Manufacturing Contracts, Modern Management Have Russia’s GAZ Advancing

NIZHNY NOVGOROD, Russia – It’s 7:55 a.m. and a couple dozen top managers have squeezed into a tiny room off one of the truck assembly lines at GAZ’s sprawling manufacturing grounds to await the arrival of Bo Andersson.

It’s a scene repeated every Monday through Friday as the CEO conducts a top-of-the-morning staff meeting to take the auto maker’s pulse. One by one, he summons terse reports from his department heads on the day’s production goals, supply-line health and quality targets.

This day, plans call for 16 Volkswagen Jetta pilots to be added into the mix with Skoda Yetis already in serial production, as well as two 10-hour shifts of regular GAZelle light-truck output.

But there’s some concern over a recurring door-panel defect discovered the previous day on one of the lines that still hasn’t been resolved. Managers tell Andersson that to catch the flawed bodies, they will need to reinstall a quality gate once thought to be unnecessary.

But GAZ’s top executive isn’t satisfied. “That’s not a root cause,” he says, addressing his staff through a Russian interpreter. “It’s OK if we don’t know (what is causing the defect), but we need to find out. It’s difficult, but we need to know. Then we can attack the problem.”

That must happen, Andersson insists, by the time the group reconvenes at 5 p.m. in another daily ritual to discuss whether the morning’s targets were met. Top management from client Volkswagen is due here to inspect operations in late February ahead of the Jetta’s official launch, he reminds his staff, “so let’s stay focused.”

Andersson, a Swede by birth but Americanized during his stint as head of global purchasing for General Motors, has ruled GAZ since his arrival in 2009 with a military precision honed during his time in the Swedish armed forces.

That approach sorely was needed because GAZ is as much an emerging auto maker and profit center for its primary investor – billionaire Oleg Deripaska – as social experiment aimed at leading a lagging, often undisciplined Russian industry into the 21^st century.

A relic of the Soviet era, the state-owned GAZ had far too many people producing too few goods prior to privatization in 1992. Productivity, quality, delivery and service were not exactly ingrained in the auto maker’s mission statement when Deripaska acquired control later in the decade.

“When we first came to GAZ, we produced 12 times less product with three-and-a-half times more people,” he notes.

No.104 on the Forbes list of wealthiest people in the world, Deripaska was working to transform GAZ even before new management, led by former Magna Co-CEO Siegfried Wolf and Andersson, hopped aboard.

It was Deripaska who initially brought the Toyota Production System to the Russian auto maker and reputedly could be found in the early days of ownership teaching its lean-manufacturing theories to workers along the line.

The transformation of GAZ into a world-class player is far from done, executives admit, but the ground gained so far is visible in pockets of this vast complex, said to be some six times the size of Volkswagen’s enormous Wolfsburg grounds and housing Russia’s second-largest automotive factory to AvtoVAZ’s Togliatti facility.

Fast-Forward 20 Years

The most obvious proof of the revolution taking place is found in new contract-manufacturing operations, where GAZ is being trusted to build world-class-quality cars for Volkswagen Group and GM, and soon will launch production of Mercedes Sprinter commercial vans for Daimler. The new lines are expected to be at capacity building 155,000 vehicles in 2014.

Despite Deripaska’s efforts, GAZ was in dire straits in 2009 when Andersson jumped into the fire from out of the frying pan of a bankrupt GM. At the time, the Russian auto maker was buried under some $700 million of debt, brought on by a doomed plan to revive its Volga car brand with a new model based on previous-generation Chrysler Sebring tooling.

Ultimately, only about 9,000 of the new-but-dated Volga Sibers were built.

The ill-fated vision, Deripaska says, called for cultivating a Russian parts-supply network in a partnership with Canada-based conglomerate Magna so that GAZ eventually could develop its own home-grown car.

The Siber project was an attempt “to develop a shortcut to passenger cars,” he admits, adding the global economic crash of 2009 played a role in derailing the effort.

