1. RUSSIA'S MANAGERS, BOTH IN NEW FIRMS AND THE LARGELY PRIVATIZED FORMER STATE SECTOR, ARE TRANSFORMING THE RUSSIAM ECONOMY, BUT LEADERS OF THE GROWING START-UP SECTOR AND MOSCOW'S FINANCIAL HOLDING COMPANIES ARE PLAYING THE MOST DYNAMIC ROLES.
--THE GENERALLY YOUNG (UNDER 40) DIRECTORS OF RUSSIA'S LEADING COMMERCIAL BANKS, SUCH AS UNEXIM, ROSSIYSKIY KREDIT, MENATEP, INKOM AND ALFA BANKS ARE ACQUIRING AND STARTING TO RESTRUCTURE RUSSIA'S MOST DESIRABLE FORMER STATE INDUSTRIAL ENTERPRISES, SUCH AS NORILSK NICKEL AND SIDANKO AND YUKOS OIL COMPANIES.
--IN CONTRAST, WHILE MANY MANAGERS OF OLDER INDUSTRIAL FIRMS -- THE NOW LARGELY-PRIVATIZED
CORE OF THE FORMER SOVIET ECONOMY -- ARE TRYING TO RESTRUCTURE AMD FIND PARTNERS,
A GREAT MANY OTHERS ARE NOT EMBRACING CHANGE SO WHOLEHEARTEDLY. MANAGING DIRECTORS
AT INDUSTRIAL FIRMS ARE GETTING BETTER AND BEING REPLACED MORE FREQUENTLY.
IN PARTICULAR, THEY ARE GAINING FINANCE AND MARKETING KNOW-HOW TO COMPLEMENT
THEIR RELATIVE STRENGTH IN MANUFACTURING. HOWEVER, A SHORTAGE OF GOOD MIDDLE
MANAGERS, IS FREQUENTLY CITED AS A PROBLEM. PERHAPS A THIRD OF PRIVATIZED
FIRMS ARE ALREADY DOING WELL.
--ENERGETIC, LARGELY SELF-TAUGHT MANAGERS OF SMALL START-UP BUSINESSES ARE
BUILDING TRADE, SERVICE AND INDUSTRIAL ENTERPRISES AND ARE BEGINNING TO BUY
FORMER STATE FIRMS AS PART OF EXPANSION PLANS. SUCH MANAGER/OWNERS RELY ON
HARD WORK, LOCAL CONNECTIONS AND
THE APPEAL OF JOB CREATION. THE GOR REPORTS THE START- UP SECTOR ALREADY EMPLOYS
SOME 14 MILLION RUSSIANS AND THAT SERVICES BROADLY DEFINED ACCOUNT FOR OVER
HALF OF GDP.
THE RISE OF THE BIG BANKING GROUPS AS WELL AS THE SMALLER FISH IN THE NEW COMMERCIAL CLASS PROVIDES VERY TOUGH COMPETITION FOR PRIVATIZED FIRMS IN RUSSIA'S TRANSFORMING ECONOMY. SOME REPRESENTATIVES OF ALL THREE GROUPS NO DOUBT WILL SURVIVE, BUT THE EVOLUTION NOW UNDERWAY COULD PRODUCE -- PERHAPS WITHIN A DECADE OR LESS -- A RUSSIAN ECONOMY MUCH CHANGED FROM THAT WE SEE TODAY. END SUMMARY.
------------------------------------
THE BIG: OF FIGS, BANKERS AND BARONS
------------------------------------
2. SINCE LAST FALL, WHEN THEY DOMINATED THE GOR'S LOANS-FOR-SHARES PRIVATIZATION PROGRAM AND TOOK CONTROL OF SEVERAL OF RUSSIA'S PRIME ASSETS, MOSCOW'S LEADING COMMERCIAL BANKS AND THEIR FINANCIAL HOLDING COMPANIES HAVE DOMINATED ACQUISITION AND RESTRUCTURING NEWS. MOREOVER, THEY HAVE WORKED HARD SINCE THEN TO PUT THAT CONTROL INTO ACTION AND TO LAY THE GROUNDWORK FOR SERIOUS RESTRUCTURING. UNEXIM BANK HAS CONTINUED ITS TAKEOVER OF NORILSK NICKEL, REPLACING THE MANAGING DIRECTOR. UNEXIM HAS CONTINUED TO EXTEND ITS AUTHORITY OVER SIDANKO OIL COMPANY. MENATEP AND ITS ROSPROM HOLDING COMPANY HAVE CARRIED OUT WHAT LOOKS TO BE A FRIENDLY MERGER WITH YUKOS OIL COMPANY AND ITS MANAGEMENT.
