Surely, macroeconomic environment has a great impact on road building and road renovation, its maintenance, and both the specialty vehicles and machinery manufacturing.
According to the Avtodor report for 2015, “Basing upon the federal law “On the federal budget for the 2015 year and for the planning period of the years 2016 and 2017”, the allocation of funds on road facilities under the Avtodor jurisdiction, shall amount: for the year 2015 – 573.9 billion rubles, for the year 2016 – 548.1 billion rubles, and for the year 2017 – 633.4 billion rubles”. Herewith, “the amount of financing of federal road building and renovation totaled 92 billion rubles for the year 2015, id est the latter decreased by 27 percent, in comparison with the initially adopted amount, and the cutback is 33 percent, as compared to the earlier approved federal targeted program “The transport infrastructure development in Russia (period 2010-2020)”.
In this way, here we can speak about some cutbacks to funding of the road building sector, in view of economic situation. A relocation of funds also takes place: from some construction projects to those, having more strategic priority.
According to the information of law web portal “LigaZakon.ru”, “the government has decreased the funding of federal roads building by 44.2 billion rubles in comparison with the year 2015, and “Avtodor shall not be able to timely put into service 4245 kilometers of roads, as defined by the federal targeted program The transport infrastructure development in Russia (period 2010-2020)”. Based on information of the federal road agency, the realization of the program is delaying for 2 years more, that is up to the 2022 year. The main reason for funding cutbacks is the economic circumstances, dictating the economy of budgetary funds.
From March 30th through April 1st an international forum and exhibition “Dorkomexpo” devoted to road building and development took place in Moscow. The forum included a demonstration of the latest solutions of domestic and foreign manufacturers in road-building and utility machinery and equipment. The Research Center “Effet” visited the forum and investigated the situation in the market of road building, road facilities construction, maintenance, and machinery manufacturing.
Road sector funding according to Avtodor
|Budget item||Amount of funding in 2014, bn rubles||Amount of funding in 2015, bn rubles||Amount of funding in 2016, bn rubles|
|New federal roads building||148.7||142.4||92|
|New roads building in constituent entities||55.5||60.5||130.2|
Road building market
The road building companies’ representatives gave the assessment of the situation in general. According to the participants information, the road building market allows carrying out activities, but the big picture is far from perfect. For example, the chief engineer of the “VAD” company, Valeriy Anatolyevich Borisenko said in the interview: “In 2015 we have had no volume growth, and it stays slight this year”.
Among important aspects influencing the market, the companies mentioned the following:
- Property settlement (purchase of land etc.) overburdens the process of road building
- The prices for construction material and its transportation have scored a significant advance
- The outdated technical standards basis raises difficulties in applying of new methods of road building, but its’ revision is under way
- Regardless a constant competition in the market, no intensification of the latter has been in recent years
The forum participants mentioned the following aspects, which stay in the way of road building development:
- Insufficient funding. Valeriy Borisenko: “The volume decrease is directly connected with finding. Taking into account the fact that our major clients, Avtodor and its’ subordinate institutions, do not receive an appropriate funding, this leads to some decrease in demand for our services. To improve the situation, the funding should be doubled, then we may have a stable, increasing market”.
- Common economic instability impedes the process of time-planning of activities.
- Price increase
In these conditions, most companies mentioned the service quality control as the primary task. In their opinion, staff and machines are the key aspects necessary for the building of good-quality roads. It is vital to use skilled personnel and reliable machines in the course of activity, as it allows minimizing all sorts of risks.
The specialty vehicles and road-building machinery manufacturers noted changes in the market segment. In particular, there is a tendency for increasing of utilities and spare parts in the whole volume of product delivery among some domestic companies.
For example, the deputy director of operations control department of “Polimiks”, a company from Smolensk, Sergey Zhuravlev, informed: “The contracts for spare parts delivery make 25 percent of total turnover. We are the only manufacturer of the transmission gear boxes for “ZIL”, and this line of activity is becoming the main.”
The major manufacturers also noted a tendency for the enlargement of product range in the segment of low prices. Aleksey Cherepanov, the business development director of “Merkator Holding”, said: “It goes without saying, in the conditions when the budget tends to decrease and the price for machines rises, the number of obtained cars decreases. That is why we have presented a new product in the low-budget category without compromising quality, which is far cry at price from the other products. Our goal for today is to gain to fit the sales volume with these models. In this way we adjust to the market needs.”
Is also should be mentioned, that many domestic manufacturers appeared in the market, and they are trying to compete with big companies in several product lines.
Below is the information on the dynamics of demand for product, based on the companies opinion.
The forum participants mentioned the following tendencies in the specialty vehicles market:
- Decline in demand for product. The companies made different estimates, but all of them confirmed the tendency for a decrease. In these conditions, the manufacturers undertake measures to increase the volumes: one of them step up the presence the segment of low prices, others increase the number of spare parts and utilities in the product line, the rest – search for entries into new markets.
- Active competition in the machinery market. In the first place, the competition is the low-price segment. The companies are trying to increase their marketability by the improvement of product quality, maximum customer orientation, and also by drop in price. Aleksey Cherepanov: “The overarching aim is to increase the coverage of our client base. It is an interesting time at present. We can enter into new markets with our projects. We have product proposals for new clients, have are going to ply and expand. We produce about 500-700 machines per year. The most important thing is the client satisfaction, we adjust the equipment to the changing customer needs.”
- Customer enlargement. Many companies, who acquire the specialty machinery, tend to consolidate. For example, earlier it were 20 small companies who bought a number of machines, and now it is 5 big companies which buy the same number of vehicles.
- Lack of domestic spare parts and utilities for machinery. In these conditions, the manufacturers have to purchase foreign spare parts, as there are no Russian equals. No wonder, that it has an impact on the extension of manufacturing terms, production cost, and in the end on the market price of the product.
- Absence of long-term contracts. In the instability circumstances, the clients cannot be sanguine about the future, which questions a long-term cooperation. Now, the most long-term contract for purchasing of machinery and equipment is for one year.
Road maintenance and facilities construction
The companies, who render services in road maintenance and facilities construction, also note the changes in the market segment. For example, the sales director of the “PIK” company from Nizhny Novgorod, Aleksandr Kardilyanov, said in the interview: “A general decline takes place, but our business expands. We work Russia-wide. We plan to increase our share in the segment. We are winning the competition in the field.” The company deals with a complex facilities construction of roads.
With that, the cutbacks of funding of road building affect the situation. Aleksandr Kardilyanov: “The number of government contracts has decreased by 30 percent. We hold our own by low prices for services and a high quality of works.”
The companies of the segment noted the following aspects affecting the maket:
- Cutbacks to funding decrease the demand.
- The whole volume of services in road facilities decreases in some way.
- Active competition
- Tendency for a drop in prices and the quality improvement
- Delayed payments for works decreases the expected income
- A large part of income is wasted on loans. The government contracts do not imply a prepayment, hence the enterprises have to invest their own capital, and only after that they receive the payment form the clients.
- The decline in segment can reach 30 percent
- Quest for new markets.
All market participants are worried about the unstable economic situation. This results in the impossibility of planning and the absence of long-term contracts. As the prices for the products rise, the client buys only what is most urgently needed.
That is why the market participants work hard to retain customers by offering low prices for products and services, quest for new markets and compete actively in the segments. Special attention should be given to the lack of domestic spare parts and utilities, which could be competitive with foreign equals. There is a slight rise in number of domestic manufacturers in the segment of low prices, and they are trying to hold their positions.