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Leo Prozument, AV Structures

by Stuart Wilson, Monday 6 March 2017

Emerging markets expert Leo Prozument of AV Structures gives us his expert opinion on doing business in Russia, explaining why some international brands fail in the market.

Why do some international companies fail in Russia?

“Russian consumers can be very loyal towards leading international brands they are familiar with. But not all internationally famous brands have high brand awareness in Russia. Companies from the US or Europe can overestimate the actual level of brand awareness for their products and services in this region.

It is quite easy to avoid such mistakes by doing some homework beforehand, by turning to consumer surveys or relatively reliable off-the-shelf reports. Business-to-business companies can find out a lot through meetings with potential partners at the business setup phase. If there truly is a gap between a company’s international and Russian positioning, companies must invest in marketing communications, such as participating in industry exhibitions, advertising, promotion, public relations etc. This is especially important for premium players. We have witnessed several cases of global leaders who have failed simply because they did not spend enough time on marketing communications. Also, international companies that have been successful in Russia have often chosen to rely on local suppliers, who have well-developed service networks, spare parts availability and shorter delivery time.

The importance of this key success factor cannot be underestimated. International brands tend to offer higher quality, but also higher prices. Using local suppliers who are able to secure lower prices can offset this, as long as international quality standards are maintained. This type of investment will always pay off and support a company’s competitive positioning, even in harsh economic conditions. A company’s service network can be a strong competitive advantage, so companies should build them as quickly, reliably and extensively as they can.

Some people may say that it is also hard to conduct business in Russia, with concerns about corruption, unclear decision-making structures, distribution networks etc. Generally, these other obstacles can be overcome with the right partner and with experience.”

How would I suggest addressing the obstacles you just raised?

“Some say that it is impossible to do business in Russia without bribes – that you are expected to pay officials for permissions, intermediaries to win tenders, buyers in retail chains, procurement managers in private companies etc. This is true in many cases. But at the same time, you can work without bribes. You are still welcome even if your corporate culture has strict guidelines. We know of many such examples.

You just need to be very straightforward and principled, as you would be in your home market, and your partner and hiring strategy will differ. Russia’s economy is highly centralized, and so are its businesses. Decision-making power will reside at headquarters in Moscow, especially for large investments or high-value procurement categories. You could say it is the European equivalent of Korea’s chaebol or Japan’s keiretsu corporate structures. But it is not always that simple. Before building their sales approach, international companies need to carefully study decision-making chains in order to clearly specify where decisions are made, when and by whom.

You can come across very complex decision-making structures in Russia, which are influenced by both regional headquarters and head offices. Companies are also daunted by the need for massive distribution networks. As a starting point, most international companies could consider country-wide distributors for their established relations with key accounts. This helps lower risks and save money. The downside of using distributors will be the lack of control over communications with the market and lower margins. This may not work for businesses with high brand capital or low-margin products.”

What other pitfalls can international companies avoid?

“Quite often, international companies fail to take into account the different industry structures in Russia and make many mistakes as a result. Suppose you are a component manufacturer. The market may look very small because the initial data shows that consumption is low. The reality is different. Many businesses in Russia manufacture their own components in-house. So there may be missed opportunities if companies come to the wrong conclusions.

In this case, we would advise companies to consider selling the idea of outsourcing as a starting point. This could mean that your sales people should aim to meet with senior staff, sometimes even CEO, to sell the advantages of component outsourcing, rather than middle-level managers who may worry about their job security.”

What other opportunities are there?

“Russia’s government is investing heavily in technology and innovation. There are several hi-tech hubs being built on a federal level. One example is Rusnano, a joint-stock company created and owned by the government of Russia, aimed at commercializing developments in nanotechnology. Rusnano’s task is to create a nano-industry that will make marketable products worth 900 billion rubles

Then there is the Russian equivalent of Silicon Valley, Skolkovo innovation center, a planned high technology business area to be built at Skolkovo near Moscow, Russia. The site is intended to be an ultramodern complex created to attract science and technology companies. Russia is also expected to offer a lot of potential incentives for hi-tech investors. Companies can consider looking in these sectors for opportunities, especially since Russia also offers a well-established higher education system that produces very employable staff.

Companies can also use Russia as a springboard to expand into the CIS region, particularly countries like Ukraine, Kazakhstan and other regions. Russia makes up to 75% of the GDP in CIS countries, where the majority of people who are older than 30 also speak Russian. Moscow is not only the logistical hub for Russia, but also for all CIS countries. There are many distributors that cover the CIS region and transportation is set up easily and efficiently.”

Which city do you suggest companies choose as their Russian base?

“From most perspectives, Moscow is first choice. it is the largest market with 15-20 million people and houses key governmental bodies, public entities and private corporate headquarters. Russia is a highlycentralized economy and the government controls over half of the economy, so Moscow is also the ultimate logistical hub for the rest of Russia. This makes Moscow the inevitable choice for business-to business companies or public-oriented businesses such as banks and medical equipment companies. On the other hand, Moscow is also very expensive in terms of salary, real estate and infrastructure. Consumer goods, retail and manufacturing businesses should look for other possible locations.

Saint-Petersburg can be a good alternative. It offers developed sea-based logistics, fewer administrative barriers and access to highly qualified but less expensive personnel. Moreover, many find it a very livable European city with many cultural and entertainment options. On the other hand, Saint-Petersburg can be very competitive for some sectors – take retail for example. The share of retail is 60-70% of commercial space compared to 35-45% in Moscow. Other locations may offer faster sales growth opportunities, and each business will need to evaluate their options carefully.”

DISTREE Russia 2017

We are pleased to confirm that Channel EMEA is an official Media Partner for all DISTREE events in 2017, including DISTREE Russia. DISTREE Russia will return to Moscow in 2017. The country’s leading technology channel event will once again offer technology suppliers access to Russia leading retailers, e-tailers and resellers in one place at one time. DISTREE Russia will take place at Hotel Yahonty (www.yahonty.ru) in Moscow on the 21-23rd June 2017.

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February, 2020

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