Ruble devaluation cheapened the contract electronics assembly in Russia, and has made it attractive to foreign producers, says Blazej Bernard Reiss, CEO of TPV CIS. In his interview to Kommersat journalist Svyatoslav Fedorov, Mr. Reiss told about the status of the local electronics industry market and the measures that would make the import substitution in this field will work at full capacity.
Svyatoslav Fyodorov
-BUSINESS GUIDE: What is the status of the St. Petersburg contract electronics assembly market? How was it affected by the ruble devaluation, crisis, sanctions and other negative factors?
-BLAZEJ BERNARD REISS: According to our estimates, the volume of sales of TVs in 2015 compared to 2014 year decreased by 40-45%. This year it continues to fall, as the demand decreases due to a reduction of purchasing power, especially considering that household appliances and electronics are not essential commodities. In 2016 we expect further decline by another 10%. The other electronics segments also showed reduction reaching 30 to 50% in different types of products.
In this situation, demand for cheap products increased, and it quite tangibly reduced for mid-range products. Against this background, the consumption of premium segment models keeps almost at the same level.
As for the contract electronics assembly market, it has narrowed. But at the same time due to the fall of the ruble against the euro and the dollar, Russian assembly field has become more attractive. Now in Russia electronics manufacturing is even cheaper than in China. For example, in terms of dollar the average salary of workers in Russia is about $ 410. Almost as in China, although in some provinces, it already reaches $600
-B.G.: How has the pattern of behavior of your company in a crisis?
-B.R.: Our development strategy is based on the fact that we will continue to work in Russia. Despite the difficult economic conditions, we intend to develop. We believe that the volume of investments and those developments that have been made should not leave to waste. The crisis and the sanctions have played into the hands of our company, motivated us to diversify, we use the effective technological base accumulated over the years as much as possible. All this time, we have focused on building efficient and automated production. Now it has become a major competitive advantage for us in attracting new customers.
At the end of this year, we expect production volume of our company to grow in two to three times. This will contributed to by the devaluation of the ruble and the growth of the attractiveness of the Russian manufacture, confident first steps of the authorities and business towards import substitution and, of course, the actions of our company to enhance its presence in the market. We began to work not only with the television sphere, but also in other segments of the electronics industry, for example, we started producing communication equipment - set-top boxes, routers. We did not stop investment projects within the company, on the contrary, we have intensified them, but made more focused.
Import substitution, which unfolded in the Russian market goes very difficultly and slowly, because the field of electronics in general did not develop in Russia at all for a long time. This is a very long and arduous path, because you cannot put the child in an adult suit. But it’s good that thinking began to change, it adds optimism. I do not expect that we will see the results of the program today or tomorrow, but since that thought came already at the government level and top managers of large companies - that's good.
-B.G.: You have repeatedly said that Russia is in non-competitive conditions in comparison with other European countries in terms of contract electronics assembly. What will be the driver for the development of the market?
-B.R.: The first step has been taken – due to the ruble devaluation, Russia became competitive in labor costs. But this is still not enough to attract the world's major players and start production in the volumes that Russia needs. To do this, as the world practice shows, we need a balanced customs policy of the state. It is necessary to turn to the experience of the BRICS countries. There are three successful example of such a policy - in China, India and Brazil. All these countries have built the right balance between the import duties on finished products and duties on individual components.
To create a deep localization conditions (35% and more), the Brazilian model, for example, should be used that suited the Russian economy well. In Brazil, the customs duty on finished products is very high, and there are specific requirements for localization of plastic and electronic units, forcing global manufacturers to localize their production in this country, even for small amounts.
-B.G.: How long will it take to implement this model in Russia?
-B.R.: Two or three years from the date of increase of duties on finished products. But I do not know how long it takes to increase the protective duties. To implement this model in Russia it is necessary adjust the existing conditions and the agreements between Russia and the WTO. This is no easy task, but it must be solved for the import substitution to work to the fullest. Today the agreements state that import duty on the finished mid-range TVs (17-18 ths RUR) is only 10%. This is enough to keep the existing SKD, but does not contribute to an increase in the depth of localization. In Russia, the duty on the finished product should be not less than 20-30%. Thus it is possible to localize production in Russia and attract major market players. I stress, without clear decision on the part of the Russian government, this industry will not move anywhere. And this is a huge market that can be localized. And I am sure that Russia is able to master this.
-B.G: Which electronic components can first be made at the local level?
-B.R.: Now we use packaging, the production of which is localized. It’s cardboard, polyethylene foam inserts. Logistics of these materials is expensive, and low duty exists. In addition, Russia has both the technology and a number of advanced enterprises, so the packaging is convenient to be produced on-site, especially as the amounts are allocated to different industries.
