#1Automotive Investments: Climate in Russia, Focus on St. Petersburg and Leningrad Region Dmitry Babiner Partner, Head of Tax and Legal Practice, Ernst & Young, St. Petersburg September 4, 2008 E ERNST & YOUNG Quality In Everything We Do#2Russian Profile for Automotive Investments ERNST & YOUNG Quality In Everything We Do#3Russian economy High oil prices support continued growth and strong ruble Domestic consumption surge (purchasing power grew by 13.5%) Most major ratings agencies - S&P, Moody's and Fitch - have upgraded Russia's investment rating Strong growth in the machine-building and automotive sectors (up to 10% and 5% in the last 5 years) and expected further growth of 12% to 2015 Nominal and real GDP growth US$ bin. 3000 2500 5.1% 2000 1500 1000 4.7% 7.3% 7.2% co 8 7.8% 7 6.7% 6.8% 6.4% 6.4% co 6 5.2% 5.2% 5 LO 4 3 2 500 1 307 346 432 589 763 985 2001 2002 2003 2004 2005 2006 1,288 2007 1,602 1.796 2.002 2,182 F2008 F2009 F2010 F2011 0 Real GDP growth (%y-o-y) Nominal GDP (US$ bln.) Source: Rosstat, Ministry of Economic Development of the Russian Federation, Ernst & Young September 4, 2008 3 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#4Tax situation improved ▶ If not a “tax heaven", Russia is among less “tax miserable" places now A few problems still remain, primarily related to implementation ► Still many uncertainties in application of tax law ► "Form over substance" approach is usually taken by the tax authorities "Budgetary plans" for tax collection Tax audits result in tax litigations in most cases ► Practical difficulties in VAT refund France China Italy Spain Turkey Japan Poland USA (New York) Germany United Kingdom USA (Texas) Tax Misery Index* Russia Ireland India 0.0 50.0 100.0 150.0 200.0 2000 2007 *Tax Misery Index is a sum of sizes of major tax rates. The higher the index, the higher is the tax load Source: Forbes (May 2007), EY Research & Analysis September 4, 2008 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#5Russian automotive market in global context Traditionally leading markets such as the US, Germany, and Japan showed a negative dynamic in car sales in 2007 China, India, and Russia surpass all sales forecasts In 2007 Russia turned out to be third in Europe and sixth in the world By 2012 the Russian Federation may sell more than 4.6 mln. passenger cars annually 2007 sales of new passenger cars in the top markets (thousand) US China Japan Germany Italy Russia United Kingdom CEE* France Brazil Spain India 0 2006 Source: Global Insight, Ernst & Young 2,000 4,000 6,000 8.000 10,000 2007 F2008 F2009 *CEE: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Turkey September 4, 2008 5 Investment Climate in St. Petersburg and Leningrad Oblast El ERNST & YOUNG Quality In Everything We Do#6WTO membership Vs Chamne on autions dumes lose on the abweel of the ams වල www.Agreementils off industrial assemow are not to be signed WORLD TRADE ORGANIZATION September 4, 2008 6 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#7Russian Automotive Market ► A record level of investment in the industry Commitment of most of the leading automotive players to establish manufacturing facilities in Russia with overall new capacity over 1.5 million units by 2012 ► A continued restructuring by Russian automotive players coupled with several international acquisitions ► A clearly intensifying trend of a shift in new car purchases not only toward foreign brands, but also toward a higher price segment ► A further aggressive expansion of car dealerships into the regions Intensifying competition in the car finance market with the appearance of many new players, including OEM banks, as well as attractive credit instruments September 4, 2008 7 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#8Russian Automotive Market Passenger car market sales estimated at over US$50 billion in 2007 New foreign brands sales (both imported and locally produced) estimated at more than US$40 billion Russian brand sales fell to US$6 billion Car market (US$ billion) 60 50 40 30 20 10 0 2005 + 57% +44% 2006 2007 September 4, 2008 8 Investment Climate in St. Petersburg and Leningrad Oblast Used imports New foreign cars Russian cars ERNST & YOUNG Quality In Everything We Do#91 half-year 2008 Sales of Passenger Cars Market share by brand in 1H 2008 Foreign brands sales continue to go up, 15.7% 24.8% however the sales Russian brands Hyundai Chevrolet Ford 2.5% growth rate has slowed 2.7% Toyota Nissan (+47% in 1H 2008 3.5% Mitsubishi Renault comparing to +70% in 3.7% ■Opel Daewoo 8.9% 1H 2007) 3.8% Kia Mazda 4.0% Honda Other 4.2% 7.3% 5.5% 6.9% 6.3% 2007 1H 2008 1H 2007 Gro