3. BUT THESE HIGH PROFILE DEALS ARE JUST THE VISIBLE LEADING EDGE OF THE ACTIVITIES OF THE LARGEST COMMERCIAL BANKS AND THEIR HOLDING COMPANIES. THESE BANKS HAVE CONTINUED TO ACCUMULATE LESS FLASHY ASSETS ALL ACROSS RUSSIA. ACCORDING TO THE GOR, THE 33 REGISTERED FIGS NOW CONTROL ENTERPRISES ACCOUNTING FOR OVER SIX PERCENT OF GDP AND EMPLOYING MORE THAN THREE MILLION WORKERS. AND THESE IMPRESSIVE NUMBERS LEAVE OUT MANY IMPORTANT FINANCIAL HOLDING COMPANIES, SUCH AS MOST GROUP AND ALFA GROUP, THAT HAVE NOT REGISTERED AS FORMAL FIGS WITH THE GOR. ROUGHLY HALF OF RUSSIA'S 30 LARGEST COMMERCIAL BANKS ARE NOW OPERATING, AT LEAST IN PART, AS HOLDING COMPANIES FOR INDUSTRIAL ASSETS. THESE BIG COMMERCIAL BANKS AND THEIR HOLDING COMPANIES HAVE COME FROM VIRTUALLY NOWHERE IN THE LAST FIVE YEARS TO CONTROL IMMENSE HOLDINGS. RUN, BY AND LARGE, BY SOPHISTICATED, YOUNG BANKERS (SOME SELF-TAUGHT), THESE COMPANIES ARE WELL POSITIONED TO EXERCISE SUBSTANTIAL INFLUENCE FOR MANY YEARS.
4. THE QUESTION REMAINS, HOWEVER, OF JUST WHAT THESE HOLDING COMPANIES ARE TRYING TO ACHIEVE, BEYOND ACCUMULATION OF SHAREHOLDINGS, AND WHETHER THEY HAVE THE CAPABILITY TO EFFECTIVELY MANAGE THEIR HOLDINGS AND IMPLEMENT BADLY NEEDED DEEP RESTRUCTURING. SOME INFORMED CRITICS CONTEND THAT THESE BIG BANKS HAVE NO PROVEN RECORDS IN RESTRUCTURING OR EVEN MANAGING INDUSTRIAL ENTERPRISES. THIS MAY BE TOO HARSH AS SOME CLEARLY ARE ATTEMPTING SERIOUS RESTRUCTURING OF MAJOR FIRMS. IT IS TOO SOON TO JUDGE THE RESULT.
---------------------------------------------------
NEITHER CEO'S NOR RED
DIRECTORS -- THE MANAGERS OF RUSSIA'S PRIVATIZED INDUSTRIAL FIRMS
---------------------------------------------------
5. OPINION ON HOW RUSSIA'S 130,000 FULLY OR PARTIALLY PRIVATIZED ENTERPRISES ARE DOING IS LARGELY IMPRESSIONISTIC AND DOMINATED BY WHAT HAPPENS AT A HANDFUL OF HUGE FIRMS RUN BY THE BARONS OF RUSSIAN INDUSTRY. JUDGING FROM EVENTS AT SUCH GIANTS AS NORILSK, YUKOS AND SIDANKO, THE PROMOTION OF AVTOVAZ' KADANNIKOV TO FIRST DEPUTY PRIME MINISTER, AND THE NAMING OF DEPUTY PRIME MINISTER KAZAKOV AS CHAIRMAN OF GAZPROM, THE MUSICAL CHAIRS AT THE TOP OF RUSSIAN INDUSTRY HAS BEEN FRENETIC. THESE HIGH-PROFILE CASES, HOWEVER, PROBABLY EXAGGERATE THE RATE OF CHANGE IN INDUSTRY AS A WHOLE. A FOCUS ON THESE FEW FIRMS ALSO MISSES THE UNDERLYING TREND WHICH SHOWS THAT ALTHOUGH SOME BRANCHES OF INDUSTRY ARE GROWING, RUSSIAN INDUSTRY BROADLY SPEAKING IN THE LAST TWO YEARS HAS REALLY ONLY BEGUN TO STABILIZE AT ROUGHLY HALF OF THE 1991 VOLUME OF OUTPUT. (IT IS IMPORTANT TO NOTE THAT A LARGE PART OF PREVIOUS OUTPUT LEVELS CONSISTED OF MILITARY ORDERS AND OTHER UNSALABLE GOODS.)