The next step is localization of plastic and metal parts (case and some internal parts). Then we need to focus on the localization of board assembly. Parallel to this the added value will increase. Now for the contract SKD it is only 3-5%. If we localize the production of plastic and start to produce the boards, it will increase by 20-30%.
-B.G.: Which companies may wish to invest in this business?
-B.R.: All the major electronics manufacturers such as Intel, HP, Dell and even Apple, and also contract electronics assemblers (e.g., Jabil, Flextronics, Foxconn) will be forced to localize their production in Russia, if they want to confidently trade in this market. Otherwise, they will be out of the market, that is, more expensive by 30%.
-B.G.: Despite the diversification into other electronics industries, does the company intend to further expand cooperation with other TV brands?
-B.R.: Yes, sure. For example, we have recently concluded an agreement with one of the largest federal Russian brands. This partnership will increase our volumes in the television field by at least 40%. In addition, today we negotiate about cooperation with another major global brand and several federal Russian ones. Further growth of the television market is determined by marketing and technologies changing. Today the emphasis is on the development of SmartTV. In terms of "hardware", the TV will not develop much. Even the recent trends, such as a curved screen - it's just a niche phenomenon. I am confident that manufacturers will work on to increase the screen resolution, increase a variety of applications, such as gaming ones. That’s all. No sense to expect any major change, contributing to the explosive growth of the market in the near future. In this regard, we will continue to diversify, which gives its fruit. We already produce set-top boxes for "Infomir" company and are in negotiations with other major serious players in the set-top-box market. The prospects are enormous. I have been working in Russia for eleven years and believe that now it is the right moment for the development of the country's own electronics market. Moreover, I am sure that Russia is now obliged to establish its own rules of the game, including in its relations with the WTO, because it is still one-way traffic, as, for example, duties on television sets are already higher in the EU!
On the other hand, the matter is not only in the economy but also in the development strategy of our own company. We want to go forward. We have all the possibilities for this - a professional team, which has built an efficient company, a highly equipped technology platform, the pursuit of development and much more. The Russian division of TPV Group is in the top positions in the corporation in terms of efficiency and quality. This, on the one hand, shows that it is possible to conduct effective business and produce quality product in Russia. On the other - all our efforts to build the Russian market of electronics and home appliances assembly, the assembly of foreign cars can be simultaneously crossed out by the unexpected decision of the Russian government to provide tax and other economic preferences to individual subjects of the Russian Federation. Especially to the Kaliningrad region.
In the context of sanctions the import of technology in the country can be difficult. In this situation, the development of internal innovation processes is vital to the economy, if it wants to maintain global competitiveness. However, experts believe that the government cannot and should not replace a socio-economic environment, able to reproduce within itself the need for renewal and innovation. It can only produce a spot encouraging of the development and introduction of innovations in some sectors strategically important for it.
Svyatoslav Fyodorov
Talk about the development of innovation as akin to chatting about import substitution, but there is one difference. Innovation is the creation of new products, products with new properties or improved technological solutions that were not available previously. It is not simply import substitution, which developed in our country, it is the replacement of all obsolete, irrelevant to new and competitive in principle.
However, Błażej Bernard Reiss, CEO of TPV CIS, considers that in the matter of innovation it is important to follow a sequence of actions and there’s no need to hurry. According to him, to be able to develop innovative ideas, an appropriate industrial base must be first created, in which it will be possible to test new ideas. Otherwise innovation will turn into an empty phrase. "We will not create anything new until we do not do basic stuff well. If we talk about the electronics industry field, it is necessary first to develop software to train programmers, learn how to produce own microelectronics. It is a long way, but it needs to be passed from the start", said Mr Riess.
Alexey Kalachev, an analyst in "Finam" group of companies believes that for creation of innovation in Russia, it is necessary to develop science, invest in education - both higher and vocational, to maintain the atmosphere of searching for new, developing citizens’ entrepreneurship, stimulate small business .
Arseny Vasilyev, CEO of "Unisto Petrostal", believes that the Russian economy and industry need to adopt more advanced technologies that already exist in the West. "First we need to catch up - and only then surpass. Of course, there are new areas of economy, in which we could develop at priority rates, but the number of these areas is limited, and in the coming years they will not have much impact on the GDP level in Russia", the expert believes.
However, in terms of sanctions the import of technologies can be difficult. Therefore, it is important to stimulate innovation processes from the inside, said Konstantin Bushuyev, head of market analysis company "Opening Broker". According to the expert, it is vitally important for the Russian economy, if it wants to maintain global competitiveness.
