Key Trends CISCFO - Deloitte United States€¦ · Deloitte CFO Survey of the Leading Companies in Russia 04 Key findings • Overall, by early 2018, the positive expectations concerning

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Deloitte CFO Survey of the Leading Companies in RussiaKey TrendsSpring–Summer 2018 Deloitte CIS Research Center

Overview 03

Key findings 04

Russia in figures 07

Business outlook in Russia 08

Uncertainty and risks 12

Business strategies in 2018 18

Business drivers and barriers 22

Sources of financing 23

Clients of companies 24

Innovation and digitalization 26

Expectations and personal experience of CFOs 30

Our respondents 33

Contacts 34

Deloitte CFO Survey of the Leading Companies in Russia

03

OverviewWe are pleased to present the insights from the annual Deloitte CIS CFO Survey of the leading companies in Russia.

This is the seventh time we have conducted the survey in Russia as part of our global research efforts. The opinions provided by the respondents have enabled us to identify major concerns, key drivers, and development priorities for the Russian economy, and perform a comparative analysis of the existing trends.

The survey was held in March 2018, and includes responses from 80 experts.This report has been prepared by the Deloitte CIS Research Centre.

Survey goal and objectives

Survey goalPerform a comprehensive analysis of trends in the Russian business environment.

Survey objectives

• Describe the 2018 business outlook for Russia

• Provide forecasts for key financial metrics in 2018

• Evaluate the level of uncertainty and key risks of doing business in Russia

• Identify key business strategies and areas for change

• Identify business development drivers and barriers faced by businesses in Russia

• Analyze company-client interaction

• Determine the levels of companies’ innovative activities in Russia

Research methodology

Target audienceCFOs of the leading companies across key Russian industries.

Research methodologyData was collected through an online questionnaire and personal interviews.

Our comprehensive analysis was based on the following approaches:1. Identification and examination

of general market trends;2. Comparative analysis

of data in meaningful subgroups (analysis of data differing significantly by subgroup and/or from the overall population);

3. Multivariate data analysis (an in-depth analysis of the results to identify hidden differences and incorporate the findings).

SamplingThe Survey was performed on a random sample of respondents from a closed and highly specialized population. The final sample included 80 respondents who were divided into several industry groups.

Definitions

Industries

Revenue in 2017

Consumer business

E&R (Energy and resources)

Manufacturing

Technology, media and telecommunications

Financial services and insurance

Healthcare and pharmaceuticals

Over RUB 50 billion

RUB 10 billion – RUB 50 billion

Up to RUB 10 billion


04

Key findings

• Overall, by early 2018, the positive expectations concerning financial prospects became more moderate. Over a half of CFOs (55 percent) did not expect significant changes in the current financial position of their companies.

• The highest share of ‘optimists’ was observed among the CFOs of manufacturing companies (40 percent).

• CFOs of small companies (up to 250 people) were the most pessimistic (22 percent).

• In the past six months, the number of CFOs expecting company revenue growth increased by 11 p.p.

• Expectations regarding operating profit have remained almost flat since the second half of 2016. Presently, over half of the companies (60 percent) expect profits to grow.

• The expectations regarding operating profit growth are higher by 9 p.p. compared to the second half of 2017.

• CFOs do not expect the cost of capital to change significantly in the next six months (65 percent).

• This time, CFOs cited expected increases in the number of staff more frequently (6 p.p.). Overall, this indicator increased by 10 p.p. in the past two years.

• A total of 73 percent of CFOs expect salaries to increase. These expectations were significantly lower (15 p.p.) just six months ago.

• Our experts expect increases in operating costs by 50 percent, number of staff by 48 percent, and company revenues by 28 percent.

In early 2018, we saw gradual increases in the level of uncertainty. Starting from the second half of 2017, the uncertainty increased by another 10 points reaching the 2H2016 level.

The higher level of uncertainty seems to have had an impact on the risk appetite as in the past six months it has decreased by 29 points.

Risk factors that had the most negative impact on business in Russia in 2018:

• Higher trade barriers / protectionism

• Geopolitical risks

• Lower core business revenue

• Rising barriers to entry into new markets

• Lower consumer interest in new products

Priority business strategies in Russia in 2018:

• Ongoing cost control

• Business development through organic growth

• Cost cutting

Financial climate in 2018

Uncertainties, risks, and development strategies


05

Business drivers in Russia in 1H2018:

• Production costs

• Digitalization

• Liquidity

Barriers for business drivers in Russia in 1H2018:

• Focus on core operations

• Currency risks

• Domestic production

• Almost one in two survey participants (49 percent) said that his/her company implemented the balanced governance policy, i.e., equally took the interests of both the company and its clients into consideration.

• One in two CFOs (51 percent) noted an increase in new clients compared with the previous year (with the balance reaching 0.42).

• One in two respondents (49 percent) noted that their company’s value rose after implementing innovative approaches. Among them, one in three respondents (33 percent) indicated that their company grew by 5 percent, almost half (52 percent) indicated a 5–10 percent growth, and another 11 percent witnessed a 10–20 percent increase in their company’s value.

• In early 2018, the innovation ratio of companies was estimated at 0.15. Last year, it increased by 4 points. The highest growth occurred in 1H2017.

