Panasonic caught up in low-key Russian anti-corruption drive

By bne IntelliNews December 8, 2006

Ben Aris in Berlin -

Panasonic has been caught up as an accidental victim in a quiet anti-corruption drive to stamp out one of the most egregious scams in the Russian economy.

The Japanese electronics manufacturer said on Thursday that it was not involved in any illegal dealings in Russia. The maker of popular consumer electronics has denied all wrongdoing.

"We are not involved in illegal export, there are no facts indicating this," claimed Yasuhiro Nishi, head of the company's department for Russia and the CIS.

The company was on the back-foot after six of Russia's biggest consumer electronic distribution chains alleged that it was dodging customs import duties. The companies Eldorado, M.Video, Technosila, Mir, Svyaznoi and Euroset threatened to blackball Panasonic's products during a joint press conference on Wednesday.

The Russian distributors cited the manufacturer's "unfair, and sometimes illegal business practices" in Russia as the reason for the move. None of the distributors currently have direct import contracts with Panasonic, but buy the Japanese company's products through intermediary importers. The six retail chains together hold a 60% share of the Russian consumer electronics retail market.

Panasonic has no direct distribution and sells all its goods either through the main changes or private distributors at markets like the Gorbushka electronics market in Moscow. Experts estimate that Panasonic has a 5% share of Russia's audio and video market and 1% of the total white good market.

Russians have been spending billions of dollars on all the knick-knacks of middle-class life as they enjoy spiralling incomes and access to consumer credit over the last five years. The import of consumer electronics topped $4.2bn in 2005 from about $2bn in 2004 and will easily grow another third this year, say experts.

The Russian press speculated that discounts on Panasonic's goods offered by German discount distributor Media Markt had sparked the row, which opened its doors in Russia on December 2. Amongst the bargains on offer was a Panasonic flat screen TV that normally retails for $1,900, but was on offer for $1,200.

Zbignev Zdulechny, general director of Media Markt Saturn Russia, dismissed the allegations, telling newswires that "even the thought of any illegal activity is unconscionable."

The Russian Antimonopoly Service (FAS) waded into the row on Wednesday, pouring oil on the fire, saying that a boycott of Panasonic by the leading retailers may be illegal under Article 11 of the Federal Law "On Competition Protection." FAS officials are due to meet with both the retailers and Panasonic next week.


Anton Semyonov, Panasonic's general director in Russia, said that the charges were all the more galling because three of the distributors that are threatening the company also dodge import duties through grey schemes, although he declined to name which three.

The brouhaha highlights a big problem for all Russia's retailers: the fact is they all cheat on import duties, but none of them can stop without putting themselves out of business.

"You have to have a high gross margin or a super-crazy growth rate if you want to clean up the operation and become transparent. The reason is if you don't have these things, then invariably there is going to be someone out there that is willing to compete with you and won't follow the rules. If you become transparent, you put yourself at a cost disadvantage vis a vis your competition and put yourself out of business," Charles Ryan, CEO of Deutsche Bank/UFG says.

Retailers have been over a barrel. In the post-Yukos climate clearly cheating on your taxes is a dangerous pastime, but as competition is becoming increasingly fierce paying these duties and raising your prices is equally unattractive.

Bn argues that the only way of solving the problem is for the government to act and enforce the rules on everyone at the same time - and that seems to be what is going on now.

The first sign of a crackdown appear last year when the customs service seized and destroyed millions of dollars worth of illegally imported mobile phone handsets, which is one of the worst abusers of the customs code.

The president of the Association of Trading Companies and Manufacturers of Consumer Electronic and Computer Equipment, Alexander Onishchuk, said on Thursday at a conference that the share of illegally imported handsets has plummeted in the last year: the number of illegally imported phones on sale this year has fallen to one or two in 10 this year from over nine out of 10 in 2005. At the same time, mobile handset imports jumped to $2.84bn in January-September this year from about $220m in January-September 2005.

Since the crackdown most handset retailers have struck direct deals with manufacturers and pay the full customs duties whack. But that is not the case with the bulk of white goods. Indeed Media Markt, rather embarrassingly, had to admit that some of the TVs on sale were destined for the European market and not the Russian market as they had no Russian language facilities installed. However, is Panasonic to blame as most of their products are imported into Russia through independent traders.

Panasonic may have been slighted by this row, but if the experience of the mobile phone manufacturers is anything to go by, the result may be direct deals between Russian distributors and the manufacturers and an end to the grey schemes.

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