Russian Computers Break Out of the Red

ZELENOGRAD, Moscow Region -- Its owners call it a state-of-the-art assembly plant, but to the untutored eye, the Kvant factory looks like no more than a series of conveyor belts running past workers who screw circuit boards into plastic computer casings.

One of the industrial centerpieces in a city of barbed wire, rusting iron gates and military-industrial plants, the Kvant factory is ground zero in Russia's modest computer boom.

The top producer of personal computers in Russia, the plant divides its production between color television sets and PCs, rolling out 18 percent of the personal computers produced in Russia, to which three domestic companies affix their names.

The workers at Kvant do not actually manufacture computers. They assemble them from parts made in Asia, Europe and the United States.

The arrangement may not be glamorous, but it sells. Russian computer producers, many of which contract their computer-building orders out to Kvant, have a market worth at least $1.5 billion largely to themselves. Russian manufacturers accounted, by market estimates, for two-thirds to three-fourths of the 1.5 million personal computers sold in the country last year.

"Right now they [foreign manufacturers] don't concentrate too much on this market -- it so far represents only 1 to 3 percent of total worldwide sales for them," said Gennady Bespalov, the commercial director for Vist, Russia's top producer of personal computers and the Kvant plant's top client.

A number of factors have conspired to keep the foreign presence minimal.

First, Russia is not among the world's boom markets for the PC industry. Russians, the experts say, have not embraced computers and other high-technology items as fast as consumers in Asia's developing economies. While the number of computers purchased in China, the Philippines and Thailand is growing by 50 to 80 percent each year, computer purchases in Russia grew a much more restrained 17 percent last year, according to third-party research provided by Intel Corp., the U.S.-based manufacturer of microprocessor chips.

Second, foreign manufacturers have been unable to compete on price. Computer importers today face tariffs of up to 20 percent, and their prices are about one-third higher than those of locally produced models.

Russian computer producers, in the meantime, have come a long way quickly. Derided as little as two years ago as hawkers of cheap and highly unreliable personal computers, domestic manufacturers are now the main players in the country's growing computer market.

On the strength of high-profile marketing campaigns and more reliable computers, they have turned consumers' eyes from American and Asian technology toward the previously unthinkable: technology made in Russia.

At the vanguard of Russia's computer industry is PC assembler Vist, with a strategy and growth profile that mirrors that of the Russian computer market as a whole.

In a little over five years, Vist has progressed from an assortment of associates importing PCs in suitcases, to a producer of "red" computers -- Russian computers of perceived dubious quality, which domestic consumers sidestepped in favor of "yellow" computers from Asia and "white" PCs from the West -- to Russia's top PC seller.

Now, Vist says it holds a 20 to 25 percent share of the Russian PC market -- triple the share of big Western names IBM or Compaq. Research firm IDC put Vist's share of the market at 17 percent.

"Vist has changed from [having] the lowest possible price anywhere two years ago to now offering a product that is of a more consistent quality and better than the cheapest product on the market," said Robert Farish, the editor of Computer Business Russia Internet.

Vist is renovating a new corporate office in northwestern Moscow, where employees breeze past carpenters in the stairwell and computers and fax machines are stacked up in the bathroom. The company sold 400,000 PCs last year, a number that should grow to 450,000 this year, Bespalov said.

Bespalov was one of the nine young Russian engineers who founded Vist in 1991 on the money they earned shuttling computers from Taiwan to the hungry Russian market.

Back in 1991, Bespalov said, entrepreneurs could travel to Taiwan and buy a computer with 1 megabyte of RAM and a 20 MB hard drive for $2,000. In Russia, the same computer would fetch $4,000.

"We put an ad in Vechernaya Moskva that said 'selling IBM' and the phones rang off the hook," he said. "There were two to three middlemen in the sales process, because few people knew what a computer was, and few knew who wanted to buy one."

At the time, Cold War trade restrictions meant Western marketers were forbidden from exporting most PCs to Russia. The only computers of Russian origin, meanwhile, were decidedly low-tech models sold at a store on Leninsky Prospekt for about $4,500, roughly the cost of a Volga car.

Vist began production by assembling computers by hand in a Moscow kindergarten. When production in 1994 hit 2,000 units a month, Vist struck a deal with the Kvant factory, which would assemble PCs from components supplied by Vist.

One of Vist's biggest supporters at the time was U.S. chip producer Intel, which today supplies the microprocessor chips for 85 to 90 percent of all the computers assembled by Russian firms. Intel loaned Vist more than $1 million in 1994 to help accelerate the assembler's production.

