Nov 20, 2013

Mitsubishi Motors considering TSR for Russia-bound CKD kits: VP Harunari

Hiroshi Harunari (left), vice-president of Mitsubishi Motors, at the speech table

Hiroshi Harunari, executive vice-president of Mitsubishi Motors Corp., talked about the current state and future outlook of the company's production/logistics systems in Russia at the country's Kaluga Presentation that was held in the city on November 18. Mitsubishi Motors currently manufactures two vehicles, including an SUV, through PCMA Rus, the assembly plant that it jointly owns with PSA Peugeot Citroen. CKD (complete knockdown) kits are hauled by sea from Japan and Thailand. However, the company is considering using the Trans-Siberia Railway (TSR) in order to shorten the lead time, so it will also conduct trials going forward. Meanwhile, it will engage in the promotion of the localized procurement of parts and materials not only to control the exchange rate fluctuation risks and the rise in costs, but also to continue enjoying tax exemptions in the country. Mitsubishi Motors aims to realize 50% or higher localized procurement ratio in the future, with Harunari saying that, "We are eager about the foray of Japanese-affiliated suppliers."

Located in Rosva in Kaluga province, southwest of Moscow, PCMA Rus kicked off operation in 2009. Apart from Mitsubishi Motors' Outlander and Pajero Sport, it also manufactures Peugeot, Citroen brand's C segment sedan and other vehicles. Its factory has a total floor area of about 145 hectares, housing two lines each for car bodies and assembly and one painting/coating line. Its annual production volume of the two Mitsubishi models totals about 40,000 units.

With regard to the backdrop of selecting Kaluga for its production site, Harunari said that, "The provincial government's acceptance and support of foreign-funded entities have been beefed up and it is close to Moscow, which has a population of around 10 million people. Relatively inexpensive labor can also be secured in the area and we get to enjoy tax exemptions such as fixed asset and corporate taxes, so we decided to make a foray into this region." The company initially started with the semi-knockdown method, but it began CKD production for the Outlander in November 2012 and for the Pajero Sport in July 2013.

CKD kits are hauled via containerships from Japan's Okazaki plant and Thailand. The cargoes are unloaded at the Tallinn port of Estonia and then transported by railway to the factory in Kaluga. The Russian plant has its own railroad service track and customs clearance procedure is done within the plant, thereby making the process extremely smooth. However, it takes a rather long time of about three months from the time of ordering up to actual delivery, so Mitsubishi Motors is thinking of using the TSR in order to shorten the lead time since there are problems such as the long time needed for reflecting packaging and design changes, among other issues. It is already conducting trials and has verified that there are no problems in collapsing loads and so on. Now Mitsubishi Motors is scheduled to undertake trials for CKDs as well and if transshipment at Pusan port is done smoothly, it will be able to cut the transport time by a wide margin.

Meanwhile, Mitsubishi Motors will also mount activities toward the enhancement of the localized procurement ratio. PCMA Rus has entered into a localized procurement provision with the Russian authorities called the D166, which would require it to raise its local procurement ratio in stages of 24 months, 42 months and 54 months from commencement of production in order to continue enjoying various tax exemptions. With this, the company has to clear the required 30% and higher local procurement ratio and annual production output of 25,000 units and higher by March 2018. As a result, customs duties that usually stood at 5-20% for CKD imports will drop to 0-5%.

Mitsubishi Motors is moving to boost the ratio of locally procured parts not only to comply with the D166 agreement, but also to reduce the exchange fluctuation risks and transport costs. It plans to frontload the attainment of the above target to 2015. Meanwhile, Harunari pointed out that, "Even major global suppliers rely on imports for small parts, so there is a shortage of suppliers in the Tier 2 and lower categories. The suppliers are also made up mainly of European/U.S.-affiliated entities as there are no Japanese-affiliated enterprises who have advanced into this region. We expect the advent of Japanese-affiliated suppliers from the perspectives of cost and quality, too." South Korea's Hyundai Motor Co. has advanced the local procurement of its parts, including from its affiliated suppliers, so its local procurement ratio has already exceeded 50%. Mitsubishi Motors wants to achieve a local procurement ratio of 50% and above, too.

Further, Harunari said that, "There are various problems at hand, including the language barrier, the long time needed in obtaining the necessary licenses, the numerous document procedures and the complicated taxation system in the country." He stressed that, "Russia's automobile market is projected to grow to the 5 million-unit level in the future. And while it would take time for the procedures, there is support from the provincial government, so Russian businesses have so far been progressing virtually in accordance of the plan." If the local procurement ratio surpasses the 50% level, then it would be possible for Mitsubishi Motors to export its products to Ukraine, which is expected to manifest market growth henceforth, free from duty, as well as target as leading markets the former CIS countries which have a customs union with Russia. "We have an extremely strong sense of hope on the region's market scale in the future," claimed Harunari.

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