“We thought we would be able to develop a crucial component industry for the passenger-car market,” he says. “(But) the issue is it’s not enough to have a product. You need to reach customers.

“If you look at the OEMs that are successful in Russia, they are developing a very complex distribution network,” something GAZ was poorly positioned to do.

To clean up the mess, Andersson slashed 50,000 employees in a now legendary purge and convinced dealers to pre-pay for vehicles to get cash flow going. In return, retailers were promised 12% margins and delivery within six days of order.

He reined in supply lines where it made sense, bringing all of GAZ’s light-commercial-vehicle seat production in-house in a move that cut costs for those components some 30%.

Andersson also went on a tear-down and renovation binge, knocking down about 100 of the 400-plus buildings on the 3,000-acre (1,214-ha) grounds here, while renovating cafeterias and locker-room facilities at key plants and spearheading a much-needed 3-year project to facelift the group’s crumbling engineering center.

He showed up every morning at 7 a.m. sharp to personally oversee construction at the engineering operations. “I went through three contractors,” he says, just in renovating the center’s cafeteria.

Another hurdle was getting a wary workforce to trust management, but GAZ’s union eventually agreed to freeze pay for 2009 and 2010 in exchange for profit sharing – a mostly unheard-of concept in Russia.

Distributions have equaled about 1.5 times the average $600-$650 monthly income the past two years. This year, the rank-and-file will get a 75% share of a $60 million bonus pie, with 25% earmarked for management.

Employees also were encouraged to look for additional process efficiencies, with the pledge no more jobs would be eliminated and they would get a 50% cut of any money saved.

“This is how you change the direction of the next-generation (worker) – give them a way to participate in the success,” says Wolf, chairman of GAZ parent Russian Machines.

Management also began to win over the rank and file by improving working conditions based on employee feedback. In the last 18 months, 500 actions – ranging from setting up smoking areas in plants to ensuring there’s hot water for locker-room showers – have been taken, officials say.

“That was completely new in Russia,” Wolf says of the employee surveys. “Nobody has asked workers before how they feel, what we should change.”

But the biggest piece of the puzzle is the contract-manufacturing work, which executives see not only as a revenue-generator but an incubator for productivity and quality improvement.

“I told Deripaska we can gain 20 years’ (experience) in a very short time,” Andersson says of pitching the plan to turn GAZ into the Magna Steyr of Russia. “We can get the credibility. We can challenge (our people) and see how they react.

“If we (hadn’t done) something, we would have just died.”

The retooled Siber operations used for Volkswagen and GM production are state-of-the-art. The $29 million Chevrolet Aveo facility, to employ 700 workers building 30,000 cars annually, is the less sophisticated of the two, with some manual welding operations and parts coming in kits from GM’s South Korean plant.

The VW operations required a $235 million investment. Capacity of the body shop, identical to VW facilities elsewhere, is 100,000 units per year on three shifts employing 1,250 people. It can weld up to four different body styles. Three are scheduled, with the Yeti currently in production, the now-launching Jetta and the Skoda Octavia sedan due to enter the mix midyear. All three vehicles, as well as the Aveo, will be sold in the Russian market.

The 506,000-sq.-ft. (47,000-sq.-m) VW assembly plant largely is carryover from the Siber. Currently, it is operating at 20 jobs per hour, but as Jetta and Octavia are fed into the system, output is slated to ramp up quickly to 440 units per day on three shifts, employing 1,356 workers.

“We’re on a very aggressive launch curve,” Andersson points out. “It’s not normal to launch three products in one year.”

VW’s global quality standards must be met by the operation here or GAZ will be paid less for every car it builds. To ensure targets are hit, an expansive, 31,500-sq.-ft. (2,900-sq.-m) training center has been set up to teach workers proper assembly, painting and finishing techniques. So far, 752 employees have been processed through the facility, with a total of 3,565 expected to be indoctrinated here by year’s end.

Nizhny No St. Petersburg but Management Undaunted

A third manufacturing contract will see previous-generation Mercedes Sprinters built on a new line transported here from Argentina. It is being installed within GAZ’s light-commercial-vehicle plant that produces the GAZelle lineup. Output will launch later this year.

