TAG | Acer Inc
Acer Computer Russia (Case Study)
Assignment Questions for “Acer Computer”
1)How did Acer break into the Russian market?
2)What were the difficulties in building a distribution system?
3)How has Acer’s marketing strategy evolved?
4)Why did Acer decide to build computers in Finland? Was this a good decision?
ACER COMPUTER (May 22, 1996)
Acer Computer International is part of the Acer Group, a $5.7 billion Taipei-based personal computer manufacturer, the seventh largest in the world. In Russia, Acer was the fastest growing brand name PC company in 1994, although it is still behind Hewlett Packard in terms of revenues, Acer’s sales in Russia were $2 million in 1993 (last quarter only); $22 million in 1994; and expected $50 million in 1995.
Acer Computer’s worldwide products mix is roughly 77% personal computers, 14% computer servers and 9% notebook PCs. The Acer Group also has many business units which manufacture key computer components such as monitors, memory chips (through a joint venture with Texas Instruments), motherboards, and chips sets. These business units provide a percentage of output to Acer Computers, but also sell to other companies.
Although Acer Computer International is a Taiwanese company, it moved its headquarters to Singapore in 1993. Acer Computer International went public on the Singapore Stock Exchange in September 1995.
Acer’s corporate character seems will-suited for Russia. Its a company known to take risks, to look at all markets long-term, and to target emerging markets.
BEGINNINGS OF ACER IN RUSSIA
Back in 1989, the president of Acer Computers in Taipei, William Lu, arrived in Moscow. The USSR was opening up for business and few foreign companies were taking an interest in the market. In staunchly anti-Communist Taiwan, no one knew much about the communist USSR. Both countries had closed and bolted their doors to each other for decades.
Acer, however, typically targeted emerging markets and Lu believed it was time to enter the Soviet Union. The USSR was grossly under-computerized and Moscow officials were promising to buy tens of thousands of computer through government lenders. Lu figured that if he established good relations with Moscow, Acer would have a competitive advantage when bidding on contracts.
But in order to win tenders, the Soviet government was dictating terms of mutual cooperation, with foreign business. Party officials wanted investment in big manufacturing projects in hopes of bailing out a sick industrial sector.
Importing and selling computers would be overly ambition, as everything would have to be built from scratch in a country without knowledge of how a free market systems works. There was virtually no private business sector – nor infrastructure to encourage the growth of one. Distribution was centralized in Moscow; there were no privately owned distribution companies or dealer outlets. No foreign accounting or legal services were in a position to advise foreign companies. Everything has to be done through the daunting government bureaucracy. Lu reasoned that establishing a computer assembly joint venture – as the Soviets wanted – would give Acer a government partner and greatly increase chances of selling computers on a long-term basis in the vast Soviet Union. The market, with a potential 270 million consumers, was not small.
Such a dazzling opportunity brought Lu to Moscow many times, as he carefully cultivated government contacts and inspected several state-run electronics companies. He found an electronics factory and eventually a joint venture contract with government for a computer assembly operation was drawn up. In November 1989, a few days before the contract was to be signed, President Gorbachev relinquished control of Eastern Europe, effectively ending the Cold War.
Acer felt the impact immediately. Although the Soviet Union was still intact, the countries of the East Bloc were liberated and Moscow was shaken up. Politicians were uprooted or reshuffled. Sources over supplies, transport networks, and export markers were cut off. There was government-level discussion encouraging the Communist Party to give up its monopoly on power and compete with other parties (Note:This happened in February 1990). The USSR was chaotic. Lu’s communications with government officials were broken. He couldn’t even contract the people he was originally working with. All this months of work had been in vain. Acer backed off the Russian market.
Acer had its own turmoil in 1990. The company took a $22.7 million loss and laid-off hundreds of employees – an action previously unheard of in a Chinese company. In late 1990, Acer re-hired new employees and brought in some Westerners at the middle level of management to give the company a more international flavor. One such employee was American Steve Kuzara, who was hired as a marketing specialist.
Later in 1993, two years after the collapse of the Soviet Union, Russia seemed to have achieved some relative stability. Foreign business was pouring in and selling to the vast, undersupplied market.
By this time, Acer has gained some valuable experience in emerging markets with operations in Latin America and Asia. William Lu asked Steve Kuzara if he wanted to give Russia a try and open an Acer representative office in Moscow. Steve had expressed and interest in Russia with he first began working in Acer in 1990. Lu felt Acer has been burned in the Russian market and he wanted to approach it cautiously this time. “It was a situation where they said ‘OK, we don’t expect a lot from Russia, but this guy is willing to go out there and do it, so we’ll see what he comes back with.” recalls Steve. He was 29 at the time.
Steve took some Russian lessons and researched the Russian market. Management wanted mainly to see the three-year business plan with revenue projections, manpower planning, budgeting, infrastructure development, return on investment, how much additional up-front capital was needed to support the operation and based on this upfront capital, how much they can get back in the subsequent year.
Two big obstacles awaited Acer. One, the competition had already established themselves. Acer entered the highly-competitive Russian PC market rather late. Acer competitors such as Hewlett-Packard, Dell Computers, Digital Equipment Corp., Apple, and Compaq were already there. IBM and ICL even had local assembly operations set up. Acer was unknown in Russia.
Second, there was a stigma against computers made in Asia. The first wave of computer sales in Russia in the late 1980′s and early 1990′s was dominated by thousands of defective Asian-made clones, which pretty much fell apart and tainted the reputation of PC’s made by Asian companies. Taiwan-based Acer has to establish a brand name, overcome this stigma, and take market share from first tier competitors who were already entrenched.
Steve’s plan asked Acer for operational expenses of $100,000 and $250,000 for promotional funds. Steve would initially base himself at Acer’s Singapore office and fly to Moscow for periods of item to set up the business.
Before Steve left for Moscow, he had vacation time coming and decided to spend the free time in Russia to get initial impressions of the country in a non-business setting. He went with a backpack, on a train through Eastern Europe to Russia, staying with a Russian family. He soon discovered a fundamental characteristic of Russian business: the importance of connections. The Russian family he stayed with had invited a relative to dinner. “When he found out I was in the computer industry, he said he also worked for a computer company, which happened to be Steepler, the largest computer distributor in Russia,” Steve recalls.
At the time Steepler dominated the Russian market and had offices in Taiwan, Germany and in the US. The next day the relative contacted the president of Steepler, a meeting was arranged between the president and Steve, and soon, in July 1993, a contract was inked. Acer’s had signed its first Russia distributor. For an analysis of the actual and potential market for office computers in Russia at this time, see Exhibit 2.
