The announcement of a new joint purchasing organisation based on the principles of the existing Renault-Nissan purchasing unit could see more suppliers having to localise production

The Renault-Nissan and AvtoVAZ announcement that they are to establish a common purchasing organisation (CPO) which will supply the activities of all three companies activities in Russia could create a potential raft of opportunities and issues for suppliers. The new purchasing organisation will be equally owned by AvtoVAZ and the Renault-Nissan Purchasing Organization (RNPO) on which the new CPO for Russia will be modelled. The current Renault Nissan purchasing department has been extremely successful in lowering the purchasing costs of both companies and unlocking synergies. The RNPO is the largest joint entity in the Renault-Nissan alliance and it covers all purchasing activities of both Renault and Nissan worldwide. The CPO will generate significant savings for the three partners in Russia thanks to increased volumes and better pricing with suppliers, using the established techniques and methods which saw RNPO generate EUR851 million in cost-saving synergies in 2012, which accounts for about a third of all synergies, which result from the relationship between Renault and Nissan.

The techniques that the new CPO will employ which will be taken from the Renault-Nissan's existing operation include communicating "a common position to suppliers on quality, costs and delivery deadlines, as well as develop relations with suppliers in order to increase parts localization in Russia". The CPO will attract global companies to the AvtoVAZ and Renault-Nissan supplier base, with some of the companies likely to engage in new investments in Russia in order to service the new joint purchasing alliance between the two companies, something that is also being encouraged by the Russian government's Decree 166 automotive industry, a portion of which is given over to encouraging foreign direct investment (FDI) from foreign automotive suppliers in an effort to modernize and bolster Russia's automotive supplier base. This will create pressure on existing suppliers when it comes to contract negotiations to include the Russian OEM in its thinking. Whilst there are opportunities to scale up production, there may also be pressure to localise production in Russia, with all the challenges that presents.

The Russian automotive component industry still lags behind the levels of investment that have been made in OEM production sites, which means the ratio of component imports by foreign OEMs into Russia is still relatively high. The implementation of the RNPO agreement will also accelerate the requirement of AvtoVAZ's suppliers to meet Renault-Nissan's quality standards, with the company requesting that 80% of AvtoVAZ's domestic suppliers meet Renault-Nissan's global standards by the end of the year

In terms of the direct alliance on model development and production, this will soon span five models across three brands being manufactured across three brands – Lada, Renault and Nissan. Investments in this project will total about EUR400 million. The joint purchasing company will initially be tasked with ensuring the purchasing and component costs going into the manufacturing of these vehicles will be as low as possible, therefore maximising the profitability of the new integrated entity operating in Russia. AvtoVAZ's sales have stagnated at the 600,000 mark while the Russian market has continued robust growth. Foreign OEMs have eroded AvtoVAZ's market share as consumers increasingly shun the company's outmoded model range, instead opting for a new generation of models being built by foreign OEMs in Russia, which have been designed specifically for the Russian market in mind, such as the Hyundai Solaris and the Russian-market VW Polo.

The fact that AvtoVAZ only just launched in July its first Renault-derived model in the form of the Lada Largus, more than four years after the two companies first sealed their alliance, indicates how difficult it has been to cement a meaningful partnership to make the best use of Renault technology and Lada's leading position in the Russian market. This will also concern suppliers, who will see this as an example of the difficulty of integrating into the Russian market.

AvtoVAZ is hoping to increase the number of its suppliers that comply with its de facto owner Renault-Nissan's requirements up from the current level of 66% to 80% by the end of the year. Commenting on the drive to increase supplier quality and procedures, AvtoVAZ president Igor Komarov said in July, "Currently only 66% of suppliers meet with the requirements of the Renault-Nissan Alliance. The task is to increase that to 80% by the end of the year." The company's current suppliers will be subject to the Renault-Nissan Alliance Suppliers Evaluation Standard. The suppliers that meet the necessary level of quality will be hired for future vehicle projects by the extended alliance between the three OEMs.

While the integration of the purchasing departments presents an opportunity for suppliers to scale up production in a European market, their enthusiasm may be dampened by issues of quality and localisation.

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