9 Feb 2022

Bosch President in Russia and CIS Steffen Hoffmann: We do not prioritize some consumers at the expense of others amid microchip shortage

Steffen Hoffmann

Steffen Hoffmann
Photo: Bosch press-service

Germany’s Robert Bosch GmbH last year unwittingly turned out to be a kind of "ambassador" of the global shortage of semiconductors in the Russian automotive industry, when its client and the largest player in the domestic car market, Avtovaz, was the first in the industry to publicly announce downtime due to short deliveries of components. In an interview with Interfax, Bosch President in Russia, Ukraine, Belarus, Central Asia, Mongolia and the Caucasus, Steffen Hoffmann, spoke about how the company was getting through the semiconductor crisis, what opportunities and challenges it sees in the electromobility future, and what role it assigns to the Russian automotive industry in its business.

Question: Bosch reported that the revenue of the company in the CIS countries in 2020 amounted to 1.4 billion euros, of which 1.1 billion euros came from Russia. What are the results of 2021 and how big is the contribution of the auto industry to them?

Answer: We count our turnover across the region, also including Belarus, Ukraine, the Caucasus region, Central Asia and Mongolia. But, of course, Russia in this region is the largest market for us. The volume of deliveries of original Bosch components to automakers in 2021 amounted to about 200 million euros. Another 230 million euros of the total turnover accounted for the supply of automotive components for retail sales. Thus, the total volume of our business in this sector last year amounted to approximately 430 million euros of the total revenue for the region, which was at the level of over 1.6 billion euros or 143 billion rubles. This is 19% more than the corresponding indicator in 2020 and 12% more than it was in the pre-crisis 2019. We can say that last year was not bad for us, despite the challenges.

Q.: Obviously, one of the main challenges for many was the lack of microchips. How much did it affect the business processes in the company?

A.: I would not say that in connection with this, the business has somehow been radically transformed. But now we have to respond flexibly to the situation in order to overcome the shortage of semiconductors. When you start a plant in a situation of ongoing shortages, it is very difficult to form a production schedule. We are forced to constantly change the plan and schedule of production because the management of the entire plant depends on the availability of one component. If it is available, you produce something in a certain volume, then you stop again. When the component appears, you restart. It's very difficult. The first half of 2021 was relatively good, but the situation deteriorated in the second half of the year, which became a difficult challenge for our customers who could not obtain the necessary components in sufficient quantities, including those from our production. We ourselves had the same problems.

Q.: Just before the active phase of the semiconductor crisis, in the first half of 2021, automakers gave quite optimistic market forecasts. Did the industry fail to see the imminent global collapse?

A.: I think that already before this crisis, we were in a situation where the global demand for semiconductors was growing, and everyone was preparing for this, including us. In December 2020, we opened a wafer plant in Dresden with a €1 billion investment. This is a gigantic investment, the highest in Bosch's 130-year history. Of course, the preparation of such production went on for several years before it started working. On the scale of the global deficit, this enterprise is a drop in the ocean. But there are other players opening similar factories. Another thing is that the industry in 2020-2021 found itself in a “perfect storm” situation. Coronavirus lockdowns have led to the closure of semiconductor factories, most of which are in Asia. During the situation, fires occurred at key global production sites. And when the most critical phase of the corona crisis seemed to be over, we were faced with an unexpected surge in demand for semiconductors from various industries that began to compete for chips among themselves.

Q.: How competitive in this sense were the positions of the Russian auto industry?

A.: The automotive business is our largest segment globally and we are fully aware of our responsibility as a supplier. Deliveries to the industry are a very high priority for us. As for Russia specifically, I would not say that our automotive business is small here. Of course, in our region, Bosch has a strong position in business and in the consumer sector. But this does not mean at all that we do not pay due attention to business in the automotive segment.

Q.: Would it be incorrect to assume that Bosch as a supplier in the current situation would find it more profitable to supply chips, for example, for the production of washing machines than Lada cars?