$2 MILLION PER MONTH FROM AN APARTMENT OFFICE
To set up Acer’s office, Steve rented an apartment in Moscow, bought a fax machine and worked as a one-man operation for several months. In fact, in 1994 when Acer was racking up $2 million in sales per month, Steve was running the company from his flat. He didn’t want to sign a lease and be committed to an office until he was thoroughly familiar with business conditions in Russia. Real estate is expensive. A low-to-mid range Western-type office in Moscow is about $700 per square meter per year—a price comparable to prime office space in New York City.
“There are a lot of tough businessmen in this market,” he says. “There are sharks waiting for you around every corner and I wanted to know the situation here well before making any commitments. My strategy was to get locals to guide me around, get me farther ahead on the learning curve, and then make a commitment.”
By default, Steve worked with limited help from the home office. Acer considered the Commonwealth of Independent States (CIS) market to be under the jurisdiction of Singapore headquarters (as opposed to Acer Europe). It was difficult to get someone from distant Singapore to enthusiastically support the Russian operation—much less convince some employee to live in cold and remote Moscow. Additionally, Steve didn’t want the drain on his modest operational budget.
“When Acer started, things happened quickly because of various delivery conditions and the price position we were able to deliver. We expanded fast. I was juggling the legal, administrative and channel development issues, the logistics, tax issues, promotion, lease agreements. I was on a first name basis with the staff of KPMG and Baker & Mackenzie. They all thought I was some kind of small entrepreneur. I also leveraged my local partners for help. For even silly things. Once I went from Singapore when it was 30 C to Moscow where it was minus 30 C and became quite ill. My partners brought me home remedies from their wives and vodka, which they insisted would help me.”
Acer Russia reached $2 million in revenue in the last quarter 1993 and became profitable. In June 1994, Steve hired two locals. In the early days Steve had spent a lot of time at the Aerostar Hotel in Moscow. He noticed the relative efficiency of a girl working at the reception desk. She handled customers well and was polite and responsive—unusual considering Russia has a reputation for notoriously bad service. In short, she had a grasp of the Western notion of service. Steve asked her if she wanted to work for Acer. She wanted to stay at the Aerostar, but recommended some friends to Steve for consideration. From these recommendations and others, Steve hired Veronica Brezgounova to be Acer’s marketing director. Veronica had no marketing experience at all and was sent to Acer in Singapore six times for training.
Steve also hired an administrative assistant, Yuri, the son in the Russian family who he had stayed with during his first visit to Russia. Yuri was 19, has a deformed heart and won’t live much longer. “He was sitting around the apartment without purpose, so I hired him as administrative assistant,” Steve says. “He’s interested in computers and assists in data base management, he does a great job and makes more money than his parents—and they are PhDs. So it was the three of us. Veronica, Yuri and myself.” Today, Acer Russia has 27 employees in Russia and another 30 in Finland.
To hire solid employees in Russia, the best solution is not to place a want ad because thousands of people not remotely qualified could show up claiming they could do the job. The concept of the résumé is new and the idea of “selling oneself” to an employer is alien to Russians.
Acer learned that experience or education is not considered prime criteria for hiring. Veronica adds: “You can find people in industry with great experience and hire them and they’ll sit on their hands. Experience isn’t the factor.” In Russia, employers often hire people by “getting a good feeling that the person will work out.”
Steve says: “I notice that the person with what I call the ‘Soviet’ mentality, when going from point A to point B, will focus on the obstacles. When given a task this person will immediately assume it can’t be done. He will look for and highlight the problems rather than look for the solution. Veronica, by comparison, was honest about her lack of experience. But she said she was willing to learn, to work extra hours if necessary, to do multiple tasks: getting coffee for a guest, cleaning, traveling—a panorama of responsibilities. The others didn’t seem willing to assume responsibilities outside of their official job description. They expected little of themselves. Their attitude seemed to be ‘What can the company do for me?’”
Acer’s office in Russia would differ considerably from its other offices worldwide. Seventy percent of Acer’s worldwide business is conducted through their own office in each country. They import, keep stock, distribute and often link up in a joint venture with a local company. But in Russia, the issue of tax demanded that Acer operate in a slightly more novel way.
Russia’s taxes are always changing. Old laws and new laws are arbitrarily enforced and rarely followed precisely. Import tax can be anywhere from 10%-15% for assembled PCs, depending on the origin of the product. Additionally, components such as monitors or CD-ROM drives are taxed 5%-8%. That may sound fairly reasonable, but there are many hidden costs. Vladimir Prosikhin, president of Lanck Computers in St. Petersburg, an Acer master distributor, says that other taxes such as Value Added Tax, a “special tax”, and the “President’s tax” add up to an additional 30% of the cost of the computer. Everything must be paid before the product can cross the Russian border. Often, even more hidden costs arise at border crossing points. It is widely known that customs officials extract bribes and organized crime demands extortion payments from companies importing goods.
“There are some legal ways to lower the import taxes and some illegal,” Vladimir says. “As a rule, a company uses most legal ways and some illegal ways. Unfortunately, 99% of business must [use illegal ways] to survive, to grow. It is very difficult to separate growing potential from survival.”
Acer looked at the way products were being imported into Russia and Steve knew the company couldn’t set up its own infrastructure and keep its own stock, because that meant clearing customs. “Being a foreign company, that means we’d have to pay all taxes, and it meant getting involved in a bribe scheme. Put simply, we would have to play by a whole new set of rules which we are completely unfamiliar with. Besides, it’s unethical. This is a very unique situation in Russia.”
So Acer set up a representative office which does all the functions of a usual subsidiary, but the only difference is it doesn’t make financial transactions within the Russian customs territory. The company is paid in dollars through overseas telegraphic transfer (TT), in cash. After the distributor pays, he takes over the importation and deals with taxes and customs. When an Acer product crosses the Russian border, it is in the Russia distributor’s name. This payment arrangement also offers Acer protection against rouble value fluctuations. No waiting for late payments while the rouble loses value.
“How they clear customs is their business,” Steve says. “I know how some do it, don’t know how others do it. Each distributor has his own import technique and its kept secret from Acer. To be honest, it’s ridiculous for me to ask. This is truly a Russian issue. It’s not only the computer industry but many industries that do this. From our perspective, our original outlook was ‘This is illegal.’ Because we pay taxes. Everything about our representative office is completely legal. To really understand and to accept it you have to be here. It’s just the way it is, so you have to make the decision to accept that it happens and not participate in it.”
As Steve got the office up and running, he realized that the major task for Acer in Russia would be distribution. Solid distribution channels take time to build, but they would be absolutely essential to Acer’s Russia operation. As Steve points out, a computer company could just come in and hunt lucrative government contracts, ignoring distribution and dealer channels. Such contracts involve the purchase of hundreds or perhaps thousands of computers at a time. But a reliance on contracts makes for a wildly unpredictable business.
