samsung in russia final
TRANSCRIPT
2015
International Business 701
Hammon, Kyle
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Samsung in Russia
Kyle Hammon
International Business 701
4/30/2015
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Maps of Russia
Federal Districts in Russia. Retrieved from The Moscow Times (2015).
Map of Russia with surrounding countries. Retrieved from CIA (2015).
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Introduction
Russia is one of the world’s biggest emerging markets. Because of this, many companies are
attempting to set up operations in the Russian market. Samsung Electronics is a South Korean company
with many subsidiaries around the world. Samsung has been involved in the Russian market for around
20 years and is one of the oldest Western-allied companies in the country. This gives Samsung a
competitive edge and a better understanding of business customs and the Russian market. Samsung is
always in the process of pursuing ventures in Russia. There are, however, several opportunities that
Samsung could take in the market that would further improve their position and protect themselves
from the wildly fluctuating Russian economy.
Background of Samsung Electronics
Samsung Group has several subsidiaries ranging from medical care equipment and heavy
machinery to finance services and chemical manufacturing. The flagship company owned by Samsung is
Samsung Electronics. Samsung Electronics is a South Korean international company founded in 1969
that deals in semiconductors. As of May 2014, Samsung’s market cap is valued to be $186.47 billion.
Samsung has three branches of products: Consumer Electronics (CE), which includes products like
washing machines, televisions, monitors, refrigerators, and others; Information Technology & Mobile
Communications (IM), which includes the very successful Samsung Galaxy cellular phone line of devices,
as well as cameras, computers, and other communication systems; and Device Solutions, which includes
computer memory, integrated circuits, LEDs, and other components (Forbes, 2015).
The International Division
The CEO of Samsung Electronics Global is Dr. Oh-Hyun Kwon who has been with Samsung since
1985 and aided in the development of several products that has helped Samsung Electronics rapid
advancement in semiconductor design (Samsung, 2015a). Samsung Global is considered to be the same
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as Samsung, as the global part of the company is built into it. Samsung’s structure is set up as an
international area structure, so they set up very competitively in the international market. Samsung
Electronics currently has sales networks operating in North America, Asia, Middle East, Europe, and
South America, including in USA and Russia (Samsung, 2015b).
Topography of Russia
Russia contains plains, mountains, forests, and tundra across the country. Despite its large size,
most of Russia’s land is not arable because it is too far north. This forces Russia to rely a great deal on
outside sources of food to feed its population (Advameg, 2015). Development is halted in many areas of
Russia due to the existence of permafrost, volcanic activity, earthquakes, and flooding (CIA, 2015).
Because of many of these reasons, most of Russia’s population stays around the cities, especially
Moscow and St. Petersburg. Since a large portion of the population stays in the main cities, it may be
more attractive to set up headquarters in those cities.
Russia’s average population is also aging and on the decline. What was 149 million people in
1990 is 144 million today (Chamie, 2014). The results of an aging and declining population may make
Russia less attractive for new, high-tech business.
As with many transitional economies, Russia needs to foster managerial talent. Since Russia had
been a centrally planned economy, it has a lot of catching up to do to get workers and managers that
can work well in a market economy (Wild, 2012). Due to much of the workforce in Russia being
unskilled, there is a higher need for ethnocentric human resources practices. Having to use these
practices make it more expensive to open operations in Russia.
There are few free trade zones in Russia, as the government is extremely selective of the
countries that they want to freely trade with. There is a free trade zone near the Suez Canal that is
intended for free trade between Egypt and Russia, as well as other zones that are still being worked on
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intended to open free trade between Russia and the other former Soviet states (Russia Today, 2015).
There is also a World Trade Center located in Moscow that may help international companies enter the
market (World Trade Center Moscow, 2006).
The Russian Economy
The Russian government still has heavy influences from its Soviet past. After the dissolution of
the Soviet Union, the objective was to transform Russia into a mixed market economy. This objective
has stalled over time, however, and has resulted in a system that has only been partially reformed. An
overwhelmingly high concentration of wealth is centralized in the hands of Russian officials; meanwhile,
the rest of the country’s populace is very poor (CIA). Most industries in Russia have been privatized with
the notable exceptions of energy and defense-related industries. Property rights are overall weak and
the private sector is extremely susceptible to government interference.
