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High hopes dim for Russia contract manufacturing

Posted: 27 Mar 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Russia contract manufacturing? tech industry Russia? contract electronics?

Contrary to early 2008 forecasts, Russia is turning out to be a disastrous place for contract electronics manufacturing.

Seen as a promising emerging market with massive growth potential, Russia is now facing a cessation of new investment, along with shutdowns in existing facilities, delays in new ones and questions about the widespread use of counterfeit products, according to iSuppli Corp.

"During early 2008, Russia was viewed as an up-and-coming contract manufacturing region, a key member of the fast-rising Brazil, Russia, India, and China (BRIC) economies," said Adam Pick, principal analyst for EMS/ODM at iSuppli Corp. "Interest about the market opportunity for electronics manufacturers in Russia was intense among iSuppli's clients in the OEM, Electronics Manufacturing Services (EMS), Original Design Manufacturer (ODM), component supplier and financial sectors. With the ongoing recession and financial crisis, however, it appears that most of the interest in penetrating the Russian market has disappeared. Furthermore, the historical record for electronics manufacturers operating in Russia has been plagued by multiple problems."

Short-lived existence
To illustrate the problems, iSuppli notes that Elcoteq, one of the early entrants into Russia, has experienced a very challenging time since launching its St. Petersburg facility in 2004. During its short existence, the St. Petersburg plant has been put up for sale on two occasions. Now, the company has finally announced it would shut the facility as part of a major company-wide restructuring.

Flextronics has also regularly signaled that it would extend its footprint into Russia. In early 2008, the company entered into an agreement with Elcoteq to purchase the St. Petersburg facility. However, Flextronics decided to abandon that bid and pay Elcoteq approximately $1 million to back out of the contract. iSuppli said import/export duties on components and systems for LCD TVs impacted the decision to not implement its Russian expansion.

Finally, Foxconn and Hewlett-Packard Co. in August 2007 announced they would launch a $50 million joint venture in St. Petersburg to manufacture PCs. The facility was expected to produce up to 40,000 units per month. Although Foxconn began construction in May, 2008, the ramp of this facility has been delayed. Now, it is scheduled for later this year. iSuppli, as well as industry insiders, point to several factors behind the souring sentiment on Russia.

What went wrong?
One is the inherent problems in the Russian economy. The market is in shambles, with a host of social and political issues, combined with the falling price of oil. Russia's economy appears to hold little promise for strong future growth.

The country is also said to be constrained by tariffs and value-added taxes that negatively impact the total landed costs both inside Russia and for export.

The Russian government is also known for shifting policies and laws, making for an uncertain business environment.

"There are several challenges specific to the Russian market for our company and others," observed a director of sales for a leading, North American semiconductor supplier who covers the region. "Getting components into the region is a friction-filled process, with duties and customs delays of up to four weeks. Government policies are in flux."

The market research group also stresses business success in Russia often is determined more by connections than competitiveness.

"Post-Putin, the Mafioso is not as bad, but doing business in that region is still about knowing the right people to some extent," said Greg Sheppard, chief development officer for iSuppli.

The absence of a domestic semiconductor supply does not help. "There is just not much semiconductor manufacturing in Russia right nowexcept for government-subsidized projects like Mikron, which is defense oriented," noted Len Jelinek, chief analyst, semiconductor manufacturing for iSuppli. Another serious impediment and major challenge is the significant impact of counterfeit products within the electronics supply chain. Specific to consumer electronics, it was previously reported that up to 80 percent of DVDs in Russia are sourced via the black market.

iSuppli has also found that rampant crime and security issues act as disincentives for operating in the nation.

- John Walko
EE Times Europe

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