Going from a high of 2.9 million vehicle sales in 2012 to a low of 1.4 million in 2016 has taught Volkswagen Group Russia boss Marcus Osegowitsch the value of staying calm and remaining flexible. This has paid off because VW Group's Russian market share has risen to nearly 12 percent from less than 7 percent since the former management consultant arrived in Moscow in 2010. He spoke about the keys to success in Russia in an interview with Automotive News Europe Managing Editor Douglas A. Bolduc
You have been running VW Group's Russia business for nearly a decade. How do you avoid overreacting during the big ups and downs?
The key is that you don't chase after the trends. Don't freak out. Try to balance market prices, volumes and your factory utilization. That's certainly the skill you need for the Russian market.
How important is it to have consistency at the top of the organization in a market such as Russia?
It helps in two ways. One is the experience of knowing how to manage things during the big swings so you keep your team aligned and calm. The other advantage is that Russia is a relationship country. If you are there for a long time, that gives the dealers a lot more confidence because they know and trust that guy. This is also important with the politicians. Therefore, keeping people for longer periods in Russia makes a lot of sense.
What is your outlook for Russia?
After the big drop in 2015, we were really glad to see the comeback in 2017 and 2018. We are still, with a total market of 1.8 million sales last year, miles away from previous top levels [2.9 million vehicles were sold in Russia in 2012], so there is definitely potential for growth. For this year, however, we think we will be flat.
With the intensifying global situation [due to the U.S.-China trade war] nobody knows what effect that will have on the oil price and the currency. When the currency gets weaker people buy for a short time but when we increase prices the whole market collapses.
How much of VW Group's sales in Russia come from your local production?
For Volkswagen and Skoda, it's 80 to 85 percent local production. For Audi, Bentley, Lamborghini and Porsche, we rely on imports. Localization is the absolute key to keeping costs down and being competitive in Russia.
Have you had success in bringing suppliers there?
We have about 65 local suppliers. All but two of them are Western companies that moved with us. We have localized more than 5,000 components in Russia.
How important is it that you build engines in Russia?
The engine is a real success story. We use Russian aluminum and for Russian output we do the costing in rubles. We make these engines in Kaluga, and we even export them. Last year we exported 44,000 engines.
Where do they go?
They are Euro 5 engines that go into products built in Western Europe and then are shipped to Euro 5 countries such as North Africa. We have also been shipping to South Africa and Mexico. The engine plant has been successfully integrated into the global supply network.
Will the Kaluga plant also become an exporter of cars?
It's a bit more difficult because the cars we build in Kaluga, the Polo and the Skoda Rapid, are really Russia specific. The [sedan version of the] Polo is only sold in Russia and India. [The VW Tiguan is also built at Kaluga along with semiknockdown (SKD) versions of the Audi Q8 and Q7.]
What about the contract production GAZ does for you in Nizhny Novgorod?
We export the Skoda Octavia quite heavily from there to Europe. We built Euro 6 engines into those cars.
What roles do GAZ and Volkswagen handle as part of this deal?
It's a classic contract manufacturing relationship. We rent the hall and we rent the hands. We pay per car produced. We own the material all the way through. We own the cars all the way through. We do the quality control and the logistics. It's all our equipment, our standards, everything. We have been fortunate over the last two years that we could run a solid two-shift operation in both factories [Kaluga and Nizhny Novgorod]. With good utilization you achieve a huge cost advantage.
Will you add a third shift?
We have to be cautious. We are at 100 percent utilization on two shifts. You will fill only 20 percent to 30 percent of the capacity at the beginning and then you have the inefficiencies again because you will never fully fill the third shift. Therefore, you would rather do a few Saturdays [of production] and remain at two shifts than go to a third shift.
How volatile is the ruble?
The exchange rate jumps between 70, 75, 80, back to 75 [rubles to the euro] within weeks. It makes our internal finance people crazy. But you have to manage. Two things you can't expect in Russia are stability and predictability. You have to stay flexible and make fast decisions.
Who are your biggest competitors in the market?
It is Toyota for Volkswagen and it's Kia and Hyundai for Skoda. For Audi, it's the classic rivals, Mercedes-Benz and BMW.
How does Mercedes' decision to add production in Russia affect Audi?
We will wait and see what they do and how it affects their pricing. Localization results in better pricing but with the numbers they are talking about it is unlikely they will have lots of local components. What we know is that if you don't start localization of lots of components, you are very exposed to currency fluctuations.
How do you feel about Opel re-entering Russia?
It's their business so you should ask them, but what is definitely true is that the price levels in Russia are not very high and the competition is intense. It's not easy. They also closed a network of dealers and now they are going to reopen it again. Talk to the government. Talk to the dealers. Everybody. You have to convince everybody that this time you will stay for good. And it is not so easy to make everybody believe. You also need a critical mass in Russia.
How have Kia and Hyundai been able to become serious competitors in Russia?
During the crisis when we were holding back to balance profitability with volume and pricing, they kept the prices low and went for market share and volume full speed. I don't know how that affected their profitability. That's their secret, but they really used the crisis to gain market share. Also, what you cannot underestimate is they are still producing a lot of models in Kaliningrad [using contract manufacturer Avtotor], giving them not only the Solaris and the core models out of St. Petersburg, but many other models for a very good price in Russia.