After over seven (7) decades of Soviet rule, the Russian economy still has heavy government
interference. However, in the past 23 years since the Soviet Union collapsed, Russia has made great
strides to become a more market and globally integrated economy rather than a centrally planned
economy (CIA). This leaning was due to protests and demands of the Soviet people, which ultimately
forced the breakup of the Soviet Union. These protests started quickly after the Soviet government
granted certain rights and freedoms to its repressed populace (such as freedom of speech) (The Cold
War Museum, 2015). After Russia started transitioning to a market economy, certain people had a leg
up over others. Members of the Communist Party as well as managers and supervisors under the old
system generally kept their elite status after the transition, leaving little room for other Russians to
make a better living. Due to this, much of the Russian population is very poor and is not able to afford
many luxuries—or even basic items (Wild).
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Although Russia has a declining population, there are still a massive 144 million people living
there, making Russia the 10th most populace in the world. With so many people living there, the GDP is
estimated at $3.6 trillion and is known as one of the BRICS countries (CIA). Being an emerging market,
Russia has the potential for huge economic growth.
Russia is a world leader in production and exporting of oil, natural gas, steel, and aluminum. Due
to the reliance on these types of exports, the Russian economy is very susceptible to swings as the prices
of these exports fluctuate (CIA). These swings can be dangerous to companies that are not expecting it
and results in companies that operate in Russia keeping a close eye on oil prices out of necessity to
predict the swings in the Russian economy. The Russian government has also been known to heavily
interfere in the private sector, which can make the investment climate uneasy. The Russian government
has framed and arrested businesspeople in the past who they consider to be a threat to the state (Wild).
Russia has other stability issues as well. There have been political issues since the breakup of the Soviet
Union over boarders between Russia and the former Soviet republics, like with Georgia in 2008 and with
Ukraine in 2014. Being close to areas where terrorist groups reside can also cause issues if Russia does
not keep its nuclear arms under close security (Wild).
The current exchange rate between Russia and the US is approximately 62 Russian rubles to one
(1) US dollar. This number has increased dramatically over the past couple of years being as low as 30
Rubles to the Dollar in 2013 (CIA). The drastic fall of the ruble may mean that it is cheaper for foreign
investors to enter the economy, but it may be more difficult for already poor Russian consumers to be
able to afford their goods.
Russia exports more than it imports; its overall balance of payments in 2014 is a positive 59.5
billion US dollars (Bank of Russia, 2015). Russia’s balance of payments with the United States is a
positive 12.9 billion US dollars (Census, 2015). This is largely due to the many tariffs and trade
regulations in Russia. Telephone equipment has a 15% tariff, television sets have a 10% tariff, and many
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other consumer electronics have similarly high tariffs (Extreme Tracking, 2002). These tariffs can make it
difficult for companies to invest in Russia by importing their products for the Russian market. In many
cases, it can be more cost effective for companies to make their products in Russia using Russian
materials.
Business Customs in Russia
Russian businesses are often open form early morning to early evening (around 8pm). Some
may stay open later and most are either closed or will close early on Sundays. There is a midday hour-
long break in Russia called pereryv, which usually occurs around 1 or 2 in the afternoon. Several public
holidays occur throughout the year which may affect business hours (Visa Express, 2015). These include:
New Year’s Day (January 1)
Orthodox Christmas Day (January 7)
International Women’s Day (March 8)
International Labor Day (May 1 and 2)
Victory Day (May 9)
Russian Independence Day (June 12)
Day of Reconciliation and Accord/Formally known as Revolution Day (November 7)
Also to celebrate the spring, most Russian businesses shut down during the first half of May
(Visa Express). It is important to know these holidays, festivals, and customs in order to ensure that
meetings with Russian businesses won’t run into problems, as many may be busy or closed during these
times.
There are a lot of women in Russian business due to the equality values of the Soviet Union.
Despite these old values, however, many women in Russian business are not taken as seriously as their
male counterparts, and there are very few in senior management. Women are showered with attention
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and courtesies as part of the culture, but when it comes down to doing business, women are often seen
as inferior to their male colleagues (World Business Culture, 2013). Due to this, it may be better to have
male businessmen handle meetings with higher ups in Russian companies.
Businesses are very centralized in their management structure in Russia. It is often seen as a
waste of time to speak to middle managers or lower because they have little decision making ability. You
need to have what is referred to as svyasi, or friends in high places (Kwintessential, 2014). Managers are
very directive and give specific instructions for their subordinates. These mindsets come from the Soviet
era and are largely seen in older managers. Younger managers in Russia are more influenced by Western
management theory and aren’t generally as directive; however, they are usually low on the corporate
ladder (World Business Culture). Over time, it should be expected that Russian managers will become
less directive as the Soviet era managers retire and the post-Soviet era managers enter higher positions
in corporations. For the present time though, it is important to realize the directive and controlling
characteristics of Russian senior managers.
