New Routes Test Location Logic

VedomostI Ford–Sollers Plant, Vsevolozhsk, Leningradskiy Region.

Only a few years ago Hartmann, a manufacturer of adult diapers, was content to make products in Germany and truck them into Russia. Now it imports raw materials, but manufactures and distributes in Russia.

"Increasingly smaller businesses want to do something more sophisticated than shipping from abroad," said Christopher Van Riet, director of customer solutions for Radius Group. From companies like John Deere, with revenues in the region of $30 billion, Van Riet dealt with Hartmann (around $1 billion) and "now we see $500 million-revenue companies that want a local operation". He cites companies that sell components, or elements for the construction of buildings.

Another trend is for retailers like Decathalon, that import goods from around the world, to build more efficient distribution centers. GM will be strenthening an existing business by consolidating five spare parts warehouses around Moscow region.

The impetus for localizing production in Russia can be competitive or political — the offer to share technology with local partners can be a condition for continued or greater access to the national market in cars, agricultural machinery of pharmaceuticals, for example.

Russia's government is aware of the problem of low labour productivity and wants to create 25 "high-efficiency job sectors" by 2020 from the commercialization of research and development. It aims to do this by encouraging foreign companies to produce more locally.

The country's joining of the World Trade Organization in 2012 has not stopped it slapping punitive "anti-dumping" duties on foreign machinery makers. These have since been replaced by quotas, which in some cases undermine the logic of building local assembly plants in the first place.  

Consumer vehicle production has seen a sharp rise in localization: Ford opened a plant in 2002, and a rash of foreign players followed — Renault in 2005, Volkswagen and Toyota in 2007, GM in 2008, Peugeot-Citroën in 2010 and Hyundai in 2011.

Car ownership, at 250 cars per thousand people, is half the European level and a third of the U.S. Russia's Ministry of Industry and Trade forecasts annual sales to exceed four million by 2020, and more than three-quarters of those will be assembled locally, along with 60 percent of components.

The sales slowdown since 2008 has made pharmaceutical companies more likely to consider out-licensing the production of promising compounds. Another impetus is the Russian government's aim to substitute the import of essential, commonly purchased, price-controlled drugs, which account for half the market, as well as strategically important drugs, which tackle dangerous diseases.   

Pfizer works with Russian companies in manufacturing, education and research. It has an agreement with the Moscow based incubator ChemRar High Tech Center to share research into diabetes. With BIOCAD it is researching the manufacture in Russia of a drug for hemophilia.

Other companies, like Johnson & Johnson and Abbott Laboratories Inc. are forming joint ventures and investment funds to promote research. Yet the Russian government's commmission on foreign invesetment quashed an attempt by Abbott Laboratories to buy the Russian vaccine maker Petrovax. The deal, valued at about $280 million, was proposed in 2012 and blocked this year.

Merck & Co and Bristol-Myers Squibb have out-licensed production or begun local production.

Making Sure You̓ve Got The Power


David Whitehouse, Managing Director, AECOM,
for Russia, CIS and Turkey

How are warehouses, logistics and infrastructure developing?
As investment goes to the regions, logistics needs to go with it, ideally in advance. The most advanced logistics markets outside Moscow are places like Vladivostok and Yekaterinburg and, of course, Kazan.
However, utilities are a problem. Until you get a statutory obligation for a power company to provide power to a site I don't think it will ever improve. In some cases, during the investment agreement, a region says it will bring power to the site. It looks good but there is a risk that they don't deliver. Some companies choose to do it themselves and are then charged a triple premium and it may even involve upgrading a transformer sub station 50 miles away.
If you build in France, Belgium, Germany and England you just know that your power will be there because the capacity is there. Russia has done the opposite to what the UK did which was to sell its electricity industry, so France now provides power to UK homes in some areas. The government here classified power as a strategic asset.

Do companies need to construct their own facilities?
Mostly its speculative development by German, UK and US developers, like Raven and AIG Lincoln, based on their client relationships.
It will develop eventually along the European model where business parks are built around communities. There are none here yet. There are a lot of sites out by Domodedovo. They did the road and the airport and that will eventually become a regional town.
Often development seems to be the wrong way around. In the west we would build the road and rail and develop around it. In Bucharest, Sofia and around Poland, they're all the same. Here they tend to build something and 10 years later a road will go there, 20 years later it should be connected by rail. And only after that do you start to get a conglomeration of business and residential but that's the wrong way around. It all stems from the wrong concepts of urban planning.

Is AECOM involved in advising Russian city authorities about planning or regulations?
The key thing is to tie up the city transport planning and the urban planning so both go hand in hand. Cisco, AECOM and IBM tried to put together a three-way proposal to the government to use technology to solve transport and traffic problems and they did not make contact beyond mid-level city bureaucrats.

How does Russia compare with other emerging markets like Turkey?
In the hospital sector, Turkey has 30 public-private partnership projects and 110 public sector projects. They're doing this in order to stop medical tourism and to bring innovation and modernization to the country. That's entirely what Russia needs to do but it has not yet pushed the button on it.
There are projects to build hospitals in St. Petersburg and Krasnoyarsk but there is nothing that is really driving the market. Compare that with Turkey where there is a new 4,500-bed hospital, an ongoing project of 3,500 beds, and surrounding the hospitals are schools, residential and retail so they are almost like mini towns.

What is holding the market back?
There is a big blockage on the Russian domestic capital side because it is all controlled by three banks: VTB, Sberbank and VEB, which is mostly infrastructure. That leaves two banks that are bankrolling most of the commercial ventures and PPP sectors like transport. You don't see many of the tier two banks investing. AlfaBank used to do a bit and there are one or two Turkish banks, like DenizBank, so there is a lack of tier two capital available and any capital at a reasonable price. There is no board or governing body that regulates the cost of capital.
However, a lot of work in the manufacturing sector has kicked off again: automotive in St. Petersburg and Vladivostok, consumer goods like Unilever, in semi heavy industries, Hyundai and General Electric and Pilkington Glass.

Russia - USA 2013
Russia - USA 2013
Russia and the U.S. have one of the fastest-growing business relationships. The Moscow Times first special report on Russian-US trade, in association with the American Chamber of Commerce in Russia, gives an insight into key issues affecting trade: Building relations with government, localizing your production and distribution, and complying with anti-corruption laws. It also takes a look at branding, the advertising market and the small but growing feature of Russian investment in the U.S.
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