1. Market Trends
Mechanical engineering segments are developing differently
Production in the Russian mechanical engineering sector is expected to increase in 2019. During 2018, production volumes rose by 3.6% year-on-year. The government is helping domestic manufacturers by granting them industrial subsidies and sales aids. However, the government wants to phase out the programs introduced during the crisis to grant discounts on the purchase price. This could lead to a drop in demand and thus lower production of agricultural and construction machinery. As part of the import substitution policy, foreign producers are setting up local production facilities in order to participate in government tenders.
For machine tools, the Ministry of Industry expects production to grow by around one fifth to EUR 505 million in 2019. In the previous year, the production of metal cutting machines increased by 2.6% in volume terms and that of forging machines by 5.5%. With the “Strategy for the Development of Machine Tool Construction until 2030”, the government wants to increase the sales volume from currently EUR 1.3 billion to EUR 1.8 billion. The medium-term goal is to reduce the high import quota of about 70% for machine tools.
Manufacturers of agricultural machinery had to accept slight declines in 2018. Production of tractors fell by 2.1% in terms of volume and of seed drills by 7.7%. But the backlog demand remains enormous. Around 70% of agricultural machinery has been in use for over ten years. Up to 18,000 new combine harvesters have to be purchased each year. As part of its “Strategy for the Development of Agricultural Technology until 2030”, Russia wants to triple local production. In the future, the Ministry of Industry wants to determine the local production share for tractors no longer by obligatory work steps, but according to a point system. The more local added value is generated, the more points will be awarded.
For road construction machinery, the Ministry of Industry expects production to grow by about one third to EUR 810 million in 2019. By 2030, the government plans to increase the share of Russian construction machinery from the current 40% to 70%. The high average age of construction machinery (eight years) is the most important driver for new acquisitions, together with the billions being invested in infrastructure as part of “national projects”. Since demand is primarily met by imports, the government imposes a scrapping tax on them. Local manufacturers also have to pay it, but are reimbursed in the form of industrial subsidies.
During 2018, manufacturers of food processing machinery increased their output by 15% in value terms to around EUR 720 million. For 2019, the Ministry of Industry expects a further 10% production increase. Companies from the food processing sector will receive subsidies of around EUR 28 million in 2019, including for the procurement of new machinery and equipment.
Machinery imports remain high – despite import substitution
The number of Russian companies ordering machines from abroad in 2018 reached again the level of 2014 – the year in which import substitution began. For cost reasons, however, they are increasingly relying on lower-quality equipment from South Korea, Japan, and Taiwan. In addition to Russian manufacturers, European suppliers are the main victims of this trend.
Foreign companies are responding to the tightening policy of import substitution by building local production facilities. German manufacturers are the largest group of investors. The agricultural machinery manufacturer Claas is increasing the local content at the Krasnodar plant as part of a special investment contract and is attaching Russian-produced tires to combine harvesters. From 2023 onwards, engines will be produced locally.
Russia: Current projects in mechanical engineering
|Project (Region)||Investment (in EUR millions)||Planned commissioning||Responsible|
|Construction of CNC machining centers (cluster Lipezkmasch, Lipezk)||102.8||2022||SAO Lipetzkoje Stankostroitelnoje Predprijatije, http://www.lssp.ru|
|Construction of a production plant for YTO tractors and assembly of tractors for the company Master (Republic of Bashkortostan)||79.0||2020||Baschselchostechnika; http://www.bshte.ru, Baschkirschkaja Meschdunarodnaja Kompania Zhifang; Jiangxi Zhifang Numerical Power Co|
|Buildup of production of CNC machining centers (Krasnodar)||40.5||2025||Juschni Sawod Tjaschologo Stankostroenia, http://yuzts.ru/ru|
|Buildup of production of lathes and milling machines (Rjasan)||16.0||2020||Stankoprom (part of Rostec), http://www.rostec.ru|
|Conversion of the production of 2-, 3- and 5-axis machining centers with CNC control (Republic of Bashkortostan)||12.2||n/a||NPO Stankostroenie (part of Holding STAN), http://www.stankostroenie.com|
|Buildup of production of 5-axis machining centers with CNC control (Vladimir)||8.9||2024||Kowrowski Elektromechanitscheski Sawod, (KEMZ, part of Rostech), http://www.kemz.org|
|Buildup of a cluster for the production of lathes and milling machines (Vladimir)||6.2||2024||Kowrowski Elektromechanitscheski Sawod, (KEMZ, part of Rostech), http://www.kemz.org|
|Buildup of a production facility for agricultural machinery (Voronezh)||5.1||2020||Kuhn Group, http://www.kuhn.ru|
Source: GMI Research
Focus on digital connection of production facilities
Russian machinery manufacturers want to use industry 4.0 solutions to reduce their technological backlog and increase labor productivity. In 2017, according to an OECD study, Russia lagged 3.8 times behind Ireland, the leader among its member countries. According to the IT company Zyfra (part of the Renova holding company of oligarch Viktor Wekselberg), only one in seven manufacturing companies in Russia was prepared to introduce IoT solutions in 2018. The main reasons for the poor performance are the low level of automation in production, the lack of modern equipment and engineering deficits.
