Upload
pavel-melnikov
View
153
Download
0
Tags:
Embed Size (px)
DESCRIPTION
The presentation answers the following key questions What drives localization in Russia? How localization is done by different companies? What are potential or existing benefits companies? How to make the most from the federal and local endorsement? Optimal solutions for localisation
Citation preview
Federal endorsement and interaction with regional officials in the process of Greenfield and Brownfield investment projects implementation
Moscow, November 2013
Presentation for the members of Association of European Businesses
Contents
What drives localization in Russia?
How localization is done by different companies?
What are potential or existing benefits companies?
How to make the most from the federal and local
endorsement?
Optimal solutions
What drives localization in Russia? There are no formal regulations formulating rules of game for localization in
Russia. The state rhetoric: ‘you can localize but we can give you no guarantees
it will help you keep and raise share in state purchases or any other
guarantees’.
One of the key criteria for implementing a foreign
direct investment (FDI) project or localization of
production is the willingness to keep and raise
share in state purchases.
Localization is considered as a gate jumper for a
company to avoid both tariff (customs duties)
and non-tariff regulations (localization helps
decreasing the warranty period of the locally
produced goods) in a legal field.
Business
Business
As a secondary reason logistics issue, shortening the shipment distance and
proximity to clients are often mentioned.
Example:
Market leader in energy management located their Technology Service Centre in Kaluga region (2010) so that to be able to provide service on turbine maintenance for its local clients.
Finally, it often happens that the key goals of localization set in the beginning
of the project couldn’t be achieved due to different reasons.
Example:
Global insulin producer has a strong Russian competitor Pharmstandard that is said to be affiliated with Russian authorities ensuring it allegedly has informal preferences in tender process. Thus keeping the company’s share is an issue much more complicated that couldn’t be 100% solved by localizing.
The majority of tomograph‘s components components are not produced in Russia and have to be imported after high customs duties are paid (customs duties for a tomograph are lower than for its components). Thus global tomograph producer couldn’t decrease prices.
The benefits for the state are obvious: they are increasing local
investments, creating local jobs, increasing locally paid taxes.
Potentially decreasing prices of the end product for the population.
It also gives the state officials the leverage to make companies more
flexible (dependent as they are localized now) and force them to pay
before, during and after the FDI project is implemented.
Automotive sector is the most successful example of
localization. The state has been implementing industrial assembly
program for more than 7 years already. The government has
provided very favorable conditions for car manufacturers motivating
them to localize production. This example was accompanied by the
strong political will of Putin himself. He really wanted to attract
investors hence everything was prepared in a proper way.
The state
How localization is done by different companies?
Localization by different companies Majority of companies in all sectors tend to start with a minor project, test-drive the
region, the production and sales opportunities and then to proceed to further
investments and deeper localization.
Foreign car manufacturers, for example, have been localizing production gradually,
and now they have to achieve 80% of localized production during an average period of
5 years starting 2012 (some were given 7 years). After this period of time regular
import tariffs will be re-introduced for them.
Some investors only announce the full cycle localization in X number of year. Some
declare their commitment to Russia but don’t want to invest a lot today and leave a
decision until tomorrow as situation may change and they won’t invest at all.
There are such economy sectors like pharmaceuticals, that are mostly dependent on
the state purchases thus they decide to proceed quicker than their colleagues in other
sectors. In other words localization format including its depth and type depends on an
industry sector.
Production localization vs. soft projects (R&D, etc) After evaluation of expected benefits of localization in financial
terms companies decide to pursue either production localization or soft
projects. Or both.
Production
Coca-Cola opened its first plant in Russia as early as 1994.
Ford could be considered as one of the pioneers in the localization process as well (2002). They also took part in preparation of localization Decree signed by Ministry of Economic Development, Ministry of Industry and Ministry of Finance (2005). It defined the criteria for industrial assembly for the whole automotive industry. The pioneers were provided with the most favorable conditions, sending an important message to other investors.
On the over hand the following negative aspect could be underlined:
High construction costs and administrative barriers and
difficulties when starting operations in Russia lead to long term and low
Net present value/Internal rate of return for projects in most sectors.
Research & Development projects (R&D) Could R&D and training projects be considered as an option? FDI is
largely taken for granted. While R&D and training projects can
add real value. Sometimes even reduce expectations for local
manufacturing.
Examples:
IBM decided to open Russian Systems and Technology Laboratory (2006) in Moscow which became part of the IBM research centers network worldwide. IBM has only R&D facilities in Russia
Honeywell (major American producer of commercial and consumer products, engineering services and aerospace systems) opened a center of technological solutions in St. Petersburg (2010), designed to develop innovative capital and organize a research center. Then opened a Centre for Technology Studies in Skolkovo (2012) that will develop innovative solutions for the processing industry.
Major French producer of electrical systems for aerospace could be
mentioned as a negative example as it lost market share and huge
contracts with state when declined opening of R&D facility in Moscow.
Production and soft projects Pfizer implements 2 localization projects:
Joint project of Pfizer and NGO Petrovax Farm to localize the production of pneumococcal vaccine (2011)
Pfizer signed a memorandum of understanding with Biocad to explore the possibility of localization of innovative drugs production for the treatment of hemophilia (2012)
On the other hand Pfizer launched a soft project as well:
Together with the Moscow Institute of Physics and Technology it signed an agreement on cooperation in the sphere of development and implementation of joint educational program for talented students and young scientists (2011). Ministry of Economic Development oversees this program.
Localizing both production and soft projects in Russia doesn’t
guarantee you market access or give you a competitive advantage on
the market. But companies like Pfizer try to pull all kind of strings to
maintain market access.
