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Russian Bus Fell Victim To Administrative Economy

Russian Bus Fell Victim To Administrative Economy

10.11.2009 — Analysis

Russian Buses - GAZ Group announced that the further fall in demand for medium size buses in 2010 may result in the shutdown of the Kurgan Bus Plant LLC (KAVZ). Regional authorities are against the shutdown of the plant, they suspect that the proprietors are not willing to develop the production. The RusBusinessNews observer found out that KAVZ makes products which are in demand but the "Russian style" business does not leave the plant much chance for a place under the sun.

The Kurgan Bus Plant in the soviet times used to produce 20 thousand light buses on the chassis of the GAZ truck. In the nineties with the declining demand from agricultural enterprises KAVZ almost went bankrupt and in 2001 the plant was given a second chance becoming a part of the GAZ Group's bus division.

The new proprietor made a decision to run assembly of medium size intercity coaches Avrora in Kurgan out of components made by the Pavlovo Bus Plant (PAZ). The Kurgan plant having started, essentially, the semi-knock down operation had found out that the transportation of large parts from the Volga region is rather expensive and began the modernization of their production capacities. As a result the two models for exurban and intercity travel have been developed on the basis of Avrora - KAVZ-4235 and KAVZ-4238.

These vehicles are truly international: the engine is supplied from China, gearbox and clutch from Germany, axles and driveshafts from Kanash Vehicle Unit Production Plant (Russia), and steering from Byelorussia. On the wave of economic growth KAVZ was making 3,500 vehicles per year. In 2008 the decision has been made to develop the production of a low floor city bus. Components for this were predominantly from China.

The plant's employees claim that the exurban bus model KAVZ-4235 adapted to work in urban conditions is in demand in Russian megapolises: Saint Petersburg purchased about 400 of these buses and is planning to buy further 200. The only obstacle is the lack of money. Manufacturers also have financial problems during the crisis.

In 2009 it became expensive to purchase components abroad and there is neither an engine nor other components of required quality available in Russia. The medium size bus market has shrunk by about 70% according to the data provided by the GAZ Group's press service which affected the workload of KAVZ: in January, February, and May the plant did not produce, in the summer it was working only three days a week. The situation was improved a little by the federal programme on the modernization of municipal automotive transport, thanks to this programme the plant, according to the data provided by Aleksey Simanov, the Deputy Governor of the Kurgan Oblast, the Director of the Department for Industry, Transport, Communications, and Energy, will sell 700 buses in 2009 which will enable the company to pay wages and taxes. The regional administration reckons that in 2010 KAVZ will be able to manage to break even too.

The plant's proprietor's assessment of the situation, however, is more pessimistic. The press service of the GAZ Group has circulated the statement from which follows that the next year will bring further fall in the market because the timeframe of the federal programme for the modernization of passenger transport is running out in December 2009 and the market of affordable financial tools (loans and leasing) for the consumers of buses and coaches is still not working.

Today, claims the proprietor of KAVZ, the Russian market is capable of consuming about a thousand medium size buses per year. It is clear that this amount can be produced by the Kurgan plant alone, but there are also PAZ and Ukrainian and Byelorussian plants. Taking into account the end of the federal programme KAVS has managed to sign contracts for 2010 only for 300 buses which is twice lower than the break even point. The GAZ Group's management said that if the amount of orders does increase the Kurgan plant will cease production until better times.

Aleksey Simanov reckons that the proprietor decided to halt KAVZ, take away its developments, and start producing those at the Pavlovo Bus Plant. In unofficial conversations employees of the GAZ Group trading house admit that the Kurgan branch at worst will be able to sell 500-600 vehicles in 2010, at best - up to 1000.

The GAZ Group press service denies the claims of the Kurgan authorities: "The possible shutdown of the production at the Kurgan Bus Plant with the future reopening is determined by the economic indicators rather than the desire of the company to load the Pavlovo Bus Plant's production capacities. In the current year PAZ, according to the implemented measures of the anticrisis programme, has a stable workload until the end of this year and the established order portfolio for 2010."

KAVZ employees explained RusBusinessNews how the Pavlovo plant manages to ensure the production workloads: in 2007 managers of the bus division of the GAZ Group, being former PAZ employees, stopped the production of the countryside bus (so called "school bus") in Kurgan and using the existing technologies modernized the outdated PAZ buses. Today the demand for PAZ buses is declining again forcing the GAZ Group to look for a solution.

The trend, evidently, is leaning toward the medium size buses as the transport companies prefer neither little PAZ buses, nor large Ikarus buses but vehicles about 10 metres long. Kurgan experts assess the capacity of this market to be 3,000-4,000 units. Aleksey Simanov reckons this is the market that the Pavlovo plant is aiming for, having got the KAVZ-4235 and KAVZ-4238 models it would be able to increase the production of medium size buses to 1,500 units per year, increasing the total production to 9000 units.

It is possible that this is why the GAZ Group bus division managers are in no rush to advertise the Kurgan buses. Yuri Minin, the Director General of the Ekaterinburg transport company UVA-Trans says that transport companies have not seen the low floor bus in action yet. The manufacturer, in the expert's opinion should come to the consumer and offer a test drive of the new vehicle so the end user could compare it to similar models.

Experts assert the Kurgan plant's products are better than those from Pavlovo. KAVZ reorganised its production and at the moment has the lowest fixed costs amongst the GAZ Group's companies. During the crisis they obtained a certificate for a vehicle designed for the transportation of schoolchildren and the development of the "cheap" city bus model KAVZ-4238-04 has begun. Also the plant is planning to produce 80 low floor buses in 2010. They will be buying not the assembled chassis in China, but separate units (axles, engines, steering, gearbox and clutch assemblies).

There is interest to KAVZ products, but they need further promotion. Owing to an advertising campaign Ukrainians have once managed to conker the Ekaterinburg market with their Bogdan-Isuzu model. Neftekamsk Auto Plant offered good terms of contract for municipal transport companies and the number of NefAZ buses in Ekaterinburg is rapidly increasing despite the fact that these vehicles are more expensive than Kurgan buses.

Instead of the development of a promotion strategy the GAZ Group chose a simpler way focusing the bus production at just one site. Experts, however, say that the market is capable to consume the products from several Russian medium size bus manufacturers at the same time.

Experts more familiar with the situation in the automotive sector assert that the GAZ Group will split into several companies: independent companies will be making trucks, buses, and cars. It cannot be ruled out that the bus division managers are trying to grab whatever they can at the moment.

In the interests of Russia, experts claim, it would be better to have several competing companies: there are no bus manufacturers further east than Kurgan, and only Chinese and Korean buses are used there.

Vladimir Terletski

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