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International Market Entry for the Mobile Telecommunications Market in the Russian Federation

International Market Entry for the Mobile Telecommunications Market in the Russian Federation

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Published by Patrick Petit
This essay presents and analyzes of the findings from a research diary (provided in an appendix), which aims is to explore the market entry and development strategies for the mobile telecommunication market in the Russian Federation.
This essay presents and analyzes of the findings from a research diary (provided in an appendix), which aims is to explore the market entry and development strategies for the mobile telecommunication market in the Russian Federation.

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Published by: Patrick Petit on Sep 13, 2010
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05/24/2012

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Grenoble Graduate School of Business: International Marketing MBA Assignment
International Market Entry for the Mobile TelecommunicationsMarket in the Russian Federation
Patrick PetitProgram Lecturer: Paul Gaffney professor at Grenoble GraduateSchool of Business and Oxford Brooks Business School
Abstract
This paper presents and analyzes of the findings from a research diary (provided in an appendix),which aims is to explore the market entry and development strategies for the mobiletelecommunication market in the Russian Federation. The research diary uses references fromrelevant academic sources, trade journals and online publications that are available in theReferences Cited section. The diary covers the experience of foreign firms doing business inRussia and how they see opportunities and risks in general terms in this country. Speaking of themobile telecommunications market is actually an umbrella term for several sub-markets (or sectors)including wireless-carriers and cellphone operators, cellphone retailers, cellphone manufacturers,consumer electronics, mobile network value-added services and software vendors, each being of significant size. For the sake of keeping this study within a reasonable scope, the research diaryfocuses more on the mobile-phone (cellphone or handset) market in Russia from the perspective of some of the top five cellphone manufacturers including Nokia Corp,
Samsung Electronics Co, LGElectronics Co
, Sony Ericson, and
Motorola Inc
. The main findings suggest that the cellphonemarket growth opportunity in Russia is not what it used to be since it has reached a saturation pointof over 100 percent, and that many analysts cast skepticism about the potential of newtechnologies, like 3G networks, to effectively maintain sales growth in a foreseeable future.
Introduction
Western firms are attracted by the Russian market principally due to its large domestic market of over 142 million consumers, its increasing political stability, with good recent macroeconomicindicators and promising growth prospects. In addition, Russia is a young and dynamic market(Smith, 2006) capable of rapid changes leading to risks as well as opportunities for new entrants.Other incentives for entering the Russian market include the country's large natural resources,potentially exploitable technologies and a well educated workforce. It is undeniable that dealingwith Russia's sometimes difficult to understand business environment has caused problems formany foreign companies. The difficulty to understand Russia's business environment can also be anadvantage as it serves as an entry barrier that assists those who do enter and learn how to operateeffectively to reap higher returns (Fallon and Jones, 2004; Fey and Shekshnia, 2008)
The economic environment of the Russian Federation
The Russian Federation is the largest country in the world with a population of 142 million peoplescattered throughout eleven time zones. This country has large natural resources (gas and oil),whose industries account for nearly a quarter of the country's GDP and one-third in tax revenues of the state incomes. However, until 2000, doing business in Russia was hindered by poor03/28/081
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Petit P. 2008
 
