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S.V. Orekhova, Candidate of economics, Docent, The department of enterprises' economics, Ural State University of Economics, Yekaterinburg, Russia, [email protected]
INSTITUTIONAL ANALYSIS AND DEVELOPMENT PROSPECTS OF THE RUSSIAN PIPE MARKET
The author proposes the methodology of institutional analysis of the market based on an assessment of two components. They are the complexity and the uncertainty. The study aims to determine the level of institutional complexity and uncertainty of the Russian pipe market. The basis of the identification of the level of institutional complexity is a classification of the market by type of entry barriers. Institutional uncertainty is measured by the level of transaction costs in the market. The analysis found that for the Russian companies the capacity of the pipe market is reduced due to the unfavorable global economic situation and the crisis of the Russian economy. The rules in the market are formed by related industries. In recent years there is a pressure on the Russian producers from China. At the same time, the domestic producers have an opportunity to retain and strengthen market position due to the economic and social changes and increased barriers to entry the market for foreign companies. The analysis revealed the average level of institutional uncertainty and a significant level of institutional complexity of the Russian pipe market. Diagnostics of specific institutional parameters of the market allowed the author to offer strategic development of Russian pipe industry in the current economic situation. Key words: institutional analysis, institutional complexity, institutional uncertainty, pipe industry, enterprise strategy, the Russian pipe market.
Formulation of the problem Transformation of the conditions for business functioning in Russia dictates the necessity of searching for new instruments of competitive struggle in domestic and international markets. Some industries, that directly depend on the global economic situation, export conditions and prices in related markets, are facing with significant difficulties.
Metallurgical industry, one of the "pillars" of Russian heavy industry, now is also undergoing significant deformation. For the economy of the Ural region, where metallurgy is a locomotive, the problem of reducing the effectiveness of the industry's market is very important.
Market research is an inbuilt part of modern economic research carried out both at macro-level (to forecast the development of global, national and regional markets) and micro-level (such research is designed mainly to study
company behavior allowing for the specifics of a market). However, classical economic analysis of markets links with dynamic and structural diagnosis of statistical data on the activities of its main actors (principally, producers and consumers), changes in supply and demand and other quantitative parameters ceases to satisfy contemporary scientific requirements.
Real markets may be called the "market" only formally, because they function through institutional coordination mechanisms. A price according to Neoclassic Economics is "the result of the invisible hand of the market", but in fact it may be governed by formal or informal institutions1.
Without belittling the significance of neoclassical analysis, analysis from the position of industrial organization for understanding the vector of development of a market it is quite important to look at it from "institutional angle".
The present research aims to determine the level of institutional complexity and uncertainty of the Russian pipe market in order to formulate proposals for sustainable strategic development of the pipe industry.
The article is going to deal with the following tasks:
1) development of methodological bases of institutional analysis of a market;
2) analysis of the Russian pipe market through the prism of neoinstitutional economic theory according to institutional complexity and uncertainty;
3) identification of Russian pipe industry development ways.
Methodology for assessment of the level of institutional complexity and uncertainty of a market
Institutional analysis of a market, in our view, should concentrate on determining the following fundamental aspects:
— general institutional frames (formal legal and economic norms, basic laws in the market);
— rules describing the procedure of choice in the transactions and simultaneously limiting the range of accessible alternatives in the market — the so called market of "institutions";
— specifics of informal institutions existing in the market, level of relational contracting;
— methods for choosing partners which are predetermined by initial institutional conditions and distribution of information in the market;
— presence of mechanisms for institutions' functioning decreasing information asymmetry (coordination mechanisms);
— presence and rigidity of enforcement mechanisms supporting existing institutional structure of a market;
— institutional dynamics, i.e. evolution of institutions mirroring the trajectory of their development.
Institutional analysis should be conducted through the prism of two parameters: the complexity and uncertainty. The level of the market complexity is one of the most influential factor of the level of institutional market uncertainty. Level of institutional complexity of a market influences strategic and tactical steps of a company operating in the market. Actually, the more complex and dynamic the market is, the more expensive the adaptation will be for firms present in this market.
We see institutional complexity of a market as presence and structure of multi-level formal and informal institutions determining the conditions for entering (exiting) the market and performance and specifics of interaction of market participants.
The institutional complexity may experience the influence of such factors as structure of market participants, their market power; number of barriers to entry and chances to overcome them; indicators of proportionality of a market (level of competition, demand and supply, business activ-
ity, absolute and current market capacity etc.)
Similarly to classification of markets according to the level of entry barriers from the position of Industrial Economics2, it is possible to identify four levels of institutional complexity of a market (Table 1).
