Russian machine tool market: opportunities and challenges coexist

The status quo of the Russian machine tool market 1. Urgent need for strategic transformation
In recent years, the Russian economy has been severely challenged both internally and externally. Externally, due to the severe sanctions imposed by the West in the Crimean crisis in 2014, the three core economic sectors – energy, finance and national defense – were hit. Russian state-owned banks and companies are restricted from entering the EU capital market, and the US banking industry is prohibited from providing loans to large Russian banks, energy and defense companies with maturities of more than 90 days. At the same time, the sharp decline in international oil prices has also had a huge impact on the Russian economy, and the ruble continued to fall. The industrial structure that is trapped in the long-term accumulation is unreasonable, the development of light and heavy industries is unbalanced, and the heavy industry such as military and energy is too dependent on the economy. The construction of domestic infrastructure is lagging behind, the construction of logistics network is backward, the economic development is heavily dependent on resource exports, and multiple factors are superimposed. The Russian national economy is in urgent need of strategic transformation.
In 2015, the Russian industrial production index continued to grow negatively, down by about 3% compared with previous years. Entering 2016, although there are some signs of improvement in the industrial production situation, investment is still the soft underbelly of the Russian economy, accounting for only 20% of GDP. Take the traditional user car industry of the machine tool industry as an example. According to the statistics of the Russian Statistical Office, from January to October 2015, the Russian production of light-duty vehicles totaled 1.1 million units, and the output decreased by 23.2% year-on-year; the cumulative production of trucks was 103,000 units, and the output decreased by 18.3%; the cumulative production of passenger cars was 29,000 units. It was down 16.6% year-on-year. In October, sales of new cars in Russia were 130,000 units, down 38.5% year-on-year; cumulative sales in January-October fell 33.6%, and sales have fallen for 21 consecutive months. It can be seen that its auto market is still struggling in the downtrend channel.
According to the report of GARDNER of the United States, the Russian machine tool market consumed US$2.03 billion in 2014, ranking 7th in the global machine tool consumption market, with imports of 1.869 billion US dollars, making it the world's fourth largest machine tool importer, while domestic machine tool production was only 234 million US dollars. Among the 27 major machine tool producing countries, ranking 20th, the self-sufficiency rate is only 10%. The Russian network report is slightly different: in 2015, its dependence on imported machine tools dropped from 88% in 2014 to 80%. In any case, the Russian machine tool industry is still weak, mainly relying on imports, and the high dependence on foreign countries is indeed a fact. Its market demand is multi-layered, and the high-end demand has great potential, which is also the consensus of the industry.

2. Introduced a number of industrial policies
At this stage, the Russian machine tool industry is weak, and the market consumes a large amount, mainly relying on imports. In order to change the status quo, the Russian Federation has introduced a number of measures:
(1) The "Industrial Policy Law" was promulgated (approved on December 31, 2014). The law is the basic document for the reform and development of all future industrial sectors in Russia. The key issues include the establishment of industrial development funds to provide low-interest loans to domestic industrial enterprises, government procurement to purchase domestic industrial products, and the development of defense industrial systems, including Improve industrial infrastructure, price formation mechanism of military products, and external distribution mechanism for defense orders; encourage the transformation of scientific research results into production applications.
(2) Formulate a tax reduction plan for industrial enterprises and amend the tax law. After the tax reduction, the Russian Federation’s finances should be levied free of profits tax on industrial enterprises, and the local reduction of 60%.
(3) Introduce financial subsidies. A total of 296 million U.S. dollars was allocated to 85 regions to revitalize the development of SMEs.
(4) Establish an import substitution committee. The committee consists of a sub-committee on civil economics and a sub-committee on the defense industry complex to promote the substitution of civilian industries for import and assembly industries instead of imports.
(5) Financial support for key industries. In 2016, Russia's support for the automotive industry will increase to 50 billion rubles (about 770 million US dollars); a new freight subsidy policy will be implemented for cars produced by auto companies in the Far East Federal District and shipped to other parts of Russia. In the field of aerospace manufacturing, Russia will provide $4.4 million in subsidies to domestic aircraft manufacturers.

3. Future demand for high-end, large-scale, special equipment
Russia is the largest market in the “Belt and Road” strategy, and is also an important founding member of the AIIB. It plays an important role in the “Belt and Road”. The Putin government’s development strategy of “Far East Development” and China’s “One Belt and One Road” "The strategic focus is in line, and the Sino-Russian economic cooperation has stimulated new market space.
The biggest demand in the Russian machine tool market comes from the fields of military industry, energy and infrastructure construction. In 2011, the Russian government decided to invest in these key areas, such as investing 300 billion US dollars in power facilities and nuclear power plants in five years; and investing 900 billion dollars in military equipment construction in 10 years. In May of this year, Putin approved the military development plan for the next four years. The second phase of its “Far East Development” strategy will implement large-scale energy projects from 2016 to 2020, expand passenger and cargo transportation flows, and build a trunk line network including railways, highways, airports and terminals to increase the proportion of raw materials for deep processing.
The recovery of the Russian market that the industry is concerned about is constrained by multiple international and domestic political and economic factors, and the current variables are uncertain. Some experts believe that if the international oil price can be stabilized at more than 50 US dollars / barrel, the Russian economy will likely improve in 2017.

Practical experience of Chinese machine tool enterprises entering the Russian market
Since the Russian machine tool market is affected by the strong sense of autonomy of the government, especially since the implementation of the "Industrial Policy Law" in 2015, more than 10% of the equipment purchased by government procurement and military enterprises must be value-added in production in Russia, and this The proportion is still increasing at a rate of 10% per year, so foreign brands entering the Russian market will face a high threshold.
Dalian Machine Tool Practice : Fitting the capital construction plant to cope with Russia's stricter government procurement policy. Dalian Machine Tool Group began to invest together with China Poly Group and Russia National Technology Group two years ago to form a CNC machine tool manufacturing company in Russia. The processed parts of the joint venture company's products will be manufactured in Dalian and assembled in Russia. Since localized production can participate in the bidding, coupled with the reduction of logistics costs and the improvement of after-sales service, profits are expected to increase. Previously, Dalian Machine Tool has been operating in Russia for many years. It has mature sales channels and employees with market development experience. At the same time, it has accumulated rich experience in cross-border mergers and acquisitions, joint ventures and so on. Beijing Cage practice : long-term deep cooperation, adhere to the principle of win-win. Beijing Kaiqi CNC Equipment Co., Ltd. has been working in the Russian market for more than 20 years. Shortly after the disintegration of the Soviet Union, Cage joined hands with Shenyang Gaojing and Russia to form the Russian Baltic System Company, which opened up long-term deep cooperation in the field of numerical control systems. The software system was developed mainly by Russia, and the copyright was returned to Russia; hardware The equipment was developed by Cage. The system is one of the two local brands of the Russian CNC system, and the installed capacity of local machine tools in Russia reached 70%.
It can be seen that the Russian machine tool market has a large upside potential and strategic potential, but there are also various obstacles and risks. All the domestic enterprises have made long-term operations and hard work. More machine tool companies in China should make use of the current favorable opportunities to develop the Russian machine tool market. At the same time, it is necessary to take precautions against various risks, including financial risks, currency settlement risks, and rapid policy changes. There is also a need to consider language communication. At present, the popularity of English in Russia is far less than that of China, and there are fewer Russian-speaking talents.
(The Machine Tool Association went to Russia to study group)

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