Russia’s market for machine tools and metalworking equipment continues to demonstrate strong growth and offers good prospects for U.S. exporters. The potential for growth is attributed to the Russian government’s plans for modernization of key domestic industries, such as the energy, auto, defense and aerospace, as well as the availability of the huge stock of outdated machine tools that need replacement.
The current inventory of machine tools is two million units and 65% to 70% of this equipment has been in use for 15 to 20 years. Since the average useful life of this equipment is 26 years, it is expected that by 2013-2014, the majority of Russian machine tool equipment will “turn into scrap.” According to Russian government estimates, the growing demand will require procurement of 700,000 new machine units by 2015.
Following the breakup of the Soviet Union and the subsequent economic crisis of 1998, the domestic industry has not been able to sufficiently supply the market and ensure adequate quality of machine tool equipment. In 1990, Russia produced a total of only 101,500 such machines and had a total inventory of 2.5 million units. Year-over-year, this inventory declined by an average of 3%. By mid-2007, Russia had only 1.5 million machines, which is 1 million less than in 1990.
In addition to an insufficient supply of machine tools, the domestic industry tends to manufacture a universal type of equipment, whereas ongoing industrial modernization calls for the introduction of advanced machine tools equipped with Computer Numerical Controls (CNC). The Russian government plans to make investments in the modernization of the metalworking industry to narrow the technology gap. The state program “National Technology Base for 2007-2011” allocated $6.4 million to support R&D projects in order to develop state-of-the-art machine tool technologies.
In the meantime, foreign imports continue to play a major role in meeting domestic demand, despite import duties ranging from 0% to 15%, depending upon the specific type of machinery. According to Russian media, the average import duty for the 180 types of machine tools surveyed is 6.25%. In addition, imports are subject to the 18% Value Added Tax (VAT) and customs fees ranging from 0.15% to 0.33% of the total machine tool value.
Foreign producers supply both cheaper universal types of equipment (China and Turkey) and advanced Western machinery. Selling machine tools in Russia is done through the four most common business models: direct sales to the end user from offices outside of Russia, sales via a representative office in Russia, sales via engineering companies and sales via local trading companies.
To a great extent, the choice of the business model depends on the size of the machine tool producer, the breadth of the product range, and expected sales volumes. Smaller producers seeking to enter the Russian market should try to cooperate with local partners. Engineering companies can be especially useful given the fact that they provide strong service along with commercial support.
Large automotive companies such as AvtoVAZ, Kamaz and GAZ have their own subsidiaries/departments with established purchasing and logistics procedures and, therefore, prefer to purchase machine tools directly from producers (either from local offices or from offices outside of Russia). Aerospace companies purchase a significant amount of equipment via local trading or engineering firms, as some of the plants are located in the eastern part of Russia.
As competition grows, the nature of the machine tool demand in Russia is changing toward a more “push”-oriented model with the foreign machine tool producers increasing their local and, sometimes, even regional presence and thus playing a more active role in developing contacts. Many of the major European competitors (especially German firms) have set up their own representative offices in Russia to increase brand recognition, facilitate working with local partners and maintain client relationships with key accounts.
Financing is the most challenging factor for importing machine tool equipment into Russia given the late 2008 economic slowdown and the systemic problems of the Russian banking sector. U.S. exporters are advised to have a differentiated strategy: develop long-standing relationships with and provide flexible financing options for larger clients, but maintain a conservative approach when dealing with small end users.
For large modernization projects, U.S. exporters could use more proactive credit arrangements provided by a foreign bank to a Russian bank or leasing company under the auspices of ExIm Bank, or insurance via OPIC.
At present, all types of machine tools are in demand in Russia. For years, the domestic industry has specialized primarily in a broad application type of machine tool, such as turning, milling, and horizontal boring machines. The advanced types of machine tools, such as precision and gear processing and all types of grinding machines, are underdeveloped in Russia, thus offering the best prospects for sales, especially given the country’s great need for modernization.
Given the popularity of trade shows with Russian end users, such events are traditionally seen as the most appropriate tool to present machine tools and to gain brand recognition among customers. They have an “educational effect” for the end-users’ technical experts, who prefer to see and test the tools themselves before they come to rely on a specific type of equipment manufactured by any one producer.
There are two major machine tool-related trade shows held in Moscow: “Metal Forming” and “Machine Building.” These trade shows attract end user technical experts and are popular with foreign machine tool producers as well. There are also several important regional trade shows, such as “Machine Building, Machine Tools, Instruments” and “Ural Expo Tool” that are organized in the main regional capitals of Russia.
Presence in the regions helps foreign producers develop long-standing relationships with key customers and helps ensure repeat business and sufficient service volume in the future.