6. HOWEVER, ONE SURVEY INDICATES THAT AS OF LATE 1995 ROUGHLY ONE THIRD OF RUSSIA'S PRIVATIZED INDUSTRIAL ENTERPRISES WERE PERFORMING WELL, WHILE A FURTHER ONE FIFTH WERE INSOLVENT. MANAGERS AT MOST COMPANIES ARE NOT YET ACCOMMODATING TO OUTSIDE INVESTORS AND ARE RESISTING DOWNSIZING AND OTHER NEEDED CHANGES. A RESPECTED FUND MANAGER REPORTS THAT THE MAJORITY OF DIRECTORS STILL FEAR LOSS OF CONTROL TO AN OUTSIDE INVESTOR AND HAVE NOT YET RECOGNIZED THAT A SMALLER PIECE OF A GROWING PIE IS MORE VALUABLE THAN OWNERSHIP OF A DEAD ENTERPRISE. INVESTORS REPORT THAT VIOLATIONS OF SHAREHOLDER RIGHTS, WHILE STILL TROUBLESOME, ARE NOW LESS EGREGIOUS AND THAT COMPLAINING TO LOCAL OR NATIONAL AUTHORITIES GENERALLY REMEDIES THE SITUATION, AT LEAST ON PROCEDURAL MATTERS.
7. ALL REPORTS INDICATE THAT MANAGEMENT TURNOVER IS ACCELERATING, WITH ONE SURVEY SHOWING THAT NEARLY A QUARTER OF MANAGING DIRECTORS HAVE BEEN REPLACED SINCE 1992 AND THAT ONE QUARTER OF THE NEW MANAGING DIRECTORS WERE OUTSIDERS. SOME OBSERVERS THEORIZE THAT MOVEMENT AT THE MANAGING DIRECTOR LEVEL VIRTUALLY STOPPED DURING THE GORBACHEV ERA, BUT ACTUARIAL REALITIES, A FEW TAKEOVERS AND CONCERNED SHAREHOLDERS ARE FINALLY BREAKING THE LOG-JAM. CONTACTS IN THE RUSSIAN AND FOREIGN INVESTOR COMMUNITIES, AND MEETINGS WITH INDUSTRIAL MANAGERS, INDICATE A CONTINUING TREND AWAY FROM RELIANCE ON CENTRALIZED CREDITS TO PROP FIRMS UP.
--------------------------------------------------
BURDENS OF THE PRIVATIZED:
EXCESS LABOR, SOCIAL SERVICES, LACK OF CAPITAL AND GOOD MIDDLE MANAGERS
--------------------------------------------------
8. AS HAS BEEN DOCUMENTED MAMY TIMES, RUSSIA'S PRIVATIZED INDUSTRIAL FIRMS HAVE FACED A SEVERE SHORTAGE OF NEW CAPITAL FOR AT LEAST FIVE YEARS, FOCUSED ENTIRELY ON PRODUCTION AT THE EXPENSE OF MARKETING AND FINANCE, AND TRADITIONALLY SUPPLIED HOUSING, SCHOOLS, HOSPITALS, SUMMER CAMPS AND OTHER EXPENSIVE SOCIAL SERVICES TO WORKERS. ALTHOUGH SOME ARE BEGINNING TO DIVEST SOCIAL "ASSETS," THIS PROCESS IS SLOW AND PAINFUL, ESPECIALLY IN ONE AND TWO FACTORY TOWNS WHERE LOCAL GOVERNMENT'S ABILITY TO STEP INTO THE BREACH IS LIMITED. LIKEWISE, RUSSIAN FIRMS HAVE LONG RETAINED VERY HIGH LEVELS OF EXCESS LABOR, WHICH IT IS DIFFICULT SOCIALLY AND POLITICALLY TO REDUCE. SLOWLY RISING UNEMPLOYMENT AND THE EXPANDING START-UP SECTOR INDICATE PROGRESS HAS BEEN MADE, BUT MOST PRIVATIZED FIRMS HAVE STILL SEEN OUTPUT DROP FAR FASTER THAN EMPLOYMENT, RESULTING IN DECLINING PRODUCTIVITY. (NOTE. FROM 1994 TO MID-1996 UNEMPLOYMENT IN RUSSIA USING ILO METHODOLOGY GRADUALLY ROSE FROM THE SIX PERCENT RANGE TO NEARLY NINE PERCENT).
