International Construction regional report on the CIS: Growth is returning

Construction equipment manufacturers are showing keen interest in Russia and some Commonwealth of Independent States (CIS) markets, where growth is expected despite the downturn in the west and the problems faced by troubled southern European economies.

The biggest interest is in Russia, which is by far the largest construction market in the region. Several manufacturers have launched new equipment tailored for the Russian construction market, and sales are expected to rise in the medium term.
Growth in Russia’s construction industry is being driven by large, complex projects, including preparations for the 2014 Sochi Winter Olympics, the 2013 Kazan Universiade, the 2016 World Hockey Championship, and the 2018 FIFA World Cup.

Consultancy PMR forecasts that Russia will invest between RUR 162 billion (US$ 5.1 billion) and RUR 199 billion (US$ 6.2 billion) modernising the 15 stadiums expected to be used in the 2018 World Cup, with an additional RUR 22 billion (US$ 674 million) spent on training centres for the teams taking part.

Russia’s construction output registered a total increase of +5% in 2011, according to economic research company Buildecon, with the residential sector showing the greatest dynamism.

Between now and 2014, it forecast a further moderate development in the non-residential sector while major growth in civil engineering and residential construction is on the cards.

Together with the expected growth in Russia’s construction market, another driver of increased construction equipment sales in the country is the need to replace old and ageing equipment. Construction machinery stock owned by contractors in Russia, for instance, has been depleted by -40% to -60% on average over the last decade, according to PMR, while dilapidated construction machinery accounts for more than 50% of total equipment stock in Russia.

Meanwhile, the Russian rental market grew by almost +35% in 2011 to reach an estimated value of € 700 million (US$ 900 million) and could triple in size by 2015, according to the Russian rental consultancy and training organisation RusRental.
With all this promising data, it should come as little surprise that construction equipment manufacturers are showing significant interest in the Russian market.

Caterpillar CIS sales director for global construction and infrastructure Sergey Minko said the company expected to see growth in Russian equipment sales this year of +40%.

“Demand is coming from the resources market – the oil and gas sectors in particular – as well as the infrastructure and construction market,” Mr Minko said. “Caterpillar manufactures excavators at it is Tosno facility, the 20 tonne 320DC and the 36 tonne 336DL, and last year expanded this to include production of the 773E rigid hauler. These heavy duty machines are well-suited to demand in this growth market.”

In May, meanwhile, drivetrain components manufacturer Dana opened a new office in Moscow, while Terex and Russian Machines also completed the formation of a joint venture which will see them co-operate on the manufacture and distribution of construction and road building equipment in the country.

And in April this year, Volvo broke ground on its SEK 350 million
(US$ 49 million) excavator factory in Kaluga. Volvo Construction Equipment’s business director for Russia, Ukraine, Belarus and Kazakhstan, Andrey Komov, said the manufacturer was also expanding its distribution network in the country – a feat being organised by Ferronordic, its Russian dealer.

“Ferronordic is growing very fast,” Mr Komov said. “It started with 160 people in 2010 and now has 600. They have invested in many new locations across Russia.”
Sales increase

John Deere, meanwhile, said it had seen sales of construction equipment in Russia rise +135% year-on-year during 2011. The manufacturer, which started to sell construction equipment in Russia in 2009, forecast a further +100% growth in sales for this year. Andrew Christopher, director of John Deere’s construction and forestry division in Russia/CIS, investment continued.

“In 2011, we doubled capacity at our manufacturing centre in Domodedovo, and we are planning to keep the growth at the same pace. We added +25% more staff in 2011 and we are expecting to raise staff by +20% in 2012 as well,” he said, adding that John Deere planned to increase its dealer network, which totals 40 sales offices and service centres, to 50 in the near future.

This year also saw John Deere introduce a leasing company to Russia – John Deere Financial – and by 2015 the company plans to have invested a total of US$ 500 million in the country.
This year’s Conexpo/CTT show in Moscow – which took place from 29 May to 2 June – also saw John Deere preview a new line of excavators made for the Russian market. It was the beginning of what the company claimed would become a complete product portfolio for Russia.

JCB, too, unveiled its most powerful backhoe loader to date – the all-wheel steer 5CX – at Conexpo/CTT. Specifically designed for tmarkets in Russia/CIS, the Middle East, Africa and Latin America, the machine is powered by an 88 kW Tier 2 JCB Dieselmax engine, and boasts a 1.3 m² shovel as standard.

But it’s not all plain sailing, and doing business in Russia comes with its own problems, including cumbersome regulation and state intervention. Caterpillar’s Sergey Minko said, “Russia can be a very challenging environment – delayed payments are a big problem for contractors, for instance, and constrain their capabilities.

“Moving people and machines across the country can also be difficult, and the Russian government is also holding back the emergence of economies of scale by dividing contracts up into many smaller parts instead of awarding one or two larger contracts,” he Minko explained.

Smaller economies

Meanwhile, although the region’s smaller economies currently account for a relatively minor slice of overall construction activity in the region, the outlook for some is also for sustained growth in the medium and long term.

“Russia accounts for about 80% of the overall equipment market in the region,” Mr Minko said, “But Kazakhstan is also a growing market, as is Mongolia. Kazakhstan accounts for perhaps 10% of demand in the region, while infrastructure in Mongolia is developing very fast and this will be large market in the future.”

According to PMR, cement production in the CIS region is set to grow +14% this year to nearly 106 million tonnes. At the same time, these states’ total consumption is expected to reach nearly 109 million tonnes – with the gap being filled by imports.
The Kazakhstan construction market is expected to grow +3% next year, boosted by government measures to support the industry.

For each area of the construction market, a government programme has been rolled out to provide support.

Similarly in Ukraine, which co-hosted the European Football Championships with Poland earlier this year, the government is keen to demonstrate that it is open to foreign investment. Priority infrastructure projects for the development of the transport sector in the country are now open to tenders from foreign companies.

Challenges

But while there are clear opportunities in the Russia and CIS region, doing business here can clearly be a challenge. Broadly speaking, one of the main constraints to growth has been government interference – According to the World Economic Forum 2011to 2012 rankings, Russia is in the bottom decile on the burden of government regulation, with its weak institutional framework cited as a key obstacle to growth.

In addition, enforcement of rules is often inconsistent, and corruption is a persistent problem. These factors outline, perhaps, why growth is returning to the region, but slowly.