• Over one third of respondents (37 percent) said that their company plans to spend 1–5 percent of its revenue on R&D in 2018. This trend shows that companies want to implement a digitalization strategy.

• Most innovations are implemented by dedicated divisions in 66 percent of the companies surveyed.

• According to our respondents, the market and competition are seen as the key drivers for digital strategies. The management strategy ranks the second.

Business drivers and barriers

About company clients and innovations


0606


07

Key macroeconomic indicators

Indicator Value (2017)

Change, 2016 vs 2017

Note

GDP RUB 92,082 billion

A 1.5 percent increase on 2016 (in physical terms)

Forecast for 2018

Inflation 2.5% A 2.9 p.p. decrease on 2016

Forecast for 2018

Bank of Russia’s key interest rate

7.25% as of April 2 2018

A 2.5 p.p. decrease y-o-y

On 23 March 2018, the CBR’s Board cut the key interest rate by 25 b.p. to 7.25 p.a. The annualized inflation remains at sustainable low levels. The inflationary expectations gradually subside According to the CBR’s estimates, the annualized inflation will reach 3-4 percent by late 2018 and stay at 4 percent in 2019. As a result, the Bank of Russia will continue to reduce the key interest rate and will complete the shift towards the neutral monetary policy in 2018.

Fixed investments (2016)

RUB 15,966.8 billion

An 8% increase on 2016

According to the Economic Development Ministry’s forecast, investment growth will resume in 2018. In 2018–2019, the investment CAGR will reach 1.3 percent and will depend on private investment potential on the back of lower government investment expenditures.

Central Bank of Russia

ISF RAS

Standard & Poor’s

The European Commission

The World Bank

The International Monetary Fund

OECD

from +1.5 to +2.0% +1.2% +1.8% +1.6% +1.7% +1.5% +1.9%

Central Bank of Russia

ISF RAS

The International Monetary Fund

Vnesheconombank The World Bank

Bloomberg

from 3.0% to 4.0% 3.1% 3.8% 3.9% 4.0% 4.0%

Russia in figures

Source: The Economic Development Ministry, CBR, Russian Statistical Agency


08

Business outlook in RussiaFinancial outlook The respondents were asked to assess the financial outlook

and compare it with the situation six months prior (1H2017):

Trends

• Overall, in the first half of 2018, the positive expectations concerning financial prospects became more moderate. Over half of CFOs (55 percent) do not expect significant changes in the current financial position of their companies, resulting in an all‑time high for this indicator.

• A key change seen in the past six months was a significant decrease (17 p.p.) in the level of optimism among CFOs.

• The balance indicator fell almost twofold (0.17 points) in the past year, albeit remaining in the positive zone.

Optimistic Pessimistic No change Balance

Highlights

• The highest share of ‘optimists’ was observed among the CFOs of manufacturing companies (40 percent). At the same time, the share of pessimistic estimates was somewhat above average among representatives of the TMT industry (6 p.p.).

• The representatives of companies with revenue of RUB 10–50 billion were the most optimistic (the share of such CFOs was 14 p.p. above average).

• Interestingly, companies with revenue exceeding RUB 50 billion with a headcount of between 251 and 1,000 employees showed no pessimism regarding the financial outlook. Consumer business representatives show no pessimism in assessing the development outlook either, which may indicate sustainable demand growth. The CFOs of small companies (up to 250 people) were the most pessimistic (22 percent).

• The companies present in various Russian regional markets tend to be less pessimistic (9 p.p.) as opposed to the companies operating only in some regions.

0.05

0.440.270.23

0.10

0.47

-0.04

37%

26%

51%

27%

36%

53%

36%

27%

30%

4%

22%

13%

9% 9%

36% 44

%

45%

51%

51%

38%

55%

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1

Industry Number of staff

Revenue Presence in regional markets

Financial outlook for companies

22%

4%0%

39%

32%40

%

39%

64%60

%25

1–1,

000

empl

oyee

s

Ove

r 1,0

00 e

mpl

oyee

s

Up

to 2

50 e

mpl

oyee

s

13%

4%

37%

35%

50% 61

%In

all

Russ

ian

regi

ons

In s

ome

Russ

ian

regi

ons

33% 40

%

31%

25%

0% 10%

15%

12%

67%

50%

54%

63%

14%

0%7%

29% 38

%50%

57%

62%

43%

The index: the weighted balance of respondents is on a scale of -1 to 1, where 1 percentage point equals 0.01


09

Financial performance

Growth

Decrease

No change

Trends

• Over the past six months, the number of CFOs expecting company revenue growth increased by 11 p.p.

• The expectations regarding the operating profit have remained almost flat since the second half of 2016. Presently, over half of all companies surveyed (60 percent) expect profits to grow.

Highlights

• The representatives of the consumer companies and companies with the revenue exceeding RUB 50 bn tend to speak about expected revenue growth more often (93 and 92 percent, respectively). They also tend to forecast an increase in the operating profit (by 20 and 17 p.p., respectively).

• The companies represented in all Russian regional markets expect the operating profit to grow, too (10 p.p. above the average).

