CATERPILLAR'S GIANT TRUCKS FALL VICTIM TO RUSSIAN

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000439 SIPDIS STATE FOR EUR/RUS STATE PLS PASS USTR (HAFNER, KLEIN) COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON) E.O. 12958: DECL: 02/19/2019 TAGS: ETRD EIND EFIN ECON RS SUBJECT: CATERPILLAR'S GIANT TRUCKS FALL VICTIM TO RUSSIAN CAR DUTY INCREASE REF: 08 MOSCOW 3745 Classified By: ECON M/C Eric T. Schultz, Reasons 1.4(b,d). -------------- SUMMARY -------------- ¶1. (C) The giant trucks that Caterpillar produces for the mining and construction industries have become an apparently unintended victim of Russia's recent duty increases on cars. The heavy duty vehicles, which cost about one million dollars each, currently enter Russia under a customs code reserved for "off-highway vehicles," the duties for which were recently raised from the previous 5% ad valorum rate, to a new rate of 25%. Russia does not produce these giant trucks, therefore the duty increase provides no benefit to domestic industries and only serves to raise costs for Russia's already struggling mining and construction companies. ¶2. (C) Caterpillar is hoping that the issue can be resolved through discussions with officials at the Ministries of Industry and Trade and Economic Development, and at the Tariff and Trade Policy Committee chaired by First DPM Zubkov. However, even if the duty problem is resolved, tight credit conditions and the strong dollar will still suppress the company's Russia sales in 2009. END SUMMARY. -------------- -------------- Giant Truck Swept Up in Wave of Car Duty Increases -------------- -------------- ¶3. (SBU) On February 19, ECON and FCS officers met with Aleksander Cherepkov, Government and Regulatory Affairs Manager in Caterpillar's Moscow office, to discuss how the recent Russian duty increases on cars (reftel) had affected the company's imports of heavy duty vehicles. ¶4. (C) Cherepkov explained that three types of giant Caterpillar trucks, which are primarily used by the mining and construction industries, had been affected by the recent car duty increases: giant dump trucks that weigh over 50 tons used in mining operations, trucks that are used underground inside mine shafts, and heavy duty articulated trucks used at construction sites. He said Russian Customs treats these massive trucks as "off-highway vehicles" under the Russian customs classification 8704. The import duty in that series of tariff line items had been raised from the previous 5% ad valorum rate to a new rate of 25%. ¶5. (C) Cherepkov said no Russian companies produce comparable equipment. Caterpillar's chief competitors were Japanese producer Komatsu and the Belarusian Automotive Factory (BELAZ). Cherepkov said that prior to the tariff increases, BELAZ had dominated the Russian market with a 90% market share, while Caterpillar held seven percent of the market, and Komatsu three percent. ¶6. (C) Cherepkov said BELAZ enjoys some competitive advantages over Komatsu and Caterpillar. Its trucks enter Russia duty free under the Russia-Belarus single customs union; its products are priced in rubles instead of dollars; and BELAZ is a well known brand within Russia with a long and continuous presence in the market. In addition, before the duty rise, BELAZ trucks sold at a 50-60% discount compared to the Japanese and American trucks. ¶7. (C) Cherepkov said the CAT and Komatsu trucks on the other hand were perceived by customers as a higher quality product, because of their greater efficiency of operation, reliability, and durability in tough outdoor and underground conditions. He added that the trucks are costly: the price tag for Caterpillar's most popular heavy duty truck, the 777, is one million dollars, and Komatsu's equivalent truck has roughly the same price point (Komatsu also prices its Russian truck sales in dollars, rather than rubles or yen). Cherepkov said European manufacturers Volvo and Liebherr, which produced heavy duty articulated trucks used in construction, had also been affected by the duty increase. -------------- Duty Increase May Be Unintentional -------------- MOSCOW 00000439 002 OF 003 ¶8. (C) Cherepkov said that during a recent trip to Minsk, the Belarusian Industry Minister had intimated to him that there were some advance discussions between Russian and Belarusian officials about the duty increases. However, Cherepkov said he believes that the duty increase's impact on Caterpillar may have been unintentional rather than an effort to assist BELAZ, which will not be affected by the duty increase but in any event didn,t need protection, given its dominant market share. ¶9. (C) Cherepkov said Russian officials may have unwittingly increased the duties across the whole range of off-highway vehicles. He said they may not have realized that the duty change would dramatically increase costs for Russian mining and construction end-users, many of whom are struggling to cope with the global economic crisis. -------------- Next Steps -------------- ¶10. (C) We told Cherepkov that we had met recently with Alexander Rakhmanov, Director of the Industry and Trade Ministry Department for Automobile and Agricultural Equipment Policy (septel). Rakhmanov had told us that the GOR was open to considering specific changes to the recent duty increases for special-purpose vehicles for which there was no domestically produced analogue. ¶11. (C) Cherepkov responded that he was hopeful a resolution could be found and added that, for the moment, Caterpillar did not believe that any additional USG advocacy was necessary. He said the company's next step would be to meet with officials from the Ministries of Industry and Trade and of Economic Development to discuss how to resolve the duty problem. ¶12. (C) Cherepkov said there were a number of potentially simple fixes. Caterpillar's trucks could come in under tariff line 8705 ("special purpose vehicles"),where the duty had not been raised and remained 5%; the GOR could agree to grant Caterpillar a special duty exemption; or the GOR could agree to return the duty rate for the subcategory of off-highway vehicles weighing over 50 tons to the previous 5% rate. ¶13. (C) Cherepkov said that if all else failed, as a back-up plan, Caterpillar would consider bringing in all of the components for these heavy duty trucks from the United States and assembling them at the company's existing assembly plant in Tosno or at a new stand-alone facility. However, it would take some time to establish a domestic assembly operation, and the company would need to receive GOR assurances of favorable duty treatment for parts and components. -------------- Caterpillar's Sales Will Drop in 2009 -------------- ¶14. (C) According to Cherepkov, in 2008 the company booked record sales of over 200 trucks in Russia, but for 2009 was forecasting that sales would decline to about 60-70 trucks. Cherepkov said Caterpillar was facing several headwinds to its 2009 truck sales in Russia. Tight credit conditions, the 35% devaluation in the ruble against the dollar since August 2008, and the value-added tax of 18% that went into effect in mid-2008, along with the duty increase, would all contribute to the slump in sales. He said the duty increase would by itself account for a loss of sales of at least 10 trucks, which at one million dollars per truck, would be equivalent to as much as $10 million in lost sales. He also noted that since it had gone into effect on January 12, Caterpillar had not imported or sold any of its giant trucks in Russia. -------------- COMMENT -------------- ¶15. (C) Caterpillar's trucks appear to be an unintended casualty of the haste and lack of transparency with which the GOR acted when it decided to raise duties across a wide swath of vehicles last December. It seems unlikely that the GOR would have intended to dramatically increase costs for struggling Russian mining and construction companies in order MOSCOW 00000439 003 OF 003 to benefit a Belarusian producer that already enjoyed a substantial market share within Russia. If that interpretation is correct, then Caterpillar should get a fair hearing from the Ministries of Industry and Trade and of Economic Development, and we would expect to see one of Cherepkov's "simple" fixes implemented. BEYRLE