Narek Sirakanyan – President, Freedom International Group
Analysts warn of forex fluctuations and forecast consumer patriotism growth. That made us, Freedom International Group, think a year ago of moving our food production from Taiwan to Russia. It seemed quite reasonable since in Russia we have our customers who prefer Russian made products, and a well developed agricultural production, while we also have experience of launching integrated businesses. So everything appeared to be ideally fitting in. Yet the very initial practical attempts to start local production showed that at every stage the costs involved are multifold higher than in Taiwan or even in Europe.
Ginseng growing in Russia’s Altai region in the Far East, for instance, is twice as cost consuming as in China, even given the import duties on imported products. That is primarily due to the underdeveloped agricultural infrastructure in Russia. To grow vegetables/fruit/herbs, etc., one needs at least fresh water and convenient access roads which requires huge investments. Even though big money can help resolve the problem, a shortage of qualified staff can not be easily sorted out. In China, a crop estate can employ over a thousand workers. In Altai, qualified workers in such numbers are just unavailable. Growing plants requires a great deal of manual labor. Ginseng growing, for example, takes six years and every plant must be replanted twice, with a different inclination and planting depth. People willing to do such manual works are scarce.
Executives are as scarce as low tier workers. We first faced that problem when attempting to start contract production in Russia. For that, we approached a leader of the local market in order to place an order, initially amounting to about 4% of their annual production which could over time grow in scope.
Yet, until a meeting between the owners of the customer and contractor took place, hardly anything happened at all. Preliminary steps to be accomplished by regular managers are too sluggish, a very lengthy time is spend on discussing, corresponding and calculating. But an owner wants to immediately understand if the venture is worth any efforts at all. We have accumulated a significant experience of dealing with Chinese and French counterparts. Those would usually within 24 hours reply, “Cost price is such and such, you will have to pay this and that”.
In Russia, for a newcomer, there is usually a surcharge imposed by suppliers, while in the said countries, if you are a new player, you will most likely get extra benefits as your local partners want to keep and get use of your competitive advantages.
Pricing is a separate story. Quite regularly, figures in the offers are only results of intuition guided by the orders from other customers. That is, Russian businesses lack basic IT instruments.
Having successfully gone through all these challenges, we still faced breaches of deadlines, failures to honor terms of supplies, backwording.
We believe that is due to the fact that a Russian midlevel manager earns just a fraction of what his European colleagues make. So a substantial deviation in salaries results in substantial gaps in qualification. Hence when you start discussing business with such people, you get a feeling you deal with persons of a very different level who are unable to see long run prospects and are too much attached to paperflow.
Yet another problem is the packaging design. Strangely enough, packaging was our major problem in Russia. Every company claims it has some original design of its products’ packaging, while in fact that is a huge problem. A business executive is often convinced a mere drawing submitted by a designer is sufficient for making a high quality packaging. So in most cases a company would not realize it manufactures a boringly ordinary product of no unique features. Therefore, from the very start, we bought our packaging abroad and keep doing that until now.
Ultimately, we have made several sincere attempts to engage in purely local production and have contacted a number of large producers. With some of those, we never got beyond the correspondence stage as it took them too long to reply. Some others failed to meet the deadlines. Still others had absolutely unreasonable prices, and products more expensive than in Europe.
So at the end of the day, even though local products are free from VAT, logistics costs, customs duties (for dietary supplements, for example, the rate is 13.5%), their costs in Russia are nevertheless higher. The ingredients are identical and even the raw materials suppliers may be the same, yet the final price in Russia is 50% higher.
As for consumer patriotism, the reality also turned out to be much different from the initial expectations. We experimented with producing identical products of identical ingredients both in Russia and abroad. Russian products were always inferior to foreign analogues and consumers casted their rubles in favor of imported goods.
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