Grenoble Graduate School of Business: International Marketing MBA Assignmentmacroeconomic performance, its structural economic weakness, and the absence of political andinstitutional support for business (Fallon & Jones, 2004). Sustainable market growth has becomemore possible since the election of president Putin in early 2000. He introduced the new economicreform programby June 2000. The program, based on free market principals, called for anextension of fair business activities, guarantee property rights and the elimination of bureaucraticconstraints on businesses. Reform objectives included: taxation, budgetary measures, legal andcorporate governance, labor laws. It resulted in undeniable success, despite oligarchs' attempts toblock reforms, which helped create a market environment in which successful economic transitionand western businesses investments would become possible (Fallon & Jones, 2004).Business analysts have revised Russia's credit ratings upward, reflecting the growing confidence of the country's political stability, along with an increasing enthusiasm from western businesses andinvestors. Following Moodys and Fitch's upgrades in October 2003 and November 2004respectively. S&Ps finally agreed that Russia warrants an investment grade rating BBB-, stableoutlook. (PCM, 2005)In effect, with one of the world's fastest GDP growth rates is estimated to 6.3% for 2008 (7.5%from 2001 to 2005), and a substantial average growth in purchasing power of more that 400 % from2001-2005, Russia has definitely become an attractive destination for foreign investments (Fey andShekshnia, 2008).This represents a dramatic investor confidence change from the mid-1990 when Russian marketwas perceived by analysts as a high risk market. However, challenges remain. Many analysts think that the economic reform in Russia is incomplete. Domestic and foreign direct investments remainlow. Industrial capital assets have aged dramatically, placing major constraints on the country'sfuture ability to achieve sustainable growthin (Fallon and Jones, 2004). Also, little progress hasbeen made in reforming Russia's bureaucracy. Western enterprises trading in Russia still suffer fromdamaging government interferences in their business activities and from failure in reforming thebanking and financial systems. Problems of barter, crime and corruption remain pervasive at alllevels of the Russian society (BEEPS, 2005), to such an extent that Fey and Shekshnia (2008) arguethat companies claiming that they have never dealt with corruption in Russia are either lying orcompletely misunderstand the environment in which they operate.
The Mobile Phone Market in the Russian Federation
In the Business Week Online article, "3G Could Be a Tough Sell in Russia", Jason Bushsummarizes well the situation of the cellphone market in Russia in 2008."Nothing symbolizes the emergence of Russia's consumer market more than its remarkableexplosion in mobile-phone ownership. With some 155 million mobile-phone subscribers and $15.3billion in projected mobile-telco revenues this year, Russia now boasts the third-largest cellularmarket in the world, behind only the U.S. and China. The market has grown at breakneck speedsince the start of the decade, when there were just 1.35 million subscribers."(Jason, 2007).While one in five Russians still lives in poverty, workers' salaries have doubled from 2003 to 2008and the country is also home to a newly developing middle class (O'Leary, 2008). However, theRussian market is complex and composite, showing wide variations between major urban centerssuch as Moscow or St. Petersburg and the rural regions. Hence, thinking of a homogeneousconsumer profile would be serious misleading in understanding the characteristics of the Russianpeople.For these reasons, the cellphone market in Russia is segmented in eight price bands (below $80,03/28/082
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Grenoble Graduate School of Business: International Marketing MBA Assignment$80-100, $100-120, $120-150, $150-$200, $200-300, $300-$450, and above $450), and threegeographies (Moscow/Moscow region, St. Petersburg/Leningrad region, and the rest of Russia)(
Baker and Kirsanova, 2007)
.
Three mobile phone operators MTS, Vimpelcom and Megafom control about 85 percent of thecountry's entire cellphone subscription market according to the CEO of VimpelCom Alexander Izosimov (Smith, 2006; O'Leary, 2008).Mobile phone distribution channels are dominated by two major retailers. The first is Euroset,which is also the third-largest retailer in Russia, and the second is Maxus, which operates under theSvyaznoy brand. Both Euroset and Maxus sell mobile phones as well as service contracts on behalf of Russia's major mobile-phone operators. Maxus focuses more on high-tech products and value-added services, while Euroset emphasizes low prices and zany marketing (Jason, 2005). BothEuroset and Maxus agree that increasing customer reach through new branch networks arestrategically critical and that margin can be 30 percent higher in the regions than in Moscow (Jason,2005).Handset sales growth in the Central & Eastern Europe and Middle East & Africa regions are driven by the success of the top 3 vendors, with Nokia's impressively growth and both Sony Ericsson andSamsung gaining at the expense of Motorola, which continues to struggle due to a lack of newmodel activity. Nokia dominates leadership of the cellphone market in EMEA, rising to its highestlevel ever, with a market share of 51 percent in Q2 2007 (IDC, 2007). Samsung has overtakenMotorola in handset revenue terms with 17 percent market share. Sony Ericsson continues to recordgains in major markets, with CEMA and Western Europe representing two of its three strongestgrowing regions, and hols a 14 percent market share in the EMEA region. Motorola slipped tofourth place in 2007, down one place from the first quarter of 2007 with a 6% market share, andcontinues to pay the price for market share gains with low-cost handsets and over-reliance on theRAZR line. LG Electronics holds a market share of 4 percent (Baker and Kirsanova, 2007;Economist Intelligence Unit, 2005; Theler, 2006; IDC, 2007). However,
Samsung was the leader inhandset sales in Russia in 2006 with 30 percent market shares, followed by Nokia with 26.5 percentmarket shares and Motorola with 17.3 percent market shares (Baker and Kirsanova, 2007; Smith,2006).
Market entry and development strategies
Businesses must choose between a variety of alternative market entry strategies, each offeringdifferent degrees of risk and control over their operations. Obviously, the decision of how to enterthe Russian market will carry a significant bearing on the results as risk and returns are both likelyto increase along with increasing commitment to Russia, and to be greatest in the case of investment entry modes. Fallon and Jones (2004) outlined what should motivate the choice of aparticular entry mode in the Russian market.All top five mobile manufacturers entered the Russian market primarily by means of exporting.Exporting is the marketing and direct sale of domestically-produced goods in another country.Since exporting does not require that the goods be produced in the target country, no investment inforeign production facilities is required. Like the top-five cellphone manufacturers, new entrantswould be expected to enter Russia through exporting in collaboration with locally-baseddistributors or agents in order to gain insider knowledge of the market and legal constraints,leverage the existing distribution channels, save costs and minimize risks (Fallon and Jones 2004).Being able to rely on
existing distribution channels to distribute products is critically important in a big and dispersed country like Russia (Bush, 2005). To that aim, Euroset increased it sales network 
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