Trends

• The CFOs reported a simultaneous increase in corporate profits (8 points) and operating costs (5 points), and a small decrease in operating profit (2 points). Moreover, there was a significant decrease in the cost of capital (23 points). Hence, this indicator is back to the previous year’s level.

Revenue Operating profit Operating costs Cost of capital

Changes in key corporate financial metrics in 2018

Changes in the expected revenue and operating profit from 2015–2018

0.17 0.29

0.060.00 0.060.04

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1

0.27

0.21

0.26

0.20

0.39

0.29

0.23

0.28

0.31

0.38

0.42

0.07

0.42

0.22

0.12

0.280.270.30

0.12

0.30

Revenue Operating profit

36%

31%

23%

18% 18

%

20%

11%

33% 27

%24%

30% 24

%

2015

H2

2017

H2

2016

H2

2016

H1

2018

H1

2017

H1

2016

H2

2015

H2

2017

H2

2017

H1

2016

H1

2018

H1

53% 60

%

61%

60% 71

%

66%78

%

42%

60%73

%

46%

60%

11%

9% 16%

22%

11%

14%

11%

25%

13%

3% 25%

16%


10

The scope of expected changes in key corporate financial metrics

Highlights

• We asked the respondents about expected changes in each indicator. In their opinion, the operating costs, headcount and revenue will grow by 50 percent, 48 percent and 28 percent, respectively.

Revenue

Operating costs

Operating profit

Cost of capital

Number of staff

Average salary

28%

50%

15%

13%

48%

3%

Expectations relating to changes in operating costs and cost of capital in 2015–2018

Growth

Decrease

No change

Trends

• The expectations of the operating profit growth are higher by 9 p.p. compared to the second half of 2017.

• However, most CFOs do not expect the cost of capital to change significantly in the next six months (65 percent).

Highlights

• Representative of the companies with less than 250 employees more often point to a possibility of operating cost reduction (their share is higher by 8 p.p.). The same applies to the companies operating in all Russian regions (by 7 p.p.).

• Companies earning RUB 10–50 bn in revenue more often expect the capital expenditure growth (by 9 p.p.).

Operating costs Cost of capital

40%

29%

73%

25%

24%

61%

37% 58

%

64%

19% 68

%

65%

2015

H2

2017

H2

2016

H2

2016

H1

2018

H1

2017

H1

2016

H2

2015

H2

2017

H2

2017

H1

2016

H1

2018

H1

51%

53%

14%

60%

62%

21%

47%

33%

18%

64%

21%

22%

9% 18%

14%

15%

14%

17%

16%

9% 18%

17%

11%

13%


11

Number of staff Salary

Expected number of staff and payroll changes

Trends

• The expectations of an increase in the number of staff and salary levels grew in the previous six months by 9 points and 3 points, respectively. Both types of expectations have risen 15 points since 2016.

Expected changes in the number of staff and salaries from 2015–2018

Growth

Decrease

No change

Trends

• The number of CFOs expecting growth in the number of staff rose by 6 p.p. Overall, this indicator increased by 10 p.p. in the past two years.

• 73 percent of companies are expecting salary growth, which is 15 p.p. higher than in the second half of 2017.

Highlights

• The highest expectations with regard to growth in the number of staff are observed in the TMT industry (54 percent), while the representatives of the consumer business sector forecast some reduction in the number of staff (20 p.p. below average), similarly to the companies with revenue over RUB 50 billion (18 p.p. below average).

• An increase in the number of staff is more often expected by companies with 251 to 1,000 employees (12 p.p. above average).

• The expectations of salary growth are more widespread in the consumer business sector (14 p.p.), and in the companies with revenue exceeding RUB 50 billion (12 p.p.).

Number of staff Salaries

69%

49%

49%

47% 45

%

29%

58%

62%

38%

50% 39

% 27%

2015

H2

2017

H2

2016

H2

2016

H1

2018

H1

2017

H1

2016

H2

2015

H2

2017

H2

2017

H1

2016

H1

2018

H1

25% 29

%

49%

25% 35

%

70%

24% 34

%

58%

30%

53%

73%

7% 22%

2%28%

20%

1%18%

4% 4%20%

9% 0%

2016

H1

2017

H1

2018

H1

2016

H2

2017

H2

2015

H2

-0.04

0.090.04

0.120.060.04

0.21

0.360.36

0.16

0.270.24


12

Uncertainty and risks

0.46

-0.12 -0.020.020.32

-0.28

0.44

34%

28%

64%

27%

49%

56%

51%

66% 72

%

36%

73%

51%

44% 49

%

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1

Respondents were asked to assess the political and economic environment from a standpoint of uncertainty in strategic decision making.

Measuring uncertainty in strategic decision-making

Trends

• In the first half of 2018, the uncertainty continued to rise gradually. Starting from the second half of 2017, the uncertainty increased an additional 10 points, recovering to the 2H 2016 level approximately.

• 49 percent of the respondents point to a high level of uncertainty around the current economic and political situation when it comes to strategic decision-making (up 13 p.p. year‑on‑year).

• Higher uncertainty may stem from the political agenda presented in early 2018.