"Their business in Russia grew 10 times after they began supplying Vist with parts," Bespalov said.

Vist has further expansion plans: Bespalov said the company plans to begin manufacturing motherboards and monitors by 1999, a move that could help bring the Russian PC industry one step closer to the sophisticated computer industries of foreign nations.

Today, Vist has 150 dealers and 60 service centers across Russia, making it the most ubiquitous computer marketer in the country. Although most computer sales still take place in Moscow and St. Petersburg, Bespalov said promising cities and regions like Omsk, Tatarstan and Astrakhan are making up a greater percentage of Vist's sales each year.

Much of Vist's success or failure in the regions, Bespalov said, depends on the dealers in place there. "We give them a trial period of six months," he said. "They have to be well grounded in their market and have a good office, and be able to provide good service."

Vist sells its computers wholesale to the dealers, who mark up the prices 20 to 30 percent. Retail prices for desktop computers start at $750 and run to $2,250 for a top-of-the-line desktop model including an Intel Pentium 233MMX processor, 32 megabytes of RAM and a CD-ROM drive. A color notebook with a Pentium 133 processor, 16 MB of RAM and a CD-ROM drive costs $2,095.

Vist says its level of service gives it an edge over Russian assemblers and even importers, who aren't as established in Russia's regions and can't respond as quickly to customers' service needs.

"If you bought [an imported computer] in Moscow and brought it to Khabarovsk and something happened to it, you'd have to bring it back to Moscow for service," Bespalov said.

Russian assembler R-Style, which owns eight service centers in various regions, makes the same claim.

"These centers are on the same level of our Moscow office. A client coming into our center gets service and repair on any technology he bought from R-Style," said Vladislav Demenin, marketing manager.

The atmosphere at R-Style's bustling computer store in Moscow underlines the company's commitment to service. Salespeople appear genuinely interested in explaining a computer's pros and cons as they offer to help the customers already milling around the store's glass display case at 10 o'clock on a weekday morning.

One of the most popular R-Style PCs is the notebook introduced earlier this year.

"We get a lot of New Russians who come in and buy a notebook on the spot," said one salesman, snapping his fingers, "for their child's first day of school."

R-Style, which began as a dealer of Compaq and Hewlett-Packard PCs, began assembling computers at its own Moscow facility in 1994. U.S.-based computer manufacturer Hewlett-Packard even invited the company to its factory in Austria to learn how to do it right. "They don't consider us competition because they are in a higher price category," said Vladislav Deminin, R-Style's marketing manager.

R-Style has remained a large dealer of foreign PCs and peripherals such as printers and scanners. Meanwhile, it has built sales of its own computers and network servers to 30 percent of the company's computer sales by revenue.

The company, however, is not hinging its future growth on PC assembly and sales. R-Style is becoming a truly diversified technology company, with a new computer consulting business and a software development lab that racked up $7.5 million in sales last year.

For R-Style and other Russian PC providers, the biggest hurdle in the way of wooing Russian customers is overcoming the reputation that they are selling lemons.

Russian-made computers in recent years have sometimes contained faulty microchips that cause glitches in computing. It is cheaper to buy batches of chips containing a higher number of defective units per thousand, making it a tempting cost-cutting measure for some Russian assemblers.

To boost consumer confidence, Vist now provides two- to three-year warrantees on its PCs. The company also signed a deal with Microsoft in 1994 to deliver its computers with Microsoft operating systems installed.

Vist's Bespalov says the overall quality of Russian computers rose significantly in 1996, but added that it's tough to match the stronger image of imports.

"Worldwide brands like Compaq and Hewlett-Packard are much harder to compete with," he said, noting that foreign companies have so far been smaller players in the market. "But multinationals might change their course and spend more here. That would be tough."

Foreign and local computer sellers in Russia have traditionally targeted fairly separate markets, with importers going after large corporate and public sector clients, and local marketers selling more to small businesses and families. Of the 400,000 computers Vist sold last year, 80 percent went to small businesses and families.

U.S. computer manufacturer Compaq, which claims to be the No. 1 PC seller worldwide with an 11 percent share of the market, captures a more modest 6 percent of sales in Russia.

Compaq said it recognizes the potential for home computer sales, but a Compaq representative said the company will continue to prioritize sales to large clients like government agencies, banks and multinational corporations.

"Some section of buyers want the cheapest thing available," said Victor Gorodnichy, manager of product marketing in Compaq's Moscow office. "Corporate buyers want lots of attention to servers, integration, service and support," the areas where Compaq says it stands out.

