In 2009, Igor Shchegolev, who was then the Minister of Communications and Mass Media, held a meeting with the heads of Russian offices of foreign manufacturers of computers and telecommunications equipment (Acer, AMD, Avaya, Cisco Systems, Dell, Fujitsu Siemens Computers, Hewlett-Packard, Huawei , Intel, Lenovo, Motorola and Nortell participated), during which he stated that the Russian government intended to actively support those who will start production in Russia.
It was reported that potential preferences can be provided even at the stage of construction of a conventional assembly line in the event that "the vendor will promise that the equipment produced on will it in two or three years contain components made in Russia."
And as a successful example of such cooperation the automotive industry was taken, where foreign brands are successfully produced at Russian plants.
However, top managers of IT companies reacted cautiously to the proposal, knowing all the difficulties and soberly assessing the benefits they may receive. Although they noted in the comments that this topic is, of course, important, and deserves discussion.
It is interesting that at the moment the number of IT vendors, who started the production in Russia really began to grow.
In 2004, Fujitsu Siemens Computers officially announced the start of mass production of the PCs at Zelenograd factory "Quantum". And in 2006, the vendor equipment line was replenished with LCD monitors.
In 2006, LG Electronics started a plant in the village of Dorokhovo (Ruza district, Moscow region.). In 2009, the plant consisted of four buildings, one of which produced LCD and plasma TVs, as well as home theater systems and computer monitors, and the second - large household appliances (refrigerators and washing machines). Two buildings accommodated the companies that manufactured components.
Today at LG plant, quite a successful one, according to its representatives, household appliances are mainly produced: washing machines, refrigerators and televisions.
In 2008, in Kaluga region a plant was started by Samsung Electronics. The volume of investments in the company amounted to more than 250 mln USD, the range of products consisted of LED and plasma televisions, monitors, as well as washing machines. Today, the plant complex has capacities which assemble finished products, there are a printed circuit boards and chips shop, as well as a thermoplastic molding shop. The total area of production facilities reached 40.6 thousand sq. m.
The same year in Kazan Schneider Electric plant was started; it produced low and medium voltage switchgear. To date, Schneider Electric has six plants in Russia, which employ 12 thousand people. Investment in the Russia economy over the past five years amounted to about 1 billion dollars. The company says that about 60% of Schneider Electric sales in our country account for products of Russian plants. It’s primarily electrical products. Some systems that are used in the construction of data centers, are made in Russia, such as medium-voltage equipment (cells), low-voltage cabinets, wiring products.
In 2010, Cisco Systems, Inc. announced plans to invest in the development of entrepreneurship and innovation in Russia $1 billion. And in 2011 in Zelenograd production of the main electronic unit for the first Cisco product - innovative hardware VPN-module – was officially launched. In October 2011, the company announced the next stage of the localization of its equipment in Russia in Tver on the basis of a global contract manufacturer Jabil Circuit, Inc. which started to produce Cisco digital TV set-top boxes for transmitting video and new television services via IPTV networks.
In 2010, the HP and Foxconn joint venture for the production of PCs in Shushary near St. Petersburg was started. The plant supplied the Russian market with consumer and commercial desktop PCs of Compaq, HP, and HP Pro series. The total investment in the project amounted to $ 50 million, and the production capacity was estimated at 480 thousand monoblocks.
The first Russian plant of the Chinese contract electronics manufacturer TPV Group, specializing in developing, manufacturing and after-sales service of displays, monitors, LCD TVs and LCD panels for a wide range of applications, started in St. Petersburg in 2011. The factory is located in the same place, in Shushary. The first shipment of products took place in April 2011, and in December 2012 the millionth Philips TV was made. The enterprise has the exclusive right to manufacture and sell TVs under this brand. By 2015 the TPV CIS plant mastered the assembly of product for the brands: Philips, AOC, Sony, Sharp, Panasonic, Infomir. For this producer, this practice is not an exception: TPV group structure includes more than 10 plants in different countries.
In April 2012, in Ryazan, D-Link company started its own production of firewalls, certified in accordance with the requirements of GOST R ISO 9001-2008 (ISO 9001: 2008) at the total area of 1.7 thousand sq.m.