9. WESTERN AND RUSSIAN EXPERTS ALIKE CONFIRM THAT IMPROVING PRIVATIZED INDUSTRIAL ENTERPRISES IS A "PEELING THE ONION PROBLEM" -- AS ONE PROBLEM IS REMEDIED NEW ONES SURFACE. THE CURRENT CONSENSUS IS THAT WHILE MANAGING DIRECTORS ARE IMPROVING -- AND GAINING BASIC FINANCE AND MARKETING SKILLS TO BALANCE THEIR RELATIVE STRENGTH IN PRODUCTION -- A SHORTAGE OF TALENTED MIDDLE MANAGERS HAS EMERGED. THIS SHORTAGE IS GREATLY COMPOUNDED BY THE DEPARTURE OF THE BRIGHTEST MIDDLE MANAGERS TO RUSSIA'S BIG COMMERCIAL BANKS, BROKERAGES, FOREIGN REP OFFICES, START-UPS AND OTHER JOBS IN THE "NEW" ECONOMY.
-----------------------------------------------------
THE NIMBLE: THE START-UP
SECTOR: AGGRESSIVE UP-STARTS
-----------------------------------------------------
10. THIS YEAR'S PRESIDENTIAL ELECTION HAS RAISED THE POLITICAL PROFILE OF RUSSIA'S NEW AND SMALL BUSINESS SECTOR. PRESIDENT YELTSIN HAS HERALDED THIS COHORT AS BOTH THE BENEFICIARIES AND THE HEROES OF REFORM (AND WARNED THAT ZYUGANOV WILL DESTROY THEM) AND ZYUGANOV HAS PROMISED THEM A SECURE PLACE UNDER A COMMUNIST GOVERNMENT. ACCORDING TO THE GOR, RUSSIA HAS ONE MILLION SMALL BUSINESSES ACCOUNTING FOR OVER 14 MILLION JOBS. IT IS NOT CLEAR WHAT THIS NUMBER INCLUDES, BUT ANYONE WHO HAS TRAVELLED TO RUSSIAN REGIONS, LET ALONE EXPERIENCED THE VIBRANT SERVICE SECTOR, SHOPS AND KIOSKS OF MOSCOW, KNOWS THAT RUSSIA'S START UP SECTOR IS ON THE MOVE. ALTHOUGH THE FOCUS OF THE START UP SECTOR IS IN TRADE AND SERVICES, THE SERVICES PROVIDED ARE INCREASINGLY SOPHISTICATED, INCLUDING BANKING AND FINANCE, ADVERTISING, BUSINESS CONSULTING, ACCOUNTING, LEGAL, CIVIL AVIATION (TRAMSAERO) AND OTHER KEY BUILDING BLOCKS OF A MODERN MARKET ECONOMY.
11. BUT TRADE AND SERVICES ARE NOT THE WHOLE START-UP SECTOR. SLOWLY, BUT INCREASINGLY, START-UP FIRMS ARE ENTERING MANUFACTURING DIRECTLY OR ACQUIRING INTERESTS IN MANUFACTURING FIRMS, INCLUDING IN THE PRIVATIZED SECTOR. ALTHOUGH ONLY NOW GAINING STEAM, START-UP FIRMS IN MANUFACTURING AND FOOD PROCESSING ARE SPREAD FROM ST PETERSBURG TO SOCHI AND MOSCOW TO MAGADAN. IN MOST CASES, THESE ARE SMALL OPERATIONS THAT RENT OUT SPACE FROM A FORMER STATE SECTOR ENTERPRISE OR INSTITUTE. AM INCREASING NUMBER OF START-UP FIRMS, HOWEVER, HAVE LEASED WHOLE FACILITIES FROM FORMER STATE SECTOR FIRMS. THERE ARE ALSO A NUMBER OF CASES IN PHARMACEUTICAL, FOOD PROCESSING AND MACHINE TOOLS WHERE START-UPS HAVE PURCHASED FORMER STATE FIRMS OUTRIGHT, EITHER TO GET STARTED OR TO EXPAND. AND FINALLY THERE ARE ALSO NEW INVESTMENT FUNDS AND OTHER FINANCIAL SERVICES COMPANIES THAT HAVE PURCHASED AND ARE RESTRUCTURING FORMER STATE ENTERPRISES.
