The Russian market for leasing industrial equipment is now past the period of transition triggered by Western sanctions and the disruption of supply chains for most products. In fact, growth resumed once the market adapted to the new situation.
Equipment leasing market in 2023
Like other segments, this market was predictably impacted by the sanctions imposed by the Western countries. In 2022, US and European vendors suspended almost all the supplies of machine tools, equipment and components, forcing many Russian manufacturers to put on hold any plans they had to upgrade their machinery or to buy new equipment. However, 2023 saw a restructuring of the market. Most business leaders came to admit that they couldn’t hold off upgrading their equipment for much longer and needed spare parts. Importers realized they could still supply many things via parallel import channels, while certain items could be actually made at home. By the middle of the year, most equipment lessees turned to Asian markets such as Turkey, India, and Kazakhstan.
Many lessees shifted to used equipment; the share of used equipment on the leasing market increased from 14% to 23%.
China became the flagship of import substitution in Russia. At the same time, equipment and components are being increasingly manufactured locally, using Chinese facilities. In fact, shortages of industrial machinery and equipment became a problem during the coronavirus pandemic; the Western sanctions further aggravated the situation, and even the huge Chinese market and the booming import substitution have been unable to reverse the trend just yet.
Pros and cons of leasing as equipment financing option
Despite the significant financial commitment, the object of an equipment lease is a low-liquidity asset; however, updating machinery and equipment is crucial for modernizing your business. Manufacturers of various products choose equipment leasing as a more favorable option compared to buying equipment with a loan.
Leasing can be a less expensive and faster option as it usually requires no collateral or down payment, and a minimum of paperwork. It is also the best choice when your equipment quickly becomes outdated and needs to be replaced to maintain growth. Regular updating of your production means improves the quality of products and expands the product range, giving your company a firmer foothold in the market. Furthermore, leasing usually makes a business eligible for a VAT refund of 20% (if the company pays taxes under the general tax plan in Russia).
Stimulating domestic equipment manufacturing strengthens the country’s commodity security and autonomy, something our industry badly needs. The industries that generate the highest demand for new equipment include synthetic materials, packaging, chemicals (household cleaning products, cosmetics, and fertilizers), as well as the automotive and aviation industries. With a high demand for leased machinery and equipment, suppliers begin to expand leasing deals on their end; this increases the share of leasing deals in the entire industrial segment.
Recent changes in the equipment leasing market
- The origin of equipment imports has shifted to China and other friendly countries such as Türkiye, India, Kazakhstan, and Belarus. Lessees also began using domestic suppliers.
- There are new players from China, which were not represented on the Russian market before.
- Restructured logistic chains, including from “unfriendly” countries where the sanctions are not so strictly observed (Italy, South Korea, Taiwan); however, delivery times have become longer.
- A higher demand for new equipment.
- Leasing companies have to invest their own money when the equipment leaves factory gate.
- Entrepreneurs wish to reduce their initial involvement in the leasing deal with minimum advance payments as they are unwilling to allocate funds from their circulating assets that are usually spent on raw materials and components.
- Clients wish to minimize their monthly payload under equipment leasing deals by signing deals for longest possible terms.
- More leasing companies get involved in financing production equipment: as competition in the segment increases, financing rates decrease and more lenient deal terms with respect to advance fees and leasing terms become available.
- Suppliers are increasingly opening departments focused on cooperation with lessors, due to the growing share of equipment sales via leasing.
- Leasing companies’ clients can apply for deals online via their corporate accounts and monitor information on their existing contracts.
Innovative technology that can influence industrial leasing development
Industrial leasing is most popular among young businesspeople and startups as they require highly specific equipment. Businesses are not only interested in supply services but also in document management and customs clearance services, installation and setup, training, maintenance and warranty services.
Leasing is a rather conservative segment when it comes to implementing new technology. However, IT has found its way in.
Automation-wise, the main goal is to expedite leasing procedures and make them transparent to the client. Entrepreneurs are the same people who order taxis, food delivery and use banking apps. Very soon, leasing will become one of these convenient services.
For example, lessors are actively developing client accounts that show data on both existing deals and payment schedules. Moreover, a client account is a tool used for other purposes such as:
- requesting and downloading documents, delivery certificates and invoices;
- checking customized special offers from the leasing company, manufacturers and suppliers;
- calculating leasing fees for specific tools and equipment and sending applications.
Leasing must be convenient to both entrepreneurs and suppliers. It is important to have access to up-to-date information on the availability of specific equipment, its specifications and current cost. All these options should become the service that all the parties in the process don’t notice but can’t do without.
Subsequently, it may be possible to implement AI as analysis assistant for more effective and fast decision-making in deals. AI can find its application in sales and transaction support (bots) as there is a shortage of human agents. Potentially, biometrics can be used to sign contracts and close deals remotely.
By Yevgeny Antipin, Head of Key Partners Development Group, Alfa Leasing