CLUSTER, AS A NEW TOOL, ENABLES RUSSIAN AUTO MANUFACTURERS TO IMPROVE COMPETITIVE POSITIONS Samara region administration

Joint-stock company AVTOVAZ

The Volga region office Of Russian Engineering Academy Samara Center Of Project Financing Regional strategies and regional competitivenessNEAC conferences (European net of automotive clusters)Samara-Togliatty, Russia, June 18 20, 2007

Cars regional production 0.00.51.01.52.02.53.03.54.04.55.01990199219941996199820002002200420062008Mln units.RussiaPolandCzech RepublicTurkeyRomaniaSloveniaHungaryUzbekistanSlovakiaOthersSource: PriceWaterHouseCoopersGrowth coefficient by countries2000-2008PolandRussiaTurkeyRomaniaHungarySlovakiaUzbekistanCzech RepublicGrowth,%

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50%40%60%30%70% 50%SamaraKalinaVAZ 2110Growth of the components outsourcing shareof the VAZ models productionAVTOVAZ shareSuppliers share

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20101500168019502100180270150

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2008780150565180

2009740190640190

2010700230750200

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8

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14

15

16

17

18

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Based on 2001 results5-10.000$10-15.000$15-20.000$20-25.000$Over 25.000$Up to 3.000$3-5.000$

1

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Quantity$Russian manufacturersWestern manufacturersProfitTotal costsSalesFixed costsFixed costsProfitTotal costsSales*

Russian FederationPrivolzhskiyfederal districtSamara region*

Eastern Europe

SouthAmerica

Asia-PacificRegion

North America

Middle East and Africa

Western Europe

% of changes

Growth rates of mature markets (Western Europe, North America) are slowing down:Have already reached cyclic peaks or are approaching themA fundamental threat to industry profitability

Small emerging markets are a source of production volume growth

E.g.:On the global scale growth share of Eastern-European market, which is one-third of West-European market in size, will be three times bigger

Will growth rate be sufficient to overcome the influence of competition on mature markets?

Short-term returnseconomies of scale more readily available in stable developed markets, but competitive pressure intense and rising, resulting in compressed margins

Longer-term returnshigher volume growth potential in the worlds developing markets, but long-term perspective required

Mature markets (WE, NA) slow downAlready at or near cyclical peaksSafe haven in recent years disappearing?Threaten foundations of existing industry profitabilityAs we are already experiencing (DCX, supplier profit warnings, etc.)NA & WE: low AGR (i.e., < 2%) in these large & mature markets

Smaller emerging markets the source of unit growthExample:East Europe, one-third the size of West Europe, will see three times as much volume growthSouth America, facing both recovery and incremental growth, and East Europe are the fastest growing marketsBut only the incredibly diverse region of Asia Pacific brings the potential for both high growth rate and volumeSA, 1/5 size of NA, contributes twice the growth (though partly recovery)Will growth there be sufficient to offset mature market competitive environment challenges?Only if the industry finally learned how to profitability exploit these volatile, fast-growing markets?

Mid-annual market growth rates0 %100 %Share of import on the averageBranches StarsBraches Cash CowsBranches Question MarksBranches Difficult childrenGas complexOil complexTree processingBuilding materialsChemistryMetallurgyPaperHousehold electronicsFootwearClothesTextilesAutomotiveFoodSpaceDurable goodsMedical equipmentPolygraphic equipmentComputer technologiesBiological technologiesCommunication facilityPharmaceuticsEcological technologies*TRANSFORM-Program

The size of the circle is determined by the number of small-scale enterprises representing this industry in the Samara Region

The concentration of small-scale automotive industry enterprises on the territory of the Samara Region is higher than in any other branch of industry

Average annual market growth rates

6 %

4 %

2 %

8 %

10 %

0

12 %

2,25

3,175

4,5

1,125

Industry ratio K

Branches Stars

Branches Cash cows

Branches Question Marks

Branches Problem children

Ferrous metallurgy

Food industry

Wood industry

Building materials

Chemical and Petrochemical industry

Electric-power industry

Automotive industry

Non-ferrous metallurgy

Fuel industry

Light industry

RussiaBrazilThailandIndiaChinaMexicoPolandGM2002 FOREIGN PRODUCTIONFordChryslerVWFiatBMW/RoverMercedesVolvoToyotaNissanMitsubishiHondaRenaultHyundaiDaewooKiaScrew-drive assemblyProductionSource: The Boston Consulting Group?

