NOTHING VENTURED

Jan Madeja:

Russians love Mercedes-Benz and we love Russia

Capital Ideas talked about weekdays at Mercedes-Benz Russia with Jan Karol Madeja, the company’s CEO

Mercedes-Benz can be rightfully called a pioneer of the automotive industry, as well as pioneer in terms of cooperation with Russia. The first Benz was delivered to Moscow in 1894, and the first shop to sell Daimler-Motoren-Gesellschaft vehicles opened in Moscow in 1910. Just two years after that, the company became the official supplier to the Royal Court of Russia.

In 1923, the capital of the USSR opened its doors to the company, which transformed into the Daimler-Benz AG concern within three years. In December 1994, it became the first foreign company to establish a subsidiary in the RF. The subsidiary was called “Mercedes-Benz Automobiles,” and was later renamed “Mercedes-Benz RUS.” The company sells Mercedes cars and smart vehicles, as well as low-tonnage Mercedes-Benz cars. Among them is the SprinterClassic, which is manufactured by GAZ in Nizhny Novgorod, 440 kilometers outside of Moscow. Diesel engines for the vehicles are assembled at a plant in Yaroslavl – a major industrial center on the Volga, 280 kilometers outside of the Russian capital.

Mr. Madeja, people inevitably ask questions about the company’s plans with respect to building their own plant in Russia. Why didn’t you abandon this idea during such difficult times, when a lot of companies are exiting the Russian market due to the crisis, the ruble devaluation and the sanctions? Why do you need your own plant in Russia?

I’ll start by noting that there aren’t “a lot of companies” exiting the Russian market. Yes, some companies are leaving. I personally know of only two that are exiting the Russian market. But to address your question directly, when you have a plan that you have been discussing for some time, weighing the pros and cons of the project and outlining the specifics of opening your own plant in the RF, you don’t think in terms of two, three or four-year time spans. We are talking about strategic planning, and the time frames for such projects are much longer: 10 or 20 years. I don’t think anybody would deny the fact that Russia has been, is and will continue to be, an important market.

Yes, there are certain challenges that Mercedes-Benz encounters, but I am confident that the Russian market will, in one way or another, recover – maybe in a year or two. This is not just my own personal opinion. If you read through expert studies, all of them agree that the Russian market is recovering. It is likely that it will not reach the same level as three-five years ago over the next 10-15 years. But I’ll say it again: we’re talking about strategic planning, which isn’t impacted by temporary fluctuations on the market. This is why “Mercedes-Benz” has not abandoned plans to build a plant in Russia.

How far along are your negotiations with the Russian authorities regarding the construction of a Mercedes-Benz plant in Russia? Have you already decided on the plant’s location in Russia?

We really have been holding talks with Russian official bodies for over a year. A big challenge here is defining the conditions that comprise the framework for the implementation of this project. In Russia, these endeavors are carried out on the basis of the Government Decree of the Russian Federation No. 166, dated March 29, 2005, on the Amendments to the Customs Tariff of the Russian Federation with respect to components imported for industrial assembly. This document gave auto manufacturers the opportunity to import an entire series of components at preferential customs tariffs for industrial assembly purposes. However, this decree is only in effect until 2019. So right now we are working with the Russian government to jointly set up conditions that will define the flow of our operations after 2019. The agreements have not been signed yet, but we are moving forward and I am confident that we will complete the negotiations in the next few months.

What kinds of vehicles do you plan to manufacture at this plant?

This doesn’t matter that much. We can manufacture several kinds of cars, including sedans and SUVs.

But you were promised some kind of state support and you’re guaranteed preferential advantages, right?

That’s the question. Everything comes down to the Government Decree No. 166, which we already talked about and which gives us certain advantages. Now we’re trying to figure out what’s going to happen after 2019. In other words, since we want to implement a long-term project, we need transparency and stability for the next 10 years or so. Then we would feel confident.

Mercedes-Benz sold over 41,600 cars in Russia in 2015. This is a lot, considering the present state of affairs and how hesitant most Russians are to make major purchases. What are your plans for this year?

Considering today’s challenges, talking about specific plans in Russia for the near future, for the next few months, is not an easy task. First, it is important to point out that we are at least seeing the market in Russia stabilize to an extent. There hasn’t been a revival yet. We are not expecting a significant recovery in the coming weeks or months, but it is stabilizing. Suffice it to say that, for example, in July 2016, we saw an increase in the number of sales for the first time in several months. It was a growth of only one percent, which, of course, is not much. Nonetheless, this is evidence that the market is stabilizing.

In terms of the upcoming months, we expect that the Russian market will continue to stabilize. This depends a lot on one important factor – the stabilization of the ruble. If this happens, the development will, among other things, play an important psychological role – people’s trust will be restored, along with confidence in the Russian currency and the country’s economy. Then, people will be ready to make new purchases. That is, if the Russian currency stabilizes over the next few months, which I am very much counting on, market stabilization will follow. We are expecting that the Russian market will go through somewhat of a revival in 2017. That’s our assessment of the present state of affairs on the Russian market.

Who are the main clients of Mercedes-Benz in Russia? Are they primarily state institutions? What is the share of individuals in the company’s sales volumes in Russia?

