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Russia: Understanding Its Furniture Market And Business Culture by Vladimir Makeev

By Vladimir Makeev

At the invitation of the Malaysian Furniture Promotion Council, (MFPC) Vladimir Makeev, Vice-director of The Association Of Furniture And Woodworking Industries Of Russia, presented a report on the Russian furniture industry, in Kuala Lumpur, Malaysia, on July 23, 2009. Excerpts:

The Russian government now treats imported goods fairly, for the first time. In other words, once the imports are cleared by the customs, their supply chain within Russia is given the same privileges enjoyed by domestic products.

Import procedures are defined by the Customs code of the Russian Federation, which came into force on January 1, 2004. It brings significant corrective amendments in the organisation of customs procedures, as well as the rights and duties of players of the foreign trade.

Customs clearance can be completed within a maximum three working days.

Necessary documents for customs clearance now are:
1. Original invoice (account-invoice),
2. Export declaration,
3. Transport documents,
4. Account on payment of transportation if you order it independently,
5. Packing leaf,
6. Price-lists,
7. Contract and others.

The new Customs code stipulates that the customs declaration can be submitted in advance, until the moment goods arrive at the customs. Custom charges must be paid before goods can be released.

Import Disputes

Some problems that may potentially arise at the customs include disputes over the goods’ value, and thus the amount of custom duties to be charged. Custom officials may request reliable documents such as invoices to support importers’ claims of overpriced taxes.

In the case of different interpretations regarding the definition of customs cost, a conditional release of the goods will be made, and a further court case will be conducted after its release. It is possible to challenge decisions from the customs. Before introduction of the new Customs code, the appeal procedure consisted of two stages - the appeal in a higher body, and then in the arbitration court. Now, importers have the right to appeal straight at the arbitration court.

There are no export duties charged on furniture from the Russia.

Quality Of Imported Furniture

Quality Of Imported Furniture Development, Federal Custom Service and Federal Agency of Forestry, about 40 percent of all imported furniture sold in Russia are in fact made from local raw materials or discarded pieces. They are usually marketed as East European or Baltic, under seemingly prestigious “western” labels. Or, they would be made within the EU using at least 40 percent of unhealthy materials containing chemical additives, including dyes.

According to biochemical research institutes of the Russian Federation, release of toxics from such additives into the environment begins just some weeks after the purchase of the so called "respectable" product.

Since many Russian consumers are inexperienced and uninformed, there is an enormous market for such sub-standard products, especially in large cities and the industrial and resort centres. Therefore the annual volume of "overseas" furniture contraband reaches several billions dollars. Easier speaking, it has stable demand.

NewImport Regulations

The new import mode, by analytical estimations, claims to be able to reduce import of forged and discarded furniture by 12-15 percent.

A Customs Union between the Russian Federation, Belarus and Kazakhstan has been created. This raises the issues of national legislations and technical rules. Here again we face some problems in negotiations with republics Belarus and Kazakhstan. It is necessary to pull together rates of the VAT, excises, and consolidate for custom processes. It is a long and difficult road ahead. From the point of view of Russian experts, it would be impossible to iron out the problems within a short time. Therefore in the meantime, it is advisable to carry out direct deliveries, which can be expedited. Deliveries to Russia should not pass through customs posts on territories of republics Belarus and Kazakhstan.

Russia’s Economy

For last 10 years, the Russian furniture industry developed very successfully. This is thanks to the general rise of the Russian economy, and boom of the building industry absolutely new to Russia and its private investors. In 2000, furniture manufacturing was worth US$653 million in Russia. By 2008, this amount has exceeded US$4 billion. Thus within eight years, Russia’s furniture manufacturing value increased more than in six times.

During this period, the furniture industry has changed qualitatively: the variety has expanded, quality of production improved, and competitiveness of production raised in comparison with imports. Russian furniture’s restructuring was made possible by following factors:

• Rather low capital intensity of factory modernisation;
• Systematic improvements on custom tariffs directed to improve the development of furniture manufacturing;
• Reconstruction of the industry of wood panels on the basis of technology upgrade;
• Move to encourage spending by levelling retail and cost price;
• Restructuring of some enterprises by hiring foreign experts.

It is obvious that the sector is ready for further development and growth, and also to satisfy the demands of the market on production, in terms of quantity, and quality.