Price/Expenses

Functionality

Quality

Lean Production

QMS, TQM

Innovative engineering

30 % - assembly plant70 % - suppliers

- AVTOVAZ JSC

30 % - assembly plant70 % - suppliers (world experience)

Design-engineering potential

- suppliers

AssemblyAssembly kits IntegratorsAssembliesSub-assemblies and partsRaw materialsIntegratorsAssemblykitsVAZ from components production to final assemblyHierarchical supply structureDirect suppliesA lot of direct suppliersAbsence of integratorsVAZ outsourcing of some operationsElements of tier supply structureMultiply supply routingsConsiderable number of direct suppliersIntegrators involvingVAZ assembly and suppliesTier supply structureSupply routings reducingEnhancement of the integrators and suppliers of the high added value components (assembly kits) roleSuppliersIntegrators1970 1990 1990 2000 2000 2006 2007+ AssemblykitsIndustrial parkIntegratorsVAZ assembly and suppliesElements of industrial park supply structureFurther supply routings reducingSupply chain management and e-commerce adaptation

Strategicdirectionsof regiondevelopmentCluster root enterprises strategiesCluster companies strategiesForecasting of region social and economic development, indicate planningBalanced Scorecard (BSC)of regionBSC of cluster companiesPlanning and EstimationSystem of strategic planning of region cluster development

MISSION

TARGETS

STRATEGIC TASKS

AND STRATEGIES

MISSION

TARGETS

STRATEGIC TASKS

AND STRATEGIES

Parameterizationand estimationof cluster condition PortfolioAnalysisof investmentprojectsBusiness environmentestimationCondition/Environment estimationCurrent condition estimationOpportunities estimationBreaks analysisImplementation planexternal threats estimation Opportunities of improvement specificationScripts developmentSCRIPT 1SCRIPT 2SCRIPT NCompetitiveadvantageestimation

Systemof determinants estimationInternal advantages estimation

Contribute to the development of Volga Region community and business using the immense multiplicative potential of automotive industry in order to boost Volga Region economic activity, improve quality of life, increase competitive ability and turn it into a locomotive of national economy

MISSION

GENERAL PURPOSES

OBJECTIVES

Contribute to the development of Volga Region community and business using the immense multiplicative potential of automotive industry in order to boost Volga Region economic activity, improve quality of life, increase competitive ability and turn it into a locomotive of national economy

MISSION

GENERAL PURPOSES

OBJECTIVES

Automotive Cluster in Volga Region Development Partnership

OBJECTIVES

GENERAL PURPOSES

MISSION

Promoting cooperation of state resources, politics and economy within the cluster partnership of public and private sector Improving access to financial resources for all economic agents of the cluster Development of marketing and foreign economic activityStrengthening ties between science/education and productionExpenditure reduction and quality improvement in supply chainsProviding possibilities for technology and information exchange within the cluster, providing access to advanced domestic and foreign informational resources

GENERAL PURPOSES

MISSION

Establishment of leading engineering and research schools in a number of directions (logistics, quality management systems, strategic and corporate management, lean production, hydrogen energetics, mechatronics, etc.)

Raising state, public and business awareness on the development of Automotive Cluster in Volga Region initiative

Defining PARTNERSHIP current projects and policy (e.g. dual-fuel vehicles, fuel cell vehicles, industrial parks, etc.)

Working out standards for a number of materials and components, interconnect protocols, etc.

Optimizing regional legislation base in the interests of the cluster

Establishing a fund to support innovations

OBJECTIVES

ManufacturersAdministrationSuppliersResearch organizationsTraining and educationTransport and communicationCommunicationsProjectsContractsInformation and knowledge exchangeCISFI,Piemonte, ItalyAgrupacion Cluster (ACICAE)Basque country, SpainCluster of ARIANord-Pas de CalaisFranceNordrhein-WestfalenGermanAcstyria,AC Automobil-ClusterAustriaWelsh Automotive Forum (WAF)Wales, UKAutomotiveClusterin Volga Region Volga Automotive ClusterAUTOMOTIVE CLUSTER IN VOLGA REGIONAutomotive ClusterUSA

Manufacturers Consulting Firms Suppliers VD REA - coordinator Institutes Research and Technology Organizations Transport and Communications companies Administration and Public Organizations Banks and Funding Engineering FirmsVolga Automotive ClusterAUTOMOTIVE CLUSTER IN VOLGA REGION

Manufacturers and Suppliers consolidation Manufacturing globalization and logistics Supply Chain Management Reduction of number of the suppliers Modules and platforms manufacturing Reduction of terms of development Increase of a role of the suppliers in development and manufacturing Increase of the requirements to suppliers from auto manufacturers on quality, logistics and organization of manufacture Creation of joint ventures with the leading auto manufacturers Growth of need in new technologies and innovations Introduction of IT and e-commerce Introduction of modern technologies of managementVolga Automotive ClusterAUTOMOTIVE CLUSTER IN VOLGA REGION

The unified requirements to the suppliers from the auto manufacturers Introduction of the modern standards of quality Logistic (just-in-time, just-in-sequence) Supply Chain Management (SCM) Modern methods of management (BSC, ABC) Modern technologies of consulting E-commerce IT (electronic stock exchange, Internet - portal) Introduction of typical information systems and design systems Creation of joint ventures in the cluster framework Formation of a package of the investment projects Ecological management Training of personnel Volga Automotive ClusterAUTOMOTIVE CLUSTER IN VOLGA REGION

Stage 1CLUSTER ORGANIZATION WITH MAIN MANUFACTURERS PARTICIPATION.