Table 1
Classification of markets according to the level of institutional complexity
Type of market Characteristic of sectoral market Probable type of market according to the level of competition Institutional characteristics of market
Easy 1 Absence of competitors in a market that enjoy any cost advantages, high number of market participants 2 No strategic barriers 3 High capital mobility 4 Competition in upstream market (freedom in buying resources) 5 In most cases, the market is growing, supply outstrips demand 6 Substantial product differentiation — Perfect competition (almost is not met in practice) — monopolistic competition 1 Simple institutional structure (standard (market) rules and mechanisms of coordination of interaction between market participants) 2 Insubstantial institutional barriers to entry 3 Domination of neoclassical contracts 4 Active formal institutional framework established by government bodies 5 Insubstantial role of informal institutions
Granted 1 No strategic barriers due to their inefficiency in long-term prospect 2 Supply follows demand, because the number of buyers is limited 3 There are several major players 4 Products differentiate insignificantly, substitute goods are rare — monopolistic competition — oligopoly 1 Institutional structure is complex but rarely changes 2 Substantial institutional barriers to entry 3 Substantial number of formal and informal institutions regulating relations in the market 4 Presence of relational contracting
Captured 1 There is the dominating firm (25% or more market share) and competitive environment (market followers, small and medium-sized business) 2 Strategic barriers on the part of dominating firm 3 Supply follows demand, because the number of buyers is limited 4 Products differentiate insignificantly, substitute goods are rare — oligopoly — market with dominating firm 1 Institutional structure is determined by the dominating firm 2 Substantial institutional barriers to entry 3 Domination of relational contracting (duality of informal and formal institutions) 4 Enforcement mechanisms are determined by or connected with activities of the dominating firm
Blocked 1 One participant (association of participants) 2 Barriers to entry are due to strategic barriers 3 Market participants can control demand 4 Products differentiate insignificantly, substitute goods are rare — cartels — natural monopoly 1 Institutional structure of a market is determined by association of market participants or by the sole participant 2 Institutional barriers to entry are almost insurmountable 3 Domination of relational contracting (duality of informal and formal institutions) 4 Enforcement mechanisms are determined by or connected with activities of the dominating firm
The question of determining of the level of market uncertainty may be considered from positions of several scientific approaches. From the position of system approach the definition of "uncertainty" can be considered as the level of deviation from the norm (in a static or dynamic)3. The followers of theory of scenario analysis study uncertainty as a choice of alternatives, the ambiguity of the outcome of events4.
In neoinstitutional economy uncertainty is determined by the level of transaction costs. So, Oliver Williamson5 identifies two types of uncertainty: environmental (market condi-
tions) and behavioral (unclear aims and actions of some market participants).
Generalizing the research6 in the study of the factors that determine the size of the transaction costs, it is possible to identify five groups of parameters that affect the level of institutional uncertainty of the market Table 2).
Testing of the proposed methodology for institutional analysis conducted by the example of the pipe market. The production and sale of pipes is significant for the economy of the Ural region. Changes of global institutional environment also make actual the search and
Table 2
Factors determining the level of institutional uncertainty of the market
№ Factors Characteristics Level of transaction costs by a factor Type of transaction costs
1 Market size — number of market participants — level of personalization of relations The more personalization, the lower the costs All types of transaction costs
2 Difficulty of measuring the characteristics of goods — Type of goods (goods with search, experience and credence qualities)7 — Degree of product differentiation The more difficult to measure characteristics of the product, the more costs Costs measuring
3 Difficulty of measuring activities of the participants in the transaction — Frequency of transactions — Transparency of the transaction — The degree of asymmetric information The higher a possibility of control by the principal and the agent's motivation, the lower the level of opportunism and costs Agency costs, motivation and control costs
4 A formal system enforcement to perform transactions — Presence of formal institutions — Irreversibility of enforcement mechanisms The more understandable relations in market and stricter enforcement mechanisms, the lower costs All types of transaction costs
5 Ideology of market participants (informal institutions) — Unidirectionality of formal and informal institutions — Orientation participants on short-term or long-term relationship — Relational contracting (previous experience of participants) The harder moral ideology which does not accept opportunism, the lower costs All types of transaction costs
6 Level of institutional complexity — Level of market participants power — Barriers for entry (exit) to the market; — Presence of different types of contracts, coordination mechanisms and enforcement The less completive market, the lower costs All types of transaction costs
Fig. 1. The largest countries — pipe manufacturers in the world, million tons '
development of new strategies for companies of this industry.
