Yes, Russia is big. But the phrase, "It's too big to ignore" has become a cliche. Moreover, it says nothing about the timing or methods of market entry. To consider market entry into Russia, it is important to revisit some basic questions:
1) Why is Russia important at all?
2) What is it that makes us all so nervous?
3) How can we balance the risks and opportunities of market entry?
In exploring these questions, our bottom line is: Despite well documented risks, most global firms should enter Russia now through plant a seed" strategies. Cliche or not, Russia is the riskiest market you have to be in.
Why Can't Russia Be Ignored?
Our first question is relatively easy. Russia can not be ignored for five reasons:
One, Russia is world-class in terms of land mass and natural resources. Statistics are revealing here: Russia has 55 times the land mass of Poland and it represents about 75% of the land of what was formerly the Soviet Union. On this land mass sits 16% of the world's oil, 19% of its timber, 18% of its crude steel, and 12% of its coal production, among other resources.
Two, Russia is a vast, untapped consumer market. Its roughly 150 million consumers make comparisons with Eastern Europe - its frequent competitor for Western business leaders' attention - almost laughable. Cigarette production in the two factories in St. Petersburg - Klara Tsetkin and Uritsky - equals that of Hungary. The Moscow or the Volgograd regions are equal in consumers and in industrial production to Hungary and Czechoslovakia combined. Moreover, from Russia you gain easy access to 51.4 million more consumers in Kazakhstan and Ukraine.
Three, its people are educated. The communists did not do a lot right, but they managed to provide a relatively good education system, especially in the sciences: 99% of Russia's population is literate, most people have 11 years of education, and 12% have higher degrees.
Four, it has some good technologies and industries. Russia's oil, natural gas, hydro and nuclear energy, metal making, and timber industries are known to be relatively strong and have a strong, albeit politically subsidized, export track record. At the same time, these are considered to be the growth industries.
Five, |first-mover' advantages have been created by market upheaval. Russia's leaders have embarked on unprecedented economic reform. The sheer scale of Russia's privatization and market reform efforts - creating new companies starved for foreign investments - are opening up opportunities for the strong-hearted who are willing to accept political risk to pursue buy now, buy low' strategies. One consumer products company, by entering contracts with the two largest producers to help them privatize, was able to exploit such a strategy and secure a near monopoly production position in Russia's northwest region with very little short-term cash investments. * Bottom Line: These five factors mean that Russia inevitably pops up on every business leader's "should investigate" list.
More specifically, companies must look at four strategic opportunities Russia presents: 11 Source of unit or revenue growth: For one consumer products company with whom we worked, obtaining only a 3% share of the St. Petersburg and Moscow markets would represent 25% unit growth. Capturing this share is, of course, far from certain. * Source of low-cost supplies or production: Russia is being explored by dozens of companies as a source of cheap materials and cheap assembly. One wire producer has found that assuming they can bring Russia's process controls to Western standards, they can achieve a 25% materials cost savings (this factors in free-market energy prices). * Source of new capabilities: For example, some firms are moving quickly to gain control of key technologies where Russia has world-class capabilities in metallurgy, avionics, and other fields. 11 Means to consolidate regional positions in Europe, Central Asia, and the Far East: This last opportunity is the most difficult, at present. Because of its vast size, Russia can help firms strengthen their regional positions in three different markets. How this will be done, however, is an issue global companies are just beginning to explore.
Why Do Firms Hesitate to Enter?
Of course, the question of Russia is not simply about opportunity - it is also about risk. There are six reasons why firms are hesitating to move into Russia:
One, the need to protect home markets. This is not the greatest time to be an emerging market...