The vehicle-building programs cover half the fixed costs at Nizhny Novgorod, officials say. Contracts with the three auto makers run for eight years and put GAZ at capacity. Although there’s plenty of room for expansion, Andersson is not eager to bring in any more work.

“I would not take one more (contract), because we will sweat a lot this year (to launch the current programs),” he says. “I’m getting sick of facilities management. I’m getting sick of wet cement, (fresh) white paint, new electricity, new ventilation, all this stuff.

“I’m looking much more forward to the first guy that signs up for another eight years.”

Geography could be the Achilles’ heel to sustaining the contract-manufacturing business model beyond 2020, because many industry-watchers believe the center of Russia’s auto industry is emerging further west in St. Petersburg and in Kaliningrad, designated a special economic zone with favorable tariff treatment for manufacturers importing parts.

“Everybody in St. Petersburg is committed to building the next Detroit,” notes Warren Browne, president of WP Browne Consulting and one-time point man for GM’s Russian operations. “There’s a difference between St. Petersburg, Kaliningrad and Nizhny.

“The whole epicenter of the Russian automobile enterprise is Moscow-west, not Moscow-east.”

But both Wolf and Andersson believe GAZ’s contract-manufacturing business is here for the long haul.

Only four auto makers have signed on to Russia’s New Decree 166, which requires a commitment to produce 350,000 vehicles annually in exchange for favorable tariff treatment. That could mean many others will seek lower-volume manufacturing opportunities with minimal commitments in new brick and mortar as a way around import tariffs, the GAZ executives contend.

“I see it for the long term,” Wolf says. “If you just have small volumes, you can’t build a plant by yourself.

“When I was responsible for Magna, we started the (contract-manufacturing) business in Europe, and nobody needed us because Europeans could build their cars without Magna. But we (gave) the best service to our customers, and that is the same principle, the same guideline and the same rule here at Nizhny Novgorod.”

Andersson contends the notion St. Petersburg will emerge as the country’s auto-industry hub is misguided.

“I strongly disagree,” he says simply. “Because I worked in St. Pete.”

Even with the burgeoning car-manufacturing operations and a new-generation GAZelle NEXT to join the truck lineup this year and bolster GAZ’s already 50% hold on Russia’s LCV market, there’s still much work to be done, executives admit.

For starters, Russia’s supplier network remains weak.

“You will not be able to develop any good product in the automotive market without good components,” says Deripaska. “We’re working as quickly as we can to bring more partners to develop product in Russia.”

The VW operation is beginning to draw some parts makers to the country, a few of which are leasing space from GAZ for local operations. GAZ also is seeking more direct tie-ups of its own, such as the one with Bosal to produce exhaust systems and catalytic converters.

The JV, 51% owned by Netherlands-based Bosal and 49% held by GAZ, started manufacturing 400 mufflers and 300 catalytic converters per day for GAZelle light trucks last April.

An expansion already is under way to provide the same components for the VW vehicles built on the GAZ grounds, with trial production getting under way this month.

“This is the template for a lean-supply operation in Russia,” Andersson says of the facility that will employ just 70 people at full capacity. “Russia can’t be competitive unless we can do components locally.”

Executives say the high cost of credit here, at close to 9%, or double international rates, also serves as roadblock to further progress, both for GAZ and the country’s auto industry in general.

“We have to get competitive bank rates,” Wolf says. “And the Russian central bank has to get more pressure on entrepreneurs to put money in areas where we need it. We need this bit of fertilizer.”

And although GAZ is making progress on productivity and quality, the transition to a fully modern operation that can compete with other low-cost manufacturers around the world will require more time, insiders admit.

“It took us already 12 years,” Deripaska says. “And I think we have another eight years…(before) we really can compete with the Germans and, more importantly, with the Koreans.”

Sums up Andersson: “Give me another 10 years, and I’ll have a world-class company.”

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