The French Are Coming
- By Sergei Druzhinin
- Jun. 07 2011 00:00
Construction material makers Saint-Gobain and Onduline pin hopes on production in the Nizhny Novgorod region.
NIZHNY NOVGOROD — "It wasn't by chance that we choose Arzamas as the first manufacturing location for our company in Russia. The convenient location of the business allows us access to the markets of Central Russia and the Volga region."
That's how Oleg Dorin, director of the dry gypsum plaster department for Saint-Gobain Construction Manufacturing Rus, explained his company's decision to put a factory in this part of European Russia.
Dorin's employer is the Russian daughter company of Saint-Gobain, and, along with Onduline, the two giant French manufacturers of construction materials are taking advantage of growth in the Russian market and attractive business conditions in the Nizhny Novgorod region.
The financial crunch several years ago froze the completion of large investment projects funded by foreign capital in the region, but only on a temporary basis. Now, foreign companies are returning to the regions, no longer just importing construction materials from abroad, but developing their own manufacturing facilities within Russia.
The building supply market remains lucrative for foreign investors, despite the economic, political and corruption risks of doing business in Russia. Experts are convinced that the impressive growth rate in demand for high-quality construction materials in Russia will translate into higher profits. Russia has a deficit of high-quality housing, as well as massive construction under way for the 2014 Olympic Games in Sochi.
The biggest French investment projects in the construction industry in the Nizhny Novgorod region are Saint-Gobain's factories, which manufacture construction mixtures and drywall panels, also known as gypsum board, and Onduline's facilities, which produce roofing materials.
Constructing a Market
The global financial crisis dealt a serious blow to manufacturers of construction materials, with the industry's economic indicators declining drastically. According to research by RosBusinessConsulting, demand began dropping in October 2008, and the manufacturing volume of all major types of building materials also decreased. Beginning in 2010, however, the domestic market for construction materials began to recover from the financial crisis.
The oscillation between growth and the contraction in market demand for building materials is reflected in data from the State Statistics Service. According to those figures, the amount of construction materials sold in 2007 — not including re-inforced concrete structures and components — was 228.9 billion rubles ($8.2 billion). It was 307.1 billion rubles in 2008, 289.5 billion rubles in 2009 and 305.6 billion rubles in 2010.
According to an estimate by Dmitry Baranov, an analyst with holding company Finam Management, retail sales of construction materials in Russia and in the Nizhny Novgorod region will grow by 8 percent to 15 percent in the next several years — depending on the overall economy and the rate of recovery in the construction industry.
The fast pace of growth in the construction materials segment can be explained by the fact that 80 percent of newly built residential buildings are sold without a finished interior, said Dmitry Morozov, director of the Nizhny Novgorod construction company Metallimpress.
He also said the main catalysts for an increase in demand in Russia will be large-scale construction for the Olympic Games in Sochi, the 2013 World Student Games in Kazan and the FIFA World Cup in 2018.
The advantageous situation that developed on the Russian market for finishing materials in the post-crisis period has attracted foreign companies, which are in many ways crowding out domestic manufacturers. According to various analyses, imported materials already make up more than 60 percent of all construction materials sold in Russia. Meanwhile, French companies are getting more and more active in the Russian market, and they are sparing no expense to launch their own manufacturing centers here.
This strategy could be economically justified: By producing materials within Russia's borders, instead of importing them, a foreign investor can cut its total costs by 10 percent to 15 percent, said Anton Safonov, an analyst at the Investkafe agency.
Saint-Gobain's and Onduline's projects offer a vivid illustration of French companies' effective strategy in the Russian construction materials market. The firms started out in Russia prior to the crisis. During the economic downturn, the companies fulfilled their obligations to regional authorities: There were no halts in manufacturing, no mass layoffs of personnel and no withholding of salaries, said Oleg Timofeyev, a partner at T&K Legal, a law firm specializing in legal guidance for foreign investors in the Nizhny Novgorod region.
Saint-Gobain arrived in the Nizhny Novgorod region with two projects. The company's factory in the town of Morozkova, near Arzamas, began manufacturing construction mixtures (various types of plasters, fillers, adhesives and floor-
leveling screed) under the brand Weber Veronit in 2006, Dorin said.
Construction of the building began in 2004 on a 6.5-hectare plot belonging to the company. The company invested more than 18 million euros ($26 million) in the project. The projected capacity of the factory is 130,000 tons of mixture per year. Currently, the factory produces about 75,000 tons of product per year, a fifth of Saint-Gobain's total production.
The company plans to be producing at full capacity by 2013, Dorin said. That prediction is based on marketing research Saint-Gobain itself conducted, which suggests that the Russian market for building supplies will grow 12 percent to 14 percent in 2011, and that in the following three to four years, the market will grow by 10 percent a year.
