May 2012
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How to start a BMS business in Russia

If you want to predict the demand for your product on the Russian market, you have to check your competitors’ positions and totally feel the behavior of the construction industry in Russia.

Andrey Golovin,
BACnet Russia and KNX Russia Director

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There are many myths and misunderstandings about doing business in the Russian Federation. In this article I would like to point out some risks and possibilities for the Russian building automation market. I hope that this information will be useful for those foreign companies that have decided to expand their business in Russia.

The economic situation in Russia

The Russian market has different rules from the point of view of European companies. It is very attractive because of the huge prospect of getting profits quickly, but financial risks are also much higher than in Europe. The whole Russian economy today is very closely tied with the world price level of oil and gas. When the price of a barrel of oil is greater than 100 USD (or around it), there is nothing to worry about. The Russian construction market is largely financed from the oil and gas industry. While they are feeling good, the whole construction market is OK.

The Russian construction market can be separated into residential and commercial construction projects.

The residential part mainly consists of the following projects: private houses, apartments and townhouses. When there was the so-called financial crisis, all the main Russian players on the building automation market survived only by means of private residential projects. But now the situation is back to a positive scenario and many commercial projects are under development.

Most experts see no negative forecasts for the Russian construction market in the next few years. The economy is stable and many large-scale projects are launched now. The richest city and the most interesting part of the market in Russia is Moscow. The capital of Russia has more than 12 million people. All big companies and corporate headquarters are located in Moscow and all financial decisions are taken here. This is the place where a foreign company MUST start and be present.

In 2011 the Moscow Government decided to merge with the Moscow region and enlarge the boundaries of Moscow to the south and southwest. This will give a new impetus to the construction industry, because many governmental buildings will be transferred from downtown to the new area. The lack of hotels is another problem in Moscow. More than 100 hotels should be built in downtown Moscow by 2016. In just the period 2012-2014, 33 hotels with 7371 rooms will be built.

Besides Moscow, major projects for building automation are in demand in St Petersburg, Kazan, Krasnodar, Rostov-on-Don, Yekaterinburg and Novosibirsk. All these cities have a population of more than one million people. These cities are definitely worth a visit and to try out a business offer, but only when you are present in Moscow.

The 2018 FIFA World Cup is scheduled to take place in Russia. This will be the first time Russia will host the tournament, as well as being the first World Cup in Eastern Europe. For this event many new football arenas will be built and existing sport buildings will be renovated. It will be a great opportunity for many engineering companies in the market.

Building automation market segment

The Russian market, just like any European market, is placing its bet on open protocols. BACnet, KNX, Lon, EnOcean, Modbus – all these open technologies are in demand in Russian projects. There is only one condition that should be accomplished if we want a building with a modern BMS: the building owner should not be interested in selling off a building right after its construction. In this case, building automation will be done on a normal or even a high level. Otherwise, it will be with poor functions and, probably, done on the local level. The segment of proprietary protocols is still big enough, but open technologies are more in demand from year to year.

To be sure, foreign manufacturers are dominating the Russian market. German, Swiss, US and UK brands are holding the top-10 level among BMS manufacturers. Russian manufacturing companies (about 5-6 brand names) have fewer functions in their products, less reliability and less weight on the market. Normally they are used in municipal housing facilities.

What do customers want from BMS today? To answer this question, we have to imagine an average office building under construction, where the building owner is going to use it as a business tool for more than five years. In this situation, we don’t have to convince a building owner to ask designers to include a building automation system in the project. The main requirements from customers are:

Russian marketing surveys do not withstand any criticism. Everything I saw during last five years was just wasted money. That is why I cannot recommend to anybody to spend money for surveys from ‘no name’ companies. I think that no one today has the real numbers on the market. And in my opinion this is not so important, because the Russian market lives by its own rules, not like in the USA or Europe. If you want to predict the demand for your product on the Russian market, you have to check your competitors’ positions and totally feel the behavior of the construction industry in Russia.

Financial risks

Reliable ControlsMoscow is one of the most expensive cities in the world. If you didn’t know that, you will be surprised! If your company should decide to set up its own office, be ready to spend a lot of money before you start to earn something. And do not expect a fast return from the market, because it is inert. Let’s estimate approximately potential expenses at the beginning stage.

Moscow-Cotu

Office. To rent an office in an A-class building in downtown Moscow will cost about 850 USD per sq.m. a year. This is just the price of rent.  Additionally there will be a coefficient for corridors (+15%), VAT (+18%), facility charges (heating, electricity, etc.), IT-services, parking place. It is very hard to find a good office smaller than 100 sq.m. in a prestigious building. Normal offers start from 70–80 sq.m.

Sales Manager. To start with product sales in the country you will need a Russian sales manager or representative. The salary for such positions starts from 3000 EUR/month. Don’t forget about the tax on payroll (+34%). And to find a person speaking English well enough will not be an easy task.

Exhibitions. Due to the common situation with the cost of living in Moscow, the price level for exhibitions booths is around 300 EUR per sq.m. with no construction (naked area), plus other additional charges. So, a very modest participation will cost around 10,000 EUR.

Bank loans. If your company will need to take a credit in a Russian bank, the average percent will be around 15% for 12 months. I can’t say that this kind of financial service is popular among engineering companies.

Then what to do?

The best way to start your business in Russia for the first several years is to find a reliable partner company. This company should be doing both distribution business and systems integration. In this situation your products could be sold to other market participants and your partner company can earn extra money for the installations. Preferably this partner company should have local branch offices in several other big Russian cities or local representatives.

Normally a BMS manufacturer should take care about teaching Russian partners and support them with promo-materials (samples). Sometimes European manufacturers organize training sessions for Russian installers and designers in their European headquarters (3-5 days trips).

The vendor should take care of getting necessary Russian certificates, especially GOST R. Without that certificate, you can’t export anything to Russia. The procedure of getting the GOST R certificate is not complicated (depends upon the type of product) and has several options. There are many companies who can help with Russian certificates.

Logistics is a really hard task that the vendor should solve before starting a sales campaign in Russia. Russian clients do not like to wait for their order for more than 3-4 weeks delivery. The easy way out here is to use international carriers (UPS, DHL, TNT). But their services are pricey.

Advertising, meetings, publications. Spread more information about your products on the market (Internet websites and professional magazines). Keep on doing that for two years. Then the market will remember a new brand name.

If you have any more questions
For more information about Russian BMS market you can follow me on twitter @golovin.


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