Representatives of Huawei also spoke of the plans to launch production in Russia in 2014.
During the past few years the situation began to change. And not for the better.
The Fujitsu Siemens Computers project has existed for a brief period, and now Fujitsu managers of the Russian representative office prefer not to comment on the situation.
In 2015, the Hewlett-Packard and Foxconn joint project ceased to exist. It was reported that the production was relocated to the Czech HP site and that the reason for this was the collapse of demand for computers. In addition, the company did not manage to reach full capacity, and the cost of monoblocks was significantly higher than the Asian one. Another factor that made HP make such a decision was Russia’s entering the WTO, zeroing customs duties on imported computers in the country.
Huawei’s plans, as well as the plans of some more foreign companies, have so far remained plans.
Today's economic and socio-political situation does not add optimism. Time will show whether foreign IT companies will start new plants in Russia or would prefer not to do this. However, the experience and the motivation of those who continue to develop production on the Russian spaces, are no doubt interesting and important. We call on them.
Motivation
"Despite the economic downturn, our company continues to invest in the development of localization in Russia, - says the vice-president for strategy and business development at Schneider Electric in Russia and the CIS Armen Badalov. - This year we launched a new line at the plant in Yekaterinburg, began to build a plant for the production of transformers in Samara, on the basis of our company "Samara switchboard", in autumn we plan to open an engineering and production center in the "Moscow” technopolis. In June, at the SPIEF we have signed an agreement of intent for the implementation of investment project with Leningrad Region. Schneider Electric plans to invest more than 750 mln RUR in construction of the second stage of "ElektroMonoblok" plant in the region, at the Kommunar village".
Schneider Electric in Russia is considering the possibility to localize a number of solutions, being in close contact with customers and the relevant ministries, responsible for the program of import substitution. The company is well aware: localization is not an easy process. "We produce high-tech equipment, and the establishment of local production - is not a one year the issue, - says Armen Badalov. - In addition, the localization may be performed in a different amount, from partial to complete. To what extent and on what commodity item it will apply - this has to be a balanced business decision. We also plan to open a research and development center at "Skolkovo", which will deal with the localization of the software and, in particular, the development of dispatching and control systems for the power industry and the oil and gas industry."
The company D-Link, according to the head of Russian office Sergey Vasyuk, initially, even at the time of entering the Russian market, considered the possibility of accommodation own production facilities in Russia. "It was obvious that the booming IT market has its own unique specificity, and to be here a serious, influential player, you need to react quickly to the demands of its members, and it is best to be proactive”, he said. “The company has made an emphasis on the development and production of products with advanced technical characteristics, to a maximum extent meeting Russian customers' requirements from both the public sector and the telecommunications segment. In combination with an extensive network of its own service departments - and there are at the moment more than 40 ones throughout Russia - and streamlined technical support, presence of own industrial base allows us to ensure the supply of products to a wide range of government (including security forces) and corporate customers."
Today, the company has manufacturing facilities in Ryazan, where the plant releases FSTEC certified products, assembles and customizes equipment to the requirements of customers, its after-sales service is performed. A few years ago Russian D-Link research and development center started, specializing in software development for the future telecommunication equipment. Sergey Vasyuk emphasizes: "The plans are to start own fully-featured production lines, seeing that available resources permit."
Getting to the creation of production in Russia, Cisco Systems was guided by "one of the strategic objectives of a vendor in our country - comprehensive assistance to modernization and innovative development of the Russian economy."
"In today's economy the requirements has changed that should, ideally, help to attract foreign investment to build its own production facilities in Russia”, says the local production development manager at Cisco Systems Marina Plishon. - Now it is the time when the presence of local production plays the role of competitive advantage. The closer the production to the market, the easier it fits the specifics of the market in the country. If a foreign company wants long-term cooperation and claims leadership in the industry, it won’t do without its own production. "
Samsung Electronics company believes that the development of local production is important for any global manufacturer. Russia is one of the priority markets for the corporation. "Opening the Samsung plant in the Kaluga region "Vorsino "industrial park in 2008 is an important step for the development of the company's business in Russia. Today, the plant produces Samsung TVs 100% sold in Russia. In addition, there are monitors, washing machines of the brand available. Local production complies with international industry standards and product quality standards of the company", the press-service of the company underlines.