---------------------------------------
UP-STARTS AND BANKERS -- MUCH IN COMMON
---------------------------------------
12. ALTHOUGH BY START-UPS HERE WE GENERALLY MEAN SMALL, NEW ENTERPRISES, THERE
IS NO SHARP LINE BETWEEN THE START-UP SECTOR AND SOME OF THE LARGER COMMERCIAL
BANKS AND THEIR HOLDING COMPANIES, WHICH ALSO AROSE VERY QUICKLY IN THE PAST
FEW YEARS. IN BOTH CASES THE MANAGERS ARE MORE OFTEN MEMBERS OF THE NEW COMMERCIAL
CLASS THAN FORMER SOVIET FACTORY MANAGERS. IN BOTH THE HOLDING COMPANIES AND
START-UP MANUFACTURING, THE MANAGERS OFTEN COME FROM THE ARTS, MEDICINE, THE
DEFENSE SECTOR OR FROM PHYSICS, ECONOMICS, MATH AND OTHER QUANTITATIVE ACADEMIC
FIELDS. MOST ARE LEARNING BUSINESS BY DOING BUSINESS. IN BUSINESS STYLE AS
WELL, THEY OFTEN HAVE MORE IN COMMON WITH EACH OTHER THAN WITH MANY MANAGERS
OF PRIVATIZED INDUSTRIAL FIRMS. IN PARTICULAR, THEY ARE LESS INCLINED TO MAKE
ALCOHOL (OR AT LEAST HEAVY DRINKING) A PART OF A BUSINESS LUNCH. -------------------
SO, WHO IS WINNING?
-------------------
13. THE RESTRUCTURING OF THE RUSSIAN ECONOMY, IN PARTICULAR OF THE OLD INDUSTRIAL SECTOR, IS MOVING AHEAD BUT IS FAR FROM COMPLETE. HOWEVER, SOME TRENDS ARE EMERGING. WITH THE EXCEPTION OF THE ONE THIRD OF THE PRIVATIZED INDUSTRIAL SECTOR WHICH MAY BE PERFORMING WELL, THE DYNAMISM IN THE RUSSIAN ECONOMY IS CONCENTRATED IN THE FINANCIAL HOLDING COMPANIES AND THE START-UP SECTOR. JUDGING FROM THE PRESS AND CONVENTIONAL WISDOM ONE WOULD BELIEVE THAT THE BIG HOLDING COMPANIES ARE THE HANDS-DOWN WINNER. THIS CONCLUSION IS PREMATURE. SUCH GROUPS ARE GROWING, BUT MANY CRITIQUES ARGUE THEIR ACQUISITION POLICIES ARE SOMETIMES WEAK ON COMMERCIAL LOGIC AND FOCUSED TOO MUCH ON ACCUMULATING HOLDINGS AND TOO LITTLE ON PROFITABILITY. SOME OF THESE HOLDING COMPANIES WILL SUCCEED IN BUILDING HUGE CORPORATE EMPIRES, BUT OTHERS WILL FAIL TO MAKE THE COMPETITIVE GRADE. MOREOVER, AS OTHER OBSERVERS REPORT, RUSSIA MAY BE TOO BIG TO BE DOMINATED BY A HANDFUL OF BANKS.
14. THE ASSUMPTION THAT THE BIG BANKS WILL TRIUMPH ALSO IGNORES THE FACT THAT PERHAPS A FULL THIRD OF RUSSIA'S OLD INDUSTRIAL FIRMS ARE EARNING PROFITS AND THE TREMENDOUS SPEED WITH WHICH START-UPS MAY GROW AND DEVELOP OR ACQUIRE INDUSTRIAL ASSETS. WHAT WE DO SEE AS LIKELY IS THAT MANY OF THE BIG BANKS WILL DO WELL, BUT THEY WILL NOT HAVE THE FIELD TO THEMSELVES. CLEVER, NIMBLE START-UPS WILL DEVELOP INTO BIG PLAYERS AND MANY OF THE SUCCESSFUL ONE THIRD OF PRIVATIZED FIRMS WILL LIKEWISE GROW AND ACQUIRE ASSETS. IN SOME CASES, BOTH COULD EVENTUALLY DEVELOP INTO HOLDING COMPANIES THEMSELVES.
