In the first of a two-part series, Tom Wellings reports on why foreign providers of fleet management solutions find it so hard to penetrate Russia and the wider CIS region.
In recent years, the promise of untapped telematics markets and predicted growth has frequently pointed toward Russia and the CIS region. Why, then, have foreign providers of fleet management solutions found it so hard to penetrate this market?
Discussions with leading experts suggest that – regulatory uncertainties aside – the market is growing, and opportunities exist. But foreign companies are pushing the wrong products, and do not cater to local requirements well enough.
Although sales of commercial vehicles in the region have not matched the huge jump of more than 56% in 2011, they are still expanding and – enticingly for foreign brands – are still dominated by domestic players (85% Russian vs. 15% foreign, according to ASM Holding’s July forecasts for 2013).
Business Monitor International expects the Russian commercial vehicle sector to become a key growth market for commercial vehicles within Europe; their ‘Russia Autos Report’ predicts it will grow by 11.6% year on year, reaching annual sales of almost 500 000 vehicles by 2016.
The ins and outs of the market
The commercial vehicle telematics market in the region is broadly split between two areas.
Firstly, there are mandatory telematics applications for government initiatives like the recent legislation on digital tachographs, or ERA-GLONASS, the emergency call program that will work off Russia's GLONASS satellite-based navigation system.
According to SBD, ERA-GLONASS infrastructure is scheduled to be operational before the end of the year, and compatible in-car systems are expected to become a requirement from January 2015.
(For more on ERA-GLONASS, see Telematics in Russia, Part I: Waiting for ERA-GLONASS, Telematics in Russia, Part II: The impact of ERA-GLONASS, and Telematics in Russia, Part III: Growing the market.)
Secondly, there are the commercial fleet management applications that are discretionary investments and that rely on clear client benefits to drive sales.
The size of the market for mandatory applications and government projects is difficult to quantify due to confusion over future regulatory obligations for commercial vehicles of all types, together with a lack of available information about the size of previous contracts.
However, it is thought to be much larger than the fleet management market. By contrast, several estimates exist for the size of the fleet management market.
In its recent ‘Fleet Management in Russia/CIS and Eastern Europe’ report, Berg Insight predicts that the total market in these geographical areas has entered a growth period that will last for several years.
According to Berg, the total number of tracking devices and fleet management systems in active use in the region will grow at a compound annual growth rate (CAGR) of 22.6% – from 2.2 million units at the end of 2012 to 6.1 million by 2017.
Within this, the Russian market accounts for a significant proportion and is forecasted to grow from 850,000 units at the end of 2012 to 2.5 million by 2017 – an assessment seconded by Ivan Nechaev, former CEO of Russian Navigation Technologies (RNT), the country’s leading provider of fleet management solutions.
Nechaev, who is now vice president at Access Industries, puts the market at about nine million suitable vehicles, and the current penetration level of telematics at 7-10%.
In value terms, the Russian and CIS fleet management market in 2012 was worth 15 billion roubles ($450 million) according to NP Glonass, the non-profit partnership developing the infrastructure and promoting the navigation capabilities of GLONASS.
Boris Pankov, owner of Omnicomm, another significant player in the fleet management solutions market and a leading supplier of fuel consumption control sensors, thinks that the market is somewhat smaller at 10 billion roubles (approximately $300 million).
In terms of annual sales volumes, though, "the commercial fleet management market in Russia and the CIS was estimated to be 400,000 new vehicle tracking units last year,” he says. “This is a 20% growth compared to 2011, and I think the market will continue to grow."
So why are foreign companies struggling?
A cursory glance over telematics-related news stories in recent years would have you believe that new business was there for the taking for foreign companies.
There was talk of the Russian automotive market overtaking Germany, predictions of sales growth on the back of GLONASS programs, and a belief that the tried-and-tested telematics solutions popular in North America and Western Europe would be embraced.
While some of the factors underlying the promised growth remain true, the situation is more nuanced because, as Berg Insight notes, none of the major international solution providers have managed to capture any significant market share.
In fact, most of the providers remain Russian, and there is almost no tradition of global players, Pankov says.
According to Katsiaryna Malitskaya, head of marketing department at Gurtam, a fleet management and GPS tracking systems developer, there are three key factors responsible for the low market penetration of foreign companies.
“First of all, we have several strong [domestic] players, and it is very hard for foreign fleet management companies to compete with them - especially on governmental contracts,” she says. “Secondly, there are uncertainties over the incoming GLONASS legislation and state requirements concerning tracking hardware. Thirdly, the Russian fleet market has specific needs, which differ from the European market.”
Difficulty competing with local suppliers
“The big battle is for a piece of the governmental business,” Pankov says. “It’s a very sweet part of the pie but difficult to win as you are competing with favored suppliers who have knowledge of future government strategy.”
This situation reflects prior policies when many of the government telematics and infrastructure contracts were delivered by companies with strong state connections.
Things are slowly changing, however, as evidenced by a leveling of the playing field through the creation of the nonprofit NP GLONASS partnership. In 2012, the organization separated the delivery of the emergency ERA-GLONASS functionality from the delivery of commercial services, meaning a provider of commercial services is no longer limited by also having to provide an ERA-GLONASS functionality.
Still, it remains hard for foreign companies to win government contracts without a previous track record.
Often enough, local suppliers have lower prices and are seen as more credible because they understand the local market better and are, therefore, able to cater to its specific issues, such as the need to make systems tamper-proof and extra robust.
“Many solutions offered by local companies are low-cost due to the fact they come from these markets,” says Rickard Andersson, senior analyst, Berg Insight. “Therefore, competing with these solutions can be a hard sell for Western European companies,"
Uncertainty over legislation and specifications
Similarly to the way telematics and infrastructure developments have progressed in Brazil, the process of defining the standards, specifications and regulatory framework for the ERA-GLONASS infrastructure in Russia has taken much longer than expected.
This has meant that companies have held back from investing in the technology until they are confident the landscape won’t change.
“Right now, it isn't clear what the regulations are for the fleet management market,” Nechaev says. “Even Russian companies who have more information about the regulatory developments are still not sure where the market will go next.”
He continues: “For example, there are still technical requirements that are conflicting with each other, so, for any foreign solution provider, it is really hard to understand what is going on. Because companies want to buy systems that will last two, four years, this uncertainty over whether current systems will satisfy future government requirements means that corporate clients are holding off on purchases. They are waiting to see what the new rules will be."
As these specifications get tied down, the market should grow.
“Even though ERA-GLONASS is for all vehicles, and not just trucks, it can act as a catalyst for telematics development in the region in general,” Andersson says.
(Return next week for part II of the series.)
Tom Wellings is a regular contributor to TU.
For all the latest telematics trends, check out Content and Apps for Automotive USA 2013 on Dec. 11-12 in San Francisco, Consumer Telematics Show 2014 on Jan. 6 in Las Vegas, Telematics for Fleet Management Europe 2014 on March 12-13 in Amsterdam, The Netherlands, and Content and Apps for Automotive Europe 2014 on April 8-9 in Munich, Germany.
For exclusive telematics business analysis and insight, check out TU’s reports: Telematics Connectivity Strategies Report 2013, The Automotive HMI Report 2013, Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.