Alexei Gurin, CEO of Amtel-Vredestein NV

Alexei Gurin is certainly putting his experience to work as CEO of Amtel-Vredestein NV and chairman of its management board. An engineer by training, Gurin earned his MBA from the University of Toronto, worked as an investment manager in Canada and other countries, was marketing director for Bennetton in Moscow, served as general director of MOST-TORG and founded Rostrade Co., a retail chain in Russia.

In this exclusive interview, conducted as the company announced the formal entry of the Vredestein brand into the Russian tire market, Gurin discusses the acquisition and Amtel-Vredestein’s future. A full-length version of this interview can be found at www.tirereview.com .

What made Vredestein an attractive partner for Amtel?

In the first place, Vredestein – and the Dutch people, in general, in our opinion – are very international minded and have substantial international experience. Vredestein has done quite a lot of business in emerging markets, and they have quite a lot of off-take agreements in countries like India, Indonesia, Malaysia, Thailand and China. That was quite an important point when we decided on a position. From a cultural perspective, the integration of our Russian team with a Dutch team might be a little bit easier process compared to, say, some other companies. And, as you know, we have had some quite negative experiences doing business with some other companies.

Outline what your manufacturing plans are for the Vredestein brand in Russia. Can we expect to see Amtel-branded tires in Europe or North America?

We have just started manufacturing the first Vredestein tires at our Kirov facility. Those are test tires, which have been sent to the Netherlands for testing. Before the end of this year, we plan on manufacturing up to 15,000 Vredestein-branded tires at our Kirov facility. And, a certain number of those tires might be exported to Europe.

Next year, we are planning to manufacture 800,000 Vredestein and Maloya brand tires at our Kirov facility. We may increase our production plans to one million Vredestein and Maloya brand tires. Approximately 75 percent of those tires will be exported to Europe, and those will be 13-, 14- and maybe up to 15- and 16-inch tires.

We do not currently have any plans to sell Amtel brand tires in Europe, because we think that we need a European brand for the European market, so there is no need for another brand. Again for North America, at least for now, we have the Vredestein brand. We are selling quite a lot of tires there, and we are planning to extend our sales there in the future. For the time being, we do not plan to sell the Amtel brand in North America, simply because the size range needed for the American market is not there yet. We prefer to invest in the Vredestein brand there.

To sell tires in the U.S., you don’t need to manufacture them in Europe or Russia or in China. There might be other ways, for instance, like buying a U.S.-based company.

Is that being considered?

We’ll see.

Are there plans to produce other sizes over 16 inches?

At the moment, we are planning up to 17-inch manufacturing in Russia for internal Russian consumption or perhaps European sale. With the acquisition of Vredestein, we have created a platform for a pan-European company, so we don’t really need to manufacture all products at all factories at the same time. We will definitely focus on factory specialization for certain products. Because of its management and technological experience, we see our Enschede, Holland, facility focused on high-profit, high-end products. Certainly, that makes the most sense when you consider the workforce in place there is 20 times more expensive than in Russia. So, to justify manufacturing in Holland, our company needs to go with higher-margin products there.

That facility is also limited in size, so manufacturing can only be extended to a certain limit. Without changing any current plans, in the future, the factory will be developed in a way that will add more high-end products.

In addition, in Russia at least, now we see that European customers may not be ready to buy a high-end product manufactured in Russia or in Eastern Europe and pay the same kind of price. At least for the time being, that is another reason why our high-end manufacturing will be concentrated in Holland.

We will definitely work on the manufacturing of high-end products at our new Voronezh facility, which is a greenfield plant. And, we plan to develop this new facility as a 100 percent Vredestein plant from a technological and managerial perspective. That’s why we have deliberately given this initiative to our Dutch colleagues to manage.

Has work begun on a new greenfield factory in Russia, or is that still in the planning stages?

It is not a greenfield factory in the traditional sense, I guess. What we are doing is building a new factory using free space at our site in Voronezh. It is actually in the middle of other factory buildings there. It is not an expansion; it is a standalone facility.

Our Voronezh facility, in terms of area, is 10 times the size of our other facilities. We decided we didn’t need all this space, so we have demolished certain buildings there and are building basically a new factory inside the existing factory. The new factory area is approximately 25,000 square meters under roof.

Voronezh is quite an interesting plant. Before we acquired it, the plant was manufacturing two million tires – all kinds of tires, truck tires, ag tires, special military tires, bicycle tires. It was a huge manufacturer of bicycle tires – seven million tires on top of the two million I already mentioned.