Analysis of the pipe market in Russia: Problems and Prospects
Pipe industry is a part of the steel industry, and Russia today is one of the leading manufacturers of pipes of various sizes in the world (Figure 1).
There are eight main pipe plants in the Russian pipe industry today, and 54 enterprises for the production of welded pipes. Key participants of the Russian pipe market are represented by three main players. They are TMK Group, ChTPZ Group and OMK group. They occupy 80% of the market.
Oil and gas companies are the main consumers of pipe products in the Russian Federation (Figure 2).
Pipe industry is characterized by intense dynamics of development, which is provided due to demand. Figure 3 shows that in the pe-
riod from 1999 to 2008, the pipe industry has developed rapidly.
Since the beginning of the century the volume of the pipe market in Russia has increased almost in 3 times and has future prospects for growth. At the same time (according to annual reports of Company «Sinara Pipe Plant» for 2009-2013 11) the pipe market demand is reduced in the Russian Federation since 2011. This situation links with the overall negative economic situation in the world and low rates of economic growth in Russia. This trend may continue until 2017.
We studied the specific characteristics of the pipe market in Russia for assessing the level of institutional complexity. They are:
1. The development of the pipe industry correlates with the development of related markets. Oil and gas industry always have volatility and downs in the markets of hydrocarbons have a negative impact on the demand for pipes. For
Fig. 2 .Structure of demand for pipe products in Russia in 20139
Fig. 3. Dynamics of demand for pipes in Russia for the period 1999—2013 years, million tons
example, Figure 3 shows that in times of crisis (1999, 2009 and 2014) there is a sharp reduction in market volume by 30% or more.
2. The struggle between substitute products. Analogues in the market are welded and seamless pipes. In the case of financial and economic recession, the welded pipes are cheaper and in-de-mand, although their quality is lower. On the one hand, the diversification of the companies always gives them a profit, on the other hand, fast and low-cost changing of production is not possible with the specifics of the technology.
3. Increasing competition from foreign producers (Figure 4).
In 2013 an import of steel pipes in Russia has increased only by 4.7%, but the structure of suppliers has changed significantly. Supply from Ukraine decreased by 35.3%, from the CIS countries — 21.3%. But supply from China increased import in Russia in 2.2 times13.
China's enterprises are using tools such as dumping and state subsidies (grants program,
subsidized credit programs, tax credit). According to the World Steel Association, China now accounts 72% of world production of steel seamless cold pipes14. Chinese companies have to reduce profitability for avoid an overproduction. So, prices in the market are reduced.
In 2014, due to changes in the economic and political situation Ukraine pipe manufacturers have lost a significant share of the Russian market. This situation is an opportunity for Russian producers to strengthen their position.
4. Dynamics of the capacity of the pipe market is determined by the project of building oil and gas pipelines. Russia's refusal to build the «South Stream» in December 2014 (the building will be redirected towards Turkey) leads to a significant impact on the Russian pipe manufacturers.
Excess capacity for the production of large diameter pipes is a serious problem that now the Russian pipe companies have faced. In this seg-
Fig. 4. Dynamics of import of pipes in Russia, thousand tons, 2009—201312
ment demand was 30—50% of the possible production.
5. An appearance of new players in the market is practically impossible. In fact, all significant participants have a market power for using of price and non-price barriers to entry. These barriers determine a possibility of additional investment in equipment of major market players. Significant entry barrier to the market is also a system of relations based on a long-term cooperation with customers.
Market pipe industry is characterized by vertically integrated entities with their own raw material base. That fact leads potential market participants to increased entry costs. Market entry is impeded by the presence of significant number of institutional barriers (Table 3).
Development prospects of the Russian pipe industry enterprises: conclusions based on the institutional market analysis
So, in terms of the institutional complexity the Russian pipe market is a "captured market" (significant level of complexity).
Like most heavy industry markets in Russia, the pipe market is oligopolistic. That is char-
acterized by a limited number of key players, significant barriers to entry and exit, the specificity of the interaction of institutional market participants. Under such conditions, a decrease in demand is catastrophic to all players, as the majority has a market power. The displacement of any participants is difficult, but also associated with the market transformation.
