Grenoble Graduate School of Business: International Marketing MBA Assignment

International Market Entry for the Mobile Telecommunications Market in the Russian Federation
Patrick Petit Program Lecturer: Paul Gaffney professor at Grenoble Graduate School of Business and Oxford Brooks Business School
A bstract

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 mobile telecommunication market in the Russian Federation. The research diary uses references from relevant academic sources, trade journals and online publications that are available in the References Cited section. The diary covers the experience of foreign firms doing business in Russia and how they see opportunities and risks in general terms in this country. Speaking of the mobile 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 diary focuses 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, LG Electronics Co, Sony Ericson, and Motorola Inc. The main findings suggest that the cellphone market growth opportunity in Russia is not what it used to be since it has reached a saturation point of over 100 percent, and that many analysts cast skepticism about the potential of new technologies, like 3G networks, to effectively maintain sales growth in a foreseeable future.

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 macroeconomic indicators 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 dealing with Russia's sometimes difficult to understand business environment has caused problems for many foreign companies. The difficulty to understand Russia's business environment can also be an advantage as it serves as an entry barrier that assists those who do enter and learn how to operate effectively to reap higher returns (Fallon and Jones, 2004; Fey and Shekshnia, 2008)
T he econ o mic environ m ent of the R ussian F ederation

The Russian Federation is the largest country in the world with a population of 142 million people scattered 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 poor 03/28/08 1 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment

macroeconomic performance, its structural economic weakness, and the absence of political and institutional support for business (Fallon & Jones, 2004). Sustainable market growth has become more possible since the election of president Putin in early 2000. He introduced the new economic reform program by June 2000. The program, based on free market principals, called for an extension of fair business activities, guarantee property rights and the elimination of bureaucratic constraints on businesses. Reform objectives included: taxation, budgetary measures, legal and corporate governance, labor laws. It resulted in undeniable success, despite oligarchs' attempts to block reforms, which helped create a market environment in which successful economic transition and 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 and investors. Following Moody s and Fitch's upgrades in October 2003 and November 2004 respectively. S&P s finally agreed that Russia warrants an investment grade rating BBB-, stable outlook. (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 % from 2001-2005, Russia has definitely become an attractive destination for foreign investments (Fey and Shekshnia, 2008). This represents a dramatic investor confidence change from the mid-1990 when Russian market was 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 remain low. Industrial capital assets have aged dramatically, placing major constraints on the country's future ability to achieve sustainable growth in (Fallon and Jones, 2004). Also, little progress has been made in reforming Russia's bureaucracy. Western enterprises trading in Russia still suffer from damaging government interferences in their business activities and from failure in reforming the banking and financial systems. Problems of barter, crime and corruption remain pervasive at all levels of the Russian society (BEEPS, 2005), to such an extent that Fey and Shekshnia (2008) argue that companies claiming that they have never dealt with corruption in Russia are either lying or completely misunderstand the environment in which they operate .
T he M o bile P h one M arket in the R ussian F ederation

In the Business Week Online article, "3G Could Be a Tough Sell in Russia", Jason Bush summarizes well the situation of the cellphone market in Russia in 2008. "Nothing symbolizes the emergence of Russia's consumer market more than its remarkable explosion in mobile-phone ownership. With some 155 million mobile-phone subscribers and $15.3 billion in projected mobile-telco revenues this year, Russia now boasts the third-largest cellular market in the world, behind only the U.S. and China. The market has grown at breakneck speed since 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 2008 and the country is also home to a newly developing middle class (O'Leary, 2008). However, the Russian market is complex and composite, showing wide variations between major urban centers such as Moscow or St. Petersburg and the rural regions. Hence, thinking of a homogeneous consumer profile would be serious misleading in understanding the characteristics of the Russian people. For these reasons, the cellphone market in Russia is segmented in eight price bands (below $80, 03/28/08 2 © Petit P. 2008