High uncertainty Low uncertainty Net level of uncertainty

The index: the weighted balance of respondents is on a scale of -1 to 1, where 1 percentage point equals 0.01

Highlights

• Relatively low uncertainty is observed in responses provided by the representatives of CBT and TMT companies (the net level of uncertainty amounted to -0.2 and -0.24, respectively), as well as among companies operating in all Russian regions (-0.22).

• The lowest uncertainty was observed among companies with 215–1,000 employees. 73 percent of the respondents from those companies point to low uncertainty in the market.

• Presently, the highest level of uncertainty is observed in the healthcare and pharmaceutical industry (the net level of uncertainty is 0.5) and in the companies with over 1,001 employees (0.36).

• In early 2018, there was a distinct correlation between revenue and uncertainty growth. For example, over half of the respondents (62 percent) from the companies with revenue exceeding RUB 50 billion noted high uncertainty.


Revenue Presence in regional markets

40%

60%

38%

75%

60%

40%

62%

25%

57%

38%

50%

43%

62%

50%

56%

32%

73%

44%

68%

27%

251–

1,00

0 em

ploy

ees

Ove

r 1,0

00 e

mpl

oyee

s

Up

to 2

50 e

mpl

oyee

s

44%

61%

56%

39%

In a

ll Ru

ssia

n re

gion

s

In s

ome

Russ

ian

regi

ons

-0.24

0.50

-0.200.20

0-0.14

0.24

-0.46-0.12 0.36

-0.220.12


13

Measuring the risk appetite

Trends

• The higher level of uncertainty appears to have had an impact on the risk appetite as evidenced by the 29 points decrease in the past six months.

• Only a quarter (25 percent) of the CFOs surveyed indicated their readiness to make risky decisions.

Highlights

• Consumer and manufacturing companies were more risk-prone (15 and 9 points, respectively).

• The number of staff may have a significant impact on the risk appetite. 44 percent of respondents from companies with less than 250 employees believe that now is an appropriate time to make risky decisions.

Time is not appropriate now

Time is appropriate now

Risk tolerance


33%

30%

23%

25%

67%

70%

77%

75%

56%

86%

80%

44%

14%20

%25

1–1,

000

empl

oyee

s

Ove

r 1,0

00 e

mpl

oyee

s

Up

to 2

50 e

mpl

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s

-0.54 -0.50

-0.34-0.40

-0.60-0.12 -0.72

-0.42 -0.20 -0.49-0.06

-0.72

-0.06-0.40

86%

70%

53%

71%

53%

60%

75%

14%

30%

47%

29%

47%

40%

25%

2015

H2

2016

H2

2017

H2

2016

H1

2017

H1

2018

H1

2015

H1


14

In the course of the seventh series of our research we defined key risks facing the business in Russia:

Top 3 risks:

1. Weaker domestic demand

2. Stagnation in the Russian economy

3. Increased competition in the market

• Russian business representatives are most of all concerned about falling domestic demand, just as they were six months ago. Representatives of the healthcare and pharmaceuticals industry (75 percent), as well as FSI (80 percent) see this problem as especially pressing. Country‑wise, the representatives of Russian companies are more concerned about this than foreign companies with production assets in Russia (20 p.p.).

• The perception of stagnation in the Russian economy as a key risk moved from the third to the second position, showing that even major companies face a new stage of lower economic activity following a slight recovery in late 2016 and early 2017.

• The risk of growing competition moved to the third position. 51 percent of respondents saw that risk as significant. This risk is particularly highlighted by respondents from TMT (70 percent), companies with less than 250 employees (17 p.p. above average), as well as companies operating in all Russian regions (14 p.p. above average). Interestingly, foreign companies are more concerned about this risk than Russian companies (20 p.p. above average).

Key risk factors in the first half of 2018

Risk factor map

4 Weaker external demand13 Geopolitical risk14 Decrease in core business revenue15 Rising barriers to entry into new markets16 Lower consumer interest in new products

In early 2018, a new trend evolved, as the previous risk factors were replaced with new ones that had the most negative impact on business. The top concerns are those relating to geopolitics, and the resulting increase in internal and external barriers. For the first time, the most unfavorable risks have included the lack of interest in new products and the risk of lower external demand.

All the considered risk factors

Risk factors with a stronger negative effect

2015 2016 2017 2018

№ 1 Stagnation in the Russian economy

№ 2 The weakening of the rouble

№ 3 Weaker domestic demand

№ 4 Weaker external demand

№ 5 Increased competition in the market

№ 6 Higher production costs in Russia

№ 7 Increasing production costs abroad

№ 8 Decrease in cash flow

№ 9 Increase in the cost of capital

№ 10 Shortage of capital

№ 11 New trade barriers / more protectionism

All the considered risk factors

Risk factors with a stronger negative effect

2015 2016 2017 2018

№ 12 Increased business regulation in Russia

№ 13 Geopolitical risks

№ 14 Decrease in core business revenue

№ 15 Rising barriers to entry into new markets

№ 16 Lower consumer interest in new products

№ 17 Low transparency

№ 18Social risks – consequences of business process automation (personnel cuts)

№ 19 Innovation project risks

№ 20 Competition from innovative products 2017

№ 21 Cyber threats


15

As a result of the detailed analysis, we aggregated the risk factors into a risk map, which allowed us to assess the effect and the nature of the impact on two performance indicators: the expected and actual operating profit for 2018 and the general perception of the current financial outlook.