“Distribution channels are something you can count on every month. I don’t want to chase government contracts and have to explain to management why last month I did $2 million and this month a fraction of that. That’s a problem the competition has. Many tend to look at the market like it’s only the icing on the cake.”
Distribution in Russia presented unusual difficulties. Acer would not be importing and then distributing as it does in other markets. Moreover, private sector distribution is a relatively new concept in Russia, meaning Acer would need to educate distributors and maintain strict hands-on control in the initial stages. And, as Steve quickly discovered, giving Acer computers to an exclusive distributor would never work. The problem would indeed be complicated. But the long-term success of Acer in Russia would hinge on building and managing distribution channels.
DISTRIBUTION IN RUSSIA
During the seven decades of the Soviet Union, distribution was handled by huge government organizations mysterious to the general public. Concepts such as timely delivery, market feedback and follow-up service were unheard of.
Two economies characterized the USSR. The main one was the high-priority military economy in which mammoth factories churned out a vast array of goods to feed the military machine. The second was the low-priority consumer economy in which factories turned out consumer products. Everything was run from the top by the government in Moscow, where planners determined how many of which items would be available where.
Distribution organizations played a passive role, simply allotting products to various retail outlets. For example, a shipment of 10,000 bicycles arriving from the factory would be divided up to various cities throughout the USSR as determined by Moscow’s Central Planning Committee. Quality was not a key issue. As long as the bicycles rolled on two wheels and weren’t obviously damaged, they were distributed.
As Russia opened up to foreign products in the early 1990s, private distribution agencies sprung up to distribute them. Of Acer’s six master distributors (distributors which do the importing) in Russia, not one of them existed until the beginning of the 1990s.
As a result, Russian distributors are far back on the learning curve and Acer spends much time educating them. For example, distributors didn’t understand the necessity of building channels. They preferred to sell to people who walked into their office: It was easy money and required far less effort. They were more interested in short-term profit than long-range planning, Steve recalls.
Another example occurred when Acer established an elementary incentive program. The more volume a distributor moves, the higher percentage of discount it receives from Acer when buying the next shipment of computers. The distributors also provide these incentives to their dealers, so at the retail level, incentive to sell exists. The incentive program was coupled with aggressive advertising from Acer. Yet the program wasn’t immediately accepted.
“Distributors would come to me with a “PC World” magazine from the US and show me the price of an Acer computer and ask why it’s so much cheaper in the US,” says Steve. “They were convinced I was withholding big profit from them. I had to explain economies of scale, the fact that a US operation moves $1 billion worth of product. Russian distributors are not looking at the whole picture. They don’t understand how efficient a market economy can be.”
In Russia’s fast-changing market, distributors must be open to new ideas, nimble and flexible, and above all trustworthy. Therefore, selecting a distributor requires great care.
Certainly, a practical evaluation is crucial when choosing a partner. Vladimir Prosikhin, president of Acer master distributor Lanck in St. Petersburg, mentions some of the more practical areas Steve evaluated when looking at Lanck:
“Financial management is important. The company should be capitalized well enough. It should be the company’s responsibility to get start up capital, otherwise they will have the mentality of people asking for money, for support, for many things.
“There should be a business plan from a prospective distributor. Channels should already be established, including access to large accounts. The distributor and his dealers should have a clear strategy to develop their market and their channels.
“Some kind of Western approach to the business is preferable. For example, Lanck believed in marketing. I spent tens of thousands of dollars on exhibitions. Lanck was five times smaller than its competitors, but it grew very fast because of marketing. It was a risk to spend so much on marketing, but it paid off.
“Finally, there should be some indication of previous success. It was known that Lanck was built from nothing with little start-up capital.”
Practical matters aside, in Russia, a mutually viable partnership could likely be built more by emphasis on personal relations than on the Western method of evaluation of credentials. Connections and networking have traditionally played a role in Russian culture. Today, because the system of laws and especially the legal settlement of business disputes is only evolving, both foreign and Russian partner feel they must personally know and have a good feeling about the other.
Steve began to understand that relationships play an important role when he was looking for Acer distributors:
“How do you feel about the guy? In the past I’ve rejected people just because I didn’t feel good about them. Their attitudes, their mentality were somehow wrong. By comparison, I had a good feeling about Vladimir (Prosikhin of Lanck). The way he started up his business and was reinvesting profits to grow—it was unusual in Russia. Also, he’s a student. If you told him ‘Here’s what the Russian market will look like in six years,’ he’s one of the few who would listen and think about it. Even though he took his business from $200,000 to $2 million in a year’s time, he still listens.”
The background of the company Lanck attracted Steve. Lanck’s beginnings were more in the style of an American start-up, a rare occurrence in Russia, which has no tradition of entrepreneurship. Lanck’s beginnings go back to 1992, when Vladimir Prosikhin, a Ph.D. in optical and plasma physics, knew that the Russian government would no longer financially support the sciences as they had in the past.
Vladimir saw that there was a need on the. St. Petersburg market for modems. During this time, his wife happened to be in the US and he asked her to buy 40 modems and send them to St. Petersburg. He sold the modems in Russia, sent the money back to his wife in the US, and she sent him 80 more modems. Vladimir sold them in two weeks, sent money back to her and she sent him 150 modems. He sold those, and with the profits he rented a small retail space, called his friends to get some modest computer equipment to sell on a consignment basis, and Lanck was established.
Prosikhin raised working capital from friends in the US, began distributing computers and signed a couple of large accounts. In 1993 the market was turning from an emphasis on low price to a preference for brand name computers. Vladimir believed it was a matter of survival to find a brand name to deal with. After Steve visited St. Petersburg in 1993 and found it was Russia’s second biggest market, he searched for a local distributor and found Lanck.
BUILDING MULTI-CHANNEL DISTRIBUTION
In Russia, Acer management looked at the structure of the market and decided to establish a multi-channel strategy, an idea which the company had no previous experience. Acer is known for working well in other emerging markets such as in Asia and Latin America. But in those countries experience gained is more on the marketing side, on how to position a brand name product. Acer had no experience with managing multi-channels.
A multi-channel strategy means no exclusive distributor would handle Acer. Instead, Acer would use many different distributors, a set up that eventually created competition between distributors—and caused tension and resentment between them and Acer.
A sole distributor can be more loyal and focused on one product. But few distributors are big enough or have enough capital to provide distribution through the vastness of Russia. Acer didn’t want to rely on one distributor.
