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Machine Vision Opportunities in Russia
AIA Posted 07/13/2011Is Market Entry Worthwhile?
By Paul Kellett, AIA Director – Market Analysis
Spanning nine time zones and over 17 million square miles, Russia is not only the largest country in the world, geographically, but also the richest on a per capital basis of the so-called “BRIC” countries (Brazil, Russia, India and China). Its $1.465 trillion economy is forecast to grow at 4.5 percent this year, and industrial production and manufacturing continue to increase. (Last year industrial production grew 8.3 percent, and through the first four months of 2011 year-over-year growth has run 5.6 percent.) With economic indicators like these, what’s not to like about the Russian market?
These statistics become especially compelling when you consider that the Russian economy is underserved by the machine vision industry, with relatively few companies currently addressing this market. But this may soon change. Russia’s top leaders, including President Dmitry Medvedev and Prime Minister Putin, have acknowledged the need for economic modernization. If Russia is to compete globally and insure a level of national income largely independent of oil exports, it must deploy automation technologies such as machine vision that enable the necessary cost efficiencies, productivity and product quality.
The size of the Russian economy, its performance, and the fact that it is generally underserved by automation companies suggest that it is an attractive target for machine vision sales. But is it?
In a recent study entitled “Market Opportunities for Automation Companies in Russia”, (available free to AIA members here and for sale to non-members in AIA’s online bookstore, AIA addressed this issue. For its analysis of the machine vision market, the study considered not just the economy but also the ins and outs of doing business in Russia. The picture that emerged from the study is of a country in great need of machine vision but lacking in basic legal protections that are taken for granted elsewhere. In short, while the Russian economy has made great strides in its transition from a centralized, publicly-owned economy, it still has a ways to go.
There are several reasons why the legal/regulatory framework in Russia is not yet conducive to business. Corruption is rampant and legal protections of business are generally weak. Intellectual property is poorly safeguarded. Approval processes in customs for the importing of goods and the establishment of businesses are cumbersome. Legal resolution of disputes is often lengthy and complex, as the consequence of overlapping jurisdictions, unclear laws and regulations and overwhelmed judges.
Additionally, the lack of a business culture, monopolization of some sectors by “oligarchs” and insufficient transportation between different points in this vast country can also hinder commerce. Contributing to the unfavorable climate for business are also high custom duties and the fact that certain strategic segments of the economy are off limits to foreign direct investment (FDI). In this regard, it is telling that, FDI, which is viewed as a barometer of business trust in the Russian federation, fell off sharply in 2010, despite the recovery in the economy.
The Russian bureaucracy is a major cause of these problems. Too many contradicting regulations are creating a lot of opportunities for local and mid-level bureaucrats to intervene.
Other causes are the underdeveloped infrastructure in Russia (with a few exceptions like Moscow and St. Petersburg) and the lack of investment in their own country by Russian businesses, which lessens the confidence of foreign investors.
President Medvedev and Prime Minister Putin have repeatedly emphasized the importance of improving Russia’s business climate and attracting foreign capital, but despite bureaucratic interference, infrastructure problems and low domestic rates of investment, structural reforms have been slow and past government actions, such as politically motivated investigations into business, have made foreign businesses increasingly risk adverse.
To minimize risk, machine vision companies have for the most part avoided a direct, on-the-ground presence in Russia. Most companies that target the Russian market do so through domestic distributors (primarily Sedatec, Ltd, InSys, Ltd, and ViTec Co, Ltd), from their sales organizations in other near-by countries or via their website. (At least 17 foreign machine vision companies use Russian distributors by last count. Domestic machine vision companies are also, at best, few in number.)
At the same time, there are unmistakable signs of growing interest in the Russian market. VIT Expo, a machine vision trade show, was held in 2010 and 2011. Another show, Vision & Imaging 2012, is scheduled for April 17-19 2012. At these shows, the number of machine vision companies exhibiting has grown; at the VIT Expo in 2010 there were 71 exhibitors, while the 2011 show had 112 exhibiting companies.
These growing numbers are indicative of a realization that Russia will eventually represent a large market opportunity. In agriculture, machine vision will be needed for food inspection, since imported foods will need to measure up to international standards of food quality. In electronics, inspection of circuit boards will be especially important. Elsewhere in manufacturing, production processes will require machine vision for inspection (including surface inspection, error proofing, verification of absence/presence of parts, assembly verification and guidance). Glass, metal and plastic container manufacture, pharmaceutical inspection, printing and wood product inspection and semiconductor manufacturing will be key areas in Russia, as they are in other countries.
When the economy and underserved market in Russia are considered, it is clear that this vast country represents a sizeable market opportunity for machine vision companies, but one that is contingent upon the establishment of a conducive business climate. Until Russia’s political elites take concrete actions to create this climate, machine vision companies should limit their exposure to risk, while remaining well-positioned to expand their market presence, once improvements occur. In short, companies should proceed with caution by working through distributors in large cities, such as Moscow and St. Petersburg, before sinking more permanent roots and branching out to other regions of this great country.