In the Special Economic Zones (SEZ) vs. in other regions
Localizing in SEZ gives you the opportunity not to pay customs duties for
equipment imported as a contribution to share capital. Immediate investments
costs in SEZ are comparatively lower than in other regions. But future operating
costs are much higher than in other regions. There are also certain time
management risks connected to implementing projects in SEZ, such as time
consuming approval procedures and delaying decisions by the management of
SEZ in terms of the construction process.
The latest example is a market leader in ceiling production in Alabuga SEZ.
While in other regions you may agree on different conditions from tax holidays
to summing up of infrastructure. Such type of projects bare, mainly, market risks.
The most important thing is that such projects provide an opportunity for an
individual approach, i.e. to negotiate exclusive conditions. Usually it depends on
your GR department or consultants, the quality of due diligence they
implemented and their negotiations skills.
Market leader in energy management secured nearly perfect conditions for locating a production unit that will specialize in the manufacture, sale and service of gas turbines in Yaroslavsky region (2011).
With partner (joint ventures) vs. without partner Important to decide whether the partner adds value to your project. It
often happens in Russia especially in the pharma and medical devices industries
that you have to partner with some Russian company to be included into the list
of strategic companies or into the state purchases. An investor may also decide
to partner with a Russian company to shuffle off the burden of corruption risks
on a Russian partner.
On the other hand foreign investors often look for local state-owned partners
without any clear understanding of possible difficulties that may follow. As such
state companies may only capitalize on the promotion of partnership and don’t
really invest their time and money to support FDI project.
With partner
OTIS elevators production in Russia in 1992 as a joint venture with Moslift. Novartis and JSC RT-Biotechprom signed an cooperation in drugs localization
for the treatment of chronic myeloid leukemia (2012). Without partner Siemens bought a bulb factory in Smolensk (2003). Market leader in energy management located their Technology Service Centre
in Kaluga (2010).
Greenfield vs. Brownfield Brownfield could be cheaper in terms of the costs as the facilities
already exist thus ensuring the length of the FDI project is shorter as
well. Moreover it could be a good starting point before you launch a
Greenfield project.
Global cement producer bought 2 plants in Moscow and Chelyabinsk regions (1995). Now considers launching a Greenfield project at least in Kaluga region while Rostov region may follow.
In pharma or other high-end sectors it is preferable to go for
Greenfield as old infrastructure could limit the opportunities to launch
a really up to date production facility.
Nycomed following other healthcare competitors that have already done so decided to launch a Greenfield project in Yaroslavl region (2010).
Greenfield vs. Brownfield However, it is important to understand that costs of reconstruction in
Russia are higher than costs of a new construction site if we compare
the costs per 1 square meter correspondingly.
If you plan to develop within the limits of existing Brownfield site, it could be
considered as an option.
But if you have development plans implying expansion, then Greenfield is
preferable as it is more profitable to gradually expand your production based
on well-thought strategic plan and not to be limited to a small land plot.
Moreover if you have time constraints and tight deadlines, approval of re-
construction with authorities is much more complicated compared to
Greenfield and requires significant time thus it may lead to delays in project
implementation.
What are potential or existing benefits for the companies in terms of the state purchases and business development? How to make the most from the federal and local endorsement?
Potential benefits
Localization is only one of the tools to increase your market share. It’s not
a magic wand.
Sanofi use both production localization (Bioton Vostok Brownfield insulin production in Orel region (2010) and realize partnership projects like co-production of polio vaccine with Institute of Poliomyelitis and Viral Encephalitis named after M.P. Chumakov within Russian academy of medical sciences (2008) to keep and increase their market presence. This co-production became feasible only after they reached a partnership agreement with Sergey Chemezov, Head of Russian Technologies.
Among other issues it is important to consider whether you have Russian
competitors in specific business segments and how strong is the existing
local production. Even under the new WTO conditions (Russia has finally
accessed WTO on August, 22, 2012) it will be protected.
Consider what other foreign competitors have already done on the
market.
It is essential to use leverage of the governors as they are ‘A’
class officials meaning they are equal to any federal minister and
can outreach them easily if it can attract investors into their
region.
You can even transfer payment of taxes to a region where a
governor is supportive as he may help you secure federal
endorsement for your FDI plans.
Not entirely a crazy idea if you consider what a powerful political
leverage a governor may be to you provided you have invested
or plan to invest in his region. You definitely need to consider
this instrument and use it wisely to achieve your goals.
Potential benefits
Optimal solutions
Optimal solutions Political decision on localization should only be made when you are squeezed out of
the market by a Russian competitor or a company affiliated with state authorities.
And you don’t have any other opportunity to stay on the market.
In all other situations well-thought economic analysis is key when taking
decision on localization. Some preliminary questions to focus on and to start with
the search for the optimal solutions:
Could you evaluate expected benefits of the localization in financial terms (increasing volume of sales and money)?
What is the size of the market for your product and consumption? What are the import amounts?
What is the consumption growth trend? What is the regulatory trend? How do they influence one another?
Do you have Russian competitors on your market? If yes, then how active and influential are they?
Is your market dependent on state purchases? How heavily? Have you received any guarantees on investment conditions/state purchases
benefits from the officials both federal and regional? Are they formalized in a written form?
Contact
Pavel Melnikov
Vice President,
Public Affairs & Crisis Communications
Mobile: +7 (963) 962 19 29
E-mail: [email protected], [email protected]
Grayling Eurasia+7 (495) 788 67 84
Krasnoproletarskaya 16
bld. 3, entrance 8, floor 5
Moscow 127473
www.grayling.com