Steve explains: “These are young, new businessmen running the distributorships and each has his own ideas on how to sell to dealers. In the case of an exclusive distributor, any mistake will completely reflect on the performance of the manufacturer.”
Acer began with multiple channels right away, signing, in addition to Steepler, KAMI and Compulink. In St. Petersburg, Acer found Lanck and in the Far East, CIT. But every new distributor Acer added brought complaints and even threats from existing distributors. It was the beginning of a very difficult time for Steve.
“’Exclusively’ was all we heard from distributors. We were reluctant to give exclusively and our distributors had problems with that. We had Steepler, and Steepler was saying, ‘Look at [Acer competitor] Dell [Computers] and its distributor, IBS. They have an exclusive relationship—only IBS can sell Dell PCs in all of Russia. And they do great.’ They do good, we said, but we’re not sure that’s the right strategy for us. [Note: Acer surpassed Dell in sales in 1994]
“Of course the reason is that they didn’t want the competition. If they have exclusivity to the Acer product in Russia they’ll be extremely wealthy. It’s true. But it’s in their interest and not ours. So we had to find a compromise and it wasn’t easy. They’re not used to a free market economy like we are. So I was manipulated a lot on that. In any direction, they would try to manipulate me. They would try to discredit me by saying my recommendations to Acer management [in Singapore] were not right for Acer. I was 29 in 1993. That was another issue. I had all credibility built up in Acer, but coming out here it was different.”
Then, the market underwent some swift changes. In 1993, competing manufacturers were putting a premium on their computers in Russia to take in more profit than they would in other markets. Distributors benefited. KAMI and Steepler were reaping 50%-200% profit margins on computers, Steve recalls. Suddenly, many distribution companies began to come in, taking notice of the fat market. As a result, distributors’ profit margin began to drop dramatically. Today it’s about 15%.
“They never recovered from that big drop,” says Steve. “They blamed Acer for it! The market was evolving and they were not adjusting their organizations and cost models accordingly. They completely disregarded the big picture, the natural development of the market. It’s all new to them.
“Everyone was looking at this market like it was gravy,” says Steve. “No one was fulfilling the need for brand name, low cost computers. Before Acer came in, my first conversation with Acer management was that I want the same price as we sell in other markets. Don’t make me incur another 8% to offset other contracts in Asia. They agreed, so we came in and were extremely competitive. We started the trend here for manufacturers to adjust their prices and they did, but in some cases it was too late for them.”
While Acer’s multi-channel approach came under fire, it seemed to work. But at the same time, a danger existed. Vladimir Prosikhin comments: “Acer’s approach works, but from the point of view of the distributor it is not always good. The distributors can start to compete with each other, push the price down to the lowest point possible, and they can just burn this market, break it, because dealers will have no room for profit. Then the only way out for the manufacturer would be direct sales, no distributors at all, and I don’t think that approach would work in Russia.”
Indeed, selling direct in Russia is not an option for Acer, says Steve. Acer is completely tied to its channels. So he brought the distributors together several times and explained that it is unnecessary to cut prices so low, that Acer is the most profitable PC business opportunity in Russia and will continue to increase sales. It was crucial that they understood volume was more important than profit at that stage, he recalls.
Steve also tried to select distributors that wouldn’t compete head-on with other Acer distributors. For example, Steepler (who had subsequently changed their name to Lamport) was selling 60% of their computers from their shop. Customers would come to them and this approach didn’t conflict with KAMI, which focused on big government contracts, or Lanck, which was in St. Petersburg, a different region. The idea is to ensure everyone can live together. The problem is more complex, however. Distributors have personal wars with each other, trying to take each other’s dealers, and the problem continues.
Steve explains that foreign manufacturers often try to reap unusually high profits when they enter the Russian market, putting a premium on the sale price of the goods. When he first wrote a Russia business plan for Acer management, he specified that “One thing I won’t be caught in this game of trying to get more profit from the market,” he recalls. “So Acer in Russia has the exact same prices that we do in other worldwide markets, excluding variables such as ad budget, overhead cost, tax structure, transportation costs. But from the cost-of-goods-sold point of view, we have the same price.”
This approach was another aspect of the long-term view Acer took in Russia. Market share, Steve says, is everything. If a company can build up market share, profit comes later in large amounts through fine adjustments of the operation. If there is a market downturn, the companies with strong market share and lean operations will have the economies of scale to survive. “So if there is a shakeout in Russia, as long as we have a big channel and are moving big volume through it, we’ll still be here. I wanted to build up the channel fast and ramp up volume. It’s more difficult to bring down a machine like that.”
LOGISTICS: PAYMENT & TRANSPORTATION
Logistics—mainly payment and transportation arrangements—played a vital role in Acer’s success. There are virtually no bank guarantees and no letters of credit for Russian companies, which have no credit histories. Acer, Steve says, is a financially conservative company, a manufacturer in a highly competitive industry. The company was reluctant to ship goods unless the shipment was prepaid. Acer didn’t want to be stuck with excess inventory should distributors not take the shipment they had ordered. However, a pre-payment system presents problems.
Most of Acer’s PCs were being shipped from the Taiwan factory, taking 35-40 days by boat to Europe and a further 12 days by truck from Europe into Russia. Russian companies have little working capital to pay in advance. Russia is virtually void of a financial infrastructure that can support domestic commercial activity. Few venture capitalists are found in Russia and the stock market doesn’t support start-ups like in the US, where a small company could get capital based on a business plan alone. Companies use solely their own capital, which is limited.
A distributor’s working capital is spread thin when he grants credit to his dealers, so he doesn’t have a lot of money left over to buy more computers from Acer. But the problem is not so much with the master distributors now as it is at the channels below him—the second level. Dealers also face a working capital problem. As the market continues to develop, the problem will be pushed to the third level and so on until one day the consumers are granted credit to buy computers at the retail level.
Bank financing wasn’t viable until the summer of 1994. Until then, interest on bank loans were in three digits. Now most of Acer’s distributors use some degree of bank loans at roughly 25%-40% annual interest. Some distributors work with German banks, which demand 60% deposit on the loan. But conditions will improve as the distributor builds a credit history. Obviously, Russian distributors can’t afford to have their product tied up on a boat or sitting at a border for weeks.
The pre-payment arrangement makes speed of delivery essential for the distributor, but Acer also needed to move the product fast from factory to distributor. The CPU [the microprocessor, which is largely supplied by Intel Corp.] prices are slashed quarterly or sometimes monthly by Intel and it is usually a 30%-40% drop in CPU price. That means a big drop in the pricing structure considering that the CPU accounts for over half the value of the PC.
