quality. - Low quality of Russian automotive industry is not a specific feature; - Quality issue roots not in the total incapacity of russian producers to ensure high quality – but in the areas of quality management, control, objectives setting – and willingness to continuously pursue those.

19. What are the hurdles for further development Russian Government Decrees aimed at facilitation of the automotive industry growths has not yet become efficient tools and need further improvements. Industrial assembly regime of cars does not automatically bring in component manufacturers. - until recently the volumes were not sufficient - Decree 566 leads to more questions than provides answers - step-by-step localization leads to eventual cost increase : –An imported “kit” breaks down into a list of separate customs codes –More codes  higher customs administration costs –Higher customs duties on separate articles 1

20. Strategies for further development of a Supplier manufacturing footprint in Russia Development of local components suppliers base Production of aftermarket products Creation of local engineering pool of experts Expanding the range of manufactured products Investigation of export potential of the local production Complete integration of a Russian enterprise into the global business process

21. Automotive production localization : STAGE 1

22. Automotive production localization : STAGE 2

23. Automotive production localization : STAGE 3

24. Automotive production localization : STAGE 4

25. Result of STEP 1 Higher import duties on cars older than 7 years new cars status for cars under 3 years Equal import conditions for private individuals and companies Cheap second-hand replaced by fast-growing new official imports High speed of official dealerships growth throughout the whole country  Import structure change to newer, safer vehicles

26. Result of STEP 2 Decree 166 – industrial assembly of vehicles Duty-free import of components (assembly kits) for production of vehicles 7 years “grace period” Guaranteed localization requirements  All major world car manufacturers establish manufacturing facilities in Russia

27. Result of STEP 3 Decree 566 – industrial assembly of components for vehicles manufacturing Duty-free import of sub-components and materials for production of components 5 years “grace period” Minimum localization requirements  Appearance of completely new segment in the industry – T1 suppliers (“systems integrators”), deeper localization of foreign cars – consumers win!

28. Who were the key players? Auto industry heavyweights (Ford, GM, Toyota, Renault, Nissan..) Leading component manufacturers (Bosch, Siemens, Tenneco, Michelin, etc) Professional and business media Industrial associations Federal Government bodies Regional authorities

29. THANK YOU