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July, 2006

Finngrain - Vilja-alan yhteistyöryhmä
FOOD INDUSTRY VALUE CHAIN IN LENINGRAD OBLAST AND KRASNODAR KRAI
Electronic Publications of
PanEuropean Institute, 7/2006

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Conclusions

The project results, presented in the previous sections, have offered a view on the agribusiness value chains in two quite different regions of Russia. Diverging recent history, resources and environmental endowments coupled with the great geographical distance from each other, serve as separating factors of the regions. On the outset the choice of including Leningrad oblast to the focus regions of the study was taken as given due to proximity oriented natural interest from the Finnish food industry. It is common knowledge that the Finnish food manufacturers regard the region as “home market” as it is an integral part of the Baltic Sea economic region.

Krasnodar on the other hand lies on the Black Sea coast with such countries as Turkey and Iran in closer proximity than Finland. However, as the report clearly indicates, significant business potential exists in the Krasnodar agribusiness valuechains as well. It is intriguing to see whether Finnish agrifood companies will follow the example of the ICT and forest industry, and establish operations in more distant markets, or will they follow the generic academic internationalization models that point out the significance of geographic closeness. Undoubtedly, the attractiveness of St. Petersburg and Moscow markets cause them to be at the forefront of the strategic internationalization considerations. Either way, agribusiness related opportunities do exist both in close and in distant regions of Russia.

With the mapping of relevant decision criteria in the foreign, and specifically Russian, investment decision of the Finnish food industrialists, some factors are salient in their weight: (1) competitive situation, (2) adequate raw material supply base, and (3) consumption potential. It is evident from these results that the value chain wide considerations start to appear with interests on suppliers, competitors, pricing, bargaining power, distribution, retail development etc. These factors validate the approach taken in this project and the consequent reporting of results. In the following conclusions the focus is on the previously listed factors, but specifically on the actors and the supply base of the value chain.

The Russian agricultural sector enjoys a great level of support from the federal government in the form of subsidies, support programmes aimed at the development of productivity and implementation of new technology, as well as protective import quotas. On the other hand, the state’s and especially regional authorities’ interests in developing a viable agricultural sector with efficient supply chains able to satisfy the consumer demand, are also evident in the form of investment legislature development for example in the Krasnodar krai, where the resolution to eliminate administrative barriers to foreign investment take the form of time limits in the approval times of certain permissions. Although issues remain open in some areas, the general atmosphere towards foreign role in the development of the agricultural sector is positive. It can be concluded that the state as an actor in both the federal as well as regional level play a significant role in setting the market conditions for competition and the development of the food valuechain.

Due to the nature (e.g. perishability, seasonality or supply variability) of the agricultural product and foodstuffs in general and especially in the current Russian market, the functioning value chain is vital for profitable operations. Shortages of rawmaterial result in supplydriven, instead of demanddriven supply chains. The theoretical implications are fluctuating prices with purchasing gaming, causing inefficiencies in the supply chain. In practical terms processing industries are forced to utilize either contractual or ownership related methods in the securing process of the adequate supply base. The most salient phenomenon of this, is the seemingly common way of vertically integrating upstream companies, i.e. suppliers under the holding company umbrella. Good example of this development is the Leningrad oblast dairy industry where the major industry players include Petmol, Baltiiskoye and Piskarevskii processing holdings. Interestingly this vertical integration is not limited to the upstream functions but, while on decline, to the downstream distribution functions as well.

The development of the distribution function and the retail function in particular, contributes to the increased specialization of the value chain players: no factory owned retail outlet networks are required and their usage is on the decline. We may conclude in general terms that there are no supply chains in the Russian agribusiness, if we narrowly understand the supply chains as cooperating and coordinating independent enterprises executing consecutive value adding functions for the achievement of agricultural consumer product.

In other words, the total network of companies and functions is patchy, i.e. specialized firms undertaking supportive roles as suppliers of adequate raw materials, or warehousing and logistics functions are in some cases missing. The practical strategic implication to the Finnish food industry is the required complementary investments across the value chain as operations are established. This may be in the form of vertical integration, technology transfer, jointventures, training and providing knowhow etc. In many cases the origins of missing link in the chain is the inability to develop the respective business with the existing resources and endowments, and to pass the rising costs of production to the consumers.

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