Acer tried to find the fastest way to bring the product to the distributor. Steve recalls: “We tried shipping the goods to Vladivostok [from Taiwan] and then by train across Siberia. If you are shipping shoes or bubble gum that may be OK—you lose a container and it’s not a big problem. But with computers, forget it. You’re lucky if the product arrives at all. There are delays and theft and infrastructure problems. And you don’t know what happened to the product. There is no information here. To get an answer, you must go to the place and talk to the people directly, only to find out you can’t do anything. So I was flying to the port [at Vladivostok] to talk to the port director and ask what happened, and it was all for nothing.
“We looked at every possible way to bring the product in. Finally we found Stevoko Oy, a freight forwarder in Kotka, Finland. They manage the whole container when it arrives and ship it onward by truck into Russia. Going through Finland, we could maintain control of our product. The infrastructure is advanced. It’s Western. So we could ship into Russia five days after payment is received.
“That freed up the working capital of our partner. He could turn his money around much faster because delivery is so quick. If a distributor has $1 million in capital, for example, and Acer can supply the computers in two months, theoretically the distributor can only rotate the money a maximum six times. But reduce delivery to one month and he could double revenue. We try harder to get the product to them in the least amount of time. When your local partners are profitable they’ll work with you. Remember that it’s not that the market won’t accept the product, it’s that there is not much free working capital to buy the product.”
THE DECISION TO ASSEMBLE COMPUTERS
Acer’s Russia strategy had been strictly computer sales. But it soon became clear that a computer assembly plant to serve the Russian market was necessary. PCs are a commodity and Acer wanted to bring more speed and efficiency in the delivery of goods to its distributors in Russia. The bulk of Acer’s computers were being shipped in from Taiwan by boat.
“Every third month I could sit down with my distributors and show how uncompetitive they’d become with this shipping of finished goods from Asia. If we have, for example, 1200 units [two cargo containers of PCs], that’s maybe a normal month’s order for [Acer distributor] Lanck. On the same order, over the two months it takes to ship the PCs from Asia, there’s a $150 drop in price of the 486Dx2-66 CPU. They’ve lost $150 worth of competitiveness [per computer]. Because they bought at one price but it’s in the market competing with lower priced brands that reflect the more recent CPU pricing. Although, I wouldn’t say it’s a huge disadvantage since other foreign manufacturers face the same problem, it is an issue that [if corrected] could give our distributors an edge.”
Acer made a significant step in October 1995 when it inked a contract to set up a PC assembly operation in Lappeenranta, Finland, close to the Russian border and about three hours drive to St. Petersburg. By the beginning of 1996, Acer plans to be assembling about 6,000 PCs per month at the Lappeenranta plant. The operation is a joint venture between Acer, the Japanese conglomerate Sumitomo and Wilson Finland OY, the Finnish branch of a Swedish freight forwarder.
Sumitomo, a huge multi-national involved in various business sectors—financial services as well manufacturing—is a minor shareholder of the Acer Group. The two companies work together on trade financing in many different markets. In Russia, Sumitomo is heavily involved in buying raw materials in Siberia and is also working with the Russian government on telecommunications and power generation projects. In Acer’s Russia business, Sumitomo supports in finance issues, allowing Acer to better focus on manufacturing and marketing PCs.
Steve weighed the decision to set up in Finland instead of Russia. One issue was image. A foreign manufacturer could have its brand name image tainted by making products in Russia. There are three colors of computers known to distributors and consumers in Russia. “White”, meaning the product is manufactured in North America or Europe and considered high-end; “Yellow”, meaning manufactured in Asia and considered middle-to-low end; “Red”, meaning manufactured in Russia and considered low-end. A local assembly operation would mean Acer would be perceived as a “Red” computer and again have to fight an image problem.
Competitor IBM is assembling computers locally with a Russian partner. But Steve believes that assembly is premature and that IBM has an image problem with the consumer. IBM’s local product is perceived by the local consumers as “Red,” he says.
There are some advantages to local assembly. For example, IBM in principle holds the upper hand when bidding on huge government tenders. A law passed by the Russian government declares that government agencies cannot buy a foreign made computer if there is a locally-assembled computer available with comparable quality. But, Steve says, although the law has been passed, government agencies rarely abide by it when procuring computers.
As for manufacturing costs, on paper, a Finland operation does indeed carry much higher costs than a Russian one. Finnish labor for Acer’s assembly operation, all taxes included, is roughly $3500 per month, per person. In Russia, Acer could hire the same type of employee for about $900 per person per month, all taxes included. [Note: The actual wage in Russia would be roughly $400 take home; salary tax is more than 100%]. (See Exhibit 3 for an independent—not associated with Acer—assessment of the costs of producing generic computers outside Moscow compared with import prices.
But Finland offered European-level stability. For example, a significant productivity difference exists between Russia and Finland. “You can easily justify half of this labor cost difference with the efficiency, productivity and consistency of the Finnish workers,” Steve says.
Another problem with opening a Russia plant could be theft. A PC assembly operation involves containers of CPUs that cost hundreds of thousands of dollars. CPUs can easily be shipped into a pocket and sold to local clone houses at heavy discount. Acer has had such experience in other emerging market countries, Steve adds.
Manufacturing in Russia also carries many hidden costs and hidden risks. An Acer joint venture would require an honest partner. There have been documented cases of Russian partners seizing control of the joint venture and pushing out the foreign partner. Organized crime targets foreign businesses and is assumed to wield strong influence in government. Security would have to be recruited at a large expense. Manufacturers with capital equipment and high volume production especially need large security staffs.
“Some of our distributors like Lamport [in Moscow] have very high security. That’s a serious cost consideration, especially when dealing with a high-end, high-profile product. There is no way we can operate an assembly operation in Moscow without people sniffing around, seeing a lot of trucks pulling in and the boxes piling up. You’re just waving a flag.”
But the primary issue—the one which sealed the Finland decision—was the likelihood of being shut down.
“It doesn’t matter who it is: Fire inspector, zoning committee member, mayor for that region, anybody can come and shut you down in five minutes. The fire guy could come, find fire hazards and demand $50,000 into his overseas account. They know that if you shut down production for a few days, you’re going to lose a lot more than $50,000. Then there’s the legislation. It could change overnight and new regulations and new control measures that are unreasonable would become law. That happens often in Russia.
“If we were forced to shut down, we’d lose everything we’d built up to that point. Because building and maintaining a channel is very costly. This was my biggest worry—of losing the channel. It’s really an unstable environment in Russia. Finland, by contrast, is quite stable. Cross that [Russian/Finland] border and the difference is amazing. You can instantly see it and feel it.”
