Russian Report

Foreign Producers Adapted to New Conditions in the Russian Market

By Vladislav Vorotnikov, Russia Correspondent | July 18, 2016

Foreign paint and coatings manufacturers operating in Russia move to localize production and raw material purchases.

Representatives of the Russian Association of Coating Manufacturers (Tsentrlak) believe that over the past two years foreign producers in the country’s market have been negatively affected with the devaluation of the ruble as well as the overall economy crisis in the country, whilst domestic manufacturers may benefit from this situation and take advantage of current import-replacement initiatives.

However, the largest market players managed to keep strong positions over the recent two years and target to further improvement of their business operation in the country. Some of them have applied to localization initiatives in order to cut currency risks in cooperation with its main customers and to be able to participate in government import substitution programs.

Hempel gets residence registration

The Russian division of Hempel Group has recently finalized construction of the plant in Ulyanovsk, obtaining operational license, thus official becoming a Russian resident. According to Peter de Groot, general director at Hempel A/S for Russia, Ukraine and CIS Region, this is an important factor of the company’s strategy giving the import replacement initiatives at the local market.

“Hempel took the decision to invest in Russia quite a few years ago. When the government passed a decree prioritizing state procurement of locally produced goods over imports it gave us a strong additional reason to accelerate our €30 million investment in Russia, since we had substantial imports at that time,” de Groot noted.

“Our new factory in Ulyanovsk is a fully integrated state-of-the-art facility capable of producing Hempel’s full global product range. Since we produce our high quality coatings only from raw materials that meet Hempel’s strict quality requirements, our policy is to buy local raw materials only when the local quality standard is fully met and the price is no higher than imported. We are working with many local raw material suppliers to help them to meet our strict criteria and we see this cooperation as an ongoing long term partnership.  On the other hand, certain raw materials, such as epoxy resin, are simply not produced in Russia/CIS, and may not be for a very long time, so we are forced to import certain raw materials.”

At the same time, he explained that a number of Russian-owned local producers have been trying to take advantage of the government’s import substitution policies by offering alternatives to imported premium industrial coatings. He noted, that these producers have been somewhat successful in lobbying state enterprises to use their products by using local testing and certification bodies, but usually without passing internationally recognized testing procedures.

“We have in certain cases conducted our own comparative testing and have also received reports from a number of quality-minded customers, and negative gaps in quality are usually seen.”

“More recently, we have seen disturbing instances where customers have been forced to use alternative coatings from certain Russian-owned local producers, rather than the tried and tested premium coatings.  We see this is a negative trend because it does not lead to market efficiency which we believe comes from fair competition. In the end, the customer suffers by either paying too much or by receiving a lower quality. We are all for an open market and a transparent and level competitive playing field,” de Groot said.

Huge localization for PPG Group

PPG Group noted the worsening of the situation in the country’s market, according to Jens Brackebusch, general manager PPG Russia.

“I believe everyone in the coatings industry has felt the crisis here in Russia. When industries like automotive drop by nearly a half in a few years, all suppliers to this industry are affected. Up until the end of 2014 we were doing well as a business, and we are now steadily recovering after a difficult 2015,” Brackebusch said.

The key point of the company’s strategy here is the construction of a plant in Lipetsk Oblast with overall capacity of 25,000 tons of coatings per year and investment of RUB 1.97 billion (US$ 30 million).

“The Lipetsk plant project was initiated out of the necessity to localize the production of coatings we have been importing historically from production sites in Western and Central Europe. The pressure on localization of production from customers, especially in the automotive industry has increased over the years and we have therefore decided to offer this sourcing possibility to our local customer base,” Brackebusch explained.

“In this production site we will produce products for various industry groups, such as automotive, industrial, metal packaging as well as for marine and oil & gas customers. The majority of those customers are buying already from us today – the plant will allow us to better serve this customer base from a local production platform that will cater to their needs. We believe that this project will suit our business plans for the next foreseeable future,” he added.

Speaking about the general market situation, the manager of PPG Russia stated that the current economic situation and the Ruble devaluation have clearly put pressure on the cost of coatings in Russia with two main tendencies are competing with each other at the moment.