Data Base creating, first projects Stage 2CLUSTER DEVELOPMENT, RELATED INDUSTRIES INVOLVING.Cluster promotion and marketing Stage 3CONNECTION WITH OTHER REGIONS AND COUNTRIES Connection and joint projectsVolga Automotive ClusterAUTOMOTIVE CLUSTER IN VOLGA REGION

Trends

Engineering

Information services

Logistics

Quality

Information systems

Engineering

Finance

Investments

Strategic planning

Environment

Marketing

Lean systems

SCM

Training and re-training of personnel

companies

C

B

A

companies

C

B

A

companies

C

B

A

X

X

X

X

X

X

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X

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X

X

X

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companies

C

B

A

X

X

X

X

X

X

X

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Committees

X

X

X

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X

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X

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Balanced Scorecard (BSC)

Engineering

Quality improvement

International cooperation

Agreement of Ministry of Education with AVTOVAZ JSC and VD REA

Establishment of joint ventures

Povolje Quality Club

Partnership agreements with UTAC, TUF,SAP, Carana, IPL, GOPA

Suppliers Complex Assessment systems

Unified requirements to suppliers / dealers

Personnel training

Retraining in the field of management accounting and budgeting

Supply chain management

Logistics

Investments

Customer satisfaction and loyalty

Marketing

Cooperation with information systems suppliers

Cooperation of large enterprises with small-scale innovative enterprises

Iinnovation files

Co-design

PR, statistics, forecasts

Inter-industry marketing and inter-cluster connections

Quality Institute

Investment projects portfolio of the cluster

Perspective projects for implementation of components

Retraining in the field of logistics

Industrial park

E-commerce

Unified approach to customer satisfaction assessment

Grant financing of small-scale enterprises by Bortniks fund

Integration into European clusters network

Organization and participation in international conferences

Outsourcing

Retraining in the field of quality

Introduction of a tiered system of suppliers

Communication ground in Povolje Engineer journal

Povolje Quality Award

Program committee on harmonization of standards

AutomanufacturerAutomanufacturerComponent Supplier

supplier

Knowledge Intensive Business Services(KIBS)Component SupplierResearch and Technology Organisation(RTO)Research and Technology Organisation(University)

Agent(VDA, FAT, UBA, BAST, Project Management)federalgvmt.

Agent(VDA, FAT, UBA, BAST, Project Management)

regionalgvmt.

Business Services

RTO/KIBS(University)supplierAUTOMOTIVE CLUSTER IN VOLGA REGION

Suppliers and dealers Requirements Quality Logistics Information systems Cost management Engineering Marketing

Consulting companiesUniversitiesAuditTraining and business centersBanks, foundations, investments companiesInsurance companies,Advertisement companies,Business housesFederal and regional authorityUnified requirements to suppliers in the cluster are key factors for new techniques might thriveAVTOVAZOEMs

Small-scale Enterprise

Small-scale Enterprise

Small-scale Enterprise

Small-scale Enterprise

Small-scale Enterprise

LARGE ENTERPRISE

Consulting Market

Engineering Market

Equipment Market

ComponentsMarket

Dealers and DistributorsMarket

S T A G E S / B L O C K S O F P R O J E C T I M P L E M E N T I O N

Coordinating structure

SupplierSupplier 2

Back bumperIIIndustrial park,JIT,large-size transportationIIICross-docks,JISIIndustrial park,JISIV-,JITLowering requirements to delivery timingDecreasing supply volumesControl panelFront seatBack seatFloor coverEngine / TransmissionFuel systemCeiling coverDoors coverRear bracketGlazingSafety systemCable harnessesFront bumperIndustrial parkCross-dock

Strategic PartnersInvestors *

Instrument clustersAutomotive componentsRussia, Chistopo/ SIEMENS VDO Automotive, GermanySteering wheel and air bagsAvto Plast EngineeringRussia, Syzran / APE, ItalyAccumulator batteriesZhiguli accumulator CompanyRussia, Zhigulevsk/TUDOR, SpainAutomotive LightingRussia, Ryazan/Automotive Lighting GmbH,GermanyHeadlamp modules, fog lampsGasketsSamorim-Industrial CompanyRussia, Kinel / SAMORIM, Portugal

ECUs, mass flow sensors, ignition coilsBosch-SaratovRussia, Engels/BOSCH, Germany