Timing was right for Acer in Finland. As the USSR’s largest trading partner during the Cold War, neighboring Finland was hit hard by the Soviet Empire’s collapse. Now a European Union (EU) member, Finland is trying to utilize its Soviet Business experience to position itself as the European gateway to Russia.
As a result, many Finnish companies aggressively courted Acer, offering big incentives to set up shop there. Wilson Finland won out. Wilson has a strategic relationship with the government of the Lappeenranta region of Finland where the proposed factory sits. Wilson officials worked with the labor board to get Acer a four month 50% discount on the salaries of the assemblers. The government will offset the other half. If offered free rent on 3,500 square meter building for six months, all utilities included. Wilson also pledged to donate $500,000 to outfit the factory to Acer needs.
Also, Acer is taking advantage of “Inward processing,” a new enticement designed to encourage the use of EU labor that was established after Finland’s entry into the EU in 1994. Inward processing allows Acer to ship its components from other non-EU countries to Finland, where they are assembled and re-exported to Russia, tax-free.
ACER’S “FAST FOOD” APPROACH TO COMPUTER ASSEMBLY
Acer has been credited with inventing the “fast food” approach to computer manufacturing, known as the “Uniload” concept. Uniload is a manufacturing strategy that allows Acer to supply “fresh PCs” a short time after the customer specifies the configuration.
Instead of a few main worldwide assembly points to service all Acer markets, computers are assembled downstream, in or near the destination market, at one of Acer’s standardized assembly lines. Components are either flown in or shipped by boat from various locations in Asia, the US or Europe, depending on shelf life and cost.
Using the Uniload method, computers can be configured to local tastes, hence the label “fast food”—Acer can say to the customer “Have it your way.” But more important, the components with the shortest shelf life and constantly falling price can be ordered and put in the machines just in time before shipping.
An Acer computer can be broken down into seven main components: The keyboard, monitor, casing, power supply, motherboard, hard disk/floppy drive and the chip set (which includes the microprocessor [CPU] and memory chips such as dynamic random access memories [DRAMs] and static random access memories [SRAMs]). Optional parts include the CD-ROM drive.
About half of the components of an Acer computer are made and sourced in Taiwan. These include the computer casing, the power supply, motherboards, floppy/CD-ROM drives. Acer itself has many business units, some of which manufacture these components. For example, Acer makes motherboards, casings, monitors, power supplies, and, through a joint venture with Texas Instruments, DRAMs.
For Acer’s Russia operations in Lappeenranta, Finland, computer casings, power supplies and other low value items are shipped by boat from Asia. Shipping by boat takes roughly five weeks. The chip sets, which include the microprocessor and memory chips—70% of a computer’s value—are flown in by air, chiefly from the US. These are ordered as late as possible. The components arrive in Lappeenranta where they are assembled by Finnish workers at Acer’s new plant.
On paper, the procedure works as follows: Each month, Acer Russia forecasts the number of computers Acer will need for the market, but the configuration is not specified. On the fourth of each month, Acer receives orders from its distributors. Acer will then, in turn, place orders for CPUs and HDDs and get that day’s pricing for those high cost items. For example, Acer will order CPUs from Intel and AMD and hard disk drives (HDDs) from Seagate and Conner Peripherals. Within five days these components arrive in Lappeenranta by air, and they are assembled into the computers which have been waiting.
“In an ideal situation we can probably assemble and deliver [to the distributor in Russia] within two weeks maximum. With high-volume components, the shelf life is only three weeks. So we’ll have three week-old pricing—an accomplishment that is very, very difficult to achieve in this part of the world.”
Before Lappeenranta, Acer asked for money by telegraphic transfer up front. Now, however, Acer allows Russia distributors to buy in Finland. One of the benchmarks Acer uses is the going interest rate on the market. In Taiwan, Singapore and the US, market percent rates are similar, usually around 1% per month. But in Russia, last year the market rates reached 5% per month. So it is much cheaper for Acer to provide international market percentage rates and give the distributors a slightly higher price, rather than expect them to pay the high Russian interest rates.
RUSSIAN BUSINESS, ETHICS, AND OTHER DIFFICULTIES
Understanding the Russian mentality has posed the most difficult problems, Steve says. For example, the Russian tendency toward sweeping vision with little attention to the practical details was one frustration.
“When Russians talk about a tender, or give financial projections, they are a lot more grandiose than in reality. If a Russian distributor or government official comes to me and says ‘I have a $5 million project’, you’re lucky if it’s $2 million. Cut it in half and divide by three and you’ll get to the real numbers. I don’t know if this is intentional. I’m not criticizing them because the free market system to them is very new. But you have to understand that this makes the planning process very difficult. When you work for a corporation, short term, medium term and long term planning is everything. Especially when you’re a manufacturer. In the computer industry, we need to look at three months forecasting. Because we have centralized materials and component procurement, all the planning, even down to the plastics, metals, the CPUs, the CRT tubes is vital.”
Another problem, particularly trying, resulted from the absence of common Western business ethics and the Russian penchant for political maneuvering and intrigue within the organization. Steve says he has discovered business documents forged in his name (with his name spelled wrong), which were delivered to the Russian government. Distributors have attempted to go over his head and make complaints about him to senior management in Singapore, all in effort to gain some form of advantage or benefit. Some have also tried to exploit Acer’s policy for their own personal gain. One example Steve recalls involved Acer’s agreement to pay distributors 50% of all advertising they did for Acer. Veronica received several invoices for the same advertisement, or sometimes invoices from friends of the distributor or non-existent companies, all of which claimed to have done advertising work. Russians seemed to engage in such practices openly and with a disregard for consequences.
The lack of ethical procedure is derived from many sources. Russia has little history of private business and no established traditions that spell out business ethics. During Soviet times, spreading rumors, gaining favor and exercising influence were common methods of getting special privileges and advancement within the organization. Moreover, economic uncertainty creates a short-term mentality among Russians that encourages lawlessness.
“Every day was a frustrating experience,” Steve recalls. “I was taking much of it too personal. A lot of it was my lack of experience in dealing with big distribution projects like this. I don’t see that there is an understood concept here, like in the West, of Win-Win. In the West we believe we do business and I win, you win. But here in Russia, it’s more of a zero-sum game. They believe one side can’t win without the other losing. It’s changing of course but slowly.
Vladimir Prosikhin adds: “Russians can accept many new ideas. We speak about ‘local mentality’ but you would be surprised how flexible Russians can be, especially the younger generation. But one problem is the younger generation is not very loyal to partners and not always honest.”
