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Russian Companies to Challenge Apple, Samsung and Others in Domestic Electronics Market

Electronics part of major import substitution campaign spanning the next five years

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This article originally appeared at Marchmont

Russia is currently moving, slowly but steadily, towards import substitution, and the government’s enthusiasm is increasingly impacting the economy across economic sectors. In IT, for example, plans to create this country’s own operating system (apparently to oust Microsoft’s Windows from its present throne) and software have been recently aired. However, this is but a palliative without a dramatic reshuffle in the entire radio electronic hardware segment, government officials think. The Russian Ministry of Industry and Commerce has come up with a new plan that outlines steps for Russia to have its own tablets, smartphones, laptops and desktop PCs by 2020 already. Today, imported gadgets account in the Russian market for up to 100%; five years from now, according to the plan, tablet and smartphone imports are to drop to 75%, while in government procurement programs the share of foreign desktops should shrivel to a maximum 25%. Experts are divided in their appraisals of such a move. Representatives of government-owned corporations, such as Rostec, welcome the plan and believe the entire construct is feasible—even within the given timeframe. Business circles that work directly with the domestic B2C and B2B markets are not so sure. 

The new five-year plan that calls for sweeping import substitution across Russia’s radio electronic industry was already signed earlier this month by Minister Denis Manturov. According to the Russian business daily Kommersant, the list of domestic products to emerge in Russia contains 534 types of computing systems, telecom equipment, semiconductor-based microwave electronics, components, etc. By 2020, imports in these segments are expected to plummet. 

Revealing details, Kommersant reports plans to develop tablets and smartphones not only for consumer markets but also for corporate users that expect a much higher level of data protection than is standard for the B2C segment. If the Ministry and its industrial partners pull it off, Russia may look forward to having a variety of desktop PCs, laptops and workstations for office employees as well as research and engineering teams. According to Ministry estimates, imported gadgets and systems account in the Russian market for up to 100%. Five years from now, tablet and smartphone imports are to drop to 75% of the total, while in government procurement programs the share of foreign desktops should shrivel to a maximum 25%. In the broad consumer market, however, goals are a bit less revolutionary: imports of foreign PCs are expected to stay under 90% of the total, according to the plan. 

The government also wants to reduce imports of supercomputers, servers, including file and mail ones, as well as data storage systems and database management systems. The plan calls for a decrease in imported microchips and telecommunications equipment for both end users and telecom operators. 

Pros and cons 

Experts reckon that it will take $10m in investment to start the development of a domestic operating system; a Russian database management system will require another $4-6m to get off the ground. What appears to be even more important to consider than costs is whether there is demand for domestic products like these. That’s where things may go wrong for the plan developers. With the mobile operating systems market, for one, dominated by Android and iOS demand for a hypothetical domestic operating system is “far from obvious,” as Kommersant analysts put it. 

According to international analysts at IDC, last year the Russian PC market shrank by 22.7% in unit terms and by 32% in money terms. The tablet market contracted by 5% and a very noticeable 30.9%, respectively. 

Market players give conflicting appraisals of the news. Vocal proponents of import substitution envision bright prospects regarding the plan and have no doubt about its viability. These largely represent state-owned corporations most likely to benefit from government largess when orders for home-made devices start to pile up—such as Rostec and Rosatom which appear to be already almost ‘booked up’ with the recent government task to jointly develop a national IT platform

Private business contacting directly with customers in the B2C and B2B market segments is not particularly sanguine about the prospects of this ambitious project. For example, Konstantin Marchenko, the deputy CEO of T8, a Russian company, said in an exchange with Kommersant that “even in this country’s largest government-funded infrastructure projects, such as “E-government” or “Addressing Digital Inequality,” procurers prefer Huawei products or other foreign solutions.” The market is shared between U.S. and Chinese suppliers, he said. 

Others are skeptical about the timeframe; to them, it evokes the reminiscences of the Soviet Union’s ‘pyatiletkas,’ the historic five-year plans the Soviet government would impose on its feeble economy in an effort to “outrun America.” Those plans had an essential downside: ambitious projects were supposed to be ceremonially launched by a certain national holiday—irrespective of whether they were really completed. Some experts are now concerned that with so short a timeframe for the import substitution plan the bad old practice might be brought back to life. That’s what 2L CEO Alexander Likhtman shared with regarding this: 

“Such things can’t be managed in a command-like manner, and five years are just not enough. One needs to first put together a technological and resource base, and manage the training of specialists or hire experts from abroad. Training or no training, semiconductor component production requires much investment. A modern factory manufacturing chips means billions of dollars in investment, and payback periods take decades.” 

Mr. Likhtman doesn’t believe Russian products in this field can challenge in fair competition any sizable player in global household and industrial electronics. “Even the Yotaphone [the sole globally recognized Russian smartphone—editor’s note] is a joint Russo-Finnish-Chinese project,” the expert said. 

You can lead a horse to water—but you can’t make it drink 

Many think that material factors are not the only to cause potential trouble here. Theoretically, this nation can pool all of its efforts to revamp infrastructure and develop cutting-edge technologies to achieve success within five years, as it did during the Soviet ‘pyatiletkas.’ But no government plan will be powerful enough to change the mentality and preferences of the domestic consumer in a flash. 

In the West, companies everyone knows these days have invested billions of dollars and decades of painstaking marketing work in what is now the appealing image of their quality products. That was appreciated even behind the ‘iron curtain’ in the Soviet Union. Many Russians still remember women willing to spend endless hours lining up for beautiful imported footwear, so rare in Soviet stores. They were prepared to suffer associated inconveniences and considerable prices—only to be able to avoid buying low-quality and sometimes just ugly-looking shoes made domestically. The same with Japanese tape recorders, an item basically everyone dreamed of. Even in a country that shut itself off from the outside world, news of the quality of those goods would circulate and win hearts. 

Now that millions of people have discovered and enjoyed that quality, taking access to the top brands away from the customer and telling him that “ours is better” is a daunting task. 

In the meantime, Russian business people interviewed by generally supported the government’s latest move to give a boost to domestic radio electronics. They agreed that “in the past 15 years, we had world-class developers and production sites emerging.”

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