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. Last Updated: 07/27/2016

Fair Play Does Not Pay For IBM Russian Plant

No one tells IBM how to make computers on foreign soil. It has more foreign offices and foreign employees than any other computer company. If any foreign company is going to be successful in making computers in Russia it should be IBM. But IBM's PC-assembly venture at Kvant in Zelenograd is unable to turn out PCs at prices any lower than those obtained by Russian distributors importing from IBM's own factories in Scotland. What has gone wrong?


After three years of looking for creative solutions IBM is now facing the fact that any PC-assembly company in this country legally importing all of its components and paying all of its taxes cannot be profitable.


Russian sales tax (20 percent) and Special Tax (1.5 percent) is charged on all goods entering the country. The import duty on personal computer components averages from 8 percent to 9 percent. This makes a total payment of about 30 percent for all the components necessary to make a computer. This payment is basically the same as what should be paid to import a complete PC system.


These charges are so high that the incidence of tax and duty evasion by computer importers is believed to be over 90 percent. Any company which plays only by the rules finds itself at a huge competitive disadvantage. IBM always plays by the rules.


IBM began assembling PCs at the Kvant plant in Zelenograd in 1993. Today the venture remains the biggest investment here by a Western company in local computer production, and the only production facility in Russia producing international brand-name PCs in volume.


Even in 1992 the tax and duty regimes were weighted against companies assembling PCs in Russia. In recognition of this problem the federal government issued a decree in 1992 exempting components imported by IBM from all import duties. But the decree was repelled by the State Duma before it was enforced and the government made no efforts to reinstate it.


To make the factory's output competitive, IBM had to invest sizable sums in equipment and training to bring the Kvant operation up to its own high standards. Their risk was at the time balanced by promises from Moscow Mayor Yury Luzhkov, who said that for two years after the foundation of the venture, the Moscow government would buy up to 100,000 computers per year -- effectively the full capacity of the factory. Yet after much paperwork the city government bought only a few hundred PCs from IBM.


When this situation became apparent, IBM representatives approached the Finance Ministry, the Economics Ministry and other government bodies for help. They asked what incentives they could offer a foreign company to assemble in Russia -- and apparently never once received a single positive reply.


Russia is not the only large developing computer market in the world. IBM's other important emerging markets are China, South Asia, Africa, Central Europe, Southeast Asia and parts of Latin America. It is these regions which are now getting the investment cash Russia's leaders have successfully turned away. Russia needs the involvement of multinational companies like IBM in local manufacturing not only to create jobs for people assembling PCs, but also to generate spin-off contracts for local hardware and software companies. This would help raise the computer market as a whole. Russia has the intellectual potential to become a real force in the world computer business. But while it remains just a marketplace for foreign imports that potential is unlikely to be ever realized.





Robert Farish is the editor of Computer Business Russia, fax: 198-6207, Internet e-mail: farish@sovam.com.





This promise is enshrined in a decree issued by the Moscow city government in 1992.


In the corridors of power there was apparently no interest whatsoever in the subject.