A.: Of course, this is not true. Also, because it is impossible to use a chip designed for one type of product for the production of items of another type. Incidentally, this is another factor that complicates the current crisis: each component is specifically designed for certain products. Even if you want to stop the production of a particular chip to produce chips of a different specification on the same production line, it will take months.

Q.: Nevertheless, do you have the feeling that the chip shortage problem, from which automakers around the world are suffering huge losses, is being solved too slowly?

A.: I wouldn't say so. Creating a new production or expanding an existing one is a very long process. Production of most other components and materials is perhaps relatively easier to set up by building and running a plant if needed within a little over a year. But with semiconductors, this period is much longer, and the process is more expensive. And when you plan to invest a billion euros, you must be sure that you are not doing it just to cover temporary demand. You need to have a good idea of the structure of future demand.

Q.: In your opinion, in the long term, will automakers not try to create chip production on their own in order to insure against a repeat of the crisis?

A.: Technically, this is an extremely specific process. It's not something automakers can easily decide to do on their own.

Q.: Russia is by no means the largest car market in the world, and not the largest in Europe either. Doesn't this push local automakers further back in line for chips from Bosch?

A.: The principle of all customers in the automotive industry getting equal treatment is fixed at Bosch, and we want to remain honest with the consumer in this. At the start of the chip crisis, the company formed a task force in Germany that evaluated long-term customer plans and ensured that all customers would be supplied with our products in comparable volumes. We do not prioritize some consumers at the expense of others. What automakers, for their part, can do in this situation is to redistribute volumes from one part of their products to another. They do it. When a particular model delivers higher margins and profitability, this is certainly an argument in favor of sufficient supply.

Q.: One of the first Russian automakers to be significantly affected by the shortage of chips was Avtovaz, which openly announced short deliveries from Bosch. When should we expect an improvement in the supply situation for Lada production?

A.: We, of course, understood that our customers were not happy with the situation. Moreover, I would say that the situation is still not resolved and remains critical. So far, we have all the same problems that will have an impact for a significant part of this year. But we hope to see a slight recovery towards the end of the year. In the automotive business, Bosch is always in close contact with customers. Today, due to the crisis, this is a daily contact, including on logistics, so that the client always knows what to expect soon.

Q.: The deliveries of which Bosch components to Avtovaz suffered the most?

A.: At the Bosch Samara plant (OOO Robert Bosch Samara) not many different types of products are produced, mainly ABS and ESP system units. These products were most affected by the semiconductor crisis around the world. Also, at the plant in Samara, steering components are produced in much smaller volumes, the production of which practically ceased by the end of 2021.

Q.: What other automakers do you supply in Russia and how big were the supply problems for them?

A.: About 40% of our regional division's sales in the automotive segment are commercial vehicles. Important clients for us are Kamaz and GAZ Group. Deliveries for them were affected by the shortage to a smaller extent, since they are supplied with products made of semiconductors of a different type compared to those that go to Avtovaz.

Q.: Avtovaz used to sue suppliers. Were you not close to litigation?

A.: We discuss the current situation and understand that it is global in nature, this is no one's fault. There is no company that is responsible for this. Everyone is trying to cope with the situation in one way or another to the best of their ability. The main thing for us is that we have very close, I would say, friendly relations with our consumers. This allows us to think about problem solving together rather than litigation.

Q.: What part of the Bosch components supplied to Russian automakers is produced locally, and what part is imported?

A.: It depends on how to calculate the added value generated within the country, according to what criteria to evaluate localization. I would not talk about the percentage of localization of our products, but for us this is a very significant issue. And not only in the automotive industry, but also in such areas as household appliances, power tools and others. On the one hand, there are requirements for localization from the government, on the other hand, we ourselves are interested in this. After all, if we, for example, have a plant in Samara, we will not need to deliver the necessary components from Western Europe.