Business meetings are considered to be a very serious affair in Russia. It is important to be on
time, and shaking hands while keeping eye contact is appropriate when meeting (Foreign Translations,
2015). Because of the serious nature of the meetings, humor is often looked down upon during these
times. It is expected that your dress is as professional as your salary will allow. In order to gain credibility
(especially for foreign businesspeople), wearing expensive looking business professional clothes is
expected. Many meetings are meant to disseminate information. This is largely due to the directive
management style used in Russian business. In meetings not meant for negotiation, any attempts at
open debate are considered disrespectful (World Business Culture). High pressure talk can make you
look impatient and rude, as patience is very valued in Russian culture. It is also considered to be rude to
show the soles of your shoes in Russian culture. Meetings that are meant for negotiation are generally
between high level managers and are usually limited to just a couple of people. Throughout the duration
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of negotiation meetings, patience is further tested by people getting angry during negotiations, including
threats and walking out of the meeting in order to get more concessions—this is expected in
negotiations (Foreign Translations). These types of dramatic cultural differences in business practice are
what make Russian business confusing to foreigners, as things like pressure are considered rude, but
anger and threats are not.
In order to do business or work in teams, everyone involved has to get along. In Russian society
there is a general suspicion of strangers (World Business Culture). Considerable amounts of time are
required to establish personal relationships with business partners. A signal that you have established a
personal relationship in Russia is when the other party asks you for a favor (Kwintesential). In business
interactions, first names and patronymics (component of their father’s name) are used. It is acceptable
for foreigners to just use the first name (International Market Advisor, 2015).
When invited to a Russian home, it is important to bring a gift. If you are male and visiting, you
should bring flowers (but not flowers in even numbers or yellow flowers, which symbolize death and are
only used at funerals) (Morrissette, 2015). You should also not bring baby gifts until after the baby is
born, as it is seen as bad luck. You should also be prepared to have the gift initially declined (this is
considered polite), but you need to offer again for them to accept it. Dining is generally a casual affair,
with only a few things to keep in mind. You are not to begin eating until invited by the host. Keep hands
visible, but do not rest your elbows on the table, and leave a small amount of food on your plate to
signify that the host has provided ample hospitality (Kwintessential).
Transportation in Russia is comprised of mostly railways. For citizens, both railways and cars are
used. Cars are generally only used by those who live outside of the cities that they work in. The rest of
populace uses railway and other public transportation to get around (A. Phillips, personal
communication, April 2015). For economic units, nine tenths of all transportation for raw materials
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(except for oil, which is primarily transported through pipelines) runs through the railway systems
(Riasanovsky, 2015).
Samsung in Russia
Samsung is currently heavily involved in the Russian market. Holding 5 subsidiaries in the region
and significant amounts of direct foreign investment in the country, Samsung sells a wide range of
electronics in the Russian market, including TVs, smartphones, microwaves, and other home appliances.
Samsung also has a TV production facility near Moscow that produces around four million TVs every
year (Kyung-Don, 2014). Samsung is also considering Russia to be one of the first places for them to
launch a smartphone that runs a new operating system—a risky venture. The reason that they are
considering Russia is because Russia is the eighth largest cell phone market in the world (Riknӓs, 2014)
Samsung was first involved in the Russian market in the early 90s when they entered the market to hire
the cheap, post-Soviet, scientists in the region for R&D (Shaughnessy, 2013). This has created a
relationship with Russia being one of the first Western-allied companies to invest in the former Soviet
Union.
The smartphone market is one of Samsung’s largest concentrations. The smartphone market in
Russia is rapidly increasing, catching up to many developed countries. In Russia, Samsung holds about
half of the total smartphone market, way ahead of its closest rival, Apple (Tax, 2013).
What Samsung Can Do Better
While Samsung has had great success in the Russian market, there are still opportunities for the
company to further improve its position.
While Russia has seen strong growth over the past several years in the consumer electronics
industry, that growth is starting to slow. This should be worrying to Samsung, being a large consumer
electronics manufacturer (BMI Research, 2015). The recent inflation of the ruble may be the reason that
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many industries, including consumer electronics, are slowing. As prices go up, fewer Russians are able to
afford products that may be considered luxury, such as high end telephones and large kitchen
appliances. With the potential decline in sales, this could lead to a lot of financial hardship, especially
with the four million TVs that Samsung manufactures every year in the country. In order to fix this
problem, Samsung should be looking into the sectors of the Russian economy that are enjoying high
growth, such as manufacturing, engineering, and steel (Lossan, 2014). Instead of marketing
smartphones directly to consumers, Samsung may want to consider marketing their smartphones to
executives and businesspeople working in these sectors of the economy. People working in these
industries are being paid high wages, and may find Samsung’s smartphones to be a strong productivity
tool.
