Aleksandr Aleynikov. "Import and Substitution: What is Happening in the Office Construction Segment"
28 Oct 2022
At the very beginning of the current crisis, when the market faced with the departure of Western players and the disruption of logistics chains, office construction was going through, mildly speaking, hard times: the rise in prices for materials and equipment reached 50%, and the supply of most of the products not only from the European, but also the Asian market was in question — in fact the first months, the segment continued to function with the use of available ground stocks.
Aleksandr Aleynikov
Commercial Director of Pridex
The situation was largely changed thanks to parallel imports: by the end of August, prices for building materials decreased by an average of 13%, and distributors began to actively import goods in this way, which allowed to return up to 70% of foreign products. Nevertheless, as the Ministry of Industry and Trade has repeatedly stressed, parallel imports are only a temporary phenomenon that will exist until a sufficient number of Russian replacements appear on the market.
The share of affordable foreign products was quite small even before the imposition of sanctions and the departure of European companies, now it is about 10—15%. A more complicated situation is observed in the middle and high (premium) segments — about 40% and 70%, respectively.
There are certainly some successes in terms of import substitution. Some of them are long-term: for example, the production of raised floors (a design that allows the wiring of utility networks and cables in the space under the floor and provides free access to them) in Russia has been increasing since 2014 and is currently 100% localized in the country. The manufacture of complex metal products has been successfully established, the production of lighting equipment is developing, the share of which in the Russian market is now about 70%.
The appearance of domestic replacements is gradually beginning to affect the cost of materials — a decrease in individual items within 10% is in evidence. Reduction of the delivery time of certain categories of goods is also potentially possible — on average by two to three weeks compared with deliveries from abroad. So far, unfortunately, this is often compensated by a lack of production capacity: due to increased demand, Russian companies do not always cope with the volume of orders, as a result of which you get on the so-called waiting list and the time increases again.
Nevertheless, there are a number of problems, overcoming which poses significant difficulties:
The share of affordable foreign products was quite small even before the imposition of sanctions and the departure of European companies, now it is about 10—15%. A more complicated situation is observed in the middle and high (premium) segments — about 40% and 70%, respectively.
There are certainly some successes in terms of import substitution. Some of them are long-term: for example, the production of raised floors (a design that allows the wiring of utility networks and cables in the space under the floor and provides free access to them) in Russia has been increasing since 2014 and is currently 100% localized in the country. The manufacture of complex metal products has been successfully established, the production of lighting equipment is developing, the share of which in the Russian market is now about 70%.
The appearance of domestic replacements is gradually beginning to affect the cost of materials — a decrease in individual items within 10% is in evidence. Reduction of the delivery time of certain categories of goods is also potentially possible — on average by two to three weeks compared with deliveries from abroad. So far, unfortunately, this is often compensated by a lack of production capacity: due to increased demand, Russian companies do not always cope with the volume of orders, as a result of which you get on the so-called waiting list and the time increases again.
Nevertheless, there are a number of problems, overcoming which poses significant difficulties:
- 1Equipment for the manufacture of materials, components, etc. is 80% imported;
- 2A full-fledged replacement with domestically produced alternatives of high-tech products, such as multimedia, IT equipment, automation systems and microelectronics, is not possible in the medium term. Now companies in the office segment are actively increasing supplies from friendly countries — China, India, Turkey, but the selection of an equivalent quality solution is a complex and resource-intensive process;
- 3Finishing of premises in the premium segment involves the use of certain materials and products that were produced mainly by foreign companies, and at the moment only 20% of them are potentially replaceable.
Parallel import
So far, the above problems can be solved with the help of parallel imports — most of the products, with the exception of certain specific ranges (for example, some specialized software), have become available again.
However, there are risks here too: firstly, no manufacturer’s warranty, which raises questions not only about the further maintenance of elevators, pumping equipment, electrical equipment and many other items, but also in some cases about the quality of the goods imported. Secondly, an increase in the delivery time depending on the exporting country and logistics routes: on average, it is about a month, in the case of complex products — even more. And thirdly, due to the fact that many proven distributors have somehow reduced the range of products, companies in the office construction segment are forced to change the pool of suppliers — often these are new players that do not have a long history and high turnover.
However, there are risks here too: firstly, no manufacturer’s warranty, which raises questions not only about the further maintenance of elevators, pumping equipment, electrical equipment and many other items, but also in some cases about the quality of the goods imported. Secondly, an increase in the delivery time depending on the exporting country and logistics routes: on average, it is about a month, in the case of complex products — even more. And thirdly, due to the fact that many proven distributors have somehow reduced the range of products, companies in the office construction segment are forced to change the pool of suppliers — often these are new players that do not have a long history and high turnover.
Conclusions
Although at the moment the share of parallel import in the supply structure is growing, it becomes obvious that this dynamics will change soon. Russian companies specializing in the manufacture of construction materials are already investing additional funds in the purchase of foreign equipment, taking advantage of the weakening of the American and European currencies — thus, they expect to expand their range over time and replace foreign products. At the same time, for customers, the fact of the project implementation is in the first place, they are less and less willing to sacrifice time and cost for the sake of chasing a brand. In this regard, today in office projects, the items are included that can definitely be delivered.
In the next two years, the country will establish its own production of finishing materials (primarily products made of wood, metal, PVC, laminated chipboard and felt, as well as porcelain stoneware), plumbing, electrical and switchboard equipment, valves and piping, etc. At the same time, the share of Turkish (decorative materials, facing materials) and Indian (natural stone, porcelain stoneware and other floor coverings) products is already growing in the finishing segment, and the role of Asian suppliers is increasing in the engineering equipment segment — for example, up to 80% of all ventilation equipment is currently imported from China.
As for IT equipment, serious investments and the participation of large international companies are needed to localize its manufacture, which seems extremely difficult in the current situation. In this regard, we expect that in the coming years this market will be dominated by products from China, as well as Japan, Turkey and Korea.
As a result, the market will be driven by domestic producers, as well as the reorientation of purchases of certain categories of goods to the East and friendly countries.
In the next two years, the country will establish its own production of finishing materials (primarily products made of wood, metal, PVC, laminated chipboard and felt, as well as porcelain stoneware), plumbing, electrical and switchboard equipment, valves and piping, etc. At the same time, the share of Turkish (decorative materials, facing materials) and Indian (natural stone, porcelain stoneware and other floor coverings) products is already growing in the finishing segment, and the role of Asian suppliers is increasing in the engineering equipment segment — for example, up to 80% of all ventilation equipment is currently imported from China.
As for IT equipment, serious investments and the participation of large international companies are needed to localize its manufacture, which seems extremely difficult in the current situation. In this regard, we expect that in the coming years this market will be dominated by products from China, as well as Japan, Turkey and Korea.
As a result, the market will be driven by domestic producers, as well as the reorientation of purchases of certain categories of goods to the East and friendly countries.
Source: realty.rbc.ru