The risk map also helps to identify hidden risk factors believed by CFOs to have a significant negative impact on business development in Russia.

Risk factor map

–0.5

–0.5

1.5

1.5

–1.0

–1.0

1.0

1.0

–1.5

–1.5

0.5

0.5

The medium risk zone

Unfavorable zone

Favorable zone


Unfavorable zone companies expect the operating profit to fall, pointing to a deteriorating financial outlook

The medium risk zonecompanies expect operating profits to fall, albeit pointing to an improving financial outlook

The medium risk zone companies expect operating profits to fall, albeit pointing to an improving financial outlook

Favorable zone companies expect the operating profit to grow and note that the financial outlook is improving

15

13

4

14

16

12

17

6

11

7

8

118

3

20

2

21 59

1019


16

Currency risk management practices

Trends

• Similarly to the second half of 2017, the most relevant method for managing risks is to provide financing in rubles (49 percent). This practice leads to a stable and positive performance.

• The relevance of the currency diversification and hedging for the transaction portfolio has significantly decreased by 13 p.p. and 12 p.p. respectively). Overall, the relevance of hedging has decreased almost threefold since 2016 (from 66 percent to 24 percent).

Highlights

• The currency diversification of the transaction portfolio is seen as the favorite risk management method by representatives of manufacturing companies. This is supported by 60 percent of our respondents.

• Hedging is considered as the favorite risk management method by foreign companies (15 p.p. above the respective share of Russian companies), as well as by companies with over RUB 50 billion in revenue (19 p.p. above average).

Funding/lending in RUB only

Inclusion of currency clause in contracts (fixing end product prices in currencies other than the contract currency)

Portfolio currency diversification

Hedging

Working capital increase

Capital increase

Refinancing currency loans in Russian banks

2016

H1

2017

H1

2018

H1

2016

H2

2017

H2

2015

H2

40%

23%

39%

35%36%

57%

40%

21%

48%

27%

36%

29%

36%

20%

55%

24%

66%

37%

22%

7%

24%

20%

16%13%

18%7%

21%

15%

18%16%

4%3%

18%

2%

16%

9%

49%

20%

42%

49%

30%

47%


17


18

Business strategies in 2018Appeal of various business strategies

Top 3 strategies

1. Ongoing cost control

2. Business development through organic growth

3. Cost cutting

Based on the results of the surveys held by our Research Center since 2015, the opinions of our respondents regarding the most attractive strategies have changed only slightly. According to 80 percent of respondents, cost control remains the most attractive strategy.

Among top 3 favorite strategies, the organic growth strategy ranks second (62 percent) and cost cutting ranks third (56 percent).

Having performed an in-depth data analysis, we prepared a strategy map which presents strategic areas of corporate development in 2018. This method helps to identify strategies that offer the highest appeal to companies depending on their financial position and business outlook.

Strategy attractiveness map

–0.5

–0.5

1.5

1.5

–1.0

–1.0

1.0

1.0

–1.5

–1.5

0.5

0.5


Unfavorable zone

Favorable zone


Unfavorable zone companies expect operating profit to fall, pointing to a deteriorating financial outlook

The medium risk zonecompanies expect operating profits to fall, albeit pointing to an improving financial outlook

The medium risk zone companies expect operating profits to grow and point a deteriorating financial outlook

Favorable zone companies expect operating profit to grow and note that the financial outlook is improving

9 8

11

135

21

15 14

2

20

112

166 18

3

1710

197

4


19

Zone 4 comprises the following strategies selected by companies facing financial or operating difficulties:

8 Ongoing cost control9 Cost cutting11 Asset sale

All strategies that are considered

Strategies from unfavorable zone

2015 2016 2017 2018

№ 1 CAPEX growth

№ 2 Acquisitions in Russia

№ 3 Acquisitions abroad

№ 4 Organic growth

№ 5 Expansion into new markets

№ 6 Launch of new products/services on the market

№ 7 Dividend increase or share buyback

№ 8 Ongoing cost control

№ 9 Cost cutting

№ 10 Debt reduction

№ 11 Asset sale

All strategies that are considered

Strategies from unfavorable zone

2015 2016 2017 2018

№ 12 Cash flow increase

№ 13 Currency risk mitigation

№ 14 Increased costs for marketing research and PR

№ 15 Increase in production abroad

№ 16 Increase in domestic production

№ 17 Financial risk reduction (interest rates, derivatives, etc.)

№ 18 Investment in personnel

№ 19 Raising capital from external sources

№ 20 Digitalization of business functions

№ 21 Investing in startups (internal and external accelerators)

Pricing policy: the 2017 results and the 2018 expectations Trends

• 49 percent of respondents reported no changes in pricing policy in 2017. One in three companies stated that they made a decision to hike prices in 2017 by 22 percent. Another 16 percent of companies reported price cuts by 8 percent.

• Speaking about their plans for 2018, 40 percent of our respondents stated their intention to keep prices at the current levels. 47 percent of respondents plan to hike prices by 7 percent, and 13 percent of respondents plan to cut prices by 9 percent.

