In 2016 the St. Petersburg factory TPV, having played at the termination of duties preferences for the import of electronic components for the Kaliningrad SEZ, received contracts for several B-brands TVs assembly from. It is the diversification, says CEO of TPV CIS Blazej Bernard Reiss, based on close analysis of market data, which allows the plant to remain stable. The next step is the expansion of product types into the sector of IT and telecommunications.

BUSINESS GUIDE: What is the working model of the plant today?

BLAZEJ BERNARD REISS: This is a standard contract business model. Our factory is able to control the entire cycle of a product creation, from the time of production of components in Asia or Europe until its delivery to the end point (end-to-end service). At the beginning of 2015, we finally implemented after-sales service and fully closed the chain.

B.G.: How many Philips and others TVs, other electronics come out from the plant?

B.R.: I will not give you any figures, because it violates the interests of our customers. CMS Model (contract manufacturing services, contract assembly - BG) involves the production of competing brands. Summarily, the plant now produces 8 thousand TVs a day. Its full capacity is about 12 thousand per day, or 2.2 million units per year.

This year we began to work with the B-brands. I waited for the April 2016, as I knew that the Kaliningrad SEZ ceases to exist with regard to duty-free import of components, and prepared a range of services at the plant by this moment. Previously, we did not have arguments for the conversation with the same Dexp, Doffler or Haier, because the difference in the delivery of components, for example, for the mass 32 inches TV at a price of 100-120 dollars was an average of five dollars per unit. Now it is 50 cents, and it is aligned at the stage of delivery of the finished product.

B.G.: Did you take only Kaliningrad’s share?

B.R.: Minsk "Horizont"’s share, too. But there are other problems - they do not work at  quality. We have found a common language with the customers who observe the "purity" of the brand. Perhaps at this point it's all the main competition.

B.G.: If we assess the consumer electronics market as a whole, what is now the ratio of imports and internal assembly, the degree of localization of the Russian units?

B.R.: If we talk about TVs, about 85% of sales are assembled here. 15% are the brands that have not decided on a location due to compression of the market, and the segment, which will never be localized, the  high-end ("elite" class TVs that are realized apiece, but they take quite a large share of the market in money - BG). In other segments these figures are difficult to trace. For example, in IT there is still the overwhelming share of "gray" imports. The same applies to accessories for mobile devices.

The level of localization is increased mainly due to the new requirements of the federal laws: they say that if you participate in the tender for state-owned companies, and your product is not produced in Russia, the price is added to 15%, which makes the product admittedly noncompetitive.

B.G.: But when there is no local components, it is physically impossible.

B.R.: A lot of things are possible to be localized. But while there are no exact requirements for the "depth of localization", no one will rush to invest in the production of components in Russia. It is more logical to start with the localization of electronic units. It requires equipment for surface mount (SMT), a full cycle of soldering and testing. The cost of one such line starts from one million dollars.

From some sectors, such as telecommunications, requests have already came to our plant - people are preparing for the "Yarovaya package". We are also closely monitoring what units are required, and we will actively work with telecommunication and IT.

B.G.: Do you now have components produced in Russia at all?

B.R.: Sure! The package!

B.G: Not long ago, the governor of the Pskov region has sent a letter to the President with a proposal to raise import duties on finished products from 14 to 60%. What’s your opinion?

B.R.: I agree with the approach, I do not agree with the number. The fee, which motivates domestic production, but does not affect the final consumer is 30-35%. Above there are out of the market conditions, the schemes for "gray" income. For each group of products it is necessary to conduct separate studies to get a rate that initiates import substitution, but does not kill the market. Bargaining is out of place here, as well as emotions.

B.G: Andrew Turchak is lobbying the interests of a particular producer - GS Group. Do you think they will be able to get in the "Moglino" SEZ  with competitive products?

B.R .: GS is known for being able to work with the state support. What they did in Gusev in Kaliningrad region, receiving huge subsidies from the state, from a business point of view is a very unwise decision. We must realize that the bulk of our industry is taken by logistics. Logistics at Gusev plant cannot be justified, even if the people there will work for free. "Moglino" is a more appropriate place for this purpose.

B.G .: And do you leave open the possibility that some of the world contract assemblers comes here?

B.R .: Volumes from corporate clients do not stimulate organization of production at the current level of fees. The market is interesting, but to have a beer, you do not always have to build a brewery.

At the moment I do not see why TVs of some well-known Japanese brands are not localized, why they did not dare to go back at the time of introduction of the new rates of duty (in spring last year, the duty on import of finished products decreased to a final mark of 10%, however, contract manufacturers of Customs Union achieved the introduction of the so-called "euro component" - not less than 25.5 euros per unit - BG). We have continuing contracts with such brands, but a contract without specific orders is empty.

B.G.: How is it that of all the world's contract assemblers only you and Jabil stayed?

B.R .: One’s got to share expectations here, hopes for state support and the reality. Without reason (and promises were only in words) it was not worth hoping. I believe that in terms of the expectations of customers the work has been done insufficiently. Customer needs to see all the tools and figures to be convinced that the risks associated with the transfer to the local production without support of duties, from state, will be somehow justified. We are looking for cases for each customer where even it does not see the benefits itself, and prove it by working with numbers. This is the official data, they are all available, we simply analyze the market.

B.G .: This works if you want to attract a customer. But Elcoteq had the manufacture, and Foxconn, too. We talk about their loss.

B.R .: Elcoteq had a business model based on ad valorem share: the importation of goods here for processing and re-exportation without payment of duties and taxes. With such fluctuation of exchange rate and inaccurate determination of the local cost it originally was on the verge of profitability. They did not care about the lack of diversification for some reason. The same Foxconn worked with a single customer.

B.G .: You also came with one customer - Philips.

B.R .: Yes, this customer was guaranteed to us. But no one protects us against market risks and the marketing policy of the customer. We have built on Philips all the processes and effectiveness, and did not stop there. We were no different from Foxconn and Elcoteq, our expectations were also let down. But we were able to quickly reorient. The Chinese do differ from others by change management bring to the level of mastery.

B.G .: My first questions were about the business structure. How, globally, through the example of specific indicators, does TPV business change in Russia?

B.R .: The moment of our history reset is 2014. Then the whole market crashed: production decreased from 10-11 to 5.5 million TVs per year. Since then, however, our market share grew. The second is the number of customers: there were two, which grew to six. Now there is an opportunity to talk with the B-brands, and it is from 5.5 to 1.8 million - more than 30%. Thirdly - diversification in terms of other industries: IT and telecommunications. Plus, like I said, we have expanded the services cycle, and now we can offer a particular product at different stages: a customer can rewuire not only the assembly, but also the delivery of components without further production, NPI (New Product Introduction - BG), and the service function.

The plans for 2017 are to increase output by 20% in relation to 2016. "Kaliningrad" took place in April, in October tenders already start for the volumes of next year.  As for TVs, if this year we produce 600 thousand units, then the next it will be about 800 thousand. As for IT and telecommunications, the  first task  is to understand the impact of the new law on the localization. I think reducing costs when participating in tenders should add about ten percent to the total turnover.

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