Effectiveness Measured in Мoney

Last year, the Russian automotive market returned to long-awaited growth, breaking the five-year pattern of decline. The preliminary results of the first months of this year seem to confirm this trend. For your part, do you see a revival? How do we explain the fact that, in terms of growth rates, demand for commercial vehicles is still lower than for light motor vehicles?

Of course, we are seeing growth in the LCV market. And, yes, indeed, growth is not as dynamic as in the light vehicles sector, because the commercial vehicle market is traditionally more conservative and slower. But, clearly, we do see growth.

To a large degree, it is explained by the deferred demand for cars. There was a period when, due to the general economic situation, companies did not modernize their transport fleets. Now, we see improvements. In addition, there is a seasonal factor – spring is always a high season. In addition, we must remember the effect of a low starting base.

But, at the same time, over the past few weeks, there have been changes that will definitely lead to an increase in the cost of cars on the Russian market. So now there may be some rush demand in the moment for all cars, including light commercial ones. Then we expect a slowdown in growth.

What changes are you talking about?

First of all, I’m talking about sanctions. Their introduction led to a rise in component prices because it’s no secret almost all cars, even those assembled in Russia, have components that are purchased with foreign currency. Changes in the exchange rate led to an increase in the cost of purchased products for automakers. In addition, the cost of metal has sharply increased, which also has an immediate effect on the price of the car. In general, there is a whole set of factors that could lead to a jump in car prices. Buyers, both companies and individuals, are well aware of this fact and rush to buy vehicles at ‘old’ prices, as long as this is possible.

In addition to the price surge, obviously, there are, however, fundamental reasons for the increase in demand for commercial vehicles, like economic growth. How important to you is this factor?

It is important. Of course, we are watching all indicators: the index of industrial production, consumer demand, and similar indicators. And all of them now show positive changes. At least, there is a trend toward growth. Of course, among other things, this affects the purchasing power and the demand for cars. We see that the market as a whole is growing steadily for the third month in a row.

How do you explain that the growth rate of UAZ LCV sales last year was twice as slow as its main competitor, and almost three times slower than the average market indicators?

The fact is that UAZ has been on the market of light commercial vehicles for a long time. But until recently, we actually had no product that would fully qualify as a light commercial vehicle. A typical example is the UAZ-452 or the so-called ‘Loaf’, commercially produced since 1965, which is a light commercial vehicle, but is not fully a vehicle for widespread business use.

In order to eliminate this very gap, we launched a new model of light commercial vehicles at the end of last year – the UAZ Profi. Its load-carrying capacity and GVW parameters have brought UAZ into a new market segment – the segment of the mass-produced light commercial vehicles. Today, one manufacturer – GAZ – still dominates this domain.

This product is currently in active development. There have been many new modifications – with a double cabin and with certified gas-cylinder equipment, which is also produced at the plant. A modification on compressed natural gas is being developed. Recently, we have passed the certification for vans, their most common types – box van and refrigerated van. In other words, we are actively developing this platform and expect to see sales of this segment grow for us.

Can you describe the distribution and particularities of demand for your vehicles?

Strangely enough, light commercial vehicles are used not only by commercial organizations. Demand for our cars is divided between individuals and legal entities in almost equal parts, approximately 50/50. Small businesses and private businesses are one of the main consumers of this type of vehicle. We can say that they are more receptive to innovations. Legal entities are more conservative. They need more time to believe in a product.

We are now working in this direction, but according to my forecasts, we will reach the target balance next year. We strive for a sales ratio of approximately 60/40 of legal entities and individuals in sales, respectively. At the same time, we are counting on their cumulative growth of about 30%.

How are you going to achieve it?

First of all, growth will be associated with our new product, of course. It is very flexible. Success lies in offering the market the maximum number of modifications. In addition to what was said above, we have already received the certification of our milk truck, a bread van, a water tank, a mobile gasoline tank, a hydraulic lift, a crane-manipulator system – all of them will be built on the UAZ Profi platform.

In other words, we are expanding our product line. And, of course, this will lead to increased sales. But the most massive modifications were the vans, and we concentrated primarily on them. It is this modification that is now most in demand in the market, including by private individuals.

A LIFE-LONG CONTRACT

Relatively recently, UAZ brought a comprehensive transportation service to the market. Could you provide details?

Indeed, we are employing this model, which is relatively new for the Russian light commercial vehicles market. It promises service and interaction with the client regarding transport services on the basis of the so-called life cycle contract. Such a contract implies not only the sale of a car, but also its support during the whole period of operation, when it enters service, the supply of spare parts, and various additional options like storage of winter tires, for example, car washing, and so on. Perhaps these are trifles, but they greatly facilitate transport operation.