The government is trying to take countermeasures. The Ministry of Industry has developed an updated action plan in the field of engineering and industrial design until 2024. This provides for greater support for engineering centers based on universities. The Japanese machine tool manufacturer Fanuc plans to set up an engineering center in the innovation town of Skolkovo by 2020.
Government promotes R&D
Russian mechanical engineers often do not have sufficient financial resources to invest in basic research – the industry is chronically underfinanced. Therefore, the government specifically promotes research and development (R&D). For example, manufacturers of agricultural machinery can deduct their R&D expenditure from the tax base by a factor of 1.5. The Ministry of Industry supports the production of pilot plants for high-tech products. Companies producing equipment for the oil and gas industry, power sector, food processing, road construction, or machine tools can receive subsidies of up to 50% of their expenditure. Around EUR 9.5 million will be available for this purpose in 2019.
2. Local Industry Structure
Finding suppliers is difficult
In order to increase their local content, foreign companies are looking for local suppliers. In practice, however, it is very difficult to find suitable companies that supply parts in the quality, quantity, and reliability necessary. Often, the requested quantities are too small for Russian suppliers, especially from the metallurgical industry, and their production is therefore unprofitable. The required batch is only produced at irregular intervals, if at all, which results in long waiting times.
Russia’s exports of machinery rose in 2018 – starting from a low base value – by a third compared with the previous year to US$ 29.1 billion. Exports of turning machines alone increased by 71% year-on-year to US$ 14.4 million. Their main sales market was India.
The definition of mechanical engineering is broader in Russia than in other countries. It also includes shipbuilding, aircraft and vehicle construction, production of oil and gas technology and the defense industry. According to the SPARK-Interfax business database, at the end of 2018, there were around 700 machine tool manufacturers, 737 agricultural machinery manufacturers, 475 manufacturers of construction machinery and 660 food processing machinery producers across Russia.
Russia: The 10 largest mechanical engineering companies (2018)
|PAO ODK-UMPO||Propeller turbines||http://www.umpo.ru|
|PAO Irkut||Airplanes, helicopters||http://www.irkut.com|
|AO Metrowagonmasch||Locomotives, trains||http://www.metrowagonmash.ru|
|AO GSS||Airplanes, helicopters||http://www.scac.ru|
|PAO Silowyje maschiny||Turbines||http://www.power-m.ru|
|OAO DMZ||Locomotives, trains||http://www.dmzavod.ru|
|PAO Sewernaja Werf||Ships||http://www.nordsy.spb.ru|
Source: Database SPARK-Interfax
3. Regulatory Framework
The Federal Customs Service (FTS, http://www.customs.ru) is responsible for customs clearance in Russia. The Russian Agency for Technical Regulation and Metrology, Rosstandard (http://www.gost.ru), defines technical standards and norms. Other certification bodies are also accredited, including WNIINMASCH (http://www.vniinmash.ru), which is responsible for mechanical engineering standards.
Due to the EU sanctions, no dual-use goods and certain equipment for development work in the Arctic, the deep sea or for shale oil may be supplied to Russia. In practice, Russian companies mainly purchase used machinery and equipment from the oil and gas, metallurgy, and chemical industries to circumvent the sanctions.
|MinPromTorg (Ministry of Industry)||http://minpromtorg.gov.ru|
|MinEkonomRazvitiya (Ministry of Economy)||http://economy.gov.ru/minec/main|
|Moscow State Technological University (MGTU) Stankin||http://www.stankin.ru|