In both the packaging and processing sector, domestic equipment suppliers, it seems, have been unable to keep up with the rate of technology development from their western counterparts. Analtoliy Sviridov is the former deputy minister of the Dairy and Meat Processing Industry of the USSR, but now holds the position of senior consultant at the Institute of Food Industry Engineering and so is well positioned to assess the present situation in Russia.
Sviridov identifies several primary areas where the domestic market has become dominated by western players in recent years. One of the primary areas is beverage processing equipment, where he claims that 45,000 bottles are currently processed on domestic built machinery every hour, whereas some 60,000 bottles are processed on foreign supplied machinery every hour.
Three of the segments with the biggest growth in recent years have been those of dairy, confectionery and ice cream. Much of the growth has been driven by big western European players, who, keen to maintain the same quality standards, have also introduced the same western built equipment. Sviridov also points out that almost the entire confectionery sector now specifies nothing but foreign built machinery in the production facilities.
"The other major area of growth for foreign companies has been packaging equipment," said Sviridov. "In the earlier Soviet era there was no difference in packaging products. Bottles were used for filling beer and milk and cooking oil. Now variation has greatly increased, as have the requirements for the quality of the packaging. For the moment, Russian equipment providers are not able to supply the domestic food and drink industry with new and advanced equipment for packaging."
So just why is this happening? Why are Russian equipment manufacturers being squeezed out of the market in just about every area of the food and beverage processing industry? Sviridov believes the domestic industry has the capability to supply the market but it is being held back by a lack of vision and investment.
"Potentially, Russian equipment suppliers can meet global standards of quality, but because of weaknesses in the area of electronics and a shortage of decent research and development facilities, this industry is 'stagnant'. Furthermore, only 8 to 20 per cent of domestic equipment is compatible with domestic equipment.
"Up until 1995, the federal government provided budgeted funds for the realisation of programmes to develop hardware for the food processing industry which allowed for research and development projects to be carried out. Then the programme was bought to a close due to the fact that most enterprises in this sector were in private hands. The State does not have any serious intentions to develop the domestic equipment sector if such equipment can be freely imported, and accordingly there is now a distinct lack of innovation in Russia."
Currently one of the biggest growth areas is that of packaging equipment. According to Sviridov there are several significant European players in this segment at the moment, one of the most significant being Italian supplier Italpack. Other key areas include dairy processing, where Sweden's DeLaval is the leader, and meat processing, led by Austria's Laska. Accordingly all of these companies have significant business foundations in Russia on which they are currently building.
It is also evident that the domestic equipment industry cannot meet all of the manufacturers' requirements. According to Sviridov's records, there are currently some 270 specific types of machinery which cannot be made in Russia. One of the most problematic is ultra filtration equipment commonly used in the dairy industry for the processing of whey. Currently this type of equipment is only manufactured by one domestic manufacturer, which means that often as not dairies are forced to go with foreign equipment suppliers such as Germany's Krupp.
However, as Sviridov explains, there are Russian businesses that are standing up to the onslaught from foreign suppliers.
"As an example there is the rapidly developing enterprise Luch which is under the management of the Ministry of Nuclear Industry. Earlier, the Ministry was engaged in the manufacturing of equipment for the nuclear industry, but now some of the focus has been redirected to providing technology for the food and beverage industry. The level of modernisation is equal to the west, thus the standard of equipment manufactured is equal to that which is imported."
"On top of that, there is also the Novgorod factory of mechanical engineering. This facility produces quality-oriented food equipment, which is often exhibited internationally. Clients include companies from Canada, the Czech Republic, Slovakia and Bulgaria."
Currently these two facilities have a combined market share of 8 per cent of the total equipment supplies to the domestic market.
But the domestic industry is facing a big struggle. Foreign suppliers have sophisticated and highly developed means of marketing their equipment which domestic suppliers are hard pushed to meet. On top of that, there is a problem within the food and beverage industry with raw materials. Often foodstuffs, such as meat, are imported from western Europe and then processed at foreign-owned manufacturing facilities using foreign processing and packaging equipment. "Often we process German meat on German equipment," said Sviridov.
Despite efforts to fight against the growth of foreign equipment imports, the domestic industry looks to be fighting a losing battle at the moment.
"In the near future the tendency towards purchasing foreign equipment for the food processing industry will grow. Those domestic manufacturers which have managed to keep their heads above water will probably remain stable, however, the others will be hard pushed to carve out a significant share of the market market."
The interview for this article was bought about through the kind co-operation of Moscow-based market analysis company Market Advice.