Current Challenges

In view of the economic crisis in developing markets, industries related to furniture will suffer too. One of the main dangers is the decrease in production volume, which can affect the production of wooden plates. This sector is a lot more vulnerable and has been on a decline – up to half of the industry has shuttered. This credit crunch could worsen the situation. Other affected industries include the makers of chemicals and glutinous materials, etc.

Also there is a serious risk of the marketing network being interrupted, especially when its development in Russia is still in a fledgling stage. And the main thing that causes alarm is the possible loss of qualified personnel. As businesses slow down and with the lack of orders, these trained employees will look elsewhere for a job.

In our opinion, an Achilles' heel of our furniture sector is its localisation in the home market. And those few enterprises, which now work or will start to work with other markets will seriously gain a competitive advantage.

Rates of growth of the furniture industry for the specified period are indicative also. On the average, the furniture manufacturing grew by 25.43 percent annually, and over the last three years (2006-2008), growth exceeded 35 percent. I wish to note, that such high rates of growth in Russia’s furniture industry is unique in comparison with all other industries in Russia. Worth noting, is that local furniture producers practically have no state support, other than those mentioned before. Actually, it is a result of the initiatives of individual private enterprises.

Manufacturing

Manufacturing bases in Russia are dispersed around the country. About 93 percent of them are located in the European part of Russia (including Urals region). About two percent are in the Far East and five percent in Siberia. Concentration of furniture manufacturers in Central and Volga Regions is the highest at 43 percent and 23 percent respectively.

Import Growth

In 1999, sales of furniture hardly exceeded US$1 billion. By 2008, it grew to US$10 billion. The Russian furniture market within last 10 years grew by an average of 20 percent annually.

Here, it is necessary to note that sales in the Russian market in many respects grew due to import furniture. Thus rates of growth in sales of import furniture exceeded rates of growth in sales of local furniture. In 1999, the ratio of local to imported furniture was 4:1. Now, this ratio is almost equal. Consider that the price of imported furniture in 2.07 times of the price listed at the customs. Even during a time of financial crisis, positive tendencies of sales are observed.

Table 1

Growth of Furniture Production in Russia in 2000 – 2008 (US$ millions)

Table 2

Rates of Growth of Furniture Production in Russia in 2000-2008 (Percentage Growth in Comparison with Prior Year)

No Real Sales Networks/Systems

In Russia, there is no real system of furniture sales. There is no presence of any significant all-Russian players or large purchasing companies in the market. And those operating now, first of all, do not possess any significant financial or marketing resources to place large orders of furniture manufacture. This is except for IKEA, which is already successful in the market for a long time. Besides the existing trading companies who are operating at the borders of certain territories and in the near future, there is not a defined structure of furniture market of sales. But large international furniture retailers will appear soon, like in the case of the food industry.

And the main thing about the existing market structure is that while it is being developed, the sellers are not. Manufacturers, faced with mad backlog demands, have also undertaken the tasks of sellers. They have been compelled to create their own trading houses, and the whole all-Russian trading networks, just to have an opportunity to sell their furniture, and be successful.

Table 3

Volume of Furniture Sales in Russia from 1999-2008 (US$ millions)

Table 4

Volume of Furniture Sales in the Russian Market (US$ millions)

Table 5

Structure of the Russian furniture market - by shares in the total volume of sales

Russia Net Importer

In terms of international trade, regretfully, we are a net importer. In 2008, export of furniture brought in only US$360 million while we imported US$2.4 billion in furniture. The common balance of trade deficit from the furniture segment was US$2.04 billion.

And even though the general growth of export for the considered period was more than 600 percent, in absolute figures, it looks depressing, especially on a background of export performance.

More than 45 percent of the total furniture exported is made of mixed materials. In the lower range, office furniture accounts for four percent, kitchen for 4.5 percent and bedrooms for 6.83 percent. These low numbers are caused by the practical virtual absence of manufacturers willing to target foreign markets, except for the countries of the former USSR.

Unfortunately, export is not included in marketing plans of the majority of the Russian manufacturers. They are so happy with sales growth in their home market that they cannot find time to ship overseas. Only now, when demand has sharply fallen, some companies have started to look narrowly at foreign markets. This observation does not apply to exporters of preparations and parts just for decoration from wood, including plywood. As a rule, these enterprises since Soviet times were created as export-focused.

Part II of Vladimir Makeev’s report will detail the top categories of furniture imports into Russia and these products’ countries of origins. Special focus will be given to Malaysia as an import source for the Federation. To be continued in our November-December 2009 issue.