Journey to the Beyond

Air LiquideAfter entry in Cherepovets, French firm Air Liquide is taking advantage of one of Russia's Special Economic Zones in Kazan.

For the majority of French companies that enter the Russian market, Moscow is their initial destination. The size and potential of the capital's market can make it difficult for some firms to move beyond the MKAD. While no one will say setting up shop in Russia's regions is easy, the advantages of doing so can provide companies with long-term competitive benefits.

Making a name for yourself in the Russian regions can come with its share of bizarre consequences. Take a situation faced by Rasec Vostok, the Russian affiliate of a French firm that makes checkout counters and other furniture for retail outlets.

"In the Russian regions there are a lot of oil rigs, many near the Urals, and therefore a lot of little towns out there," explained Alexandra Gorkova, commercial director of Rasec Vostok. "There is this town Trezhnevoi, in the Tomsk Region, really, really far away. A client found this place. He says he wants to make a store like Auchan, only small, in his little town. We tell him that with only 500 to 1,000 square meters, the check-out will take up the whole store."

This reality did not deter their new one-store client. "There is a local chain that has money and the ability to buy equipment that is more expensive and of higher quality than that of other stores," said Gorkova.

Such is the occasionally surreal nature of working in the Russian regions as a European company. With top-of-the-line products and regional markets stretching from the Black Sea to the Sea of Japan, sometimes companies find themselves struggling to locate new clients on the map.

But Rasec Vostok has come a long way to reach Trezhnevoi and its other outlying customers in the regions. After first arriving in Russia with a French client, retail chain Auchan, the company discovered the potential of the regional market, winning tenders to provide equipment to other chains and eventually constructing a plant and warehousing unit in Tver. Now, it is one of a number of French success stories in the Russian regions, having ascended the ladder to prominence in the local retail industry. All that became possible, however, only after securing a foothold in the country's geographical base of both political and economic power.

Diving in

Despite the mushrooming opportunities that the regions have provided in recent years, Moscow remains the initial destination of most French companies setting their sights on the Russian market, for a variety of reasons. The first is that Moscow by itself represents a market that dwarfs entire countries in Central and Eastern Europe, explained Pavel Shinsky, general director of the French Chamber of Commerce and Industry in Russia.

"The potential here [in Moscow] for French companies is bigger than that of the whole Czech Republic, all of Romania, all of Hungary," said Shinsky. "So, if you take the retail sector as an example, it will be a long time until Auchan can meet demand for its stores just in Moscow."

Another key factor is information — there is much more know-how available on the capital than on any given region, especially from other French companies that already have a presence in the metropolis. In addition, the information about Moscow is more stable, partly because the identities of local authorities are stable.

"The governor is not randomly removed here like can happen in other regions," said Shinsky.

Lastly, Shinsky noted, people in Moscow operate according to Western business mores. Many are also accustomed to working with foreigners, easing the approach for companies looking to break into the market from abroad.

Opportunities Knocking

For some companies, after establishing themselves in Moscow, instead of facing a struggle to expand into the regions, opportunity finds them. VLI Vostok, a small engineering company, and its partner Proma Estate — both Russian companies established by French management with experience working in the capital — got their start in the regions by following existing clients who had new projects there. [Rasec Vostok made its way into Moscow and the regions with Auchan, then stuck around to acquire dozens of new customers, many of them chains that focus on the regions, such as Magnit.]

While Moscow represents a market the size of some nations, the regions can present challenges typically only faced when crossing a sovereign border.

For others, Moscow is just a stopover, a place to have an office. This is the case for Air Liquide, a specialty gas provider that requires close proximity to its clients to deliver its products. Thus the first place important to its business in Russia was the small northwestern town of Cherepovets, home to steel giant Severstal, for whom Air Liquide invested 100 million euros ($122 million) to build a facility producing oxygen and other gases necessary for steel making. Routes of expansion extended to other regions from that landmark project — the biggest of its kind in the world — not from Moscow.

"The Severstal plant is a big project even for us in the [international Air Liquide] group, and it was practically the first step for us to develop the gas business in Russia," said Dominique Bertoncini, managing director of Air Liquide in Russia. "It created for us a first base to develop. I think it also marked an important step — the decision to be ready to invest in Russia. It shows the public, the government and industry that we are prepared to invest here and will continue doing so."

The Path To a Presence

Not everyone can land a major client in the regions to open that door though, and even giants such as Auchan are slowed by having to take a microscope to new regional landscapes. While Moscow represents a market the size of some nations, the regions in turn can present challenges typically only faced when crossing a sovereign border.

"Given the enormous size of the country and the massive distances between cities, the opening of each new store in a different region is for us like opening in a new country," commented Ludovic Holinier, managing director of Auchan in Russia. "We have to meet everyone, learn a lot about the region, little by little build partnerships with local economic players. We also have to get a grasp on consumer preferences, which differ a great deal from region to region."

Local networks do not have to be built completely from scratch, however — one of the vital services provided by the French Chamber of Commerce is making available its contacts of regional players. Connections in a new market are nonetheless no panacea for a common problem: finding reliable partners and staff. And while new partners can be vetted, employees present a two-pronged test: training those who are under-qualified — a common practice among foreign companies used to high standards — but also retaining the cultivated talent.