*********************************************************************
SOURCE: American Embassy- Helsinki, Finland SUBJECT: GROWTH OF FINLAND BASED
WAREHOUSING, ASSEMBLY
OPERATIONS TO SERVE THE RUSSIAN MARKET
1. SUMMARY: IN WHAT LOOKS LIKE A GROWING TREND, SEVERAL U.S., ASIAN, AND EU
FIRMS ARE BASING THEIR ASSEMBLY AND WAREHOUSING OPERATIONS FOR THE RUSSIAN
MARKET IN SOUTHEASTERN FINLAND. REASONS CITED INCLUDE GEOGRAPHICAL
PROXIMITY, EXCELLENT INFRASTRUCTURE, GOOD ROAD AND RAIL LINKS TO THE ST. PETERSBURG
MARKET (AND BEYOND TO MOSCOW),
AND SECURITY. COMPANY REPRESENTATIVES BELIEVE THAT ONCE RUSSIAN INFRASTRUCTURE
AND SECURITY IMPROVE, THEY SHOULD
BASE THEIR OPERATIONS IN RUSSIA PROPER. IN THE MEANTIME, FIRMS ARE HAPPY WITH
THEIR FINLAND BASED OPERATIONS AND ARE MAKING PLANS FOR A LONG STAY. END SUMMARY.
-------------------------------------------------
SETTING UP SHOP IN LAPPEENRANTA
-------------------------------------------------
2. INCREASING NUMBERS OF
U.S., ASIAN, AND EU FIRMS ARE ESTABLISHING ASSEMBLY AND/OR WAREHOUSING OPERATIONS
IN SOUTHEASTERN FINLAND TO ACCESS THE RUSSIAN MARKET. DURING
A RECENT VISIT TO THE SOUTHERN KARELIA REGION OF FINLAND (WHICH STRADDLES
THE RUSSIAN BORDER AND IS A RELATIVELY SHORT DISTANCE FROM THE ST. PETERSBURG
MARKET), EMBASSY ECONOFF INTERVIEWED REPRESENTATIVES OF SEVERAL FIRMS WHO
, HAVE SET UP FACILITIES FOR THEIR RUSSIAN OPERATIONS IN THE
VICINITY OF LAPPEENRANTA, A FINNISH TOWN A FEW MILES FROM THE BORDER WITH
RUSSIA.
3. A 30-MINUTE DRIVE FROM THE FINLAND-RUSSIA FRONTIER, LAPPEENRANTA SITS ASTRIDE
THE MAIN RAIL AND ROAD LINKS BETWEEN HELSINKI AND ST. PETERSBURG. INFRASTRUCTURE
AND LIVING CONDITIONS ARE COMPARABLE TO THE HIGH STANDARDS THAT EXIST IN HELSINKI.
THE LOGIC THAT IS ATTRACTING FIRMS TO LAPPEENRANTA IS EXEMPLIFIED BY ACER,
THE TAIWAN BASED PC MANUFACTURER. ALTHOUGH THE FIRM STATES THAT NO
RELIABLE STATISTICS ON THE RUSSIAN MARKET ARE AVAILABLE, ACER RECKONS IT IS
ONE OF THE TOP THREE PC SUPPLIERS IN RUSSIA. THE COMPANY IS FORECASTING CIS
SALES OF USD 50-60 MILLION IN 1996 AND USD 100 MILLION IN 1997.
