Front End I Electronic Supply Components Network
The slumbering bear begins to stir
The Russia Federation is potentially a huge market for electronic components but, as Adam Fletcher explains, will require a colossal amount of investment in its infrastructure and political and legal systems before it can actively compete in the global electronics market
L
et me start by applying a little perspective on the Russian electronic components market which until comparatively recently, as the USSR, operated in a ‘closed command economy’ where the state dictated ‘what’ was to be produced and by ‘whom’, and apparently kept the ‘by when’ deliberately vague. As a result material deliveries where poorly scheduled and often late, with a year’s supply often arriving in a single shipment. In order to combat this over-or-under supply situation the Russian supply chain established an informal system of passing products between plants in a rudimentary barter system. However the informal barter system eventually became an almost formalised trading operation with many individuals helping to balance demand by buying - or stealing - and selling excess inventory and in the process, adding to a culture of corruption from which some in the Soviet Communist Party hierarchy benefited immensely.
The advent of Glasnost and market
reforms under President Gorbachev in the mid 1980s drove huge changes throughout the USSR, ultimately leading to its breakup. The greater focus on liberalising and reforming the Russian economy created opportunities for individuals and organisations both within and outside the country but in the process created enormous tensions. Having to manage huge change in an entire socio-economic system resulted in a near economic disaster. Russia has huge reserves of natural
resources particularly gas (largest global exporter) and oil (second largest global exporter), both of which have generated huge revenues for the country and enabled massive economic investment. Unfortunately investment cycles are closely linked to the price of these commodities and the primary beneficiaries have often proved to be largely undeserving oligarchs and politicians who were granted generous shares in formally state run enterprises. The Russian Government eventually
recognised that the electronics sector and in particular the semiconductor industry could be an area of high growth and strategic importance for the country. In the 1960s 70s and 80s it invested heavily in semiconductor manufacturing, creating the “closed’ (limited access, no foreigners, no photographs) city of Zelonograd with the aim of rivalling Silicon Valley. Despite “relocating” 5,000 scientists and engineers
8 December 2011/January 2012
to the new city the project proved unsuccessful and from the mid 80s the country suffered from a significant “brain drain” as many of its best technologists migrated, principally to the US and Israel. In 2006 the Russian government announced plans to invest $40bn in the semiconductor sector but a sharp drop in the price of commodities undermined this activity and the investment has not yet really recovered.
Three types of companies Russian electronics manufacturers can be broadly placed in three groups: Government-backed federal enterprises; private companies founded in the free market; and subsidiaries of primarily multinational organisations. Federal Government Enterprises are the
remnants of state controlled enterprises which continue to be managed by the Russian Ministry of Industry and Trade, which directs 60% of its activity towards military applications, with the balance made up of domestic industrial and infrastructure products. Whilst many of these organisations are disparately vertically integrated they are hampered by production capabilities that are both poorly managed and grossly out of date. The 350,000 people employed by the Ministry include a reasonable proportion of skilled technical and scientific employees but their efficiency and effectiveness is low - as are their salaries - but efforts are being made to reorganise the best of these organisations into single vertically-integrated manufacturing companies along the lines of the Korean model. There are today over 2,000 private
electronic companies in Russia with combined sales revenue of R80bn (£1.6bn). These organisations are much more dynamic and have made significant investment in new technologies. They trade mainly with international customers and domestic organisations similar to themselves but apparently find it difficult to supply goods and services to Federal Government Enterprises.
Despite that Russia is seen as an attractive location - due to its proximity to Europe and the low salary levels for all labour particularly skilled scientists. However, investment by wholly or partially owned subsidiaries of multinational electronics organisations has been extremely limited. There has been some external investment: Intel employs some
Components in Electronics
1,200 engineers at its Design Centre; ABB has a number of industrial design and manufacturing plants, and Siemens’ joint venture with Iskratel has its base in Russia. LG and Samsung have both built assembly plants for LCD TVs there but these factories are supplied directly by their parent companies and source very little product within Russia. The Russian white goods market is almost entirely served by domestic manufacturers but without exception all the operations are joint ventures where the majority of ownership is in the hands of companies such as Siemens, Merloni, Candy and LG. Global CEMs such as Foxconn and Jabil have delayed planned investment until the Russian government removes customs tariffs and enables the free movement of goods. There is little hope of productive
interoperation between these three primary types of Russian organisations any time soon, but the private electronic company sector does appear to offer a realistic prospect of growth.
Electronic component manufacturers Approximately one hundred domestic companies manufacture electronic components in Russia, almost none of which have name or brand recognition in Europe. In 2009 it was estimated that the total sales revenue for electronic components manufactured in Russia was £240m of which only 30% was exported, primarily to support military equipment and for use in low tech consumer products. Twenty multinational electronic components manufacturers have offices in Russia, primarily supporting their local distributors and a very limited customer base. Their combined sales revenue was estimated to be £160m in 2009, which contrasts sharply with the UK where the electronic components market served by manufacturers in 2009 was over £3bn. Some of these multinational organisations have licensed their technology to domestic Russian electronic component manufacturers and provide technical support for their implementation.
Distribution There are over 120 electronic components distributors operating in the Russian market with an estimated Distributor Total Available Market (DTAM) of £500m (for comparison the UK DTAM in 2009 was over £1bn).
Very few global distributors operate directly in the Russian electronic components market, most trade through the operations of domestic distributors. The top twenty distributors account for 80% of the DTAM with the three largest Russian distributors being Compel (£35m), Symmetron (£30m) and PetrolInTrade (£25m). Many Russian distributors also have wholly owned subsidiaries involved with contract manufacturing, personal computer assembly and grey market supply. Combining the revenues of all the known elements in the Russian electronic components market leads us to conclude that the total 2009 sales revenue was approximately £900m (for comparison the UK 2009 TAM was £4bn), but the Russian Federal Government doesn’t disclose electronics manufacture revenue figures but best guesses suggests that we don’t have to add more than a further £500m to the earlier figure.
What’s holding Russia back? It’s apparent that given its population size (9th largest), education infrastructure and political status Russia lags a long way behind the rest of the world in electronics. The market is undeveloped and whilst showing some growth has a very long way to go to meet its full potential. It will take a cultural mind-shift before the population fully understands how a market driven society operates. The Government must actively encourage long term systematic investment, reduce the size and autonomy of its military and police forces, strengthen the legislative systems and stop turning a convenient ‘blind-eye’ to corruption.. Sadly, changes don’t happen quickly in Russia, a fact that has prevented the country’s membership of the World Trade Organisation (WTO) for the last twenty years. Today however it looks likely that membership of the WTO will be granted in 2012, a great achievement that is sure to speed the pace of change. You only need to look at the huge changes and investment in Eastern Germany following unification to realise that there is huge potential for change in Russia. When the slumbering Russian Bear does fully awaken expect large opportunities for investment and trade in global markets.
ECSN |
www.ecsn-uk.org Adam Fletcher is chairman of ECSN
www.cieonline.co.uk
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