March 10, 2011 / 12:01 PM / 9 years ago

Russia also targets parts makers in auto strategy

* New manufacturing targets hoped to entice suppliers

* Government taking long-term view on auto industry

* Valeo plans new Russia facility this year

By John Bowker

MOSCOW, March 10 (Reuters) - International car makers are already flocking to Russia to grab a share of what is Europe’s fastest-growing major car market and component makers are unlikely to be far behind.

Auto companies are lavishing billions of euros to expand output in Russia as government incentives encourage local production, but concessions on component imports do not last for ever and local parts manufacturing is Russia’s ultimate goal.

So far components makers have invested little in Russia, yet the government’s “Decree 166” scheme for the auto industry implies their investment plans will have to encompass Russia as well as other already well-established emerging market destinations such as China.

French parts maker Valeo (VLOF.PA) for instance has just one production facility in Russia compared with 16 in China, but plans to open a new plant this year to serve customers such as Renault (RENA.PA) and AvtoVAZ AVAZ.MM.

“The law is accelerating the process of implanting local production in Russia, because it states that production must take place locally,” Valeo Chief Executive Jacques Aschenbroich said earlier this week.

Passed earlier this year, Decree 166 demands overseas manufacturers commit to make at least 300,000 cars a year in Russia by 2015, up from 25,000, in return for being exempt from import tariffs on parts.

The objective is to help reduce Russia’s dependence on oil & gas, which has recently attracted multi-billion dollar investments from oil majors BP (BP.L) and Total (TOTF.PA).

Global players including General Motors (GM.N), Volkswagen (VOWG_p.DE) and Renault have all signed up to the scheme, desperate to take advantage of a market expected to double over time to 4 million units a year — becoming the biggest in Europe. [ID:nLDE71F1MP]

Over time they will have to reduce their dependence on component imports, pledging to generate 30 percent of revenue from locally produced parts by the fourth year of the agreement rising to 55 percent in the sixth. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FACTBOX: Russian car industry [ID:nLDE71L21U] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

SUPPLY BASE

“In order for the Russian car industry to develop it needs a good supply base,” said David Thomas, head of Volvo cars in Russia and chairman of the Russian autos committee at the Association of European Businesses (AEB).

Thomas noted Soviet-era manufacturers such as Lada producer AvtoVAZ had not needed specialist suppliers as they would build everything in-house. And those Russian parts suppliers that have been created in the post-Soviet era are yet to meet the standards of established names overseas.

“There are a significant number of enterprises in Russia specialising in the production of spare parts, though their quality does not meet international standards,” said Igor Kraevsky, an autos analyst at Otkritie bank in Moscow.

“Consequently, Russia needs to attract foreign producers of spare parts,” Kraevsky said. “To attract these producers, production volumes needed to be high enough, hence the figure of 300,000 cars was reached during negotiations with car and components manufacturers.”

While car makers could take the plunge into Russia knowing there is a growing market for their vehicles, suppliers need to see evidence of a thriving car-making industry before setting up shop.

“The 25,000 cars a year target was not enough to attract follow-up investment from (major overseas) suppliers,” said Ivan Bonchev, head of the autos practice at Ernst & Young in Russia. “The major reason for the new scheme is to bring in interest from those suppliers.”

(Additional reporting by Gilles Guillaume and Helen Massy-Beresford in Paris; Editing by David Holmes)

((john.bowker@reuters.com;+7 495 775 1242 Reuters Messaging: john.bowker.reuters.com@reuters.net)) Keywords: RUSSIA AUTOS/

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