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 three geographies (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 the country'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 the Svyaznoy 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 valueadded services, while Euroset emphasizes low prices and zany marketing (Jason, 2005). Both Euroset and Maxus agree that increasing customer reach through new branch networks are strategically 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 and Samsung gaining at the expense of Motorola, which continues to struggle due to a lack of new model activity. Nokia dominates leadership of the cellphone market in EMEA, rising to its highest level ever, with a market share of 51 percent in Q2 2007 (IDC, 2007). Samsung has overtaken Motorola in handset revenue terms with 17 percent market share. Sony Ericsson continues to record gains in major markets, with CEMA and Western Europe representing two of its three strongest growing regions, and hols a 14 percent market share in the EMEA region. Motorola slipped to fourth place in 2007, down one place from the first quarter of 2007 with a 6% market share, and continues to pay the price for market share gains with low-cost handsets and over-reliance on the RAZR 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 in handset sales in Russia in 2006 with 30 percent market shares, followed by Nokia with 26.5 percent market shares and Motorola with 17.3 percent market shares (Baker and Kirsanova, 2007; Smith, 2006).
M arket e ntry an d de velop m e nt strategies

Businesses must choose between a variety of alternative market entry strategies, each offering different degrees of risk and control over their operations. Obviously, the decision of how to enter the Russian market will carry a significant bearing on the results as risk and returns are both likely to 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 a particular 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 in foreign production facilities is required. Like the top-five cellphone manufacturers, new entrants would be expected to enter Russia through exporting in collaboration with locally-based distributors 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 03/28/08 3 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment from 328 to 1177 outlets in 2004, with 90 percent of the new branches outside Moscow. Maxus' objectives is to expand its sales network to 1600 outlets by 2008 (Jason, 2005). Alternatively, cellphone manufacturers may opt for foreign direct investment (FDI) leading to the establishment of a wholly owned subsidiary in Russia. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment (Kotler, 2003). However, it requires a high level of resources, a high degree of commitment and represents the larger risk form of entry mode strategy in Russia (Fallon and Jones, 2004). On the retailer side, the American Brighpoint, who established a presence in Russia in summer 2006, seemed to be willing to take the challenge. Brighpoint's retailing strategy focuses on advanced wireless services and smartphones, especially those running Windows Mobile. Brightpoint says there is a strong market potential for these devices among enterprise users because these devices will evolve in multimedia computers (Smith, 2006). Some cellphone manufacturers started opening stores in Russia as of 2006 as consumers were finding it harder to distinguish between phone brands with similar features. Also, customers purchasing in main retail stores often shop for the best service plan, which typically steers them to a limited choice of handsets (Cassel and Li, 2006). While most consumers in Russia and elsewhere will continue to buy phones at the thousands of stores run by service providers and third-party retailers, Nokia opened a concept store in Moscow in 2006 to increase brand recognition and customer loyalty. In its stylish and fun stores, Nokia displays working cellphones that customers can try freely. To run the project, Nokia hired a former executive from Nike, which uses Niketown stores to promote its brand. Shop staff receive six weeks of training about Nokia's products and company history. Products in the stores were planned to range from about $100 up to $40,000 for the most exclusive phones(Cassel and Li, 2006)! Nokia is planning a VIP-style lounge where sales staff will cater to customers looking to buy the most exclusive products. Other handset manufacturers have similar plans. Motorola opened a branded store in Moscow in February 2006. Both South Korean LG and Samsung say they were considering opening stores (Cassell and Li, 2006). However, standalone stores must strive to find a fine balance as phone manufacturers can upset the cellphone service providers and retailers whose stores still sell the bulk of their phones. In addition, opening flagship stores is a risky venture since these flashy stores can cost millions of dollars to open and are expensive to maintain (Cassell and Li, 2006).
M a n a ging the m arketing mix