“The pressure for low cost at the price of quality and the drive to increase the export of Russian goods are competing with high quality international products. While I believe that the low cost driver will be significant in the short term, I trust that the need for quality coatings allowing Russian industrial goods to compete with international companies will prevail in the future,” Brackebusch explained.

In terms of the advantage position of Russian coatings producers compared to foreign brands, which has been previously indicated by Tsentrlak, Brackebusch said it is overstated, as there are some instances where the activities for foreign companies are restricted, but this remains a very small part of the Russian coatings industry.
Not a lot of problems for Tikkurila
According to Ilari Hyyrynen, managing director Tikkurila in Russia, the situation in the past two years has not been easy but the company has managed well.

“We have been able to grow nevertheless due to the crisis. Growth has not been as fast as assumed still in year 2014. Weakening ruble has affected to our business as business of all companies importing goods to Russia. We have not been able to transfer devaluation of Ruble fully to sales prices,” Hyyrynen said.

He also indicated that the company produces a full range of deco and industrial products in Russia, importing high-end premium deco paints from Finland. At the same time, the target currently is to localize more and more production and raw-material purchases to Russia. He also indicated the rise of competition in Russia.

“I fully agree [with Tsentrlak statement] competition is getting more tough due to big number of paint producers, doesn’t matter are they local or foreign. Local players have some certain benefits especially in the economy segment but Tikkurila, as a market leader, is in a lucky situation having wide range of products for all quality and price segments,”  Hyyrynen stated, adding that market is going through number of structural changes as well.

According to him, in the Russian paint and coatings market general trend seems to be downgrading of purchase behavior. People are looking for more price sensitive products than in the past years when economy was rapidly growing. That kind of trend and consumer behavior is very much usual in all economies facing economic challenges.

“At the same time we can see positive trends on the market. For example, the substitution of solventborne materials by waterborne is going further. This is a good sign for Russia due to ecological reasons and the impact on the health of the end-users. As an international company, Tikkurila is always promoting high-quality and environmentally sustainable solutions for surface protection and decoration. We are happy to see such trend on the market even in crisis years,” Hyyrynen concluded.
As one of the issues of recent years he also named the practice where some competitors are utilizing Tikkurila’s well-known product names and naming their products very closely/similarly. However, according to Hyyrynen this does not bring the company a lot of problems, as it mostly shows the power of its brand portfolio.

AkzoNobel indicates potential of local market

According to the general manager of the Russian division of AkzoNobel, Mikhail Ionov, the crisis  brought some effect on the situation in the country’s market, but still it has been limited.

“Just as any other sensible companies we have been forced to lay part of the devaluation risks on consumers, where it was possible. This is standard business thinking, but where it was impossible we were making advances to customers in terms of price,” Ionov said.

He also indicated that in Russia, AkzoNobel currently operates three plants: two in Moscow Oblast and one in Lipetsk Oblast. The overall capacity of decorative painting is 10,000 tons, while for powder coatings it is close to 8,000 tons per year.

He also admitted some problems with raw materials, as with the poor development of the Russian chemistry industry on some certain positions company has to import up to 100 percent of raw materials for coating production from abroad.

“This year we are planning some expansion [of production capacities] with opening of line for production of marine coatings. This will be coatings for all sorts of ships and complex metal structures, oil barrels and large plant complexes. We are targeting to open it this year,” Ionov stated.

In additional, he indicated that Russian market has a low level of coatings use per capita and most manufacturers believe as a result the market has strong potential. This is particular evidenced by the projects of PPG and Hempel.

“These [projects] indicate that foreign companies see good potential in Russian coating industry as there will be a lot of place to grow and compete here,”Ionov added.
Ionov didn’t agree fully with Tsentrlak on the rise of competition from domestic coatings manufacturers, indicating that so far Russian producers has low level of technological base.

“Somehow and from somewhere they are buying unstable raw materials and trying to make some [coating] underground to sell it under someone else’s brand.

Certainly, it is the damage to the brand, but if they do it under their own names, than these companies has not very bright future, because of quality. Large companies can not afford such high reputation risks. We will be more expensive, but still we have our own customers,”  he concluded. 

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