"St. Petersburg TPV CIS plant in recent years is consistently among the top three in terms of business efficiency, cost and warehouse stocks control, logistics management”, says CEO of TPV CIS Blazej Bernard Reiss. “Prior to St. Petersburg, I worked for several years at the plant of "Eldorado" group subsidiary in Kaliningrad, and I can tell you how the decision was made on the construction of TPV CIS plant in St. Petersburg, as if "from outside". We then worked with such famous brands as Sony, Panasonic, Philips, actively developed business within the special economic zone. But besides the fact that the zone itself should only exist until the beginning of 2017, the scheme of its functioning had certain points that created significant financial risks for foreign players. As a result, the Philips company, which has been actively working at the time with a group of TPV, began to look for new production solutions that would make the business more sustainable and transparent. We conducted a comprehensive analysis of the Russian market, studied the investment attractiveness of the regions. Added value in case of screwdriver assembly in the electronics industry is 3-5%. All the rest are the materials and logistics costs. Therefore, we initially understood that the construction of a plant somewhere in the outback, maybe would save on the cost, for example, of the labor force, but it would increase the costs of logistics and HR.”
As a result of the studies TPV CIS chose "the most interesting and well-balanced option in all respects" for its Russian plant – Saint Petersburg. In addition, Chinese investors valued the readiness of the city authorities to start dialogue with major international players.
Blazej Bernard Reiss believes that a serious impact on the adoption of foreign companies' decisions on the location of production in Russia is currently performed by the requirements of federal laws, especially the new ones, governing public procurement.
The right choice
The critical decision to open a plant in a new country, as a rule, is supported by a lot of work associated with the search for the optimal location and management selection.
Choosing a region for the production location in Russia, Samsung Electronics considered factors such as geographic location, convenient logistics, proximity to raw materials suppliers, etc. The company assures: due to favorable geographical location of the Kaluga region the Samsung plant has become a major logistics hub and it is strategically important for the company due to this too. SRDC is located here - the main storage center of all Samsung products imported into Russia. In addition, the plant in the Kaluga region today meets not only the Russian consumer demand, but also exports its products to neighboring countries.
"Favorable logistical location of the Kaluga region and developing multimodal transport and warehousing infrastructure make it possible to consider the region as a promising basis for the development of projects in the sphere of logistics”, the press-service of the Russian office of Samsung Electronics noted. “In November 2015, Samsung was the initiator of the project "New Silk Road" – a transport route, which tied Northeast Asia with customers and partners in Europe through the territory of Russia. Within the framework of the project freight is carried from the North-East China and South Korea through Dalian port by the Chinese Eastern Railway and the Trans-Siberian Railway. The route makes it easier to deliver the finished products to end-users (about five times faster than the traditional route across the sea), as well as components and materials for manufacturing enterprises in the territory of Russia and the European Union. This project also made it possible to optimize production processes, reducing logistics costs. As for the managing staff, they are chosen so that the experience and expertise in the field of production contributed to the further development and increased productivity of Samsung Electronics plant in Russia. "
When choosing Ryazan as the center of its own production base and logistics company, D-Link took into account the favorable geographical position, developed transport infrastructure, low, compared with Moscow, OPEX figures, the presence of trained personnel.
"Simultaneously with the launch of the production the company on the basis of local schools started a number of programs for targeted training of specialists which helped solve the problem of staffing the center of research and development”, says Sergey Vasyuk. - We also consider it necessary to note the support of the company efforts from the administration of Ryazan region at all stages of the project."
Cisco Systems, selecting the region, was guided by criteria such as distance from Moscow, a developed transport hub, a high level of production index (this greatly simplifies the search for qualified personnel). Marina Plishon stresses that all managing staff usually begin their careers with a low position at the plant and then gradually move higher.
