TNT is taking a wait and see approach to Russia, but continues to see it as a potentially lucrative market

Published: 9/6/1999

Despite 35% revenue growth in 1998, the transport company, TNT, like many international companies, is adopting a wait-and-see approach toward further expansion in Russia. According to Abilio Varela, TNT General Manager, although Russia is a potentially highly lucrative market, there are significant impediments to expansion: some common to many western companies; some unique to TNT. Referring to the complexity of operating in Russia, Varela observed that: "It is not just corruption or legal difficulties or the instability of the economy - it is all these things bound up together". TNT, a unit of TNT Post Group based in Amsterdam, has been in Russia for ten years. Beginning its operations in Moscow and St. Petersburg using independent agencies, the company replaced them with its own depot in Moscow in 1993. Depots in St. Petersburg and Yekaterinburg were added in 1998. The company employs 180 people in Russia, 134 of whom are in Moscow. In 1998, some 30,000 parcels passed through its Russian operation. In Russia, the company specializes in overnight delivery of documents,equipment, spare parts and other time-sensitive goods. It also handleslonger-term shipping. Varela confirmed that, while TNT intends to maintain a presence in Russia, substantial profits are unlikely until fundamental changes occur in the domestic industrial base. He added that: "Our focus is on express delivery and on-time, sensitive cargo, and Russia is a country that mostly exports materials that we don't carry: oil, gas, timber and gold. Essentially, we have to wait for the secondary industrial layer to develop - for the automotive industry, the chemical industry, the services industry to be fully up and running to be able to expand seriously." Varela cited the lack of concentration of industry in one or two regions as preventing TNT from establishing cost-effective, major hub sites that could accumulate big volumes of business. "If you have volumes and a very large industrial layer operating profitably in one region, for instance, you could set up a plane to fly there every night. It's not a big deal," he said. "Manufacturing in Russia isdispersed, which undermines volume. The Chinese have got a corridor of development ... In the U.S., you have industry that is spread across the country, but there are key regional centres. To me, it is not clear how a country that is 5,000 km from key trading partners will be able to do anything." Like most companies, TNT was hit hard by the financial meltdown last August, with the greatest impact from mid-September to mid-November, when the phones stopped ringing and volume plummeted by 50%. As a number of the company's customers went out of business, the pressure on TNT to remain cost-competitive was strong. "We've had to do different things to retain our customers," Varela said. "This included cutting prices, giving greater discounts and introducing savings mechanisms for customers. Basically, all our customers came back to [renegotiate] and tried to get lower prices in their struggle to remain in business. We've basically done the same… For example, we've been trying to negotiate to move out of this building in Sokol and into our logistics centre." He stressed that: "It's not a question of pulling out. We have a worldwide distribution and we must be here. But it's a question of being able to generate reasonable profits on the services we provide." Varela affirmed that the company has, however, fared better than many. He said that the 35% revenue growth in 1998, which was achieved in the earlier part of the year was “a very, very good result", adding that:"We had an outstanding 1997 with 55% growth. We still have the same number of staff, we only let go a few contractors". Indeed, Varela argues that the crisis forced something of a reality check. "I think that Russia had attracted a number of mercenaries. People were coming in because there was good money to be made. These same people, as soon as they made their first dollar, took it out of the country," he said. "That is not the kind of development or investment you need. It is, of course, required in due course, just like in any economy, but it only comes once the industrial layer is there. The basis of the economy is in industry." While future expansion of TNT will rely on the growth of industry, foreign manufacturers have found it difficult to break into Russia. According to Varela: "Timing is of the essence, and the Russian authorities sometimes have a problem in grasping that. A project that is in position today may not necessarily be there a year from now". He concluded that “things will inevitably improve. It will take time. Let's hope it is a development that is based on industrial output [and] on sound economic development rather than speculation as it was before. Not just 300% on the T-bill market but a good solid economic development. But I am not very optimistic about the speed of change and the depth of change over the next five or ten years."

Article ID: 833