Mats,sealings, roof lining, trunk rackPHRRussia, Vintay/AD Plastik, Croatia

Modular and integrated door locksBRANOROS,Russia, Kstovo/BRANO GROUP, CzechRepublicWiring harnessesPackard Electric Systems/ Samara Cable Company, Russia, Samara/ PES/SCC, USASafety beltsARB-Moravan, Russia, Togliatti/MORAVAN-SAFETY BELTS, Czech RepublicAutomotive glassBorsky glass factoryRussia, Bor/GLAVERBEL, Belgium

Steering gear assemblyDashboard assemblyEngine parts and assemblies:-Flywheel-Water and fuel pumps-Inlet moduleRear suspensionarmsSeats modulesDoor locks modularAssembly:-Locks-Electric driveGearbox parts and subassemblies:-Synchronizers (assembly)-Gear shift mechanism-Clutch-Gear shift rails-Shift forks-Control levers-Splitting mechanism (assembly)ABSBrakes -Vacuum booster-Brake master cylinderFront suspension module-Strut-Brakes-Stub axlePower plant hydraulic support

ModulesProduction TechnologyManagement techniquesKnowledge transferModel mix innovationNew Assembled components and units Steering booster Immobilizer Electric engine steering system Car climateLean productionCellar manufacturingJust-in-time and just-in-sequence components supplyGlobal environmental issuesIndustry suppliers parksStrategic managementCustomer satisfaction indexQuality systemsLogistic systems Cost management systemsSupply chain management RTO AVTOVAZUniversitiesConsulting companiesOutsourcing companiesEngineering companiesIndustrialparks Small companies

Experience of leading enterprises

Advance Product Quality Planning

VD REA

Interfunctional design groups with representatives of automobile assembly plants

controlling

SUPPLIERdesign office

Allocation of funds

Automobile assembly plant

Structure modelRate on scale of 101) Satisfaction on different parameters2) Importance of different parameters for the customer

The 5 of November - the Volga region Quality Club was found Organizational structures Joint-stock company AVTOVAZ The Volga region office Of Engineering AcademyPresident of the Volga region Quality Club quality manager of AVTOVAZ . V. VasilchukParticipants:Public joint-stock company AVTOVAZThe Volga region office Of Engineering AcademyClose corporation GM AVTOVAZSOK groupJoint-stock company SKKJoint-stock company AVIAAGREGATDesign office PROGRESSJoint-stock company SAMARANITROGENAssociation of Medical practice doctorsCompany BALTICAChamber of commerce and industry (Samara and Togliatti)Samara air companies groupThe Volga region industry manufacturersTUVUTACGOPA ConsultantsForeign partners

The Volga Region Engineering Academy

- Business partners;- Certified IT and Management techniques specialists;- Agreement on building up a re-training center for top and operating level managers might update their knowledge base; - Training programs on corporate IT Systems Axapta;- Preparing partnership agreement;- Unified learning seminars upon management techniques;

Co-ordination of special conditions upon replicating IT systems for the cluster and developing the system requirements

Internal trainingTraining by correspondence (or telecommuting training)Learning Information systemProbations:GM VAZ, IPL, Germany Basic component 01: Logistics principle at car manufacturing plantsComponent 02: Logistics management principles at manufacturing plantsComponent 03: Procurement. Inventory managementBasic component 01: Logistics principle at manufacturing plants Component 02: Logistics management principlesComponent 03: Procurement arrangement and inventory managementComponent 04: Storage activities arrangementComponent 05: PackageComponent 06: Major procurement modelsComponent 07: Logistics system evaluation and auditComponent 08: IT in logisticsComponent 09: Modern interplant transportation systemsComponent 10: Logistics models simulationComponent 11: Auto components identification and monitoringComponent 12: SCM

Quality certificationThe seminar has been run by TUV, Germany. Training and certification of audit authority (AVTOVAZ, REA Russian Engineering academy, SGAU - aerospace university)Personnel Probation in German companies The seminar leaded by Aage V. Nielsen has been run by Vitas Bering Management Ltd (AVTOVAZ, REA)Developing course of training and re-training in common with TUV and UTAC (ISO/TS 16 949:2002)

Memorandums of Cooperation TUV - Volga Department of Russian Engineering AcademyUTAC - Volga Department of Russian Engineering Academy - Samara-Tsentr-Certificat

Introduction of QMS international requirements meeting ISO/TS 16 949:2002 standards

Unification of requirements to suppliers on the automotive market of Volga Region

Joint consulting and educational services on a common platform of requirements

Training auditors of international level

VOLGA DEPARTMENT OF RUSSIAN ENGINEERING ACADEMY 3-a, Studentchesky pereulok, Samara, 443001, Russia phone/fax +7 (846) 242-04-39, 242-32-13 www.poria.ru e-mail: root@poria.ru