• Price growth is forecast mainly by representatives of manufacturing (70 percent) and medical and pharmaceutical (63 percent) companies.

Pricing policy for 2018Pricing policy implemented in 2017

Price growth

No change

Price decrease

35%

49%

16%

47%

40%

13%-8% -9%

+22% +7%


20

of the companies surveyed cooperate with foreign partners.

of companies surveyed do not cooperate with foreign partners.

plan to expand their business relations into other regions.

do not plan to expand their business relations into other regions.

78 % 22 %

42 % 58 %

Cooperation with foreign partners by industry

Enter in partnerships

Do not enter in partnerships

Plan to enter in partnership

Do not plan to enter in partnership

Trends

• In the previous 2017 year, the number of companies that cooperate with foreign partners remained almost flat (2 p.p. above average). At the same time, the number of companies that plan to expand the geography of business relations has significantly decreased by 9 p.p.

Highlights

• Consumer and healthcare companies (87 and 88 percent, respectively) partner with foreign companies more frequently than others. However, 54 percent of respondents of TMT companies plan to expand their cooperation. The representatives of other industries are not likely to expand the geography of business ties next year.

Prospects of developing business abroad

13% 23

%

20%

12%

87%

77% 80

% 88%

34%

54%

40% 50

%

66%

46%

60%

50%


21

Trends

• Upon comparing the current geography of business ties with cooperation plans, one can notice that the respondents tend more often to expand business ties with North America (9 p.p. above average) and Asia (15 p.p. above average)

Highlights

• Consumer companies plan to expand ties with partners in Asia (34 p.p. above average) and South America (12 p.p. above average). Plans to develop cooperation with partners in South America are more often reported by oil and energy companies (33 p.p. above average).

• Respondents of TMT companies mostly tend to expand ties with companies in North America (27 p.p. above average).

• Respondents of medical and pharmaceutical companies plan to develop business ties with North America (25 p.p. above average) and Asia (36 p.p. above average).

The current geography of ties

Geography of future ties

23%

30%

38%

20%

57%

25%

25%

20%

29%

25%

8%

30%

38%

33%

80%

86%

100%

75%

67%

85%

80%

100%

71%

67%

60%

71%

100%

50%

33%

77%

70%

88%

43%

33%

80%

43%

75%

50%

33%

46%

50%

63%

14%

33%ASIA

SOU

TH A

MER

ICA

EURO

PE

CIS

NO

RTH

AM

ERIC

A

65%67%

57%42%83%

81%

17%19%

30%21%


22

Business drivers and barriersDrivers and barriers rating

Business drivers:

• Production costs

• Digitalization

• Liquidity

Barriers for business

• Focus on core business

• Currency risks

• Domestic production

After a temporary pause, currency risks are back on the scene as a key barrier to business development. The top 3 barriers to business growth comprise such risks as the focus on core business, just as previously, and domestic production (the balance indicator is 0.3).

Key drivers for business development comprise production costs, digitalization, and liquidity.

Drivers Barriers Balance

0.65

0.24

0.38

0.61

0.23

0.38

0.49

0.26

0.37

0.83

0.29

0.11

0.09

Prod

uctio

n co

sts

Cost

of c

apita

l

Prod

uctio

n ab

road

Focu

s on

cor

e bu

sine

ss

Dig

italiz

atio

n

New

mar

ket e

ntra

nce

Fina

ncia

l pos

ition

Liqu

idit

y

Exte

rnal

sou

rces

of

cap

ital

Prod

uctio

n in

Rus

sia

New

pro

duct

s/se

rvic

es

Inno

vatio

ns

Curr

ency

ris

ks

-0.4

3

-0.3

9

-0.6

0

-0.5

8

-0.3

8

-0.6

8

-0.5

1

-0.4

3

-0.6

8

-0.4

2

-0.4

2

-0.3

3

-0.7

4

0.22

-0.1

5

-0.2

2

0.03

-0.1

5

-0.3

0

-0.0

2

-0.1

7

-0.3

1

0.41

-0.1

3

-0.2

2

-0.6

5

Prevailing effect of barriers

Prevailing effect of drivers


23

Sources of financingAttractiveness analysis of financing sources

*Crowdfunding is the practice of financing ventures by raising money from a large number of people who each contribute a relatively small amount

Attractive financing sources:

• Internal sources

• Borrowing from Russian banks

The list of attractive sources of financing based on the opinion of the respondents has not changed since early 2017.

The internal sources of financing appear attractive mostly for companies with 250–1,000 employees (18 p.p. above average).

At the same time, loans from Russian banks remain the most attractive source of financing for manufacturing companies (20 p.p. above average) and Russian companies, as opposed to foreign companies with production in Russia (44 p.p.).

Also, companies operating only in some Russian regions are more eager to borrow from Russian banks than companies present in all Russian regions (the share of the former is 24 p.p. higher).