Passenger Cars ('000) wth Russian 752 349,500 304,700 15 New Imports 1,194 760,600 521,500 46 Foreign Russia-made 452 300,500 198,600 51 Used Imports 380 201,800 160,100 26 TOTAL 2,786 1,612,400 1,184,900 36 Source: ASM-holding September 4, 2008 9 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#10OEM presence in Russia GM SUZUKI Bord GM MINSAN HUTA OBTOYOTA CHRYSLER St. Petersburg VOLVO * CITROEN RENAULT TRUCKS VOLVO Russia Kaluga Moscow IVECO Nizhny CHRYSLER Novgorod Izhevsk KIA FIAT SCANIA Elabuga Kazan ISUZU SSANGYONG MA Ulyanovsk Togliatti❤ Naberezhnye Chelny Taganrog Samara GM IVECO Miass September 4, 2008 10 Most global OEMs committed to manufacturing in Russia (over 1.6 mn cars); By 2010 the foreign OEM capacities are expected to overweigh the domestic ones; The CV market is closely following the passenger car market Number of OEMS from China is reducing significantly Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#11The Russian components industry ➤ Lack of the traditional tier division of component manufacturers due to the high level of integration with the major OEMs; ► Lack of a competitive technologies among Russian manufacturers as a legacy of the highly integrated vehicle manufacturing coupled with highly amortized equipment make most local component manufacturers not that attractive; ► The relatively long-term process of adapting new technologies and applying know-how to local manufacturers; Economies of scale are a must for attracting major foreign component manufacturers (most require a good over 200,000 units of car production in order to make an investment economically viable). September 4, 2008 11 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#12Suppliers presence in Russia Kaliningrad BS AGC TOYOTA BOSHOKU STADCO TYRES Automotive Johnson Controls TENNECO ThyssenKrupp A MAGNA BENTELER ▼ Russia St. Petersburg Valeo IHI LEAR CORPORATION *MICHELIN PILKINGTON Glaverbel SIEMENS VDO Automotive bosal sitech Fehrer Novgorod LEAR faurecia MAGNA CORPORATION ThyssenKrupp FICOSA International MARELLI Glaverbel Kaluga Moscow Nizhny Ryazan Kursk Novgorod MARELLI MAGNA MAGNE WEIGL KNORR-BREMSE FEDERAL MOGUL • Rostov September 4, 2008 12 SE SIGI STADCO BOSCH Automotive Cummins Kazan SIEMENS VDO Automotive /Tschistopol Naberezhnye Chelny vekaterin Togliatti/Samara Saratov /Engels ✔ VARTA THE BATTERY EXPERTS HAYES LEMMERZ O HAYES LEMMERZ JANTAS JANT SAN. ve TIG. A.S DELPHI HCC TENNECO Automotive A MAGNA e FEDERAL MOGUL Johnson Controls Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#13Decrees # 166 & 566 - conditions of application Welding, painting, assembling 14% after 18 months (1.5 years) Value reduction of the list 10% 24 months later (2 years) 10% 42 months later (3.5 years) 10% 54 months later (6 years) ~ 70 positions Seat parts Engine parts Value % of "List" Content 100 100 80 86 76 60 66 56 40 20 Decree #166 Amendments Safety bags Other Source: Ministry of Economic Development and Trade >18 <18 <24 <4254 Months Import duties CBUS - 25% Assembly 15% - Components - 0-5% ~ 130 positions September 4, 2008 13 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#14The industrial assembly legislation Vehicles Welding, painting, assembling in 18 months (1.5 years), 30 months (2.5 years) for new manufacturing Value Reduction of the List 10% 24 months later (2 years) 10% 42 months later (3.5 years) 10% 54 months later (6 years) More strict requirements on Value Reduction in SEZ (Elabuga, Lipetsk) up to 50% 54 months later (6 years) Possible ways of reduction: Auto components Organisation of serial output in 18 months (1.5 years), 30 months (2.5 years) for new manufacturing Value Reduction of the List 10% 18 months later (1,5 years) 10% 30 months later (2.5 years) 10% 40 months later (3.3 years) ▶organization of auto (sub) components production in Russia; ▶purchase of auto (sub) components at the domestic market; and ▶importation at the standard rather than preferred customs duty rates. September 4, 2008 14 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#15Why do OEMs require local content? Decree 166 (OEMs) was passed in 1H2005 and Decree 566 only in the end of 2006; Almost all new OEMs project are run under decree 166; OEMs who operated under different regimes (e.g. Ford under decree 135) switched to decree 166; ► Suppliers are coming with a substantial lag in time; Decree 566 still contains a number of uncertainties; Very few suppliers have already signed an agreement with MEDT (most just memoranda of understanding) Will decree 566 be extended to ensure investment into component manufacturing? September 4, 2008 15 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#16Localization matters By 2010 there will be more than 1,000,000 foreign passenger cars produced in Russia; By 2015 there the production of foreign OEMs will increase about four times; The share of work outsourced by Russian OEMS will rise to 45% in 2010; The same period will have a three-fold increase to 39% in the locally made components in foreign vehicles; Attractive opportunity for international suppliers as Russian OEMS prefer to purchase components from them because of greater quality, environmental and safety standards. 