Western aftermarket parts suppliers are trying to cash in on Russia's thriving do-it-yourself culture for amateur mechanics. Delphi Automotive Systems Corp., Robert Bosch GmbH, Valeo Inc., Varta, ArvinMeritor Inc. and others are trying to expand aftermarket sales at a time when the market for original equipment remains chronically weak.
The ruble's dive in 1998 from 8 rubles to the dollar to 29 was a disaster for foreign automakers. Sales of Russian-built vehicles are up 5.7 percent in the first six months of this year, while sales of imported vehicles are up 8 percent. But sales of new vehicles have not returned to pre-crash levels.
Rather than give up, foreign suppliers are trying to expand their share of a growing aftermarket. 'The potential is there,' said Krzysztov Frelek, Eastern European aftermarket manager for Delphi. 'Being so close to Europe, the Russian economy has to break out. It can't go on living on hope forever.'
`STONE AGE' FOR DATA
But nothing comes easy in Russia. With their low prices, Russian suppliers account for 60 percent of aftermarket sales. Another problem is that Russia 'is in the Stone Age for getting data,' according to Alexander Tolkachev, principal with consultants A.T. Kearney in Moscow. Industry observers believe aftermarket sales rose in 2000, but no one knows how much.
'There is no database for vehicle registrations,' Tolkachev said. 'There are 30 registration centers, but they aren't linked. Without that information, how does a carmaker find out where to go - where to set up dealers?'
Suppliers have the same trouble, Tolkachev said. Getting data or even keeping track of parts and shipments can be a big problem. Moreover, foreign companies must struggle to compete on price with local suppliers such as Saaz Inc., which has a stranglehold on the shock absorber industry.
Doing business in Russia is proving difficult in other ways. Most imported parts are distributed via a network of privately owned companies, a system that teetered on the brink of collapse along with the ruble over the past two years. Some companies that were eager to enter the market were too enthusiastic in allowing credit to Russian distributors. Some suppliers went out of business, while others had to raise prices to stay afloat. Now that distributors have stabilized their finances, Delphi and other suppliers can ship more products to the market. The key is to learn from the 1998 collapse. 'In this country, you have to start small and grow, given the right business environment,' Frelek said.
High taxes, red tape, bureaucracy and what is described as 'auxiliary costs' - in other words bribes and kickbacks - all plague newcomers. 'Everybody has to be very careful about how they deal with the bureaucracy,' said Alexander Ostrov, country manager for Delphi. 'I think it is important here, of all places, to have a local person running the business.'
High tariffs and a weak ruble make it difficult for foreign suppliers to import parts, Ostrov said. Apart from the wire harnesses built for AvtoVaz at Togliatti, Delphi imports everything else. That includes filters, belts, shock absorbers, batteries - common maintenance parts. To counteract its price disadvantage, Delphi emphasizes the quality of its products.
Eventually, this strategy may get results. With a gradual rise in the number of imported cars over the last eight years, foreign suppliers are learning to cater to amateur mechanics. 'There seems to be a trend for the Russian motorist to spend more on a quality replacement part and less at a garage,' Frelek said. 'The do-it-yourself market is strong, and we want to get out there in that market.'
Delphi also wants to expand outside of Moscow and St. Petersburg. The company now operates in Vladivostok, while the Ukraine and Belarus are serviced as independent markets. AvtoVaz remains Delphi's major customer, but the supplier does not want to rely heavily on one customer. Can Delphi justify its investment? Frelek says yes - cautiously. 'In other eastern European countries, you saw improvement every year. Here you just hope that things will get better.'
Frelek, like officials of other Western companies, will not put a figure on Delphi's aftermarket business. Shock absorbers, batteries and spark plugs are the big sellers, along with motor oil. Demand for shock absorbers and other suspension parts is growing largely because of Russia's notoriously poor roads. Volkswagen AG had to improve the Passat's front suspension after several reported failures. Tolkachev had to replace front suspension components on his own Passat four times in the past two years.
Robert Bosch has been active in the country for a number of years. It, too, has seen an increase in aftermarket sales, particularly in Jetronic parts, spark plugs and batteries. But Bosch spokeswoman Martina Horton noted numerous obstacles, including 'financing problems, problems checking with creditworthiness, the lack of any property law and bureaucracy in general.' Counterfeit parts are another problem. Bosch and others have found some parts, such as spark plugs and oil filters, even bearing its name. Usually it takes too long and is too expensive to do anything about it.
Foreign suppliers sometimes find a local partner to help solve bureaucratic tangles. But even that can cause problems. Tolkachev says Russian suppliers expect high profits when they start to do business with foreign companies. 'The saying is that a Russian would not get out of bed for a $20,000 deal,' Tolkachev said.
To fatten profit margins, Russian executives are willing to bend or break the law, Tolkachev claimed. To illustrate his point, he noted that 'half of Moscow's televisions are imported in crates as green beans, which only attract an 8 percent tax instead of the 30 percent duty on electronic goods.' But this is not so different from Western business, Tolkachev says. 'Where did today's millionaires make their first million? They probably won't talk about it, but they will talk happily about their second and third millions.'
You can e-mail International Editor Chris Wright at [email protected]