Russia's Ever-Changing Environment

As with Any Automotive Assembly Plant, Ford Motor Co. ZAO's facility in the small town of Vsevolozhsk, Russia, some 15 miles (24 km) east of St. Petersburg, has its share of problems.

Labor issues, supplier constraints and infrastructure troubles all are part of the job for Theo Streit, general director of Ford's lone Russian plant.

Streit formerly held top engineering positions in the auto maker's European operations. But despite the similarities to this as well as North American operations, the differences are profound, Streit tells Ward's during a recent plant tour.

Russia still is learning the ways of democracy and capitalism following the fall of the Soviet Union in 1991, he says. The business culture is a blend of Soviet-era traditions and established practices from Western nations, which presents Streit with a dizzying array of challenges.

“This society is changing fast, and they take learning and modify the law,” he says. “It's a very interesting business, and it's challenging because of the different culture in Russia. The job is totally different than anything I've done before in Europe.”

Particularly difficult for foreign OEMs in Russia is adapting to labor laws written by the region's strong labor unions five years ago. Some provisions are startling, illustrating that doing business in Russia's fast-developing market can be maddening.

Consider the study leave. It lets workers take an annual 3-month sabbatical with full pay to pursue their field of interest. “That's the labor code; it's actually law,” Streit says.

“People show up (in my office) and, if they are nice, they tell us a few weeks in advance, ‘I have to leave for three months to go to Siberia, because I'm studying forestry and have to do practices there.’ And we have to pay the traveling expenses and their wages.”

To accommodate study leaves, Streit has developed a head-count calculation that considers the number of people not available at a given time. That, plus some give-and-take with workers, has allowed the plant to maintain an adequate workforce.

Another perplexing union-scripted law is one that allows workers to demand their vacation pay in cash just days before they leave, says Hans-Joachim Voight, the plant's finance director.

“We have payroll twice a month already,” he says. “To meet this requirement, you have to run certain people's payroll just before they go on vacation because they have a right to get their pay ahead (of time). With over 2,400 employees, it's difficult.”

While Ford and other auto makers continue to lobby Russian law makers for changes in the labor code, they also do their best to accommodate workers, which are difficult to attract and retain in a country where the unemployment rate hovers at a scant 0.4% in urban areas.

Ford offers numerous incentives, including free transportation to the plant, free lunches and competitive wages. Still, the turnover rate is nearly 17%.

“We pay pretty well, but if somebody else offers the person 500 rubles ($20) more, they leave,” Streit says. “And with some people who have up to an hour (commute), if someone offers the same amount of money for a job closer to their home, they leave.”

A strong union militancy also makes it difficult to maintain a stable workforce. Last year, workers went on strike for several weeks, demanding higher wages. A compromise eventually was reached, but it cost the plant some 5,000 units in production.

The average age of the plant workers is 30.8 years, and the average monthly salary is RR21,000 to RR48,000 ($814 to $1,860), which Ford says is somewhat high for the region.

The education level is high, with 100% having finished secondary school; 39% possessing diplomas from vocational schools; 37% with degrees from technical colleges; and 24% with a higher university education.

Out of the 2,400-plus workers who operate on three 8-hour shifts a day, about 39% are women. However, Russian law prohibits women from working in the body shop due to the physical nature of the job. As such, female employees largely are relegated to the paint shop.

Ford, which launched operations in July 2002, says it was the first foreign auto maker to open its own assembly plant in Russia. The facility currently assembles the Ford Focus C-car in four body styles: 3-, 4- and 5-door models, plus a wagon, and is ramping up to add production of the Mondeo.

Capacity has been expanded several times and will reach 125,000 units annually in early 2009, up from the 25,000 when the plant opened. Ford says it sold 200,000 vehicles in Russia last year, including imports, with the Focus its best seller.

Maintaining operations for six years, while at the same time increasing capacity, has required a lot of give-and-take with government officials. Regulations change quickly in Russia, sometimes for no apparent reason.

Such was the case when the government seemingly overnight deemed a common auto part radioactive.

“Suddenly, there was a customs code indicating there was some radioactive material in a component,” Voight says, declining to identify the part. “We imported this (component) into cars and vehicles for many years and never had a problem.”

“But suddenly it must go to a central laboratory to be investigated to see if (there was) some radiation. It all takes time. But it never came to the point where we had to shut down.”

Another regulatory snag occurred when the government decided the plant was not properly licensed to use automotive coolant. “They said we didn't have a license to import alcohol,” Voight recalls, noting the situation was resolved without any work stoppage.

Owing to the difficulty of dealing with evolving regulations, it's important to develop close ties to regulators, OEMs doing business in Russia say. But boundaries must be set, as it's not uncommon for some officials to ask for monetary compensation in return for assistance in cutting through red tape.

“We haven't given anybody anything for being friendly to us,” Voight says. “This is what is very much in people's minds, that in this part of the world you achieve a lot by paying people. But if you start this once, you will never get rid of it.”

Due to the plant's remote location, there are few suppliers nearby. Most parts are imported from Western Europe, making it difficult to operate a just-in-time operation. The factory generally has about a 3-day supply on hand at any given time.

Additionally, poor roads leading to the facility make it an arduous task to transport parts and finished products. Plant officials have worked with the local government to improve infrastructure. But money for such projects is scarce, and with the region's harsh climate, road upgrades quickly deteriorate.

The plant's location does offer some advantages beyond access to the growing Russian market. For example, due to relatively low labor costs, compared with some other regions of the world, the facility is able to operate with less automation, thereby reducing costs.

Streit says the plant is the only Ford factory in the world able to build all variations of the Focus.

“We are seeing a slight ramp-up in automation. You can see it in our Mondeo body shop, where there are a few robots,” he says.

Despite a heavy reliance on manual labor over automation, vehicles built here meet or exceed the level of Ford plants in Europe, Voight boasts.

“That demonstrates the ability of the employees,” he says. “Many people like what they're doing and feel responsible for what they're doing.”

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