"It is worth mentioning that the training and qualifications of personnel can be considered as key elements in the development of production. Foreign companies tend to attract employees with the knowledge of foreign languages, which further complicates the task of finding managerial personnel. We offer free courses of English to our employees, it significantly increases the level of qualification, as the entire design documentation necessary for the production of goods, is non-Russian", said the local production development manager at Cisco Systems.
Necessary and sufficient
Profitability, no doubt, remains one of the key matters for any business. However, the motivation of companies starting production in Russia, is much more complicated and pursue not only (and sometimes not so much) the economic, but also political, social and other purposes.
According to Marina Plishon, it is impossible to clearly answer to the question of the profitability of local production.
Everything depends on the production volume, projected demand, as well as on the product application and industry.
" Russian market has great potential, so the start of production can be regarded as an emergency measure, necessary for business development", Marina Plishon said.
D-Link says that the decision to start the plant was correct in all respects.
"The development of own production was a natural step of the company in Russia”, Sergei Vasyuk emphasizes. “We opened it in a relatively "affluent" in 2012, when conditions were much more comfortable than today. For us it was a necessary step for the D-Link business to enter a new level in Russia, allowing to work with the public sector, telecom and corporate clients on a high level. In the light of current realities, we can say that this was done very promptly. The following data prove profitability: in general, the construction of production and warehouse complex with the center of research and development of D-Link in Ryazan more than $ 10 million were invested. D-Link turnover in Russia in 2015 amounted to 5.4 billion rubles..., and this year it is close to 7 billion rubles. If in 2012 there were 40 employees, in 2016 - more than 180 professionals working in our team in the Ryazan office. Commissioning of a new administrative building and additional storage areas in 2016 are best evidence of the correctness of due time decisions on launching own production and logistics facilities in Russia."
The start of Samsung plant helped us to solve several problems related to the development of the brand in Russia.
Firstly, the problem of localization has been successfully resolved.
"One of the important features of the plant is the fact that the components and materials are supplied to it by the Russian partners too. As a result, localization of production processes develop there”, the press service of the company says. “For example, by mid-December 2015, through the supply of local raw materials and components by the plant partners, more than 50% of washing machines were produced locally. Further, the company plans to continue to move in this direction. "Second, the Samsung factory plays, according to the management of the company, "an important social role in the region, adding to the budget of the Kaluga region on account of tax deductions and providing work for 1240 inhabitants of the area." And it also "uses innovation and technology for development of projects and programs of corporate social responsibility."
"Profitability of production depends on several factors. The level of demand for manufactured products can be considered as the most significant among them”, the company representatives emphasized. “Samsung occupies a strong position in the Russian market, the company's share in general increase. In particular, the Samsung has a strong position in the premium segment: as of June 2016 the company is a market leader in smartphones in terms of money, and by the end of 2015 and the first half of 2016 holds the leadership in the TV market in terms of money. Due to the high demand for Samsung products in Russia, the plant in Kaluga plays an important role in the growth of local business for the company."
"In Russia, the electronic products manufacture "is not supported” by the state. We are in a non-competitive conditions in comparison with other European countries”, - Blazej Bernard Reiss makes no secret. – “Very often, the customs duties on finished electronic products is lower than on the components. This immediately puts an end to the production. Prior to Russia membership in the World Trade Organization (WTO), many retailers have lobbied for the reduction of duties on import of finished electronic products to reduce both the cost of products and the size of value added tax payments. Placement of production in Russia gives a small gain in money terms of the economy, but it is not so obvious. Therefore, in the local electronics industry a large share is occupied by small companies that manufacture either experimental products batches, or products by special orders. Global-scale players are still few. While the government does not understand that it is necessary to introduce protective duties on finished products, like in Brazil and China, to reduce tariffs on import components, it will be difficult to attract the big players to Russia: the volumes in the ambiguous economy are not sufficient to justify the investment and localization. This, by the way, applies not only to the electronics industry, but to other sectors too. Proper customs regulation, the fight against gray import schemes and against understating the cost of imported goods are required."
Problems
So what problems can be solved by starting a production in Russia? And what, on the contrary, can be faced?
According to Marina Plishon assessment, local production significantly reduces delivery time of equipment, simplifies the delivery process, allows avoiding the time and cost expenses for import and certification of products, provides competitive prices.