Today, in Russia supported innovative projects are supported by The Ministry of Economic Development and Trade, as well as the state-owned development bank VEB. Applied venture projects in the field of high technology are successfully supported by the state corporation "Rosnano". According to Konstantin Bushuyev, eventually it is important to create an innovative environment, which cannot be carried out without stimulating private investment and entrepreneurial initiative in the sphere of innovations.
This is supported by Alexey Kalachev, who points out that for innovation it is necessary to create an area of high competition. The analysts believes that the state can and should produce point encouraging of the development and introduction of innovations in some sectors strategically important for it. First of all, in the military-industrial complex and transport infrastructure.
"It is not surprising that in these areas there are examples of successful development and introduction of innovations in Russia. In transport sphere, for example, innovative new cars are introduced – for cargo (developed by the Tikhvin Railway Car Building Plant) and passenger (double-decker cars manufactured by Tver Carriage plant). An interesting development of the innovative Russia One tram produced by "Uraltransmash" (Ekaterinburg). Under the sanctions that restrict the import of new technologies into Russia, creation and implementation of own innovations are, of course, import substitution, and are becoming an important factor for economic development ", says Alexey Kalachev.
Experts say that any innovation requires funding, much of which is generated by venture capital investments, i.e. investments in risky projects, often with unknown payback period and rate of return. "Working with start-ups (if they will "shoot ") can bring partners higher returns than funds allocated in the traditional economy", - says Anton Scherbakov, expert in "CredInform" information agency. According to him, it is not entirely correct to say that such technologies in Russia are difficult to put into practice, or exist only on paper due to all kinds of economic and administrative barriers. Anton Shcherbakov notes that many advanced solutions that do not yield to international standards, and sometimes even surpass them, are realized in Russia. This applies not only to the military-industrial complex (in terms of MIC products export, our country holds the second place in the world after the United States), but also to a number of civilian industries (oil refining, optics, IT, etc.).
“In our country stimulating innovative economy capable of bringing us closer to the long-awaited diversification is constantly declared. Such a major task is not possible only with the help of a private investors or within a separate company. For these purposes, in addition to the guidance and development programs, the government creates various funds for business support, investment climate support, provides funding under state programs (including import substitution programs). Technology development zones are established" - said Anton Scherbakov. As an example, he provided the innovation center "Skolkovo" where a research and science cluster is built, and the city of “Innopolis", which is being created in Tatarstan.
Alexey Troshin, General Director of JSC "ElTekh St. Petersburg", says that in Russia the development of innovative economy was initiated about eight years ago as a state policy. "As a result at the start of the foreign policy crisis, the knowledge-based industry has started to work and produce products, a system and institutes of support and development of the of innovation were created. Government obligations at the first launch stage of the project" Innovative Russia" were carried out on all counts", - concludes Mr. Troshin.
He notes that, in general, without state support, innovation is created only in the framework of corporate needs, but the task of the state is to build an economy based on new principles, to implement a working system of innovation and technology commercialization, rather than imposing one or another industry solutions. "Current situation provides a strong impetus for the development of high-tech sector. It is not only the import substitution that matters, but the development of an economic model based on manufacturability, not on resources trade, in legitimizing the need for technological development as the main source of profit. I am confident that when these two basic for any innovative economy groups - scientists and entrepreneurs - will understand the mutual need and determine the point of interaction, then the state will possess the role of the regulator and investor of large projects, rather than the driver of all the innovation process, what it has to act like now",- said Alexey Troshin .
Pretty effective state support works in the agricultural sector, says Irek Allayarov, general "Mineral insulation" manager at "Technonikol" company. According to him, last year the government support has made, in particular, the greenhouse sector favorable for investments. "According to the government program, by 2020 Russia plans to annually build up to 300 hectares of greenhouses, but active development of greenhouse vegetable production requires a range of activities - from concessional lending and taxation to technologies for more efficient production of agricultural products. But the market today experiences a solutions and technologies deficit, import substitution in areas such as production of vegetables , breeding, fertilizers and mineralcotton substrates is still a big issue ", - commented Irek Allayarov.
In this regard, the company "Technonikol" in 2015 decided to invest 250 million rubles in the construction of a new specialized line for the production of stone wool substrates with capacity of 200 thousand cubic meters, which is 15 times as much as the existing volume of substrates production. They are an effective substitute for natural soils and are actively used in the greenhouse complex for growing vegetables and flower crops in small-volume hydroponics technology. "According to our forecasts, at the initial stage the line can provide the hothouse farms with up to 800 ha of substrates per year", - concluded Irek Allayarov.