200K Bumpers, Seats, Exhaust Systems, Ceiling Upholstery, Batteries, Tyres etc. 500K 1,000K Chassis, Complex Plastic Components, Clutches, Pistons, SRS, Stamping, Power Train and Drive Train Components, etc 2007 Source: Ernst & Young Analysis II September 4, 2008 16 Investment Climate in St. Petersburg and Leningrad Oblast 2012 ERNST & YOUNG Quality In Everything We Do#17Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#18Automotive Cluster in St. Petersburg and Leningrad Oblast THE Финский NISSAN "Парна Sea port "Home" Cana Finnish Gulf HERCIGAN YS Sea port Ring road Magnetto Wheels * Πατρασκόμεν dre-tamaanas” проспекта" "Полистрова" nokian TYRES S STADCO Ford TENNECO Automotive Saint-Petersburg Johnson Controls A MAGNA Metamo «Обухово GM HYUNDAI SUZUKI BBB TOYOTA BOSHOKU TOYOT.. September 4, 2008 18 Investment Climate in St. Petersburg and Leningrad Oblast Source: St. Petersburg government ERNST & YOUNG Quality In Everything We Do#19Automotive Cluster in St. Petersburg and Leningrad Oblast Caterpillar ► Ford CAT Ford General Motors GM Hyundai Johnson Controls HYUNDAI Johnson Controls Magna International MAGNA ▸ Nissan NISSAN Nokian Tyres nokian TYRES ► Scania SCANIA Stadco S STADCO Suzuki SUZUKI Tenneco TENNECO Automotive ► Toyota ► Toyota Boshoku TOYOTA September 4, 2008 19 Investment Climate in St. Petersburg and Leningrad Oblast Source: www.st-petersburg.ru ERNST & YOUNG Quality In Everything We Do#20Advantages of Investing in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#21Advantages of St. Petersburg and Leningrad Oblast Convenient geographic location and developed infrastructure Favorable macroeconomic conditions Political stability Investment legislation Tax exemptions Qualified labor September 4, 2008 21 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#22Tax Incentives to Promote Investment St. Petersburg Profits Tax Investment of no less than RUR 150 m Tax rate: reduced from 24% to 20% (for investments of over RUR300 m) - reduced from 24% to 22% (for investments of over RUR150 m) Duration: 3 years Investments in processing industries of no less than RUR 3 bin during 3 consequent years Tax rate: reduced from 24% to 20% Duration: 5 years Assets Tax Tax rate: Exemption from the tax reduced from 2.2% to 1.1% Duration: 3 years Duration: 5 years Subventions NONE Agreement with NOT REQUIRED (except for major investment projects) government authorities September 4, 2008 Leningrad Oblast Tax rate: reduced from 24% to 20% Duration: payback period + 2 years Exemption from the tax Duration: payback period + 2 years Profits tax refund (difficult in practice) YES (a business plan with an accredited consultant's conclusion is required) 22 Investment Climate in St. Petersburg and Leningrad Oblast E ERNST & YOUNG Quality In Everything We Do#23Executive Authorities Concerned St. Petersburg Committee for Investments and Strategic Projects ► Chairman: Maxim Sokolov ►+7 (812) 576-6988 Leningrad Oblast ► Committee for Economic Development and Investment Activity Chairman: Grigory Dvas +7 (812) 576-40-14 First deputy, head of investment department: Sergei Kuklin ►+7 (812) 274-14-46 September 4, 2008 23 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do#24Ernst & Young in St. Petersburg Dmitry Babiner Partner, Head of Tax and Legal Practice in St. Petersburg Relevant experience of over 12 years. Projects with major corporate clients in telecommunications, processing and manufacturing industries. Tax and customs planning support for new businesses, comprehensive analysis of legal, tax and accounting risks involved in mergers and acquisitions. Extensive experience in tax and customs optimization projects to support cross border transactions, successful tax litigation support. Major clients include: Toyota, Nissan, International Paper, Gillette, Cadbury, Amcor, Swedwood, Quadriga Investment Fund, Cargill, Baltika brewery, Gazprom-Media, Svyazinvest +7 812 703 78 39 Dmitri [email protected] September 4, 2008 25 Investment Climate in St. Petersburg and Leningrad Oblast ERNST & YOUNG Quality In Everything We Do