Russia: Opportunity to Become New APAC Manufacturing Hub

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‘Made in Russia’ May Soon Be in a Store Near You

Contingent workforce engagements in the manufacturing industry are mainly associated with countries in the APAC region such as China, Vietnam and the Philippines. However, a shift may be on the horizon as increased regulations and less favorable parity requirements become more common throughout the APAC region. In the EMEA region, Russia ranks second in the Cost Efficiency category of the ManpowerGroup Solutions 2016 Contingent Workforce Index (CWI). Low and steadily declining wages over the past few years, along with a small but highly skilled workforce, create an opportunity in this emerging market for contingent labor engagements, especially in manufacturing. Other countries mentioned in the regional top five for Cost Efficiency included Tunisia, Belarus and Morocco. These countries do not, however, have the industrial infrastructure or volume of skilled labor boasted by Russia.

Salaries that have become “broadly competitive” with China are not something one may typically associate with Russia. However, ‘Made in Russia’ may be showing up in a store near you very soon as the combination of the country’s declining currency and wage levels.  Many industry leading brands have been steadily investing in the local market to take advantage of the shift in cost efficiency and have increased exports from their Russian factories since recognizing the decreased labor costs. The growth of business activity in manufacturing and services in Russia updated multi-year highs in January 2017. While the real disposable income of citizens rose by 8.1% year-over-year for the first time in 13 months, a good indication that an increase in domestic demand is again a possibility.

Since 2011, the average monthly salary in Russia has dropped nearly 30% to $558. This is a similar wage to that of Kazakhstan and other ex-Soviet republics. The steep decline is linked to the value of the ruble, down almost 40% against the US Dollar in the past 2 years. In November 2016, activity in Russia's manufacturing sector expanded at its fastest pace in nearly 6 years, due to a sharp increase in production at existing plants and an increase in new orders. Furthermore, backlogs of work associated with the increase in orders accumulated at their quickest pace since August 2006.

Since February 2016 industrial production growth is no longer in the negative. In January, Russian industrial production increased driven predominantly by the manufacturing and mining industries. At the start of 2017, the Russian services sector began experiencing higher backlogs. Subsequently, employment in the sector reached its highest level of expansion in 41 months. It’s anticipated that both the construction and retail trade will begin showing positive growth around the middle of 2017 in response to positive developments in the other industries and the Russian economy as a whole.

While these cost efficiency and productivity increases are marred by ongoing geopolitical conditions, Russia does represent an expanding opportunity when compared to the rising wages of most Eastern European markets making it an appealing option for multinationals seeking a manufacturing hub from which they can export products to the entire continent. With no parity requirements and having ranked 4th globally in the ManpowerGroup Solutions 2016 Contingent Workforce Index (CWI) in the Cost Efficiency category, Russia becomes a more attractive emerging market, especially where the manufacturing industry is concerned.

In sharp contrast with the assumption that China is an inexpensive market for contingent labor, China now ranks 53rd globally in the same Cost Efficiency category. Impacting China’s ranking are several factors including increased labor regulations on employers as well as strict labor regulation enforcement and higher taxes. Outside of cost efficiency, China is experiencing a new set of challenges for contingent labor programs in the country with young talent often finding that their skills are mismatched for the present labor market.