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Eugene Gerden

Expert Opinion

3rd July 2017, Moscow

Global personal care players to expand their Russian production

Antonina Tsitsulina, president of the Russian Association of Children's Goods Industry Enterprises. © Eugene GerdenProcter & Gamble (P&G) has officially announced its plans to invest up to 5 billion rubles (US$ 120 million) in the expansion of its plant in the Tula region for the production of diapers and other similar technical textile and nonwoven products.

An agreement between the company and the authorities of Tula region was reached on 1 June during the St. Petersburg International Economic Forum, one of the most important annual business events in Europe.

The majority of funds will be used for the modernization of the already existing facility and the increase of its production volumes. It is reported, that the allocated investments will allow the company to create new jobs and expand cooperation with local suppliers. In addition, as part of the modernization project, the company will invest in the development of new environmentally friendly technologies.

In the meantime, there is a possibility that Procter & Gamble will not be a single global leader that will expand its Russian production capacities in the coming years. According to some Russian media reports, there are currently some other personal care players operating in Russia that consider the same plans.

This would also be due to the ongoing recovery of the market and the support, provided by the Russian government to producers operating in the country.

Several weeks ago, leading diapers and feminine care manufacturers operating in Russia have called on the Russian government, and in particular the country’s Prime-Minister Dmitry Medvedev to ease conditions for the business within the local market.

The producers, among which are Procter & Gamble, SCA Group, Kimberly-Clark and others, were unsatisfied with the fact that despite a significant increase of localisation of their Russian production that has been achieved in recent years, conducting business in Russia is still associated with significant obstacles.

In an official letter, sent to Medvedev by the Russian Association of Manufacturers of Perfumery, Cosmetics, Household Chemicals and Hygiene Products (a public association, which unites leading local and foreign diapers’ producers, operating in Russia), producers said that their Russian production is associated with high costs, such as high customs duties for the supply of raw materials. Among the other problems mentioned in the letter were the common Russian bureaucracy and high corruption levels.

In the case of duties, according to producers, despite earlier state promises to lift duty on the imports of polyacrylic superabsorbent and other raw materials, which are used for the manufacture of technical textiles and nonwovens in Russia and which are not currently produced in the country, it still exists.

According to them, a principal state decision to lift the duty on absorbent and some other types of raw materials, which are used by major leaders in their production in Russia, was taken as far back as in May 2016, however, to date, it has not yet come into force. According to estimates of producers, lifting of the existing duties could result in the reduction of their “Russian costs” by 5%-7% or even more. In addition, that could help rise the competitiveness.

In the meantime, an official representative of the Russian Ministry of Justice has officially confirmed that the government was able to quickly respond to the petition of producers, while the existed duty was finally lifted.

P&G plant in Tula region. © Eugene Gerden

This has already been welcomed by producers. Since May 2016, they have made serious investments in the expansion of their Russian production, however, due to the remaining duties, these capacities have not yet been commissioned and are currently not used.

In addition to duties, the companies are still unhappy with the existing high level of corruption in Russia, which complicates implementation of many of their investment project in the local market.

Antonina Tsitsulina, president of the Russian Association of Children's Goods’ Producers, said that lifting of duties on imported raw materials will result in the reduction of the costs of Russian production, which will allow global producers to cut prices of the final product and to significantly increase sales in the Russian market, which has just started to recover from the consequences of the financial crisis.

Financial recession in Russia has resulted in an increase of prices for diapers and decline of consumer sales, however, amid the ongoing recovery of the market, producers hope to restore their positions in the local market to the pre-crisis figures of 2014 already by the end of the current year.

Last year, the Russian diapers’ market amounted to RUB 6,7 billion (US$ 120 million) in sales terms, which, according to Denis Manturov, Russia’s Minister of Industry and Trade (and who oversees the development of diapers’ industry in the Russian government), is a very small figure for the country, while the market has the potential to grow by 10 times already in the middle term.

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