Russian affiliates of western companies; how they work under the conditions of import replacement

Russian affiliates of western companies; how they work under the conditions of import replacement
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Director General of “BASF Construction systems” Ltd. Sergei Vetlov shares his opinion on the peculiarities of the Russian construction chemicals market

Director General of “BASF Construction systems” Ltd. Sergei Vetlov answers the questions of our magazine

— Mr. Vetlov, how has the current crisis impacted the situation and development of the construction market in Russia? How does it influence the activity of your company?
— Taking into account an uneasy economic situation in the country we mark our sales at the expected level. It lets us suppose that the market of the construction chemicals has not suffered hard on the whole.
Yes, some projects are postponed. Yes, our basic clients, including concrete producers, have decreased their output a bit. But still I think that the diversification present at the market currently averages everything out. Infrastructural projects are going on (e.g. we are taking an active part in the preparation for the World Cup 2018), private housing is being constructed, capital repair of industrial objects is carried out. So I do not see a crucial impact of the crisis. At least there is no such fall as there was in 2008-2009, either with us or our partners.

— Do you not see financial aggravation?
— Some negative tendencies connected with the aggravation of financial discipline are present, and this is the explicit impact of the crisis for us. We have to make debt rescheduling for our partners who are also waiting for payments for a long time.

— How have the prices for your production changed due to the crisis? Are they influenced by the volatile ruble rate to the euro?
— If we consider the geography of our production, there are the materials that we produce on the territory of Russia, and there are products that we buy from the plants of BASF’s holdings in other countries. Of course, with the latter we directly depend on the euro rate.
The situation with Russian production is much better: we use local raw materials, salaries and taxes are paid in rubles. Thus the impact of the rate is not so significant.
Of course, the company has to adjust prices. However, we didn’t raise them according to the rate of foreign currency. We try to support our clients undertaking a share of expenses. And we did not raise the price of domestic production materials; we only correlated it with the inflation. But we still undertook all expenses. It’s clear that we decrease our income, but it is inevitable in crisis conditions.

— How does Russian and imported production correlate in the portfolio of your company?
— It all depends on specific segments. More than 80% of our products we produce in Russia: the main production site is situated in Podolsk (Moscow region), and another plant opened in Kazan. Besides, our investment program provides further expansion of our presence, triggering of new production lines and grounds in other regions of Russia.
If we consider it in money terms, about 60% is the Russian production, 40% - imported, including mainly polymeric and chemically resistant floors, the materials for underground construction and some kinds of water-proof solutions.

— Is there any critical distinction between western and Russian producers in approaches, strategy and pricing policy?
— The difference between companies working in the Russian and any other market are defined by internal rules and management awareness. Western companies may have more resources for investment in development and research. It allows them to produce new brands more quickly and to use advanced technologies in chemistry.
Besides, western companies adhere to definite norms and regulations in the industry. Sorry to say, there is no actual normative basis in Russia, and we are based on European and international experience, localizing part of standards in the format of organization or industry standards and regulations. On the other hand, Russian companies we come across in the market are more flexible in some aspects than western ones. They react more quickly and follow the client. In large international corporations the decision-making process is too bureaucratized, and that slows down cooperation.

— Your materials line includes both domestic and imported production. Is there a difference in quality?
— The materials of Russian production are as good as European analogs. Our production is adapted to the Russian market, with local raw materials. The difference is in enhanced monitoring – we carry out more quality check analyses, because raw materials in Russia are not standardized and may differ in different parties.

— Where does your company belong – in Russia or the West?
— It is rather a subtle point. On the one hand we are a part of the world chemical giant BASF and are guided by rules and norms adopted by the holding.
On the other hand, we are registered in the Russian Federation, operate and pay taxes in Russia, and provide jobs to Russian citizens. We take part in practically all federal-scale projects, sell 80% of Russia-produced materials. From this point of view, we are a Russian company.

— What is your share in the Russian market?
— It depends on the direction: with some groups of materials we occupy up to 40%, others – 15%, still others – less than 1%. For example, we are just starting business with tile adhesives, not so long ago we triggered a new production of glue in Russia. We are new-comers here and have much to do.

— Does your company take part in solving the problem of import replacement?
— I do not see a problem here, rather new opportunities. Import replacement is a useful initiative that will positively influence Russian economy. But it is rather a touchy issue in construction. It is not always possible to produce everything locally because of a raw materials shortage or absence of demand. In such cases we deliver imported analogs. Our investment plans up to 2020 are oriented on the production of more materials here, in Russia.
We have been localizing our production for many years, and my experience in the industry shows that you reach success when you manufacture your production locally. It provides for more flexible attitudes to the clients, takes the specific features of the country’s construction culture into consideration, provides quicker technical support for the clients, and answers the challenges of the market. We try to localize everything that is economically sensible. From this point of view I vote with both my hands for import replacement.

— How is the market of construction chemicals divided?
— Let’s imagine the market as a pyramid. The upper parts of it are the products with high performances, then the medium and lower segments. The upper segment is mainly occupied by foreign companies with their technology and products, but they take a small share. The medium segment is a mixture of western and Russian companies. I’ll take the liberty to speak on behalf of all western companies localized in the RF: we all strive to get here, because the medium segment is more large-scale and we want to be present here.
It should be noted that Russians compete well in this segment. And this gives me the opportunity to claim that the Russian market of construction chemicals has big potential and good prospects.

— What is the development direction of scientific and innovation in the construction chemistry? How important are systemic solutions and approaches?
— A systemic approach is a strong point of BASF, and in fact all our solutions are systemic. Offering any production lines, from industrial floors to reinforced concrete framing repair, we offer systems. They consider objects, loads, ecological components, and work safety. Where is development directed? Forward– towards the materials with enhanced properties.