"The factory survived the financial crisis fairly painlessly," Dorin said.
According to Saint-Gobain executives, from 2006 through 2008, company sales were not very large, but in 2009 and 2010, sales grew by 75 percent.
"Consumers satisfied themselves that the product produced by Saint-Gobain in Russia is no different than the company's counterpart product produced in Finland," he said.
The company has already received international quality certificates ISO 9001 and ISO 14001, Dorin said.
The ability to produce a high-quality product through the use of modern technology is the biggest single competitive advantage held by foreign companies, Morozov said. By his estimates, the physical wearing out of equipment at many Russian construction materials manufacturers is nearing 90 percent.
"Equipment and technology have not been upgraded in years," he said.
'The Russian market's potential for construction materials is very large,' said Oleg Dorin of Saint-Gobain.
"We are looking to the future with optimism because the potential of the Russian market for construction materials is very large, as is its volume," Dorin said. "This segment is showing a high rate of development, which will facilitate a construction boom in Russia in the foreseeable future because of the obvious deficit of quality housing, as well as the prospects of building large construction projects" for the three upcoming sports events, Dorin said.
According to data from the construction department of the Nizhny Novgorod region, there were 1.443 million square meters of housing constructed in the region in 2009 and 1.495 million square meters in 2010, while 1.5 million square meters are planned for construction in 2011.
"In the next couple of years, the volume of construction of buildings and roads in Russia will grow by 20 to 30 percent a year in the run-up to the World Cup in 2018," Morozov said.
In the first quarter of 2012, the company plans to launch another construction mixtures factory in Polevsky, a city in the Sverdlovsk region. The details of the project have not yet been released by the company.
Demand for construction mixtures in Russia will depend a great deal on the rate of recovery of the construction industry and the financial solvency of Russian consumers, Baranov said. The situation in construction sector is far from stable: Since the beginning of the year, the industry has shown both positive and negative indicators.
In March of this year, according to the state statistics service, the volume of residential housing made up 4 million square meters, which is 13.5 percent higher than in February of last year. But in February of this year, the result was much worse, as residential housing declined by 6.1 percent.
"These seesaw movements exert a significant influence on the market for construction materials and don't allow companies to count on confident growth in the market or, consequently, on the growth of their own financial indicators," Baranov said.
Net volume of foreign investments in the Nizhny Novgorod region (2005-2010)
SOURCE: Nizhny Novgorod region administration
"Manufacturers also have the opportunity to increase their output thanks to the secondary market, which is the market for housing renovations, individual residential construction and construction of dachas," he said.
"These tendencies can be explained by the fact that the population has experienced an improvement in its financial situation, there is a stability in income, a possibility to plan for the future, and so citizens can direct a part of their income to renovate their homes, and also to build houses and dachas," he added.
"These types of work will require construction mixtures, among other supplies. And this growth can contribute to a growth of this segment by 5 percent to 9 percent per year," Baranov said.
French Plaster of Paris
This year, Saint-Gobain will begin construction in the Pavlovsk area of its second large factory in the Nizhny Novgorod region. It will produce drywall panels. Currently, this project is in the final planning stages, Thierry Fournier, the general director of Saint-Gobain Construction Material Rus, told Vedomosti in November 2010.
According to Fournier, the company bought more than 10 hectares at the end of 2009 for future development, and construction of the project is slated to begin in 2012.
In June 2007, Jean Laronza, president of Saint-Gobain for Poland, Russia and Ukraine, promised to begin, in the second half of 2008, the construction of a factory with a capacity of 30 million square meters of drywall per year. Investments into the project would have totaled 2.9 billion rubles ($103 million), and costs would have been recouped in six years to nine years. The drywall was to be sold in the Nizhny Novgorod region and the surrounding regions.
"All the parameters remain the same," the company's press service said about the planned factory.
'We chose Nizhny Novgorod because … it isn't far from Moscow, at the intersection of major highways,' said Natalya Khoroshkova of Onduline.
"Saint-Gobain has adjusted its strategy due to the crisis on the market for construction material in Russia," Fournier said when explaining the delay. "Now, the crisis has changed direction."
According to a manager of one of Nizhny Novgorod's construction companies, Saint-Gobain will begin processing gypsum at the Gomzovsky deposits in the Pavlovsk area of the city, extracting approximately 30,000 tons a year.
According to Vladimir Volkov, general director of Stroiinvest Nizhny Novgorod, demand for drywall in the region fell 70 percent in the last two years, but in the future it will grow 30 percent a year.
"The market in Russia will grow 15 to 20 percent a year in the foreseeable future," said Volkov, manager of Volma, a producer of drywall in Volgograd.
Drywall panels will continue to grow in popularity because right now the majority of residential buildings are delivered with an open floor plan, said Safonov from Investkafe.