This can be especially trying for Auchan given its size — the company's more than 20,000 employees represent the largest workforce of any foreign entity operating in Russia.

"Depending on the city, we sometimes face difficulties finding qualified personnel, but the big challenge is retaining personnel, since we invest a lot of energy and resources into the training of our employees," said Holinier.

Another speed bump on the road to expansion is a word that has been associated with development and modernization in Russia for two decades — infrastructure. The presence of reliable roads and utilities, as well as of local authorities motivated to install more of them, still largely dictates which regions become investment hotspots. That is part of what has driven retailers like Leroy Merlin to Rostov and Krasnodar, agribusiness firms like Bauche to Novosibirsk, and growing numbers of French companies to Yekaterinburg, Volgograd and the republic of Tatarstan.

While retail and commercial businesses need both essential infrastructure and people, manufacturers need just the bare bones, and this often means roads. Rasec Vostok selected Tver as the site to build its manufacturing base because of its accessibility to Moscow but also because it is along the Moscow-St. Petersburg highway, which means fewer potholes than your standard country road. The location conveniently lacks some of the disadvantages of the Russian capital. "There are fewer traffic jams," said Gorkova.

Additional bonuses for Rasec include cheaper rent and labor, and a reliable trucking company around the corner. And given the myriad of advantages to producing one's goods in Russia, the Tver factory has become the company's ace up its sleeve when facing competition.

"A lot of people in Russia come to understand that importing from Europe is very expensive," said Gorkova. "It takes a long time and requires passing customs. So the main trump for Rasec at the moment is that we have a factory in Russia, which means that we are cheaper, because we do not have to pay for trucking things into the country or for customs fees, and that we are fast — we can produce what a client needs in two to three weeks."

Another important asset that comes with producing locally is the ability to utilize local parts; Rasec, for instance, imports only two components from abroad after five years of manufacturing in Russia, acquiring everything from steel on down in Russia itself. The company claims that in some cases, the quality of components eclipses that of parts produced in Europe.

Whereas some are avoiding excessive logistic boondoggles by building facilities close to Moscow, other French firms are attacking the problem itself, working to help establish the infrastructure necessary for more robust future development. French cement producer Lafarge purchased a plant in the Urals in 2003 that produces 2.1 million tons annually; Orange Business Services is installing telecommunications and other systems for companies all over the country; and Vinci Construction has secured involvement in one of the most high-profile infrastructure projects anywhere in the nation: the 650-kilometer Moscow-St. Petersburg road, where Vinci signed a $2 billion concession for a 43-kilometer stretch.

As with the renovation of the thoroughfare to the northern capital, for which the Russian government is providing major financial support, certain regional authorities are dipping into their coffers to market themselves for investment. One method employed by the republic of Tatarstan, a region well-known for its energetic public officials, is the establishment of a Special Economic Zone, Alabuga, in the region with a fully outfitted industrial park. Together with economic incentives, the zone is designed to draw in a range of manufacturing and other facilities that will open their doors to local workers and boost what are already sky-high ambitions for the region's development. French company Air Liquide signed on to build a plant there last year.

"We consider this region to be very dynamic, with good development, so that is attractive," said Bertoncini. "Also, we must say we received very good support from local authorities to go there, because when we go somewhere, we contribute to creating infrastructure, as lots of industries need our gases in small or big quantities."

It also did not hurt matters that Air Liquide had a client waiting for them in the zone, a joint venture to produce fiberglass between oil company Tatneft and a German company specializing in building materials. Judging by the pace at which new companies are filling in the available slots across Alabuga's 20 square kilometers, including a furniture manufacturer, a Turkish glass producer, and agricultural firm Belaya Dacha, Air Liquide placed a sound bet.

Expanding Further

Like resourceful Tatarstan, certain regions have been more ready to roll out the red carpet to foreign investors than others. Shinsky cites the leadership in Krasnodar and Yekaterinburg, as well as the governor of the Kaluga Region, Anatoly Artamonov, as all filling the role of strong local promoters, lending a personal influence that can, however, swing both ways in the regions.

"[A lot can alter] if the head of the customs service [in a region] changes, if a new fire inspector takes office, if the head of the sanitation inspection service changes, or if there is a new head of the tax service," said Shinsky. "Everything in Russia is very much based on individuals. There is no concept like 'The Tax Service.' The personal factor plays a very significant role."

On the other hand, anyone who has done business in Russia knows how beneficial the personal factor can be as well. "It is all a question of partners and networks in Russia," said Sara da Costa Lopes, Proma Estate's general director. "That is one of the great things about working here — you can find out about a project while having a cup of coffee with someone and suddenly have a new contract. In France, this is impossible."   

Russia - France 2010
Russia - France 2010
To coincide with President Sarkozy of France's visit to the St. Petersburg International Economic Forum, The Moscow Times is publishing a special edition of its Partnership XXI Century guides. Russia-France is dedicated to business relations between the two countries.
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