With this post about machinery manufacturing we begin a series of publications containing analysis for Russia’s major industries. It’s not a “quantitative research” targeting market size, growth or competition – but a “qualitative analysis” of business environment and challenges existing in each industry as well as description of the major strategies implemented with the Russian manufacturers to develop their business.
The first industry we want to analyze is machinery production – that covers such activities as aerospace, shipyards, automotive, electronics, energy equipment, engineering machinery, etc.
Business environment in machinery manufacturing is characterized with the following features in Russia:
- Capacity utilization decreased a lot in the beginning of the 1990s; now they increase production but meet a problem of out-of-date capacities and technologies
- They meet a problem with old-age staff while young generation prefer to work in other industries
- By now Russia has used an “import-replacement” resource provided with 1998 devaluation
- Prices for commodities, energy and transportation grow faster than for industrial products
- Import of machinery and equipment grows faster than domestic production; there is a process of replacement of domestic equipment with imported
- Export of machinery and equipment is presented only with CIS
- There are many state-owned ineffective companies in machinery
- Ineffective organization within value chains in machinery, etc.
- Low financing of R&D activity with state and corporate players
- Manufacturing business requires high investments, so ROI is lower than in many other businesses
- Russian manufacturers meet global competition not only in the international markets but also in domestic market
- Territorial location of the Russian companies is presented with 2 models: a) concentration of production within a single location; in such model the plants play the role of so-called “settlement-forming entity” that is responsible for all inhabitants of the location (as most of them work in the plant) – that increases costs; b) large holdings have distributed organization – with assets all over Russia; such regional organization increases costs for inter-plant logistics
- Many manufacturing facilities are located in a long distance from seaports and state borders (to prevent a new “summer 1941 catastrophe” scenario they were built in distant locations)
- Territorial location of the plants defines: a) dependence of manufacturing plants on railroad infrastructure in all stages of value chain (from commodity supply to export of final products); b) high transportation costs; and c) possibility to state to indirectly influence manufacturing industry (via state-owned railroad monopoly)
- There is no organized market for machinery in Russia – all deliveries are being done only by direct contracts with customers or via intermediates; there are no exchanges or e-business facilities
- Manufacturing business most of all meets a problem of deficit of financial resources for modernization and innovations
- Taxation policy towards manufacturing business doesn’t support investments and self-financing
Machinery and equipment producers meet many challenges – from which the following are the major ones:
- Production problems – lack of labor force or materials, delays in materials and equipment delivery, mistakes in design, weak coordination, incorrect supply strategy, staff with insufficient qualification, etc.
- Customization of production processes to requirements of the specific client
- Warehousing stock optimization
- Development of own (controlled) distribution networks
- Use of few delivery and pricing models (export – long-term contracts; domestic deliveries – no price indicators, some prices are limited with state authorities; deliveries to affiliated parties by lower prices, etc.)
- Problems in relations with transport operators, railroad agents, etc.
To survive in such hard business environment and to develop their business the Russian machinery and equipment manufacturers implement different strategies, but few of them are the “common” ones for almost all players:
- Business concentration – 3-5 holdings for each large segment (like automotive or aerospace), 3-7 holdings for each mid-size segment (like engines), and 1-3 large players in each of small-size segments (like hydraulic equipment)
- Modernization of technologies and production assets, use of automated equipment and machines
- Reorientation of Russia’s universities to engineering-technical specialists (instead of numerous “economists” and “managers”); financing of R&D in universities
- Cost reducing strategies – transportation cost optimization, use of modern machinery and technologies, commodity and final products stock optimization, reducing of non-production expenses, etc.
- Development of corporate risk management systems
- Joint programs of state and private companies in development of new territories and products (“private-state partnership” concept)
- Restructuring of value chains – with engineering firms at the head; reorientation from delivery of components and products to delivery of final solutions (including services, technologies, support, etc.)
- Development of own design schools and bureaus
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