Attractive Not attractive Balance

0.22

0.08

0.16

0.12

0.44

0.14

0.06

0.29

0.11

0.01

Loan

s fr

om R

ussi

an b

anks

Russ

ian

inve

stm

ents

Crow

dfun

ding

*

Loan

s fr

om fo

reig

n ba

nks

Bom

d is

suan

ce

Deb

t inc

reas

e (b

orro

win

g fr

om c

ompa

nies

an

d in

divi

dual

s)

Fina

ncin

g fr

om g

over

nmen

t

Inte

rnal

fina

ncin

g so

urce

s

Fore

ign

inve

stm

ents

Shar

e is

suan

ce

-0.2

8

-0.3

6

-0.3

4

-0.4

3

-0.1

5

-0.3

2

-0.4

1

-0.2

5

-0.3

2

-0.4

3

-0.1

7

-0.3

1

0.28

-0.1

8

-0.3

5

0.05

-0.2

1

-0.4

2

-0.0

6

-0.2

8


24

Clients of companiesClient focus

Number of customers

• Almost a half of companies (49 percent) pursue a balanced policy in taking into account both the interests of the company and its customers.

• A third of companies (31 percent) see the interest of customers as an important priority, while 9 percent of respondents consider it an absolute priority.

• 11 percent of CFOs surveyed confirmed that the company’s policy is a priority as opposed to customers’ interests.

• Meanwhile, none of the respondents said that the company’s policy is an absolute priority.

The focus is on the company policy rather than on customers’ interests/needs

The interests of customers and the company policy are approximately equally significant

The interests/needs of customers are more of a priority than the company policy

The interests of customers are an absolute priority

11%9%

49%

31%

Trends

• 51 percent of CFOs reported that the number of new customers in the previous year has increased (the net balance is 0.42).

• One in three CFOs indicated an increase in the number of regular customers (36 percent), individual customers (27 percent), and private companies (31 percent).

• The positive trend is that the number of customers experiencing financial difficulties is decreasing in most companies. This is the only indicator reflected in the negative part of the balance (-0.09).

Highlights

• The representatives of the TMT industry more frequently report an increase in customers that are government‑owned corporations (15 percent). They also report a 38 p.p. decrease in the number of customers experiencing financial difficulties.

• The most significant increase in the number of new customers was cited by respondents from the FSI industry (80 percent).

• The highest increase in individual customers occurred in consumer business (40 percent), FSI (40 percent), as well as the medical and pharmaceutical industry (38 percent). At the same time, the number of customers among privately held companies increased by 40 percent in the manufacturing industry and consumer business.

Up Down Balance

-9%

-11%

-4%

-4%

-7%

-29%

-13%

51%

25%

36%

7% 27%

20%

31%

0.42

0.15

0.33

0.04

0.20

-0.0

9 0.18

New

clie

nts

Clie

nts

with

goo

d fin

anci

al s

tand

ing

Long

-est

ablis

hed

clie

nts

(ove

r 2 y

ears

)

Gov

ernm

ent-

owne

d co

rpor

atio

ns (B

2G)

Indi

vidu

als

(B2C

)

Clie

nts

expe

rien

cing

fin

anci

al d

iffic

ultie

s

Priv

ate

com

pani

es (B

2B)

0 0.2 1-1

The company policy The interests of customers


25


26

Innovation and digitalization

of the surveyed CFOs participate in the evaluation of new technological solutions and launch of innovative projects in their companies.

(17 p.p. up year-on-year).

82 %

CFO participation in implementing innovation

Use of innovative technologies

Company value

Trends

• One in two respondents (49 percent) noted that the company value rose after implementation of innovations. Among them, one in three respondents (33 percent) indicated that the company increased by 5 percent, almost one half (52 percent) indicated a 5–10 percent growth and another 11 percent of experts spoke about 10–20 percent increase in the company value.

Highlights

• Advanced accounting systems remains the most general technology innovation implemented by companies (64 percent). The number of companies that implemented ERP systems increased by 22 p.p.

• Responses from TMT companies show that they more often implemented such solutions as artificial intelligence, virtual reality and cloud technologies (by 20 p.p., 11 p.p., and 33 p.p., respectively).

• The manufacturing companies tend to implement the IoT technologies more often than other companies (by 17 p.p.).

Advanced accounting systems (CRM, SAP, etc.)

Full automation of select business processes

Cloud technologies

Big data processing software

Full automation of business process chains

AI (e.g., predictive analysis)

RPA

IoT

AR/VR

Blockchain

64%

38%

36%

22%

20%

11%

9%

5%

4%

0%

25%

38%

33%

25%

33%

7%

18%

13%

7%

13%

11%

24%

31%

53%

47%

82%

73%

82%

89%

87%

Implemented/being implemented Plan to implement next year Not implemented/no plans to implement

Up

No change

Down

Over 20%

10–20%

5–10%

Less than 5%

[1] Computer equipment that models and delivers various types of human intellectual activities or behavior. e.g., predictive analytics)

[2] Blockchain settlement (used with bitcoin and during similar transactions)

3% 5%

25%

16%

51%

49%


27

Changes in the level of innovation*

• In early 2018, the level of innovation in the surveyed companies was estimated at 0.15. Last year, it increased by 4 points. The highest growth took place in the first half of 2017.

Highlights

• TMT companies lead in the implementation of innovation technologies, with the level of innovation amounting to 0.23, which is 3 points above the previous year’s value.

• Manufacturing companies showed the highest year-on-year increase (6 points). They also lead by the number of planned innovations (0.23).