Acer entered the highly-competitive Russian PC market after competitors such as IBM, Hewlett Packard, Dell, DEC, Apple and Compaq had already established themselves. IBM and UK-based ICL Computers had even set up local assembly operations. When Acer stepped in, it had no brand name recognition in Russia. Moreover, the first wave of computer sales in Russia was dominated by thousands of defective Asian-made clones, which tainted the reputation of PCs made by Asian companies. Taiwan based Acer had to establish its brand name, throw off the Made-in-Asia stigma and take market share from multinational competitors who were already dug in.
In 1994, Acer initiated a brand name campaign. Acer’s advertising budget was $500,000, big in comparison to other emerging markets but justified by the circumstances. Acer’s marketing department has a staff of four and is divided into product marketing and marketing communications. Veronica Brezgounova is in charge of marketing and communications, which includes promotion, advertising, public relations activities and some channel development. She is 26 years old and is a graduate of the Moscow Teacher’s College. She previously worked at Moscow’s Aerostar Hotel as secretary in administration.
Steve has a degree in marketing, but Veronica had no marketing experience and she followed Steve’s strategy. They started advertising in Russian language computer publications in attempt to reach the computer technical professionals and show that Acer computers are in the same bracket technically as the leading brand name PCs. No home PC market existed.
Acer’s first ad campaign was devised to catch the attention of Russians and break away from the “yellow” brand label by showing that Acer is a manufacturer which makes its own computers and components compared to competitors, many of which subcontract their computer production to a low-cost third party.
(Note: The third party is then known as an original equipment manufacturer [OEM]. Nearly all world class PC companies discreetly use an OEM to make their computers—often the OEM is an unknown Taiwan manufacturer. Turning computer orders over to an OEM helps the multinational save on manufacturing costs and allows it to focus more on design improvement and R&D).
Acer borrowed an Acer image ad from the US market, which bore the slogan “Meet Your Maker.” Veronica says they intended to be original and controversial. Most of the computer advertising by foreign competitors at that time was uninspired. The key was not to get defensive about the brand name. If journalists were willing to listen to the comments of Acer’s end users, Acer talked.
“We used a slightly different translation in Russian which is not “maker” but more like “creator” (Vistryechaiti sozdatyelya) and it sounds a little shocking to people,” Veronica recalls. “In Russia it has religious overtones and it had strong impact. It was in large letters and had computers underneath. We didn’t explain the slogan, and then later a new ad appeared with an explanation of the slogan. We wanted to emphasize that we are producing what we are selling ‘Creator’ because we create what we sell.”
The other marketing front involved channel development for Acer distributors. Acer Moscow staged seminars in St. Petersburg and in Moscow. The idea was to invite distributors and encourage them to invite their dealers, while the dealers invited key clients.
The seminars are held in first class establishments and have the flavor of a show. They address three segments. One is the journalists. Acer wants to show journalists that the company is not a low-cost clone maker, but is willing to spend some money to deliver their message and also have some fun in the process. Acer also addresses the corporate clients to show the human side of the company, introducing its employees and providing drink and food and entertainment. The third segment is for the people in the distribution channels. At the seminar, Acer publicly rewards distributors that reach certain sales levels. Steve presents them with a plaque, shakes their hand and a photographer takes photos of the award acceptance.
“In Russia,” Steve explains, “they really value this. To them, it’s a special event. They will usually keep the photo in their office. The dealer becomes part of something, he has a sense of belonging to an organization. Other foreign companies that are here don’t take things down to this level. Here, it’s the details, the things we take for granted in the West, which we pay attention to and that’s why we have the channel that we do.”
Steve believes Russians love extravaganzas and sharing food and drink is crucial to building friendships with Russians. The seminars were very successful. Steve says he’s never seen another market where such kinds of events are more effective. Many invitations are sent out, and nearly everyone attends. “Most industries in Russia are not very social. In the US they have conventions for the shoe or peanut industries. Not here however. But Russians are social people, they love the big event and lots of food beautifully displayed. Now Acer has the reputation of throwing the best parties—and a lot of journalists now know we are not a cheap ‘yellow’ PC.”
Veronica says that Acer’s advertising was mainly print, but included some billboards. They stayed away from television because the majority of viewers are not potential computer customers. Also, television advertising is extremely expensive in Moscow, with a prime time one minute spot costing as much as $22,000. The home PC market hasn’t opened wide enough yet to justify such an expense.
Acer’s advertising budget in 1995 was $1.2 million, which is considered high. But as Steve explains, building a channel top-to-bottom requires consistent exposure in the press. Advertising investment becomes critical, as it complements channel development. For example, if a distributor or dealer is wondering which brand name product he should carry, he will likely choose the product that has wide media exposure. Further, Acer must continue the level of advertising after the channels are developed. Now it makes sense to increase advertising to generate “pull” to pull the product through the channels as opposed to “push”, which was what was required in the initial stages. This transition from push to pull requires a completely different advertising strategy.
Acer became profitable its first year (last quarter 1993) and is now recognized as the 5th most well-known brand name computer in Russia, (tied for 5th place with Apple Computers), according to a study done by a Russian computer magazine. In terms of revenues in Russia, Steve estimates Acer is second to Hewlett-Packard.
Steve believes Acer’s price advantage—coming in at the mid-to-low level for brand name computers—combined with comparable technical specifications helped establish Acer’s brand name. “I think you really have to have a good, solid product and money and you can build a brand name here,” he adds. “Another thing we did right is that we didn’t just give our distributors money for promotion and leave it at that. We did the promotion ourselves. We knew there was limited experience in Russia with promotion, image or public relations, so we controlled it. There are sometimes joint promotions, but details should be discussed and approved beforehand. You need to follow it every step of the way so that it is done properly.”
Acer’s policy on determining the advertising budget is to provide x percent of current revenues and 2%-3% of projected revenue plus whatever additional support funds can be acquired from headquarters.
1994 ad budget: $600,000
1994 sales: $22 million
1995 ad budget: $1.2 million
1995 sales: $50 million (estimate)
1996 ad budget: $2.0 million
1996 sales: $80 million (estimate)
CURRENT MARKETING STRATEGY
Now that Acer’s distribution channels are well established, they will begin to focus more on government contracts. “When we start winning them, our competitors are in trouble. It will be difficult for a new player to chop away at our distribution base. All of the logistics, communication, materials distribution, service and other support systems are in place. Combine that with an established brand name and a strong promotion campaign, and it will be a difficult decision for a distributor to switch vendors. Most will probably stay with what works.”
In Moscow, the majority of Acer’s customers in Russia have been the oil and gas industry, tax and customs administration and central banks. Today the customer makeup is changing along with the economy. New segments include the small Russian business and an emerging home PC market.
Acer is slowly redirecting its marketing toward the mass market. For example, they are advertising less in computer specialist magazines and approaching those publications with a wider appeal, especially financially-oriented journals like “Commersant” and “Izvestia.” Acer has also purchased trolley bus advertising. Hundreds of Moscow’s electric trolley buses can be seen roaming the city every day.