So, when we took over, we built a factory, which we call Voronezh I, that now has a capacity of 2.2 to 2.5 million passenger tires per year. The new facility – Voronezh II – will actually have a capacity of 2.4 to 2.5 million, so actually, we have tripled the capacity at the entire plant.

Now, we are looking at the market and seeing that there may be no room for the old Russian- or Soviet-style truck tires that are being manufactured there. So, we are thinking of replacing those truck tires in the future with modern manufacturing.

As the upscale market in Russia grows, and more automakers come to Russia, will you need additional capacity for larger tires?

Absolutely. But, on the other hand, if you look at existing assembly of foreign cars in Russia and future plans of the largest European, Asian and American car manufacturers, all of these companies are planning on producing mid-sized cars that will require 15-, 16- and maybe 17-inch tires. We have signed an exclusive agreement with Kia Motors and its Russian counterpart to supply 100 percent of the tires for the first Kia plant in Russia. That means that, next year, we are going to supply approximately 200,000 Amtel brand tires for the new Kia car that will be made in Russia.

What we put as an objective for ourselves the standardization and unification of all our technological and manufacturing processes at the same level as is being done in Enschede. That means that we want to raise the quality and manufacturing standards at our Kirov and Voronezh facilities up to Vredestein standards. The goal is to make the tires that we are manufacturing at Kirov absolutely identical to the tires made in Enschede. They should be ‘one for one’ in terms of construction, specification, raw materials, etc.

Besides assisting in the operation of the plant, what role will Vredestein management play in the combined organization?

Vredestein management already plays quite a substantial role in the entire organization. We are not a company that buys the other company to get rid of the brand or get rid of the technology or take over the facility or whatever. We have explained to Vredestein management that we are actually, to a certain extent, students, and we want to learn from Vredestein and transfer the managerial and technology skills to the Russian part of the business.

For example, we have established two boards for Amtel-Vredetsein. One is a supervisory board, and the other is a management board. The management board is the team that actually manages the company, and this board consists of four people, two Russian and two Dutch: myself and Viktor Nekrasov, the CFO of Amtel-Vredestein; Rob Oudshoorn, the CEO of Vredestein Banden; and Ton Tholens, the CFO of Vredestein.

A lot has to be done in terms of coordinating managerial decisions, strategy and so on. The foundation has been laid out. Plus, we have established an integration committee in each and every part of the company – manufacturing and technology, finance, strategy, sales and distribution – and those integration teams include people from Amtel and people from Vredestein.

What we have done is, instead of trying to create a body to fit a rather small head, we have added a head to a large body because we have substantially large manufacturing facilities here in Russia. We own this market, we know this market, and we can move very, very quickly in this market. But, we needed certain things. We needed breadth, we needed technology, we needed managerial expertise, we needed European distribution and we needed a quality, established brand. Right now, we have all the ingredients in place to put them together and build up the company.

Regarding the development of new tires in the future, will that be in Russia or the Netherlands?

One of the integral parts of our position is the R&D center in Enschede. There are 65 people working at that facility. Vredestein’s R&D represents about 6 percent of its entire workforce. So, I think, we have acquired something of real value and something that can be leveraged for the whole company. So, we don’t need to spend money and develop our own design and R&D group in Russia, at least for passenger car tires. All we need here in Russia – and we have quite a lot of people working in our R&D departments at our factories – is to implement what our Dutch colleagues have designed. That is an integral part of our overall integration, unification and standardization of manufacturing.

What are future plans for Amtel-Vredestein in Russia?

We think that, in terms of manufacturing in Russia, we have reached a certain limit, one that is substantial enough to consider further development of manufacturing on top of the project that we are doing at Voronezh. We do plan further increases in manufacturing capacity, but only by intensive means, not extensive means.

On the other hand, distribution – specifically retail distribution – represents a very good opportunity for further development of the company here in Russia and in CIS. Margins in retail distribution are close to 30 percent, which is way, way higher, compared to European margins. That’s why we think that some kind of a ‘Kwik Fit’ type of company will be in the making in the short term. And, I think that in the coming months, we might make certain announcements in this respect.

Would this be through acquisition of existing businesses?

We cannot exclude any option, including that one. Unfortunately, there are not too many chains to consider here. And, by chains, I mean those that have that have 10 to 20 locations or more. We will look at a target of, let’s say, 300 sites in the next two to three years. And, I can assure you that, if we decide to do this, we will do it rather quickly.

(Editor’s Note: And that they did. Within weeks of this August 2005 interview, Amtel-Vredestein purchased a total of 110 retail stores in two separate deals.)