"Today, in public procurement industrial products originating in the territory of the Russian Federation are prioritized to foreign goods, this advantage is also hard to overestimate”, Plishon says. “There are objective difficulties for the companies too, associated with finding local suppliers whose products are in keeping with international quality standards. The shortage of qualified personnel has its impact, especially in the territories. Starting our own production, we spent a long period of training, attracting foreign Cisco specialists."
Sergey Vasyuk believes that one of the main benefits the vendor gets is access to new markets that require certified products, enhancing service and technical support in the region and the ability to quickly adapt the products to the needs and specificities of a particular customer.
"If in 2012, the line of consumer Internet access devices included only 40% of products with the Russian software, today it is 90%. Moreover, such equipment has unique user functionality, tailored to the characteristics of the Russian market and in close cooperation with the leading Russian telecom operators. In addition, the presence of own production in Russia allows to organize the output of production, requiring certification FSTEC, etc.", Vasyuk emphasizes.
"Contract assembly in Russia is a very difficult business. If car manufacturers, that received a special regime of industrial assembly with the very significant benefits from the Russian government, felt more or less confident, then companies in other segments had to fight for survival”, reflects Blazej Bernard Reiss. “Global corporations - Foxconn, Elcoteq, Flextronics, that came in the prosperous years of the two thousandth - did not survive the crisis of 2008: they began to close plants and withdraw from Russia. In my opinion, their main mistake was the stake on government 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. We are focused on improving the internal efficiency of the company and the customer. The average margin in the contract assembly business is 3-5%. It should be protected by all means. To do this, you must engage in cost reduction wherever possible. And also to work with the staff."
The decision on localization of production of foreign suppliers in Russia, as a rule, is based on many factors. This step is associated with a greater risk for foreign companies: the lack of suitable infrastructure, difficulty in attracting the production staff, the need to find high-quality raw materials, solutions for administrative tasks and bureaucratic barriers.
"It is necessary to remember about the peculiarities of the Russian manufacture. They are well known and have repeatedly voiced: it is the cost of labor, energy and transport, loans, peculiarities of accounting and tax records, and much more,"- recalls Sergei Vasyuk.
"No sufficient funds for modernization of the telecommunications and information technologies market, unbalanced regulatory framework system, lack of highly qualified personnel, the economic risks - all these are the features of the Russian production", adds Marina Plishon.
However, according to Blazej Bernard Reiss, now there is no country in the world with a "easy 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”, he said. “It is generally strange for me to hear, when the Russian said that it is difficult in Russia. Do 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.
Moreover, the state control in Russia even weaker than in some Western countries. 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...
And the forecasts
What will happen next? Should we expect the arrival of a "new wave" of plants of foreign manufacturers in Russia, or, on the contrary, all initiatives will gradually come to naught? Analysts do not rush to conclusions. And representatives of foreign IT companies in Russia assure that they will continue to develop in this area.
Samsung emphasizes that Russia is one of the priority markets of the company in regard to the development of logistics and production processes. In addition, the Kaluga region, in the territory of which Samsung plant is located, has a great transit potential for the company. First of all we are talking about the already mentioned project "New Silk Road". During the implementation of the project - from November 2015 - Samsung plant took eight trains that delivered a total of 425 containers.
"With the successful implementation of major Samsung projects in Russia, there are no prerequisites that the country will lose its attractiveness for the company today", the company's management sums up.
According to Sergei Vasyuk, the immediate and medium-term plans of the vendor include the further development of both own production facilities as well as cooperation with the other market participants.
"Recently, several leading foreign vendors delegations who are interested in entering the Russian market including the organization of production of modern telecommunication and network equipment and microelectronics products visited Russia at the initiative of the company," emphasizes Sergei Vasyuk.
Marina Plishon believes that the instability of the economic situation, of course, reduces the investment attractiveness. "However, a number of government regulations aimed at creating local production, including through the conclusion of specialized investment contracts with manufacturers, government incentives for tax preferences, privileges and guarantees can stabilize the business environment in Russia", said Plishon.
Link to the material