Quite the opposite, our main clients are not state institutions, which make up less than one percent of the company’s sales volumes. We sell 100 cars to government structures every year, maybe 150. Of course, this is a significant area of our activities in Russia, because it is important to have a presence in this segment. However, it is not a determining factor for us. Our main clients are businessmen, managers, individuals. There are a lot of women among them who love driving our cars. In terms of business people, they are, for example, Gazprom or Rosneft employees. If you think of the top ten companies in Russia, all of them have employees who drive our cars.

How will Mercedes-Benz continue to develop in Russia in the future? Are you planning to expand your operations across major centers like in Moscow and St. Petersburg or are you going to strengthen your efforts in the regions?

In order to understand the trend, all you have to do is look at the facts. In 2016, we plan to open 7 or even 8 completely new Mercedes-Benz dealerships in Russia. I want to highlight that we’re not talking about upgrading or modernizing old dealerships, but about erecting new ones. One of these dealerships will be in Moscow, and another one will be located in St. Petersburg. However, the geographical scope of new Mercedes-Benz dealership locations is a lot more expansive. These include Kaluga, which is located in the Central Federal District and 160 kilometers outside of Moscow; Rostov-on-Don, the largest city in the south of Russia with a population of over one million people; Ufa, the capital of the Republic of Bashkortostan; Nizhny Novgorod, the administrative center of Nizhny Novgorod Oblast on the Volga; Astrakhan, the oldest cultural and economic center of the Nizhny Povolzhye Caspian region; and Perm, the port town on the Kama river in the eastern European part of Russia. Of course, the majority of our business takes place in Moscow. The Russian capital is the biggest market, followed by St. Petersburg, but we are not forgetting about the regions and plan to expand our business there as well.

How do you assess the potential of the Russian market? Do you think it will continue to be attractive to Western business people?

This is not a tough question to answer. Take Mercedes-Benz, for example. We have been on the Russian market for over 40 years. We’ve been through a lot during our time here: ups and downs, perestroika, the default of 1998, the crisis of 2008...these were incredibly dynamic times. But we have always been present in Russia and are happy to work here now. Russians love Mercedes-Benz and we love Russia. I don’t think anybody doubts that the Russian market will recover. Perhaps we won’t reach our former sales figures of 3.5 million cars in the next 5-10 years. Let’s say it will be closer to 2.7-3 million cars. In any case, Russia will remain the second or third largest distribution area in Europe. Thus, Russia is and will continue to be a strategically important market with a lot of potential.

There is another important indicator: the country’s average number of cars per 1,000 residents. In Germany this indicator is 570 cars, in the US the number is over 600, in Poland it is around 400 and in Russia it is about 330. That is, we are far from market saturation and the potential is obvious. And now do the calculations. If, for example, Russia reached the same level as Poland in the segment, you immediately need an extra 10-15 million vehicles. Is this not possible in Russia – a country that has gone through so many trials and tribulations, that is now rediscovering itself. Why would Russians not be capable of this?

You had an anniversary in August 2016: 4 years as CEO of Mercedes-Benz RUS. Could you tell us a bit about your experience? Has it been interesting?

You are well informed. Well, look at me: do I seem sad or disappointed? No. I greatly enjoy working in Russia. I’ll be honest: there is a lot Mercedes-Benz has to be proud of in Russia. Take, for example, the product sales network in Europe, in countries such as France, Germany, Italy, England and so on. I guarantee that Mercedes-Benz has the most up-to-date and luxurious sales network in Europe. It’s enough to visit the Mercedes-Benz Plaza, our head office on Leningradsky Prospekt in Moscow, and you will see how solid investments and creative ideas allowed us to create a completely different world when it comes to sales. This is especially true of our showroom, which is unlike any other showroom in the world. There is not a single desk in there. It’s more like a museum of sorts, a completely different sales world where everything runs on digital technology and where the salesperson meets the client in a cafe. That is, you’re not sitting at a desk in front of a monitor, but at a cocktail bar, eating fruit while watching a demonstration and listening to the advantages of a particular model. The contracts are also signed here.

Mercedes-Benz RUS is an innovative and creative enterprise that has implemented innovations of every scale, both big and small. Thus, I have to say that our activities here have had a positive effect. We are clearly a leader on the Russian market and are well ahead of our competitors. We are an extremely strong brand in Russia. What else could I ask for?

How do you like Moscow? Do you feel comfortable here?

Overall, I’m the kind of person who feels fine anywhere in the world. It mostly depends on the person, not so much on the city. The city has to be safe, clean and cheerful. Moscow is this kind of city. Moscow is a tense, stressed and busy city. The Russian capital’s traffic jams serve as a testament to this. I’ll give an example. I lived in Stuttgart, which is where the Mercedes-Benz headquarters is located, for several years. I then lived in Warsaw, Poland. I used to tell my friends and family that Warsaw is a very interesting city compared to Stuttgart: everything is somehow overwhelming, people are always in a hurry, there are always traffic jams. There is a lot of pressure. After I moved to Moscow from Warsaw, it took me just three days to understand that Poland’s capital was actually a relaxed and calm city.

Moscow is a metropolis that never sleeps. There have been several times when I flew into Moscow at one or two o’clock in the morning and got stuck in traffic jams on my way home from Sheremetyevo. At the same time, Moscow is an entertaining, thrilling city that is colorful in all of its extremes, is multifaceted and alive.

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