In addition, the life cycle contract provides for the repurchase of the vehicle. In other words, at the very start, at the time the vehicle is sold, we guarantee our buyer the vehicle’s secondhand value. Thus, the client understands very clearly the costs of buying, operating, and selling the vehicle and can easily set a budget necessary to update their fleet.

We, the manufacturers, receive big benefits, too, such as a clear view of the renewal periods for the client’s fleet, which gives us the production load. This is a clear understanding of our clients and their needs, because we are there with them at every stage.

This is not our invention or know-how. The model I described has already been implemented in Russia through operational leasing: When buying a car, the customer can get such a service. There are also companies that provide professional support services and automotive outsourcing.

We as manufacturers decided to do it ourselves. Ours is a service vehicle, a rather niche one. We know almost all our customers by name. And this allows us to establish direct interactions with them and be with them right up to the moment the old car is sold.

Practice shows that our model, including this one, interests companies, especially large ones.

Why is that?

The fact is that large companies have a certain inefficiency in the operation of transport, because this is not a profile activity for them. This is just a related function that allows them to perform their basic work. Therefore, usually, when a professional transport company starts working there, it finds inefficiency in a variety of areas: in the purchase of cars, in their operation, and in fuel costs.

For your understanding: Fuel costs are about 80 percent of the cost of operating a car for its life cycle. Therefore, the fight for fuel efficiency is very important. It is for this reason that all the vehicles that we sell as part of this program are equipped with systems that allow for controlling fuel consumption. Among other things, through analyzing the driving patterns of a particular driver, the systems that we install in vehicles allow us to track errors more accurately – speeding, acceleration, braking, sudden changes – and make appropriate adjustments. Often, the KPI of a particular driver is in their manner of driving. Naturally, when you point out a person’s mistakes, the person becomes more careful. This has a positive effect on the overall operation of the car, as well as reduce injuries, accidents, and, of course, the death rate among staff. This is also a big problem for companies that have a large car fleet.

Is there a conflict of interest in such a scheme? If the customers completely transfer the duties of building and operating their fleet to you, how can they check the quality and price of the service?

The question is somewhat different. We do not offer functions; we take them on. For example, if we are talking about transport outsourcing, when we provide a turnkey service and we are responsible for the operation of the transport, not just car sales, then we are directly interested in reducing costs. This is our effectiveness. And we are ready to share our effectiveness with our customer.

In addition, when signing the contract, we are already committed to reducing current operating costs for fleet operation. I repeat: Often for the customer, the vehicle operation function is uncommon and problematic. And the customer is prepared to outsource it to a professional operator.

Of course, we face difficulties on the ground. But these difficulties are mostly associated with the staff that operate the transport as part of the current concept, naturally, because, for them, all these issues that we begin to work on – fuel consumption, lower operating costs, work with original spare parts, and so on – are rather painful. But at the level of business leaders, at the level of people who make decisions and who want to get efficiency, of course, our proposal looks very attractive.

Do you already have some cases?

We are in the process of implementing several contracts. They are different in volume and structure because our customers have different approaches to the operation of transport. In some cases, transport should be on its own balance.

In other cases, it should be on ours. In some cases, drivers work within the structure of the customer, because they have certain skills and requirements that can be maintained only within the framework of that particular company. In such cases, we only rent out the vehicles to them in one form or another. There are many options.

Where do you get the resources to implement such a program? Obviously, it requires a lot of expenses and a lot of organizational work, both of your own structures and on the side of the customer.

In fact, this is our main difficulty because there are a lot of ideas, but integrating them offline is a difficult task. We have formed a separate unit that is responsible specifically for the development of transport outsourcing. We view this as a separate business line.

What place does such work occupy within the company’s business now and in the near future?

We are only at the beginning of the journey. Until now, the share has been very small, within 5–7% of the total. But we can see how quickly businesses that have to do with ‘alternative’ car ownership are developing. I mean services such as catering, rentals, and the like. Currently, they mostly affect private individuals. But, we believe that legal entities will eventually become more and more willing to switch to this format of having transport as a service.

Of course, companies for which transport is the main activity will manage this function independently. But all the rest will either outsource it or rent the necessary vehicles and will shy away from acquiring it as property. I’ll repeat myself: We are able to comprehensively achieve the objective of the customer with an understandable, transparent budget and clear, transparent effect, because we measure it in money.

So, we look into the future with optimism: Within the next 3 years, we expect an increase in the range of 8–10%. We have a positive outlook for the market.