"Drywall is a relatively new material for the Russian market, and without a question it has strong potential for growth," Baranov said. "It is already considered one of the most popular construction materials in Russia."
According to data provided by Knauf, one of Russia's largest producers of drywall paneling, this material has numerous benefits. It has the ability to "breathe," which means that it can take in excess moisture from the air and give it off when the air is dry; it is easy to install; "wet" processes are not needed during finishing; and it allows for the realization of the most varied types of architectural and design solutions, including creating curved surfaces. In addition, drywall is not only ecological but also provides a comfortable temperature indoors; it cuts construction costs by making the wall hanging faster; and it increases labor efficiency.
Demand for drywall panels in the next few years will grow by 4 percent to 9 percent a year, Baranov said.
Fellow French investor Onduline, one of the largest world producers of construction material, launched its first Russian factory for producing wavy roofing sheets in Nizhny Novgorod in 2008, said Natalya Khoroshkova, manager of the marketing department at Onduline Construction Material. That's the Russian daughter company of the French company.
"We chose Nizhny Novgorod because of its convenient geographical location," Khoroshkova said. "It is not far from Moscow, on the intersection of major highways, which is very convenient for delivering our product to other parts of Russia."
The factory's capacity is 7.5 million sheets per year. The company has began construction of factory in February 2006, Onduline deputy general director Andrei Nezhkin previously told Vedomosti. The factory is located on an area of more than 10 hectares on the territory of Gorky Automobile Plant (GAZ).
According to Nezhkin, the volume of investment in the project is $20 million of company money and borrowed funds.
The company gets the bitumen and organic raw material that is necessary for production from Nizhny Novgorod and other Russian markets. Using cheap local raw materials and work force, as well as cutting back on costs on logistics and customs payments allows the company to significantly lower production costs, an Onduline employee said.
"This material is ecologically clean, does not contain any health-harming asbestos, has a neutral color, and is very easy to install," said an employee of the marketing department of a Russian company that produces fiber-cement.
But, at the same time, he said Onduline's roofing products are less economical than regular slate and some forms of shingles in large construction projects. "Onduline's main market remains the construction of individual homes," he said.
"Foreign investors, including French companies, will continue to actively invest in the creation of manufacturing in the Nizhny Novgorod region due to positive outlooks for demand of their products in the future, especially since local officials are actively working to create a comfortable investment climate in the region," Timofeyev said.
"There is a clear mechanism in place in the Nizhny Novgorod region for making decisions on investment projects," said the press office of the government in the Nizhny Novgorod region. Introducing its 'One Window' system for investors allowed it to reduce waiting periods for decisions and time filling out paperwork from about 1 1/2 to two years to only three months, it said.
Onduline — Construction Material (Nizhny Novgorod)
Manufacturer of roofing sheets
Owner: French manufacturer of roofing materials Onduline SA (100 percent)
Financial results (company information for 2009):
Revenue: 1.22 billion rubles ($43 million)
Net profit: 311.1 million rubles ($11 million)
Saint-Gobain Construction Material Rus
Manufacturer of construction materials (drywall mixtures, drywall panels and isolating materials).
Co-owners: French Saint-Gobain (87.4 percent), EBRR (12.6 percent)
Financial results (company information for 2009):
Revenue: 3.4 billion rubles ($121 million)
Net profit: 156.5 million rubles ($5.6 million)
Within the framework of a meeting of the governor's investment board, the board members agree on the spot whether to accept or deny an investment project.
Because of regulations that are in place, the region's authorities narrow its field to a simple informal relationship between investors and authorities, which is much better, and very different from the way business is done in Russia's other regions. The region has legislatively strengthened its system of benefits and guarantees for projects that are a priority for the region."
As a result, the amount of foreign investments continue to grow in the region, investment in fixed capital has increased more than three times in the past few years, and the volume of saved investments increased in 2010 to 1.5 trillion rubles ($53 billion).
To date, 4,500 investment projects have been approved, and 62 projects received the status of high priority, which gives investors correspondingly preferential treatment, according to a prepared statement by the press office.
"If businessmen in the West are turned off by the political climate, people who are acquainted with the Russian economy in practice are more concerned by the creditworthiness of partners and corruption in government agencies," said Nikolai Solabuto, asset manager for the holding company of the brokerage firm BKC.
Solabuto said the first main risk for business in Russia is credit risks and those risks related to the credit worthiness of partners. In second place are market or competitive risks (simply put, businessmen are concerned about strong direct competition from rival companies). In third place are regulatory risks related to the legal framework. In fourth place are currency risks and liquidity risks, followed by concern over corruption in the government.
However, all of these risks in practice have not stopped the inflow of foreign investments to promising projects in Russia's growing economy. This trend, according to experts, will be relevant in the foreseeable future, as well.