Looking ahead

Automotive Supply Chain

Despite the worsening Russian economy, GAZ Group remains upbeat about the future, reports Sam Ogle.

GAZ Group is the largest manufacturer of commercial vehicles in Russia. The company produces light and medium commercial vehicles, buses and heavy-duty trucks as well as passenger cars, powertrains and auto components.

Headquartered in Nizhny Novgorod, GAZ has 13 plants in eight Russian regions. Its GAZelle light truck brand is so popular and universal that it has become a symbol of light commercial vehicles in Russia and is synonymous with the entire sector.

Since 2012, GAZ has been actively developing cooperation projects with non-Russian OEMs such as Volkswagen, General Motors and Daimler for the contract manufacturing of the Skoda Octavia, Skoda Yeti, Volkswagen Jetta, Chevrolet Aveo and Mercedes-Benz Sprinter. The company has also established joint venture partnerships with the European manufacturers of automotive components, Bosal and Bulten and a similar arrangement is expected to be signed with the Italian company Magnetto Wheels. These joint projects help to modernise the company’s facilities and ensures the training of its employees to meet the high standards of the global automotive industry.

Within the framework of these joint enterprises, new assembly and welding shops were introduced, the new paint shop was built, the logistics and quality control system was improved and new jobs were created taking the number of GAZ employees to just over 45,000.

Vadim Sorokin is President and CEO of GAZ Group. Formerly head of the Group’s Light Commercial Vehicles Division, he was appointed to his new role at the beginning of last year and is in charge of strategic and operational management of the company. In parallel, he also stayed at the helm of LCV Division until May 2015.

Asked about the biggest challenges facing GAZ Group today Sorokin replied, «the opportunity to increase our market share. We are a very well-trained and prepared company. We have a very good team and we know how to drive down cost as we react to the market. We have created a special Purchasing room to monitor all our problem suppliers so as to be able to react promptly and to take corrective action. We must also help our suppliers by teaching them how to be more efficient and how to reduce costs.»

According to Sorokin, the second challenge facing the company, which is no less important, is its interface with its dealer network. GAZ has the largest sales and service network for commercial vehicles in Russia and the CIS. Since 2013, 25 new sales and service centres have been opened and service is now available in all cities with a population of over 250,000.

«Back in 2012, total Russian sales of cars and LCVs totalled 2.9 million units. In 2013, 2.7 million and in 2014, 2.4 million. Now we are in 2015 and we have to guess total sales. I have seen all sorts of forecasts and projections, I have seen 1.7 million and 1.3 million and 1.5 million. Our dealers to whom we distribute are absolutely on par with European standards and they cost money to upkeep. It is absolutely clear that, in the current environment, quite a few dealers at the market will go under. The first hit will be to passenger car dealers but many of our dealers sell both cars and LCVs. The maintenance of the dealer network is a challenge for us. Firstly, to keep it afloat, not to let them lose their business, and secondly to take the opportunity of the current situation to expand our dealer network.»

Gaz Group has around 450 suppliers, most of them Russian. This year sees the fifteenth anniversary of the consolidation of machine-building assets by the industrial group Basic Element, the main shareholder in GAZ. Prior to this, all GAZ Group plants were independent companies with their own company cultures and supply chains. Today, the plants at Nizhny Novgorod and Yaroslavl are surrounded by large supplier clusters.

«After the consolidation of GAZ Group, we also consolidated our suppliers and we formed a single purchasing department for the Group,» explains Sorokin. «The first thing we did was to concentrate all steel purchasing for the whole Group in one location, finding suppliers and negotiating price and good terms for all consolidated suppliers to the Group. The logistics for inbound supply is controlled by each individual plant. They know what they need and how much. Our purchasing department signs a contract with the steelmakers and other suppliers. Then it’s the job of the logistics departments in Yaroslavl and Nizhny Novgorod to advise the supplier how much of which steel they should send to the plant and at what time. We have two steel suppliers delivering directly to the plants. One supplies 80% of our requirement, the other 20%.»

