EL SEGUNDO, CA – Once viewed as a promising emerging market with massive growth potential for the global electronics contract manufacturing business, Russia now is facing a cessation of new investment, along with shutdowns in existing facilities and delays in new ones, according to iSuppli Corp.

During early 2008, Russia was viewed as an up-and-coming contract manufacturing region, a key member of the fast-rising Brazil, Russia, India, and China economies,” said Adam Pick, principal analyst for EMS/ODM for the research firm. “With the ongoing recession and financial crisis, however, it appears that most of the interest in penetrating the Russian market has disappeared. Furthermore, the historical record for electronics manufacturers operating in Russia has been plagued by multiple problems.”

A quick review of the strategic and tactical moves by leading EMS providers illustrates that operating in Russia may not be the best idea at this time. For example, Elcoteq – an early entrant into Russia – has experienced a very challenging time since launching its St. Petersburg facility in 2004. As a result of Elcoteq’s flawed regional strategy, the St. Petersburg facility has never been identified as a success. During its short existence, the St. Petersburg plant has been put up for sale on two occasions. On Jan. 15, Elcoteq management announced that the facility would be shut down.

Further, on several occasions, Flextronics has publicly signaled that it would extend its footprint into Russia. In early 2008, Flextronics entered into an agreement with Elcoteq to purchase its St. Petersburg facility. However, Flextronics decided to abandon that bid and pay Elcoteq approximately $1 million to back out of the contract. iSuppli believes import/export duties on components and systems for LCD televisions impacted Flextronics decision to not move forward with its Russian expansion.

Finally, Foxconn and H-P in August 2007 announced a $50 million joint venture in St. Petersburg to manufacture PCs. The facility was expected to produce up to 40,000 computers per month. Although Foxconn began construction in May 2008, the ramp been delayed for later this year.

iSuppli experts and industry insiders point to several factors behind the souring sentiment on Russia.

One set of inhibitors is the inherent problems in the Russian economy. The market is in shambles, with a host of social and political issues, combined with the falling price of oil. Russia’s economy appears to hold little promise for strong future growth.

From an operational perspective, Russia is also constrained by tariffs and value-added taxes that negatively impact the total landed costs both inside Russia and for export.

Specific to these and other issues, the Russian government is known for shifting policies and laws, making for an uncertain business environment.

“There are several challenges specific to the Russian market for our company and others,” observed a director of sales for a leading, North American semiconductor supplier who covers the region. “Getting components into the region is a friction-filled process, with duties and customs delays of up to four weeks. Government policies are in flux.”

Russia also lacks an efficient distribution for the transport of components once semiconductors, module, and subassemblies enter the region. As a result, some Elcoteq suppliers shipped parts to Finland rather than St. Petersburg in order to streamline this process.

Moreover, business success in Russia often is determined more by connections than competitiveness. “Post-Putin, the Mafioso is not as bad, but doing business in that region is still about knowing the right people to some extent,” said Greg Sheppard, chief development officer for iSuppli.

Another factor stymieing the growth of the contract manufacturing industry in Russia is a lack of domestic semiconductor supply, which could help enhance and optimize the utility of contract manufacturers in the region.

“There’s just not much semiconductor manufacturing in Russia right now – except for government-subsidized projects like Mikron, which is defense oriented,” noted Len Jelinek, chief analyst, semiconductor manufacturing for iSuppli.

Another challenge in Russia is the significant impact of counterfeit products within the electronics supply chain. Specific to consumer electronics, it was previously reported that up to 80% of DVDs in Russia are sourced via the black market.

Lastly iSuppli learned that rampant crime and security issues act as disincentives for operating in the nation.

Given these factors, the possibility of elevated interest in the Russian market for contract manufacturers appears severely limited in the near-term, iSuppli said.

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