Studies Eastern European Markets
Eastern European Markets
September 2005

Olli Pekkarinen
Northern Dimension Research Centre
Publication 14

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Conclusions and Summary

The following conclusions have been made by the author on the basis of the information gathered during the study. For a start the first research question is dealt with when the conclusions about the competitive analysis of the Russian transport logistics cluster are presented. After that the second research question is answered by describing the situation of Finnish companies in the above mentioned cluster. As mentioned in the introduction, the work has been quite challenging. However, the author is glad to say that the outcomes of this study exceeded his expectations.

Findings about the Northwest Russian Transport Logistics Cluster
Russia is unique. The Soviet period left its marks on the present outlook of Russia, and the Northwest Russian transport logistics cluster is not an exception. The massive size of Russia could offer plenty of opportunities for business in general but the current economic state of Russia has forbidden the full utilization of that potential – at least up until now.

At a glance the present state of the four studied transportation modes is weak. A more profound examination of the issue gives reason to assume that the railroads are ahead of the other transportation modes in terms of competitiveness. Railroads are the traditional, largest and most reachable transportation mode in Russia. Moreover, the utilization of the Trans Siberian Railroad will increase the overall competitiveness of railroads. Lack of investments and aging, congestions, and the state ownership can be listed as negative sides of railroads.

The author categorizes the other transportation modes, road, sea and inland, and air transportation as “potentially competitive”. All these suffer from aging due to low investment levels. Road transportation is going to increase its share because of its flexibility. Sea and inland water transportation will benefit from their cost structures if the infrastructure is renewed properly. Air traffic will increase in general and the possibility of using Russia’s airspace as a route for global flights connecting Europe and Asia will accelerate the volumes. But the infrastructure is, once again, significantly old.

The role of the Russian government is quite important. The author would say that it is more important in Russia than in most countries, mainly because of the formerly exercised centrally planned economy. In the transport logistics, the most important issue is the funding of infrastructure and equipment investments. Despite the positive CA, net capital flows out of Russia, and surplus budgets, the investments have not been as high as they would need to be in a country of such a fast economical development.

The other aspect related to the government is its protective policies, which are not in line with the wished membership in the WTO.

The inherited “business model” with low level of knowledge about market economy is a great burden for Russian business in general. Luckily the trend seems to be that more and more students are trained according to higher western standards. In the author’s opinion highly educated management could be useful for example in the privatization processes. These processes are not well executed in Russia, though they are quite important for Russia in order to gain the ability to compete globally. Overall the interaction among Russian companies is only just developing – in the Soviet model the connections and partnerships were given by the central administration.

Findings of the Survey
The responses to the survey were a positive surprise. The author was told that there is some sort of barrier which prevents companies and to some extent also the institutions from telling the whole truth about their opinions on logistics relating to Russia. However, the author received good answers from both the survey and the interviews; also the response rate was satisfactory. Some of the questions received quite diverging answers, which might be due to the complicated structure and low transparency of Russian logistics.

Finnish Competitiveness Issues
Partnerships and networks must be created and utilized more in order to develop Finnish competitiveness. The author thinks that for example collaboration with the excellent Finnish universities should be increased, which is true also according to the respondents. Also collaboration among companies should increase from the present state. Another interesting point is that the EU
enlargement to the Baltic States has not changed the competitive situation to the extent the author thought it would have changed. The respondents thought that Russia is still the number one competitor against Finnish companies, while in the author’s opinion the Baltic States and especially Estonia should be considered as a more imminent threat.

According to the respondents, the Finnish competitive advantages do not differ much from the ones of the Baltic States. When the competitive advantages were listed, both had same kind of characteristics, including e.g. flexibility, know-how, and specialization. Of course at present the competitive environment and infrastructure are better in Finland but the author sees that in a few years Estonia and maybe Latvia will truly challenge Finland. Furthermore, the problems in sea transport in the Finnish ports caused many delays in 2005 and thus decreased the attractiveness of Finland as a transit route. These problems moved traffic to the Baltic States at least to some extent.

Possible Business Models
The growth figures of the Russian economy have been great; one of the main reasons is that Russia has benefited from the rise of global oil prices. While Russia is overall still quite poor when it comes to the average figures (for example the GDP per capita), there are still a lot of middle and upper class people whose incomes are high – also when measured by western standards. These people demand quality products which are usually manufactured abroad, for example electronic equipment from Asia and cars from Europe. Because Russia does not yet have enough infrastructure to handle the imports appropriately, the role of Finland as a middleman and a mentor can be utilized for now. Also the normal trade between Finland and Russia has grown again and it seems that Russia might take the first place as Finland’s leading trading partner in the very near future.

The development of Russia means that its own production will be able to compete against Finnish products, thus diminishing the currently increasing Finnish exports. However, the Finnish exports in more complicated products, like telecommunication equipment, are likely to continue growing. The Russian imports of modern cars and Asian electronics belong to the same group. As a consequence of this, the transit traffic of more valued products will continue to Russia. While the Baltic States are specialized in bulk transit traffic, the transit traffic via Finland will continue if the operations are kept competitive. Because of the higher cost structure, the Finnish companies have to maintain the high level of quality in operations, which will compensate for the higher prices.

The author has come up with two business models for the Finnish logistics operations related to the Russian markets. The Finnish companies could try to specialize themselves into VAL services. However, the more attractive choice would be to affiliate into current Russian logistics chains or to establish new ones.

If the operations are continued in Finland also in the future, some changes must be done in order to maintain the competitiveness. Collaboration is one of the key elements in this, but it would also be good to consider building a free economic zone (FEZ) on the border between Finland and Russia. This way the customs operations could be eased and the costs of operations could be lowered. The author thinks that the case of a FEZ should be studied thoroughly to avoid any possible pitfalls before utilizing it. When Russia develops enough, this FEZ arrangement could be abandoned if it does not provide some clear advantages for both parties.

The author sees, however, that going to Russia would be the most profitable business model. Although there are various risks with quite high probabilities, the size and potential of the Russian markets are too vast to be abandoned from the investment plans. Finnish logistics SMEs could offer valuable partnerships to larger international logistics enterprises. With the help of Finnish know-how and the adequate resources of an international company, the outcome could be fertile. The author also thinks that the country level an interesting partner for Finland could be Sweden. Finland and Sweden
combined would cover a quite large share of the Russian imports and thus the collaboration could be useful for both parties.

The author thinks that there are two profitable logistics business opportunities for Finnish companies in Russia. The first one is to utilize the currently held know-how of VAL services by establishing a logistics company in Russia and thus benefiting from the cheap labor force. The second one is to affiliate into the Russian logistics chains and start to manage them in a competitive way. Both these models are not easy to execute. But if a company manages to do so, the potential of Russian markets will guarantee extensive opportunities.

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More information:
Lappeenranta University of Technology
Northern Dimension Research Center
P.O.Box 20, FIN-53851 Lappeenranta, Finland
Telephone: +358-5-621 11
Telefax: +358-5-621 2644

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