Sorokin reports no issues with the Russian rail network nor with the third party carriers, forwarders or logistics providers serving the company. On an annual basis, these services are put out to tender and those whose bids offer the best terms and conditions are those with whom GAZ enters agreements. In terms of component suppliers, the company often single-sources but ensures that there is always a Plan B in case of disruption of supply.

«Historically, we have had quite a large number of suppliers around us,» he explained. «Some of them duplicated one another and there we had to make a choice. If you take ZF of Germany as an example, they supply steering gear for our GAZelle Business and our GAZelle NEXT models. Are they a single source supplier? Yes they are. If they cannot supply do we have options? Yes we do. There is a good alternative company which manufactures similar products. You cannot build one truck with a certain steering gear and have something different on the next one. GAZelle NEXT and GAZelle Business are built with Cummins diesel engines. Cummins is a monopoly supplier, a single source supplier. If we run into a problem with Cummins we can temporarily replace their engines with petrol engines made in-house, and there are some other options open to us as well.»

GAZ keeps a close eye on what is happening in its supplier base, their investment and their cash flow. If a potentially promising supplier finds itself in trouble, the company is prepared to countenance ways to help it.

«We might change payment terms and go from 60 days to 30 days or even to pre-paying,» said Sorokin. «The decision to change temporarily will be made in the purchasing department. We have learnt pretty well how to manage our working capital. On the Nizhny Novgorod site we are working with negative working capital because we get paid for the cars that we have yet to build and the average credit terms for suppliers is 60 days after delivery.»

Asked if he was satisfied with the level of innovation coming from Russian suppliers Sorokin replied, «Not all of them, I’d like to see more. I am not even satisfied with some international suppliers. We would like to be successful not only in Russia but globally, and we must be really price-competitive with a technical level the same or better than our competitors, not worse. If you are worse, you will sell nothing.»

The overall state of the Russian economy is, of course, the driver for GAZ’s success because it determines how many trucks the company will sell. Sorokin accepts that the Russian government has not always made decisions favourable to the manufacturing industry.

«A couple of years ago, the taxation of small and medium-sized businesses was a bad decision. Many of the companies had to close down and some of them were used as forwarders, they were our clients. Today, we see that the government has learned lessons from those errors and that they are trying to create real incentives for small and medium-sized businesses. If we look at our typical customer, he is an entrepreneur, a small to medium-sized businessman who makes the decision to buy our truck when he has the money and when he sees that he is going to grow his business. In a situation where orders are dropping, he doesn’t buy a new truck, he repairs his old one. Or, if he is a slightly bigger businessman, out of his fleet of ten trucks he will sell five and run the business with the remaining five.»

Oleg Deripaska is the Chairman of the Supervisory Board of theBasic Element company and, as such, is the leading shareholder in GAZ Group. With an estimated net worth of US$6.2 billion in 2015, he is amongst the 20 wealthiest people in Russia.

In 2003, Oleg Deripaska introduced the production system to GAZ plant. The system is based on the principles of «lean production». Responding to the question, for what purpose shareholder introduced the system and what it gave to GAZ, Sorokin says that he had not worked in GAZ Group during that time, but he may try to explain the logic of the shareholders’ decisions in respect of the newly acquired assets.

«The natural question he would have asked himself would be ‘what am I going to do with these assets?» He started by visiting the facilities and walking through the workshops and the shop floor he saw old facilities, old equipment and old technology. The simplest solution was to start  immediately modernising and investing huge sums of money. If he had started pouring money into his automotive business at that time fifteen years ago, most of that money would have been wasted. So he engaged independent consultants from Japan and those consultants came here and worked in different production areas to show how we could raise productivity several fold, reduce inventory and increase quality without particular investment. He had courage enough and perseverance enough to force people really to take this up in earnest in all production divisions.

«After a period, it became an inherent philosophy. In the process it also identified the people who were talented and who not only borrowed the knowledge but built on it and further adapted the system to the local requirements. It first started at high level but now it has cascaded down to each and every production area. There is a technology university in Nizhny Novgorod and we established the department of production systems there. We also train our suppliers in our own production system in our own corporate university. It became embedded in the culture of the people here, resulting in the elimination of most of the waste and making the company attractive and ready for real investment. Now the people who are calling for investment in production technology are very precise and can pinpoint exactly where it is needed and that means high efficiency of the investment.»