Expansion throughout the regions of Russia is one of Acer’s top priorities. Acer originally focused on Moscow and St. Petersburg, Russia’s two largest cities. Beginning in 1995, the company started to stage distributor seminars and billboard and trolley bus advertising in farther regions, such as Novosibirsk, Irkutsk and Vladivostok, as well as the Central Asian republics. Veronica says that the Novosibirsk market is at the level of Moscow was two years ago. “Our feeling is that Novosibirsk will have the same development as Moscow did.”
Market intelligence is another area of emphasis. Acer had a problem in the summer of 1995 when distributors bought much more than they could sell. They began dumping their computers at the lowest price that the market could absorb. To prevent such an occurrence in the future, Acer Russia will take over the forecasting responsibilities. That way, if for example a distributor wants to order $2 million in computers, Acer may advise him to lower the figure based on current market information. To minimize inventory levels, the solution is in monitoring the product flow to the distributor and then to the end-user.
No mainstream Western market research companies have set up in Russia. A local company, Dator, supplies market information but many local companies question Dator’s objectivity. It is said that companies who buy Dator’s services score high on market share and brand awareness reports. Indeed, the “skritaya reklama” or “hidden advertisement” is a common practice among Russian journalists. In this arrangement, a company will generously pay a journalist to write a favorable article about a subject, yet the article will appear to have been objectively written.
As for market share among the various foreign brand name PC companies, reliable numbers are not available in Russia. Independent foreign companies haven’t thoroughly investigated the computer sector and figures that are supplied are likely exaggerated. The brand name market is especially difficult to determine. “Russians in the industry overestimate the TAM (Total Available Market),” Steve says. “It’s a question of pride for them. They see the market in California alone is five times bigger than the Russian market so they tend to embellish their statistics.” Local distributors are also known to overstate their volume. “I have seen my distributors do it as well as the distributors of my competitors” recalls Steve.
Acer’s own estimations for market share
Total units sold in Russia
Brand name units sold
Acer units sold
Steve sees the Russian market developing slowly and in a slightly erratic course. But he is optimistic that the former communist stronghold will continue on the path to reform. Currently, Acer Computers International in Singapore attaches greater importance to the Russian market than it does to the China market. “It’s because we really started to do well here,” Steve says. “They pay attention and give you resources. They don’t see the Russian market as being another German or US market, but it is definitely an opportunity. If certain segments grow we’re positioned to take advantage of it. But it’s not seen as a global powerhouse market. China is, just because there are 500% more people there.”
The top issue for Steve today is in enhancing the distribution channels. He’s searching for ways to provide distributors with the right conditions for maximum profitability. The Lappeenranta operation will help.
“One reason we’ve been so successful in the beginning is because we had a good business solution,” Steve says. “We’ve been very flexible. A distributor can order two monitors, one PC or a PC without monitor—whatever he wants. But now the market is so competitive that we have to be more accommodating on the financial side. Give more in terms of credit to distributors, for example. Different incentives, internal promotions, product mix, delivery issues. Internally we put ourselves in our distributor shoes and ask ‘I have these competitive problems, what would make me focus on Acer?’”
The changing political scene is a growing concern. In December 1995, communists won the most seats (more than 20%) of all parties competing for the parliament. But the Russian constitution gives more power to the president than the parliament, so in the short-term, reformers remain in charge. However, in June 1996 Russia holds presidential elections. A communist victory then could slow or even stop some reforms. Communists have pledged, among other things, that some industries will come back under state control and that failing factories will be given infusions of government money to live on.
Communist policies tend to go against the recommendations of world lending institutions, which give generous financial aid to needy countries providing specific economic policy guidelines are followed. Should the Russian government alter the reform course, agencies receiving foreign aid may see their funds cut off. Acer would be affected because government agencies use aid money to outfit their huge operations with computers. Steve estimates Acer could win up to $15 million worth of big government contracts in 1996, should the course of reform not change dramatically.
What’s ahead is uncertain. Russia’s continued transition toward a free market economy is largely dependent on the presidential elections planned for June 1996.
Should Russia continue roughly on the same path to reform, Steve expects Acer will sell $80 million worth of computers in Russia in 1996, a move that would make his company the top computer seller in the country.
ON ONE side of the border is a compact, streamlined economy of 5 million people. On the other is a toppled colossus painfully constructing a market economy out of the wreckage of a socialist one. The rich, small economy grows richer still by providing a safe, honest English-speaking home for those international firms which balk at the wilder and woollier conditions across the border. What are these places? Hong Kong and China, of course. But think again: they are Finland and Russia, too.
Finland’s trade with Russia has yet to regain the levels of its old trade with the Soviet block, which consisted largely of bartering Finnish capital goods for Soviet oil. That arrangement collapsed with the Soviet Union. But a new entrepreneurial trade has taken its place and is growing fast (see chart).
[TABULAR DATA OMITTED]
St Petersburg is three hours from the Finnish border by road, Moscow about 12 hours. Crossing-time for goods at the main Finland-Russia border has risen this year from five hours to 24 hours, because of heavier traffic and because Russian border guards have been making plain the displeasure they feel at the slow payment of their wages. But it is still a much speedier way of getting from the European Union into Russia than that via Poland and Belarus, where delivery times are reckoned in weeks.
Warehouses across southern Finland are packed with clothes, electronic goods and foodstuffs which are destined for Russian markets, but can be stored more securely and managed more easily in Finland. And, unlike Hong Kong, Finland has land to spare for large-scale manufacturing operations directed primarily at Russian consumers.
The latest and biggest bet on Finland as a bridgehead to Russia has been placed by Acer, a Taiwanese computer maker, whose annual sales in Russia have soared from nothing to $75 million in just four years. Delivering personal computers from Asia took over a month, but Acer feared that, if it built an assembly plant inside Russia, it would be easy prey for interfering bureaucrats and criminal gangs. Instead, it decided late last year to put its “Russian” factory at Lappeenranta, a Finnish town 20 kilometres (12.5 miles) from the Russian border.
Wage rates in Finland are five times those in Russia: but that bothers Acer little, since assembly accounts for only 4% of the sale price of a finished computer. “More important to Acer is that efficient transport links mean it need stockpile only cheap, basic materials on site at Lappeenranta” according to Stephen Kuzara, General Manager, Acer Russia. Microprocessors, memory chips and hard drives are flown in from Asia as the market demands and snapped into computers that stand ready to go. Since the start of Finnish assembly early this year Acer can quote five-day instead of five-week delivery inside Russia.
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