Another problem that Samsung faces in Russia is the lack of powerful cellular networks outside
of the large cities (Open Signal, 2015). Due to the extreme deficit of 4G cellular signals in Russia, many of
the high end smartphones that Samsung sells are not able to be used to their full potential. Samsung
may want to consider partnering with a Russian cellular company, such as Rostelecom, the only Russian
cellular company that offers service beyond 3G. By doing this, Samsung can increase the range of
cellular networks in Russia and therefore make their phone’s abilities more apparent. Expanding Russia’s
cellular networks may also be recognized by the government as a service to the country. This could
result in Samsung being given tax breaks from the extremely high tariffs, giving a serious advantage over
its competitors.
Another thing that Samsung should consider is analyzing the market further, which could be
done with the help of the World Trade Center of Moscow. As the population of Russia ages, there will be
fewer people interested in the advanced technology that Samsung offers. From a quick look on Samsung
Russia’s website, it is apparent that Samsung carries some extent of a global marketing approach. If
Samsung were able to appeal to an older market, they may realize more profits as nearly half of all
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Russians are between the ages 25 and 54 (CIA). At the same time, Samsung may be able to do this better
than other tech companies, since they have been in Russia since shortly after the Soviet Union collapse
—establishing trust with the Russians who have seen the company around for over 20 years—not an
easy feat due to the suspicion of outsiders that exists in Russian society.
Problems Samsung Faces in Russia
Potentially, one of the biggest issues that Samsung may face at times in Russia is interactions
with the Russian government. With the government having a history of pestering privately held
businesses, this is always a risk when doing business in the country. In order to avoid potential issues
with the government, it is advised that Samsung stay out of Russian affairs to avoid being labelled as a
threat to the state. If Samsung were ever to be labeled as a threat to the Russian government, there
could be potentially catastrophic consequences for the company.
Samsung also faces obstacles revolving around the weak ruble. Since Samsung is already
established in Russia, it poses problems to be able to actually sell their expensive, foreign products to
people in Russia—especially since a large portion of the populace is considered to be poor. During this
period of time though, it will be easier for Samsung to keep its Russian investments afloat with foreign
money.
Compatibilities with Russia
Being a Korean company, some business practices in Russia aren’t totally foreign to Samsung.
The hierarchical structure of business in Russia is very similar to the structures of Korean companies. In
Korea, it is also important to be on time for meetings and to build relationships with business partners
(K4E Consulting, 2015). Because of many of the similarities between Russia and Korea in terms of
business customs and etiquette, it may be easier for companies such as Samsung to adjust to the
Russian business world than for an American or more Western business. The most difficult adjustment
for a Korean business to make in Russia would have to be dealing with the expectation of argument in
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negotiations. In Korea it is extremely important to save face and not attack business partners, while in
Russia language that would be interpreted as doing so in Korea is expected in negotiations (K4E
Consulting).
Summary
Despite Samsung already being very successful in the Russian market, it is important that
Samsung continues to adapt to the Russian market. Because of the declining ruble and the lack of overall
wealth in the main population of Russia, Samsung should be focusing on more wealthy people involved
with the high growth sectors of the economy. Samsung should also attempt to partner with Rostelecom
to expand the 4G networks available in Russia in order to improve the usefulness of Samsung’s
smartphones. Samsung also needs to be researching on how to appeal to an older market due to the
ever aging Russian population. By adapting to these market situations, Samsung can continue its
dominance in Russia as a consumer electronics company.
Conclusion
Samsung has done a very good job in the Russian market, and as long as it continues to adapt to
the market, it will continue to do so. Samsung has demonstrated a strong understanding of Russian
business after being there for longer than most international companies. Russia is stalling in its
transition from a centrally planned economy to a market economy, and it results in stability issues with
the government interfering in the private sector of the economy which can make it difficult for
international companies to work in Russia. Samsung has overcome many of these obstacles to become
successful in the region, Samsung can continue to improve its situation in the country by keeping a close
eye on the changes in the economy, political system, and changing attitudes in Russia by seeking the
most promising market segments and seeking ventures that will make their products more attractive to
Russian consumers.
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