The problem is that in Russia it is not easy to find suitable suppliers due to the peculiarities of the structure of local industrial production. Of course, the country has serious technical capabilities, for example, in the defense industry sector, in areas such as aviation. But these sectors are focused on small volume production and are generally not competitive in terms of mass production. Local suppliers are not always able to offer us products of the required specification, and this situation, in general, persists. Although the struggle for localization is on.

Q.: What, in your opinion, should the state do to effectively support component production?

A.: It seems to me that the current support measures are more focused on existing manufacturers. I think it would be nice to focus them a little more on stimulating the work of new suppliers.

If you look at the Russian automotive sector more broadly, you can see that about 300,000 people are directly employed in the automotive industry. If we add to this the people employed by suppliers of the automotive industry, we get 1-1.2 million people. Thus, in terms of creating jobs, the automotive component industry is extremely important for the country.

In general, the situation now is such that in Russia there are capacities for the annual production of 3 million cars, but their actual load is only about 1.5 million cars. There is an unsatisfactory situation in terms of production volumes and a significant discrepancy between current indicators and strategic ones. In this regard, any additional government attention to the automotive sector is only welcome. Including in matters of localization.

Q.: How would you rate the current import substitution policy in Russia?

A.: Protectionism, aimed at protecting the local market, and policy elements aimed at reducing Russia's dependence on other countries, in particular Western ones, are the trend of our time. In some areas it works, in others it is a very difficult process. The automotive industry is perhaps the best example of an industry that is very deeply integrated globally, both technologically and in terms of regulation. The processes of disintegration and separation here are associated with many difficult moments. It is worth saying that such a division is not always possible at all. Indeed, in each country at a particular moment there are not always certain technologies. One of the main reasons for globalization is the economic benefits for production. After all, if you do everything yourself, you get a higher cost and, accordingly, a higher price, which is ultimately less beneficial for the population. As an example, we can take the same semiconductors. This is a special kind of component, in which, as I said, the investment is huge. Of course, we always try to be "local for local", but even a company like ours cannot afford semiconductor production in every country where it does business - it's simply unrealistic. Therefore, the factory we opened in Dresden will supply chips to many countries, including Russia.

Q.: How do electromobility trends affect the Bosch business?

A.: Now this is a very important topic for us. Over the past 10 years, we have invested plus or minus 5 million euros annually in research and development in this area. Last year, the company invested 700 million euros in this. We are actively developing components in the field of electromobility, including, but not limited to, the electric motor itself, sensors, power electronics. The only product we do not manufacture or develop is battery cells. For a few reasons, the company decided not to go in that direction. But we are actively working in other areas. Of course, electromobility also poses certain problems for us in terms of creating added value, which is much less in the production of an electric transmission than in the case of diesel or gasoline. If we employ 10 people to produce units for diesel cars, in the case of gasoline cars this number can be reduced to three, and with electric cars it can be reduced to one person. And such a reorientation will be associated with certain challenges for Bosch. The speed at which it will occur depends on how quickly the production of internal combustion engines will decrease.

Q.: What are the goals of Bosch in Russia in terms of revenue in 2022?

A.: This year will be 30 years since I've been with the company, and in all that time, it has never been so difficult to make any forecasts at the beginning of the year - there are too many unknowns. The semiconductor crisis is certainly at the top of the list of these uncertainties. But it's also about supply chains. Soaring prices for containers, and inflation accelerating throughout the world are of great importance. Not to mention some political moments.

Q.: What transport does Bosch use for deliveries to Russia?

A.: A significant volume of supplies comes from Europe and from China, usually by train and trucks. From time to time, in outage situations, including outages with semiconductors, we have to use air transportation, which allows us to better serve consumers. In the case of air transportation, there is also an increase in prices, although not as significant as for containers. The question is whether these prices will remain as high or will they fall. To be honest, no one knows the answer to this question.