Some people in Deripaska’s position would simply have stripped out and sold the company’s viable non core assets – for example the casting or foundry operation. It speaks volumes for the man that he did not do so.

«The reasons were purely economic, the result of economic feasibility studies. Moreover, the funds were invested to the assets, professional specialists were raised, and it gives the results» said Sorokin. «We believe today that the casting and foundry operation is our core competence together with vehicles production and we can clearly see what losses and waste we would now have if we had decided to sell it off.

«When we were making the decisions about which products to invest in, we saw that we had different market shares for different models. Common logic suggested investing in the panel van and bus segments because we had lost that market share. If you start to invest in the bus segment the investment kick-in period takes two to three years. In those three years, you would lose your chassis cab market share which would drop from 80% to 40%. Then, when that investment starts to pay back, you don't have any source for new investment. That's why we started to invest in the chassis cab and the effect of that was to increase market share in chassis cabs from 68% to practically 82% last year. We kept up a steady inflow of money for the company by doing this»

According to Sorokin, GAZ Group’s entry into contract manufacture of passenger cars in 2012 has had a beneficial effect upon its truck manufacturing.

«First of all there was the financial effect. All the floor space where we have contract manufacturing now was a generator of overheads for the truck division. Now those overheads are paid for by the passenger cars. It is a profitable business with practically zero risks and we are generating more cash by doing it. Incoming supplies are the responsibility of the contract partner and we are free of the distribution and sales risks. Even if the cars don't sell, our partners still have to set up the overheads we have to build them.»

«We have also lifted our quality threshold. We started a customer satisfaction audit in the spring of 2009, borrowing the expertise and the methodology from Chrysler. The basis of that audit is taking a look at the product through the customer's eyes. We took Chrysler's measuring tape and applied it to our product. From the start, we had 1,200 plus demerit points. However, at the start of production of the GAZelle NEXT, we were down to only 80 points. At the same time, we were launching the Mercedes Sprinter and we saw that its customer satisfaction audit was more. We asked ourselves if our vehicle was better! Their customer satisfaction approach is based on how a Mercedes customer looks at his van and it's the same team of people turning out those vehicles at GAZ, the same quality department, same production team. We had to accept Mercedes' measure and apply it to our GAZelle which immediately grew from 80 to 435. And then we began to work on the quality of GAZelles in accordance with the more strict requirements.»

Asked which company he most admired in terms of how it handles contract and own-product manufacturing, Sorokin cites Austria-based Magna.

«We are a very versatile company. We produce buses and all kinds of trucks. If you are talking about corporate contract manufacturing alone, of course Magna is there as a role model. There are a lot of things that we learnt from them. When we were launching all those contract manufacturing operations, we had to invite the Magna specialists to help us. Magna mostly assembles premium cars and that is where they make their money. We have learnt to earn fairly good money on cheaper cars.»

Sorokin gives credit to Oleg Deripaska for his focus on the education of the young generation of future engineers who are also trained on the development of autonomous vehicles. Deripaska has set up a Volnoe Delo Foundation which sponsors the research and development of robotics and to which GAZ Group contributes. Whilst welcoming the opportunities afforded to bright people, Sorokin is still cautious about when such vehicles might appear on Russian roads.

«I see huge and multiple opportunities; firstly developing people then picking out non-standard, non-routine approaches and solutions and identifying at an early stage the rising stars who will become chief engineers of world renown. This is the key idea of this program. Prototypes are being produced of vehicles which orient using GPS or optical scanners and sensors. But the promotion of autonomous vehicles is not the main goal of this project, we do not see the immediate prospects for them on the Russian market.. When will we see these vehicles on the Russian road? Not in my lifetime.»

GAZ Group will continue to optimise its production processes using the tools inherent in the company’s production system. It will look to increase its share of sales of high margin products while reducing unproductive spending and optimising its transport logistics. New products with high export potential will be launched and prospective markets for these products include the Middle East, North Africa, Latin America, Southeast Asia and Eastern Europe.