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Monday, October 24, 2016

AvtoVAZ and KAMAZ will put pressure on suppliers together

Two of the largest Russian automobile plant “KAMAZ” and “AVTOVAZ”, which is experiencing hard times, decided to unite in the fight against price pressure from suppliers of raw materials and components. Foreign car factories have already mastered a number of technologies to achieve its business partners to lower prices, they will follow the example of the domestic manufacturers.

KamAZ and AVTOVAZ will consider the possibility of joint procurement of materials, said the press service of the manufacturer of trucks. The relevant question considered in the negotiations on cooperation General Director of KAMAZ Sergey Kogogin and the President of AVTOVAZ, Nicolas Moore.

“The rising cost of raw materials, materials and components amid the contraction in demand is one of the main causes of loss and problems of plants”

In particular, they talked about the cooperation between the two companies and suppliers of metal products. “Defined volume group of materials, for which joint efforts can achieve the optimal purchase prices”, – stated in the message.

Companies already have experience of cooperation. So, the foundry plant of KAMAZ was producing some parts for some models of the Volga car. AvtoVAZ currently supplies to the foundry scrap.

AvtoVAZ and KAMAZ are experiencing bad times. So, last year a net loss of AVTOVAZ under RAS increased by almost two times: with more than 25 billion rubles in 2014 to more than 43 billion rubles in 2015. The first quarter of this year has also been found for the plant unprofitable: net loss amounted to almost 9 billion rubles, while a year earlier in the first quarter was a profit of about 800 million rubles.

At KAMAZ net loss last year grew by almost eight times – up to 3.3 billion rubles against a loss of 424 million rubles in 2014. Cost of sales decreased by 13%. Rose sharply the costs of the plant, as well as the amount of long-term debt.

At the same time, this year began to report positive trends in sales growth. At KAMAZ in the first four months sales rose 30%, more in may by 17.6%. AVTOVAZ case is still worse: in the first quarter observed the collapse of sales in April, a glimmer of light – the sales rose by 7.8%. But given the sharp decline of the automotive market in recent years, this growth is attributable to the low base of comparison. AvtoVAZ is working four days a week and is planning new layoffs. The results may have been disappointing for the factory: sales fell again by 10%.

Rising costs for raw materials, materials and components amid the contraction in demand is one of the main problems. Even AVTOVAZ had to change the CEO because the previous one was too fond of imported components, which in terms of the devaluation of the ruble were actually gold. The main task of the new head of AVTOVAZ Nicolas Mora to return to the Russian suppliers for Lada cars.

In its quarterly report Russian car complain about the rising cost of raw materials, materials and components. So, KAMAZ says about price pressure suppliers of metal, electricity, gas, as well as global component suppliers. In the structure of production costs for raw materials have 14,85% on hardware products – more than 50%, the energy of 4.72%. Moreover, in comparison with the 2014 year in 2015 their share of the cost of production has increased. There is a similar situation at AVTOVAZ: raw and other materials accounted for 8% of the cost for parts is almost 60%.

To deal with steel makers AVTOVAZ and KAMAZ have something. “Only for the first four months rent on the domestic market increased in price in the range of 46%, i.e. the cost of steel used in the manufacture of cars and components, has almost doubled. And this despite the fact that automakers themselves have to fix the prices of their products given the falling market for new trucks and cars”, – says Director of investment banking at QBF Dmitry Kipa.

While the Russian car factories generate huge losses in a falling market, the Russian metal companies show good financial results thanks to export sales in foreign currency.

AVTOVAZ, the situation is complicated by the fact that he had a huge debt to suppliers of more than 24 billion rubles. To pay, the plant had to take a loan of 20 billion rubles under 11,5% annual. Gave his French carmaker Renault, which is the main shareholder of the company.

The car manufacturers want to get discounts from manufacturers due to the volume of orders, however, the benefit is unlikely to be significant, he said. Moreover, the increase in metal prices in Russia is due not only to market factors but also low demand, and increases in barriers to access to external markets. For example, for the Russian steel to the EU imposed anti-dumping duties.

In addition, if the Steelworkers will not raise rates for KAMAZ and AVTOVAZ, the same conditions will be to achieve for themselves and other major consumers, and this will lead to losses of the Russian metallurgists in the next several years to hire purchase is simply not one, except in China, says Kipa.

Russian automakers should study and apply the methods of the manufacturers, which they use to reduce the cost of components. American and Japanese automakers promote competition between suppliers. For example, they often arrange deliveries of the same items from two or more different vendors.

Another way to keep vendors on a short leash, which is actively used by foreigners, the conclusion of short contracts, for example, for a year. This encourages suppliers to not only work better, but not raise prices, if they want to continue the cooperation with the manufacturer. And Japanese automakers, for example, sign contracts with a vendor for four years, but on the principle of “target prices”. This means that the plant sets the price of the car lower component prices, plus the Japanese set the annual percentage reduction in the price of components depending on the stage of the life cycle of the vehicle.

However, for Russian car, the main problem is the higher prices of imported components. Only for 2015 they have increased in price by 16 to 24%, specifies Georgy Vashchenko of IR “freedom Finance”.

“However, to bring down import prices – a difficult task, the right way is to achieve greater localization of production and improve product quality of domestic suppliers. The average for the Russian localization is less than half – 45%,” – said Vashchenko. However, it is in any case not fast, although the first steps in this direction have already started doing a few years ago. “I believe that before 2020 the situation will not change. Now on the issue drew attention because the financial crisis crippled sales. But they gradually recovered, and there is a risk that the program of increasing the degree of localization will start to forget as soon as demand revives,” does not exclude Vashchenko.

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