Contract assembly in Russia is a very difficult business. If car manufacturers, who received special industrial assembly regime with the very significant benefits from the Russian government, felt more or less confident, the companies in other segments had to fight for survival. It was especially hard for contract electronics assemblers. Global corporations that came during happy bimillenaries - Foxconn, Elcoteq, Flextronics - did not survive the crisis of 2008, and one by one began to close their factories and leave Russia. A rare exception was the company TPV CIS, specializing in contract manufacturing of electronics (TVs, monitors, products with LCD screens, digital set-top boxes). It not just stayed at the Russian market, but it is also developing. CEO of TPV CIS Blazej Bernard Reiss tells about his attitude to the crisis and business principles in the interview to RBC.
Why do you think your colleagues and competitors were not able to build a stable business in Russia?
Colleagues have made a bet on receiving state preferences, they spent a lot of energy and time to get special economic conditions and guaranteed state orders from the federal government, local government. They paid much less attention to efficiency of production and customer service. They did not diversify their business. When the economy imploded, they not only failed to receive any preferences, but were left without customers. Business collapsed. If there are no volumes, and the company is tied to a single customer, who is also exposed to the same market conditions, the business becomes unstable. This is my opinion, supported by approximately 10 years’ practice in Russia.
You acted differently?
We do not waste time on lobbying and knocking out preferences. We focuses on improving the internal efficiency of the company and customer service. For example, I moved my work-room to the warehouse for six months. Because I knew I needed to do an efficient warehouse. Now the figures for the turnover of materials and the stocks inconsistency (10 thousand components totaling approximately $19 million) does not exceed 500 rubles at the end of the year. That is, the difference system/actuality, in physical existence, is one hundred thousandth of a percent. Warehouse is the heart of any production. If you have a mess at the warehouse, there will not be any normal production - you will not find the right ingredients in time. And you’ll lose more customers than a good service will bring.
The average margin in the contract business is 3-5%. It should be protected by all means. For this, it is necessary need to engage in cost reduction wherever possible. And to work with the staff. These trivial things that are taught in all business schools, but in Russia it is somehow a little thought about. And it is impossible to work without them anyway.
Are all these difficulties the specificity of Russia? Is it easier to conduct your business in other countries?
Circumstances are complex anywhere in the world today; there are no countries with simple conditions. If you go to Poland or to Germany to start a plant and will not optimize costs, then you, too, will die. Russia is not unique in this regard. It is generally strange for me to hear, when the Russian said that it is difficult in Russia. You think, it is easy elsewhere? It is quite difficult, because in many countries the market is mature, it’s very tight, and it is very difficult to integrate there. And the level of service is very high. Therefore, in order to succeed, you have to either go with a huge long-term investments and to restrict the dumping of competitors, or to make something completely innovative, which does not exist, and then you just do not have any competitors.
To say that it is very difficult in Russia is not correct. I would say, on the contrary. Especially, in the current crisis times. The crisis actually helps us, because it normalizes the economic conditions in Russia. With the pre-crisis ruble exchange rate the prices for services, service and everything else were too high in dollar terms, compared to the rest of the world.
But what about the administrative barriers, various bureaucratic obstacles, customs administration, corruption, that Russian businessmen complain of and because of which Russia has a Doing Business rating at the African level?
Let me reveal a dark secret to you - state control in Russia is even weaker than in some Western countries. So Maxim Meyksin is right [chairman of St. Petersburg Committee on Industrial Policy and Innovation - ed.], when he says that many Russian businessmen in America would not last a week with their manner of doing business. There's a very different order. You write letters to state bodies, give some explanation. Even if a state body begins to plead with you, your business continues to operate, even if you are to pay some penalties afterwards. But even in Poland, not to mention Western Europe, your business is simply stopped. That's all. You can of course apply to the court and even win - in 5 years, probably, the court will recognize your right, but there will be no business. I know a lot of such examples.