Gorodnichy doesn't seem too concerned by the dominance of local PC assemblers in Russia, saying Compaq has plenty of opportunity selling to big government and industry clients. That kind of strategy can backfire, however, as it did last year, when government coffers dried up and left big state customers unable to buy computers.

Compaq's focus on big business is clear through its marketing efforts. The company has spent relatively little on consumer advertising, preferring to hold expositions for its top clients. The company will gather 500 of its biggest customers at the Radisson Slavjanskaya hotel later this month for a two-day exhibition of Compaq's latest technology.

Vist, meanwhile, has spent "tens of millions of dollars" in consumer advertising, Bespalov said, including opening an Internet Cafe in Moscow's Central House of Journalists this week.

Intel subsidizes a hefty chunk of advertising by Vist and other computer assemblers, providing the ads showcase Intel's Pentium processors. Of the $10 million Intel spent on advertising in Russia last year, $8 million went to local computer makers.

Vist has taken its marketing campaign a step further than simple product-based advertising: The company sponsors the popular Sunday evening game show "Empire of Passion," hosted by popular showman Nikolai Fomenko, on which contestants face off in a series of contests and strip down to their skivvies upon answering questions incorrectly.

Computer experts are puzzled by this approach, saying Russian computer buyers are unlikely to be swayed by the tried-and-true titillation tactics of many consumer product marketers. When it comes to technology, Russians have shown they care less about brand image and sex appeal than they do about what's inside the plastic box.

"In America or England people go out and buy the brand they want and trust," Farish said. "In Russia people are far more component-oriented. They see the PC for what it's got in it.

"It's a function of the way people used to shop in the Soviet Union. A washing machine was a washing machine with various parts inside. And a computer is a computer, with a standard processor and motherboard."

While Russian companies have produced PCs here with growing success, foreign companies have stayed away from setting up production in Russia. Many foreign PC marketers have chosen to leave distribution to their Russian partners as well.

Like most foreign PC marketers trying to avoid headaches and hassles of producing or warehousing computers in Russia, Compaq sells its wares at a distribution center outside Russia.

"Before, we flew [computers] to Sheremeteyvo. Now it's the distributor's job to import them," Gorodnichy said, noting that Compaq's Russian partners are more adept at navigating Russia's often confusing import process.

Gorodnichy said the company will not open a local assembly plant until Compaq sells 2 million PCs in Russia -- a figure greater than the entire market today.

The company has operated a service center in Moscow since last year and plans to open five more in other cities. But the company's overall theory on service is to supply dealers with spare parts and entrust them to do repairs, Gorodnichy said.

U.S. computer heavyweight IBM learned the hard way the hassles of assembling PCs in Russia.

IBM was actually the Kvant factory's first commercial customer, signing a two-year assembly deal in 1993 and producing 4,000 to 5,000 units a month.

But IBM completely halted its Russian assembly operations in 1995. High import tariffs on computer parts made the company unable to compete with allegedly charitable organizations that used their privileged status to import PCs tariff-free, said Alexander Yeremeiko, electronics engineer at Kvant.

IBM now is dipping its toe back in the pool as it prepares to open what it calls a configuration center in Moscow, which will be owned completely by IBM's Russian partners. IBM will continue to produce its PCs in Scotland, while the Russian partners will import them and tweak the computers' configuration to customize them for clients.

"We studied the configuration center program because it will be more effective than opening any kind of assembly center," said Arkady Zarkhy, director of the IBM PC Company, Russia.

IBM, too, is focused on the corporate market, saying Russia's ministries, manufacturers and banks are its big buyers.

Russia's PC makers may have a lock on a large chunk of the Russian market, but whether they can develop into world-class technology innovators on par with the foreign giants is doubtful, industry experts say.

The likes of IBM and Compaq are represented on industry standardization committees that ensure new technologies will fit all major PC formats, and major PC manufacturers invest millions in research and development each year.

"I can believe [Russian companies] can find bright people here to invent some things, but you need to be in constant partnership with Microsoft and Intel" to become a top-notch PC innovator, said Compaq's Gorodnichy. .

Farish agreed. "IBM sells enterprise servers that cost $3 million, as well as mainframe computers and semiconductors," he said. "You won't find any Russian company selling those. Russian companies are strongest in Russia and in the market for desktop PCs."

And in 20 years?

"Maybe 20 years from now we won't be using PCs at all," he said.