-------------------------------------------------
PROBLEMS WITH RUSSIAN ASSEMBLY,
ALTERNATIVE LOGISTICS ROUTES
-------------------------------------------------
4. ORIGINALLY, ACER SHIPPED
TO THE CIS FROM THEIR TAIWAN ASSEMBLY PLANT. ONE OF THE ROUTES ACER TRIED,
THE TRANS-SIBERIAN RAILWAY, PROVED TO BE SLOW (THE RAILWAY IS
FAR FROM THE MAIN CONSUMER MARKETS), VERY EXPENSIVE, AND RISKY AS WELL. SEA
FREIGHT TO THE CIS VIA GERMANY AND HOLLAND INVOLVED 5-6 WEEKS IN TRANSIT,
PLUS ANOTHER 1-3 WEEKS TIME VIA EXPENSIVE GROUND FREIGHT. ESTABLISHING AN
ASSEMBLY OPERATION IN RUSSIA HAS ALSO VIEWED AS PROBLEMATIC. THE MANAGER OF
ACER'S LAPPEENRANTA ASSEMBLY
OPERATION TOLD EMBASSY ECONOFF THAT THE ENTIRE PC INDUSTRY HAS NOTED THE CLOSURE
OF IBM'S PIONEER PC ASSEMBLY OPERATION IN RUSSIA. ACER'S ASSESSMENT OF A PC
ASSEMBLY PLANT IN RUSSIA FEATURES THE FOLLOWING NEGATIVES: 1) HIGH POLITICAL-ECONOMIC
RISK; 2) NO FOREIGN INVESTMENT PROTECTION; 3) HIGH EMPLOYEE THEFT RATE; 4)
ADMINISTRATIVE BLACKMAIL; 5) LACK OF SUPPORT INFRASTRUCTURE; AND 5) EXTORTION.
KALININGRAD AND BELARUS/UKRAINE ARE DEEMED TO HAVE SIMILAR PROBLEMS.
----------------------------------------- --------
EXCELLENT INFRASTRUCTURE, FAST DELIVERY, AND SECURITY ARE LAPPEENRANTA'S PRIME
SELLING POINTS -------------------------------------------------
5. ACER CHOSE
LAPPEENRANTA FOR ITS WAREHOUSING/ASSEMBLY OPERATION BY LOOKING AT A MAP. ACER'S
LOCAL MANAGER SAID, "OUR MAIN MARKETS ARE MOSCOW AND ST. PETERSBURG. THE CLOSEST
NON-RUSSIAN, SECURE AREA TO THESE MARKETS IS SOUTHEASTERN FINLAND." DELIVERY
(BY TRUCK OR RUSSIAN GAUGE RAIL) FROM LAPPEENRANTA TO RUSSIA TAKES 1-3 DAYS,
A FRACTION OF THE DELIVERY TIMES REQUIRED FOR ALL OTHER OPTIONS. ALTHOUGH
FINNISH TRUCKING FIRMS ARE EXPERIENCING CUSTOMS AND OTHER DELAYS AT THE RUSSIAN
BORDER, ACER MANAGEMENT REPORTS THAT SO FAR THESE ARE MANAGEABLE. FINNISH
LABOR COSTS ARE HIGH, BUT LABOR IS NOT A BIG COMPONENT OF OVERALL PC MANUFACTURING
COSTS. ACER REPS REPORT THAT, OVERALL, THEY ARE VERY HAPPY WITH THE DEVELOPMENT
OF THEIR LAPPEENRANTA OPERATION. SEVERAL WESTERN BUSINESSMEN AND FINNISH CUSTOMS
OFFICIALS HAVE HEARD RUMORS OF ENCROACHMENT OF RUSSIAN CRIMINAL ELEMENTS
INTO FINNISH BORDER AREAS, BUT SO FAR NOTHING CONCRETE HAS EMERGED; FIRMS
REGARD LOCAL SECURITY AS EXCELLENT.
6. SO FAR AS WE ARE AWARE, ACER IS THE ONLY FIRM TO ESTABLISH AN ASSEMBLY
OPERATION IN LAPPEENRANTA. HOWEVER,
MANY OTHER FIRMS HAVE SET UP WAREHOUSING OPERATIONS TO SUPPORT THEIR RUSSIAN
SALES AND MARKETING OPERATIONS. U.S. FIRMS THAT ARE DOING THIS INCLUDE IBM
AND HEWLETT-PACKARD.
-------------------------------------------------
A TRANSITIONAL STRATEGY,
FOR HOW LONG?
-------------------------------------------------
7. EVERYONE WITH WHOM ECONOFF
SPOKE IN LAPPEENRANTA EXPRESSED THE DESIRE OF THEIR FIRMS TO ESTABLISH WAREHOUSING
AND ASSEMBLY FACILITIES IN RUSSIA "AS SOON AS CONDITIONS PERMIT." HOWEVER,
NONE THOUGHT THAT DAY WAS NEAR. ACCORDINGLY, FIRMS ARE NEGOTIATING LONG TERM
LEASES AND OTHER ARRANGEMENTS WITH THE EXPECTATION THAT THEY WILL BE IN FINLAND
FOR A LONG TIME.