Industry and construction materials production: only the leaders have support, so should the others be put out of commission?

Industry and construction materials production: only the leaders have support, so should the others be put out of commission?
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Experts from the HSE Conjuncture Research Center have analyzed the conditions in the industry on the whole and construction materials production in particular.

The Conjuncture Research Center of the Higher School of Economics’ Statistical Research and Knowledge Economy Institute has prepared a review of the business climate in industrial enterprises in Russia in August, 2016. The received data are based on monthly polls of the heads of 3,100 large and medium-sized industrial enterprises including construction materials production. What are the results?


Only leaders are supported

According to the respondents’ opinions, the industry has stopped dead at the same level. More than two thirds of respondents report that there are no monthly changes to the main aspects of industrial activity – production and demand.

In August, downsizing continued. The positive aspects uncovered by the August poll include the retention of the downward inflationary component. This refers to both current prices and those expected for the next 3—4 months.

Analyzing the results of the latest polls of the heads of large and medium-size enterprises, one may say that about 12—14% of enterprises working at present on the Russian market are relatively sustainable.

Respondents from these enterprises regularly report on production growth and steady demand. The enterprises constantly show steady financial conditions, and they are dealing with investments, updating and innovation activity.

They are managing to use credit for production expansion, despite the difficulties connected with getting finance.

Of course, many of these enterprises are affiliated with the state and receive such preferences as budget and project financing, priority access to state orders, support in searching for collaborators for external economic activity etc.

As a rule, such economic agents are representatives of large-scale business, often branch-forming industrial enterprises. It is such enterprises that manifest the main resulting trend in the industry on the whole and in its branches.

At first glance, the state’s financial support of the largest industrial enterprises looks quite appropriate. However, there are growing risks that leaders receiving state support leads to efficient enterprises on the second and third echelon losing their competitive advantage, as the state cannot support them due to the budget misbalance and deficit.

The Conjuncture Research Center experts warn that the scheme may finally destroy a weak competitive environment, especially in the conditions of low market conjuncture and permanent blockage of investment and consumer activity.

This may result in the bankruptcy of formerly steady enterprises and in an increase in social turbulence.

Industry and construction materials production: only the leaders have support, so should the others be put out of commission? 

Eats, shoots and leaves

As opposed to wealthy enterprises is the group (16—18% of the total number) of unprofitable and non-efficient enterprises, a number of whom are in pre-bankruptcy condition. Mainly, these are financially weak small enterprises working with almost negative added value and critical debts.

These enterprises are in steady recession. Their activities continue due to a quasi-monopoly on regional markets, weak rivalry and paternalism on the side of regional and local administrations, especially in mono-towns.

Objectively speaking, the majority of these enterprises should be led out of the market, the Conjuncture Research Center experts think. However, such a maneuver may cause increased social turbulence, which is undesirable.

If so, the management of all these enterprises should be changed, which is also difficult due to the weak mobility of management human resources inside the country, the CRC experts acknowledge.

The state plays a very important role in the solution to this task, at least on a regional level.


Expert opinion

Georgy OSTAPKOVICH, Director of the Conjuncture Research Center of  the Higher School of Economics’ Statistical Research and Knowledge Economy Institute

It may be confidently stated that the manufacturing industry sector has got out of a continuous recession and moved into a zone of “steady stagnation”.

Speaking of the economy on the whole, it is in a zone of dampened recession. Its basic industries, oriented at the final demands of the population, are the main negative drivers keeping it in this zone of decay: they are the trade and service spheres and, to some extent, construction (with the housing construction segment).

The situation is quite easily explained by the crisis of real income of the population lasting for more than 1.5 years. Taking into consideration that heads of construction materials enterprises are leading experts in the assessment of the current and expected conjuncture in the construction industry, one may assume that by the middle of autumn, some positive changes will occur in the sphere of construction. By this time, price dumping for housing construction objects is likely to end, and prices will first stabilize and then begin to rise. The population, having felt the prices bottom out, will try to realize their delayed demand for housing. Correspondingly, construction materials producers will get improved production and demand prospects. The definition of the current economic condition of the industry as ‘steady stagnation’ is based on the phase’s durability. The growth interval for the industry will be 0% - 2.2% at least until 2018. Any growth in the domestic economy and industry of less than 2.7% may be considered a stagnation model.

The economic development according to the ‘steady stagnation’ model does not offer any excessive risks for entrepreneurs. Of course, production expansion is excluded, but social indicators may be kept steady.

Many domestic industrial enterprises, as well as their top managers, feel good. But the scheme is unacceptable for the development of the country’s economy, especially when highly developed countries are entering the digital epoch with very different level of IT penetration.

Another problem with this model’s usage is that many entrepreneurs get accustomed to such schemes of business without serious problems for their personal income. This may demotivate business regarding updating and innovation processes.

It should be remembered that the most efficient management innovation solutions are used, as a rule, in a period of steady growth or, as counterintuitive as it may seem, in a period of production decay. At the same time, the mechanism is very rarely used in the stagnation model of development.

It is necessary to break through this for the economy on the whole and industry in particular in order to achieve steady growth (about 4%), not only in the sphere of high-tech or import replacement, but primarily in the sphere of management, restructuring and legislation, even if the federal budget suffers initially.

In the long term, entrepreneurs will repay the state one hundred-fold due to the growth of the tax base resulting from production growth, more so because there are both the resources and the human potential for triggering the mechanism.