In Russia people are used to working in an open environment, in gray schemes. And when the state begins to narrow the corridor to put entrepreneurs in some kind of framework, all begin to resent. Because it is unusual. People say - I could do business free before, and now they began to demand something from me...
Don’t you even suffer due to customs? And you even don’t bribe them?
TPV CIS has the status of an authorized economic operator and has a "green corridor". We prepared the basis for this for a year. Showed that we did not break the rules, did not assume the price risk. As a result, the Federal Customs Service gave us the status, and the customs clearance reduced for us from eight days to three hours. It goes in the paperless form of, online. Logistics is very convenient.
FCS trusts us, our door is open. We have nothing to blackmail for. Those who bribe are blackmailed. Our budget just does not have money for bribes!
Businessmen argue that the state nags the business into the shadows, the gray sector. And then charges them for being crooks ...
It is clear that Russian legislation is often very contradictory, it is very difficult to follow. But it is a matter of business philosophy. You either try to remain in the legislative field with a small profit, or choose a greater risk, because there is more margin.
We, for example, every time new legislative regulations affecting our business appear, analyze them for all possible risks, ambiguous interpretation, etc. We engage consultants; discuss them in our business environment. We are members of a number of professional associations: RATEK, APKIT etc. One of the goals of their work is just a part in the preparation of regulations, report the point of view and practices of business to legislators at the design stage. Through them we also provide feedback when laws become effective. As a result, the risks are minimized.
How effectively do the RATEK and APKIT associations protect interests of your contractual business?
Only partially. And if RATEK represents the interests of both producers and sellers of household appliances, APKIT has large system integrators behind. The latter do not represent the producers. They bring everything ready and connect the wires. They sell a comprehensive set of products. They have no incentive to produce anything, to localize. They agreed with global vendors (IBM, Microsoft, Cisco, etc.) on prices and do not want to do anything else. They main thing for them is buy and sell. For them, the localization of production in Russia is a threat of the market diversification, a risk that they will lose their speculative advantage.
Russia does not have associations representing the real electronics manufacturers. Because, until recently, the vast majority of Russian manufacturing companies in this area have worked on government contracts and they did not need anything. Now they are beginning to wake up, because the government orders have reduced sharply due to the budget sequestration the, as well as the sheer number of government programs, many of which end up in the near future.
Then how in such a situation, you have managed to convince the government of Russia and other countries of the Customs Union to raise at the end of last year, the import duty on ready TVs up to 10% (but not less than 25.5 euros), which significantly increased the profitability of your business?
In this particular case, we managed to reconcile the interests of retailers and manufacturers. We were able to negotiate with the trade part of the market, with retail, that was not against raising duties on this particular type of goods, because their risks were not increased. All the losses are anyway borne by the supplier - it’s the feature of the industry. We undertook to retain the price that was at the previous tax rate if something arose. And for the merchants it is all the same what to sell - imported goods or domestic ones, as long as the price is acceptable. And the price is preserved. And they agreed.
For the government, it was also important that the production capacity for this type of product exist in Russia and there is even a surplus.
How did increased taxes help you?
Firstly, there is a constant demand on the TVs. In the early 2000s, a large plasma TV was worth a car. And now the same TV costs around $ 1,000. And a main, mass 32-inch TV, with 81 cm diagonal, costs about $ 100 at the input. This price is affordable for the population in Russia, even at the current rate of the ruble.
Second, it helped us that the real duty was increased not by 10%, but more.
How come?
Fee increases were agreed upon with one condition - it was increased to 10%, but not less than 25.5 euros per item. In fact, if we are talking about the cheapest model, the fee actually amounts to about 30%.
Did It help you in the lower segment?
Yes, at the lower, mass segment, that provides the main income. For expensive TVs the rise in price by 10% is not critical, so their imports did not reduce much. And in the mass market it became more profitable for traders to sell TVs, assembled in Russia. Now the market is estimated at 4.5-5 million TVs. This year we shall manufacture half a million, and this is already 10% of the Russian market.