German Technology, Russian Production

German manufacturing firms are working to localize production in Russia, but the political situation makes it increasingly difficult. 

Machinery and equipment have traditionally been among the most important German exports to Russia, making up to 20-25 percent of the total import value, according to data from the German Engineering Foundation (VDMA). Foundation reports show that in 2014, Germany exported 6.5 billion euros worth of engineering products to Russia. But this was a decrease of 17 percent from 2013. The steep drop took Russia from fourth to fifth place in the ranking of top export markets for engineering products.

"Companies planning to work long-term on the Russian market can't do so without localizing their manufacturing here," said Monika Hollacher, VDMA's officer for the Russian, Central Asian, and CIS markets. According to Hollacher, the current economic situation makes localization difficult, and that all production facilities coming online now had been planned far in advance.

One example is the DMG Mori plant in Ulyanovsk, where construction began in 2012. The firm, which produces lathes and milling machines, can produce up to 1,200 of its Ecoline machines annually at the facility, which employs over 200 people. Machine production at the site is intended for the aerospace and automotive production industries, as well as additive manufacturing. The volume of investment, according to Interfax, stood at more than 70 million euros.

GEA, one of the world's largest manufacturers of processing equipment for a variety of industries, is also actively producing machines in Russia. "GEA launched its own production site in Klimovsk, where refrigerating and gas compressor units for the oil and gas and chemical industries are assembled," said Oliver Cescotti, GEA managing director in Russia. "GEA already has two other production sites in Russia; in Voronezh, the company produces cleaning products for milking and cooling equipment, as well as animal hygiene products, and in Kolomna, we produce equipment for cattle housing facilities. GEA is known on the market for supplying cooling equipment for the luge and bobsled courses and the ice arena in Sochi, as well as machinery for one of Miratorg's largest poultry farms in Bryansk."

Despite this long list, Cescotti says the current program is only the beginning of GEA's ambitious plans for Russia. "In the future, we plan to expand the line, since there are potentially many products that we're prepared to localize in Russia. On the whole, we strive to reach a high level of localization wherever possible. Our main production in Klimovsk is screw compressors, which we supply from our Berlin factory. The exact specifications of the assembled unit will ultimately depend on the client's requests and the availability of reliable parts suppliers," Cescotti said.

Although his firm is open to localization, it isn't always possible to the extent he would like.

"It's not easy to find suppliers of high-quality parts in Russia," Cescotti said. "But nonetheless, the production of our units used for gas deposits is now 75 percent localized, without any loss of quality or reliability."

BMA Russia Managing Director Zhambul Zhuasbekov also noted that there are places where Russian industry is not up-to-date with European-level technologies, which hampers development of local industries. BMA produces machinery for the processing of biorenewables, primarily sugar.

"Russian machinery and equipment continue to be in serious need of new technologies and new equipment," Zhuasbekov said. "For example, in a field like sugar production, many factories were built 70-90 years ago, and significant modernization has only been done at a handful of sites." According to Zhuasbekov, this is the reason production indicators for the Russian sugar industry are still far behind their European counterparts in production effectiveness, product quality and price.

BMA is hoping to change this situation, however. Nearly all Russian sugar factories today are equipped with BMA centrifuges, and some have installed the most up-to-date and effective machinery, including units for column diffusion, crystallization and vacuum pans.

Last year, the company installed a column diffuser, evaporator and drying unit at the Yeletsky Sugar Factory, which helped make the plant an industry leader in energy efficiency and production volumes.

BMA also supplied continuous vacuum pans and centrifuges to the Znamensky Sugar Factory. "The acquisition of this equipment enables both these factories to increase their daily production of sugar 30-50 percent," said Zhuasbekov. "BMA's Russian division generates about one-sixth of the group's entire revenue. A year-and-a half ago, we were considering starting production of our equipment in Russia, but have set that idea aside for now. Currently all equipment supplied to clients in Russia is produced in Germany."

GEA's Cescotti called import substitution in Russia "very politicized," which creates challenges even for companies with the best interests of Russian manufacturing at heart. "We are calling for a rational approach to this issue; this is the only route to a desirable result for Russia," said Cescotti, adding that more than 350 employees work for his company in Russia, only three of whom are foreigners. "We develop Russian engineering solutions, supply technologies and equipment, train engineers, create jobs, and are a major taxpayer in Russia," Cescotti said, pointing out the benefits his firm has brought to Russia.

Monika Hollacher of the VDMA expects German machinery exports to remain at approximately the same level as last year, which is already a positive development. "If the current situation continues to develop in the same fashion, there is a risk that German manufacturers of engineering products will lose their leading market position," she said, which in her opinion would cause Russian industry to suffer, as other countries are not as open to localizing production and improving the quality of Russian-made manufacturing. "Russia risks becoming only a market for Asian companies who could fill the niche left by the Germans. And Chinese and Korean companies are less likely to transfer technologies."


Russia - Germany 2015
Russia - Germany 2015
Despite the difficult political climate and economic downturn, German companies remain committed to Russia. Read about the challenges facing them, as well as success stories in this supplement.
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