VDMA Russia: Machine Building Companies are suffering from weak business in Russia

Author Stéphane Itasse

The economic crisis in Russia and the conflict with the EU has left a deep mark on the German machine building industry. On Monday the VDMA announced in a press interview in Frankfurt that in the first quarter of this year, the machine exports there have reduced further by a good 28 % as compared to the previous year. “This is really bothering people like us from the machine building industry”, said VDMA president Dr. Reinhold Festge.

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“We don’t see any reason to exit the Russian market”, says VDMA president Reinhold Festge, even in view of the economic crisis and sanctions.
“We don’t see any reason to exit the Russian market”, says VDMA president Reinhold Festge, even in view of the economic crisis and sanctions.
(Photo: VDMA)

That is why Russia fell back to the tenth place in the ranking list of the most important importing countries. In 2013 before the Russian crisis began, Russia was still the fourth largest sales market for the German machine building industry. “Unfortunately the downward trend in the machine building exports still continued at the beginning of this year”, stated Festge.

The crisis in Russia is severely affecting the German machine building industry

A new survey of the VDMA of 257 member companies showed that the Russian crisis has manifold effects for the local industry. 94 % of the respondents said that they were affected by the crisis; companies mainly felt the effects in the form of drop in orders (83 %) and decrease in enquiries (70 %). Hence it can be expected that the exports to Russia will see a steep decline in the coming months.

Even challenges like getting funds for exporting machines and systems to Russia are growing day by day. Half of all surveyed companies suffered because of the hesitant attitudes of banks in the west towards business with Russia. On the other hand the Russian customers are hardly able to afford loans from their local institutions due to the high interest rates. “Currently the lack of funds is the biggest obstacle”, explains Ulrich Ackermann, head of VDMA foreign trade.

The machine tool building industry is affected by tighter customs controls for exports to Russia

It is surprising that cancellations of orders (20 % of the respondents reported it) and cash loss (15 %) increased only slightly in comparison to the survey conducted in 2014. On the other hand hold-ups in customs clearance and in export control were significantly high (22 % and 24 % respectively). Mainly, machines and components with dual-use goods were severely affected. Manufacturers of machine tools had to bear the brunt in particular.

German machine building industry in Russia is losing market shares to China

Companies are increasingly worried of permanently losing the Russian market due to the competition from China. In the last ten years Chinese companies may have already decreased 10 % market share of the German machine building business. Around a third of the respondents now believe they have lost more customers or orders to their Chinese competitors due to the crisis and the sanctions. “That is why it is only a question of time till China becomes the most important machine supplier to Russia”, says Monika Hollacher, expert on Russia in VDMA.

According to VDMA the insecurity of the German machine building industry and its Russian customers also reflects in the future investment plans. 43 % of the respondents reported that they hadn’t taken any special measures to respond to the crisis. However, one fifth of the companies have cut down the staff in Russia in the meanwhile or have shelved projects. The willingness to establish a branch or own plant in Russia is missing more than ever. Only 40 % of respondents said that they wanted to develop service and distribution operations in Russia by 2017 through a branch. A decline by 12 percent points was seen in comparison to the previous survey. Thus the current crisis in Russia is different from the one in 2008/09 when many German machine building companies made anti-cyclical investments in Russia.

The VDMA still sees Russia as a key market for the German machine building industry

However, German machine building companies are not at all willing to give up or escape, explains VDMA. Only 2 % of the respondents said they wanted to exit the Russian market. “Russia is and shall remain a key market for the German machine building industry”, sums up Festge.

Due to this reason the VDMA visited Russia in May end for talks with the responsible people within ministries, banks and associations. The VDMA president explained that the visit was in pursuit of three goals: “We wanted to make it clear that the interest of the German machine building industry in the Russian market is still highly topical. We also wanted to somewhat refurbish the image of the German machine building industry again which was affected due to the sanctions. Finally we wanted to experience the options and perspectives of the Russian market from the people in the country.”