In the regions, demand for low prices remain high. Companies addressing the rural market should deliver value for money and reliability to consumers while improving affordability through financing and leasing arrangements and service agreements. Consumers in some mid-and lowerend market segments may enjoy feature-stripped products allowing cost and unit price reduction while maintaining reliability (Fallon and Jones, 2004). On the hand, consumers in urban centers are becoming increasingly sophisticated and seek for the latest technology and fashion (Kolesnikova, 2006). Russia has already become the world's fourth-largest luxury market, which is expected to rise up to $13 billion in 2008, with Moscow being alone the home to 88,000 millionaires (O'Leary, 2008). The marketing push by handset manufacturers is part of a broader branding effort. They are determined to keep their phones from being simple commodities as consumers are finding it harder to distinguish between brands as phones come with similar features, and who often make a purchase decision for the best service plan, which typically steers consumers to a limited choice of handsets (Cassell and Li, 2006). Also, Apple's iPhone has put the mobile devices' industry in the spotlight, forcing vendors to launch new design-oriented and music-dedicated products. At the 03/28/08 4 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment Mobile World Congress in Barcelona, Nokia, Motorola, Sony Ericson and Samsung unveiled their global promotional strategies on a fresh generation of mobile handsets designed to compete with Apple's iPhone in 2008. Sony Ericson will focus the X1 brand's flagship cellphones. Samsung is spending 16 millions pounds on a pan-European marketing campaign for Soul, the company's flagship cellphones for 2008. Motorla in turn is planning a multi-million-pound campaign to promote its Z10 kick-slider handset in Europe, Asia, the Middle East and Africa (Jones, 2008). Nokia started in 2005 to boost sales of unlocked N series cellphone through online retailers and independent wireless specialists and national and regional consumer electronics retailers to supplant carrier-channel sales. The strategy focuses on high-end products for high-end consumers who are willing to spend a $200-$300 premium for phones that lack a carrier subsidy. Nokia also started to market step-up phones in its fashion series through no-carrier channels and offered the glass-and-stainless-steel Luna phone on an unlocked basis in late summer 2007 for $800 (Palenchar, 2007). Nokia again, improved markets adaptation with the newer Nokia N series quadband phones, which operate in both U.S. bands (850 and 1,900 MHz), optimizing them for the use on the 850/1,900 MHz AT&T/ Cingular network as well as on the 1,900 MHz T-Mobile networks. One new standardized model, the N75 phone is a quadband GSM/EDGE for Europe, which also works in WCDMA mode in the US 850/1,900 MHz bands. Nokia also plans to expand the selection of all form factors within the N series. As a result, the number of N series distribution points is significantly greater to support sales through storefronts (Palenchar, 2007).
A d vertizing in the R ussian F e deration

The top-five cellphone manufacturers spent more than $4 billion on advertising and promotion in 2005, up 74% from 2003, according to a report by investment bank Goldman Sachs Group Inc. and Wolff Olins, a brand consultant. Because product trends and innovations are being copied very quickly, "brand and design are rising in importance," says Goldman analyst Tim Boddy in Cassell and Li (2006) Russia is also one of the fastest-growing advertising market, with spending increasing in excess of 20 percent year over year. But for all of its prospects, marketers and agencies find Russia's complex scale and diversity extremely challenging (O'Leary, 2008). Russia is a large country with eleven time zones, dozens of ethnics, cultures and different languages that make the task to the marketers really challenging. Part of the difficulty resides also from the fact that the media has been and still is used by the political class to diffuse government propaganda. People have learned to discount all that puffery, and it seems that they are equally adept at discounting the same kinds of excesses in Russian advertising (Rance, 2007). Notice that this statement is somehow contradicting John Farrell CEO of Publicis Group who said in O'Leary (2008) that Russian consumers are not only advertising and marketing literate, but they're also very receptive to it. They're less cynical than consumers in the U.S. and the U.K.,"
C on clusion an d strategic reco m m en dations