At the same time, the level of institutional uncertainty of the Russian pipe market can be defined as average. Concluded contracts are usually large, which leads to incremental transaction costs such as search activities, bargaining activities and contract making activities. However, the market is characterized by a significant degree of personalization of relations of participants; the "rules" in the market are difficult, but understandable, usually long-term and stable. The level of product differentiation is insignificant, product quality is standardized. Pipe market operates on the basis of understandable and well-known formal institutions. Market participants are focused on building long-term trust relationships. The significant role in the construction norms has relational contracting and the using of reputa-
Table 3
Institutional barriers to entry to the Russian pipe market
Type of barriers The kind of barrier Characteristics of barrier
Social and economic Initial investment The costs of fixed assets are very large Long-term return on investment (ROI)
Limitation of demand The number of consumers is limited. Inelastic demand leads to a decline in the market volume
Administrative Licensing and Certification Forced product certification: Certificates of compliance with GOST 10707-80, compliance with international quality standards Certified management system The certificate for works Sanitary-epidemiological conclusion for pipes (for each type of pipe separate expert opinion) Permission to use pipes (for each type of pipe) The license in Industry and Trade Ministry (for imports)
Antidumping actions on exports Duties on seamless pipes operating until the end of 2017, for plants Chelpipe are 24.1% , for the TMK-group are 28.7%
Antidumping actions on imports Mechanism of quotas; Quota is 23,695 tons of pipes (of which 5780 tons from Ukraine, 9940 from the European Union). For China antidumping duty is 19.15%. Import licensing pipes, introduced on August 23, 2012. Import of pipe products to the Russian Federation is carried out only on the basis of licenses issued by Industry and Trade Ministry of Russia.
Ecological standards Standards of ecological control in accordance with ISO 14001 Permits the use of any equipment issued by Rostekhnadzor.
tion mechanisms. These factors reduce the level of transaction costs.
The problem is also that the Russian participants cannot correct their pricing strategies. It links with the policy of dumping of Chinese manufacturers. So, the main directions of improvement companies' strategies are non-price methods:
1) The total improvement of product quality and quality of business processes15 (logistics, delivery time, reduce paperwork, optimization of production and so on).
2) Creation and management of intangible assets of the company, including the relationships with customers.
3) Optimization of organizational structure of enterprises. Using of a restructuring (including of methods such us outsourcing, mergers and (or) acquisitions). The choice of an efficient organizational structure would also reduce transaction costs because the level of uncertainty reduces due to the understandable interaction with contractors.
4) Increasing of the product differentiation strategy, studying of the opportunities of re-orientation of production capacity.
Using of these strategies in the domestic companies will provide a sustainable competitive advantage in long-term period. ^
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ИНСТИТУЦИОНАЛЬНЫЙ АНАЛИЗ РОССИЙСКОГО ТРУБНОГО РЫНКА: МЕТОДОЛОГИЧЕСКИЕ И ЭМПИРИЧЕСКИЕ АСПЕКТЫ
С.В. Орехова, канд. экон. наук, доцент, кафедра экономики предприятий, Уральский государственный экономический университет, г. Екатеринбург, Россия, [email protected]
Автором предложена методология институционального анализа рынка на основе оценки двух его составляющих: сложности и неопределенности. Исследование направлено на определение уровня ин-
ституциональной сложности и неопределенности российского трубного рынка. В основу определения уровня институциональной сложности положена классификация рынков по типу входных барьеров. Институциональная неопределенность измеряется уровнем трансакционных затрат при осуществлении сделок на данном рынке. В ходе анализа выявлено, что емкость трубного рынка для российских компаний снижается в связи с неблагоприятной мировой экономической ситуацией, кризисом российской экономики, а «правила игры» на рынке во многом формируются смежными отраслями. Кроме того, в последние годы наблюдается давление на российских производителей со стороны Китая. В то же время в связи с экономико-социальными изменениями и усилением барьеров входа на рынок для ряда иностранных компаний у отечественных производителей имеется возможность удержания, а в некоторых случаях — усиления рыночных позиций. Анализ показателей выявил, что по уровню институциональной сложности российский трубный рынок является сдерживаемым (значительный уровень сложности). В то же время уровень институциональной неопределенности трубного российского рынка может быть определен как средний. Российский трубный рынок характеризуется значительной степенью персонификации отношений участников, «правила игры» на рынке хоть и сложны, но понятны, обычно длительны и устойчивы. Диагностика специфических институциональных параметров рынка позволила автору предложить направления стратегического развития российских предприятий трубной отрасли в современных экономических условиях. К таковым относятся, в первую очередь, неценовые стратегические методы конкуренции, такие как совершенствование бизнес-процессов и качества продукции, включение в клиентскую цепочку создания стоимости. Ключевые слова: институциональный анализ рынка, институциональная сложность рынка, уровень неопределенности рынка, трубная промышленность, стратегия предприятия, российский трубный рынок.