In the report Marketing in Russia by UK Businesses¨ Grahame Fallon and Alan Jones present the findings of a survey of UK participants in a trade mission to Moscow which focused on the experience of small-to-medium enterprises doing business in transitioning economies (TE) including Russia. The findings emphasized that enterprises wishing to start a business in Russia should strive to answer three main questions: What are the incentives for entering (or increasing a 03/28/08 5 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment

business involvement) in the Russian market? With what marketing strategy or entry mode? and with what marketing mix including reflections about degrees of standardization versus adaptation? (Fallon and Jones, 2004). Also, in determining whether a foreign firm should enter a foreign market Philip Kotler (2003) outlined three criteria that companies should evaluate: Does the market rank high on market attractiveness? Does the market has low risks, that is, a high degree of confidence that the company can be successful? Will the company possess a competitive advantage in that market? The situation regarding the cellphone market in Russia as of 2008 is not what it used to be only two years ago. The cellphone market penetration has already reached 108 percent. Measured in terms of the number of SIM cards relative to the population in 2007 (less in rural areas). This means that on average, Russians possess more than one phone account per person (Kolesnikova, 2006). As a result growth rates are falling fast. In the first quarter of 2007, the number of phone subscribers grew by 17 percent from a year earlier. By comparison, annual growth topped 106 percent two years ago (Bush, 2007) So, the obvious issue regarding entry opportunities for new players as far as the Russian cellphone market is concerned is where to go from there? New business opportunities may be coming from the promise of future growth from new technologies like the third-generation (3G) mobile-phone networks (Goodrick and Srivastava, 2004; Kolesnikova, 2006), and the prospect of recurring business from fast product life cycle and upgrade turn-over that is estimated to three to six months (Kolesnikova, 2006). However, the big unknown is whether 3G technology will be more profitable in Russia than it has been in other countries where 3G's capacity is underutilized. On the positive side, the low attribution license fees ($100,000 each) explains why Russia's leading operators are willing to invest significant amounts ($2.3 billion) in building 3G networks across the country (Bush, 2007). MTS's market research show a high potential demand for 3G services such as mobile broadband, video-on-demand, and mobile TV, but MTS' optimism raises skepticisms. For instance, Irina Astafieva, an analyst at J'son & Partners consultancy in Moscow is reserved on this optimistic prediction. She forecasts that just 9 million Russians, mainly corporate customers, will be 3G users by 2010 (Bush, 2007). Value-added services, such as picture messaging, digital music, and the wireless Web, have not been particularly successful in Russia so far (Kolesnikova 2006). Finally, it is believed that by the time value-added cellphone services arrive, there's a good chance that 3G technology will be already outdated because fourth-generation systems are already under development (Bush, 2007). In conclusion, as a cellphone maker, I would not bet too much on 3G networks and multimedia services to boost sales in a completely saturated market with, in average, a population casting relatively low incomes, and who shows moderate interests in advanced mobile features. Other opportunities may be foreseen in luxury and fashion niches on the high-end of the consumer spectrum. For instance, Samsung with its 400 designers based in Seoul and a budget of over $100 million, who is preparing the next cellphone generations known as full metal casing signed Armani or Bang & Olufsen, may have a stride in this strategy (Capital, 2008). On the low-entry side, Nokia, whose reputation is known for its affordable and robust cellphones, may be well positioned. Unless, Asian newcomers offering ultra-cheap phones take this segment position. For instance, in India, Reliance Communications sells a model for $19, with no subsidies. The Chinese ZTE, has a model at $30. These manufacturers are doing well in poorer Central European countries. Nokia, whose cheapest phones retail for as little as $32, said it does not plan to beat those rivals on price (Jack, Moon and Mandini, 2008). 03/28/08 6 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment

R eferences Cited:
BEEPS, (2005) The EBRD-World Bank Business Environment and Enterprise Performance Survey: Firms Report Improved Business Climate. Challenges Remain. , Washington, D.C., November 15, 2005 [Online], Available, [01/03/2008] Fey, Carl F., Shekshnia, S. (2008) 'THE KEY COMMANDMENTS FOR DOING BUSINESS IN RUSSIA', INSEAD Working Papers Collection; 2008 Issue 16, p1-34, 36p, Fallon, G. Jones, A. (2004), Marketing in Russia by UK businesses: lessons from a survey of trade missioners to Moscow , Journal of Small Business and Enterprise Development, Emerald Group Publishing Limited., Vol. 11, Number 2, 2004, pp. 174-183 Goodrick, J., Srivastava, L. () Licensing of Third Generation (3G) Mobile, New Initiatives, in the Strategy and Policy Unit (SPU), International Telecommunication Union (ITU), Geneva, Switzerland. O'Leary, N. (2008) THE RISE OF BRIC., Adweek; 2/4/2008, Vol. 49 Issue 4, p32-65 Rance, R. (2007) Maybe the Russians are right: Advertising can be a bad thing., Advertising Age, 10/1/2007, Vol. 78 Issue 39, p22-22 Cassell, B-L., Li, Y. (2006) Selling Cellphone Buzz. , Wall Street Journal - Eastern Edition; 2/23/2006, Vol. 247 Issue 44, pB1-B5, 2p, Bush, J. (2005) Russia: From Rags To Cell-Phone Riches, Business Week. May 9 2005., [Online], Available, [23/03/2008] Kolesnikova, M. (2006) Cell Phone Mania, Russian Life, March 24, 2006, [Online], Available, [23/03/208] The Economist Intelligence Unit, (2005), Russia: Market profile, Telecoms & Technology Forecast World; Jun2005, p349-353, 5p Jones, G. (2008) Handset manufacturers plot response to iPhone., Marketing (00253650); 2/13/2008, p1-1 Jack, & All (2008) Mad dash for the low end, Business Week; 2/18/2008 Issue 4071, p30-30 Smith, B. (2006) Brightpoint's "Da" to Russian Market., Wireless Week; 8/1/2006, Vol. 12 Issue 16, p12-12 Wieland, K.., Morris, I. (2007) Russia's quest for telecom growth., Telecommunications International Edition; Jun2007, Vol. 41 Issue 6, p26-28 Theler, H. (2006), Russian business: tough, but worth it. Global Telecoms Business; May/Jun2006 Issue 86, p78-78, 1p, 1c 03/28/08 7 © Petit P. 2008

Grenoble Graduate School of Business: International Marketing MBA Assignment

Bush, J. (2007), 3G Could Be a Tough Sell in Russia., Business Week Online; 5/9/2007, p19-19, 1p Palenchar, J. (2007), Nokia Boosts Unlocked GSM Phone Sales, TWICE: This Week in Consumer Electronics; 6/18/2007, Vol. 22 Issue 13, p6-37, 2p Morris., I. (2007), 3G invades Russia, Telecommunications - International Edition; May2007, Vol. 41 Issue 5, p16-18, 3p IDC (2007), Motorola Slips as Nokia Takes Over 50% Share in 2Q07 EMEA Mobile Phone Market, August 9, 2007, [Online], Available, [08/03/2008] Baker, S., Kirsanova, K. (2007), Russia Mobile Phone 2007 2011 Forecast and 2006 Vendor Shares, IDC Market Analysis Abstract, [Online], Available containerId=EMH1P, [22/03/2008] Kother, P, (2003). Marketing Management. New Jersey: Pearson Pearson Education. PCM, (2005), S&P s Upgrades Russia to Investment Grade, Prosperity Capital Management, 31 January 2005, [Online], Available, [26/03/2008] Capital, (2008), Design Pour mieux seduire, Samsung lance 15 nouveautés par mois, Numéro 198, Mars 2008, p 66-68.



© Petit P. 2008

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