*The level of innovation is a weighted average of the technology complexity estimate

Industry development level by complexity of implemented/being implemented technologies

Industry development level by complexity of technologies planned to be implemented

2017 H2 2018 H12017 H1

0.140.11

0.15

The map of innovation sources

• Most innovation is implemented by special divisions inside companies (66 percent). Such divisions are created more often in manufacturing companies (70 percent).

• The least widespread sources of innovation are technoparks, venture funds, and accelerators set up by a mere 6 percent of the surveyed companies. Interest in such projects slightly decreased by 2 p.p. last year.

0.18

0.10

0.15

0.09

0.23

0.03

0.23

0.14

0.19

0.12

0.21

0.16

Medium level

0.5

0

The

inno

vatio

n le

vel

0.15

Dedicated division within the company

Outsourcing: major technology company

Technoparks, venture funds and accelerators

Outsourcing: small technology company/

startup

Government-owned colleges, universities

and research institutes

66%

6%

8%12%

8%


28

R&D expenses in 2017

Planned R&D expenses in 2018

• In 2017, over one third companies (38 percent) did not invest in R&D. Meanwhile, a quarter of respondents spent 1–5 percent of their annual revenue on R&D, more than a year ago when investment in R&D did not exceed 1 percent of the annual revenue.

• Around 8 percent of companies spent 5–10 percent of their annual revenue on R&D in 2017, almost the same number of companies spent more than 20 percent on R&D.

• One in three respondents (36 percent) said that their companies did not plan to invest in R&D in 2018. A quarter of respondents plan to spend 1–5 percent of the revenue on R&D in 2018, while one in five spoke about plans to allocate up to 1 percent of their revenue on R&D.

• 50 percent of the manufacturing companies surveyed plan to invest 1–5 percent of their revenue on R&D, which the highest share compared to other industries.

• TMT companies report about plans to invest in R&D more often than the others (23 percent of companies plan to invest over 20 percent of their annual revenue in R&D), followed by medical and pharmaceutical companies (13 percent of companies plan to invest over 20 percent of their annual revenue in R&D).

[1] Do not invest in R&D[2] Do not plan to invest in R&D

50%

40%

23%

40%

38%

31%

27%

20%

13%

25%

40%

33%

8%

25%

25%

15%

12%

23%

12%

25%

8%

38%

0%

22%

7%

0% [1] 10%–20%Less than 1% Over 20%1–5% 5%–10%

24%

9%

36%

4%

20%

7%

0% [2] 10%–20%Less than 1% Over 20%1–5% 5%–10%

8%

12% 23%

12%

40%

23%

30%

38%

50% 27%

23%

20%

13%

25% 20%

6%

15%

12%

27%

8%

50%

13%

20%

25%


29

of CFOs see a need for increasing economic efficiency through business process automation.

(up 6 percent year-on-year).95 %

Drivers and obstacles to implementing digital strategies

Drivers Barriers Balance

• According to respondents, the key drivers for a digital strategy are the market and competition (the balance indicator is 0.71, while an increase amounted to 15 points in six months). The management strategy remains in the second position (the balance indicator is 0.45).

• The accessibility of infrastructure is back to positive values after a brief stay in the red zone; it became a driver for implementing a digital strategy (the six-month increase amounted to 2 points).

-51%

-15%

-60%

-27%

-65%

-44%

49%

85%

40%

73%

35%

56%

-0.0

2

0.71

-0.2

0

0.45

-0.3

1

0.13

Fina

ncin

g

Mar

ket

and

com

petit

ion

Entit

y st

ruct

ure

Man

agem

ent s

trat

egy

HR

supp

ort

Acce

ssib

ility

of

infr

astr

uctu

re

Investments in operations automation in business units

• The largest investments were made in financial services automation (73 percent).

• One in three CFOs plans to invest in administration services automation (35 percent).

• Medical and pharmaceutical companies invest in HR process automation more frequently than other companies (75 percent).

• Manufacturing companies tend to invest in production automation more often than others (70 percent), while TMT companies more frequently invest in document exchange and administration automation (15 p.p.).

Yes No, but I am planning to No investments or investment plans

FinanceAdministration document exchangeMarketing & sales

HR and talent

Production

Security

73%

60%

53%

51%

49%

32%

20%

35%

22%

31%

22%

18%

7%

5%

25%

18%

29%

50%


30

USD/RUB

Oil price

Bank of Russia’s key interest rate

EUR/RUB Bitcoin to USD

Gold price

Inflation

51%

36%

13%

18%

66%

16%

11%

25%

64%

51%

38%

11%

18%

40%

42%

20%

69%

11%

54%

40%

6%

59 RUB

7.4 %

66 USD

73 RUB

8,660 USD

2.1 %

1,328 USD

Growth

Same level

Decrease

Growth

Same level

Decrease

Growth

Same level

Decrease

Expectations related to the changes in performance

Expectations and personal experience of CFOs

We asked our respondents about their expectations regarding changes in currency rates and commodity prices for autumn 2018.


31

Personal experience of the respondents

The use of virtual reality technologies

Experience in the smart home technology market

Use of cryptocurrency

Trends

• One in four surveyed CFOs has experience in using virtual reality technologies (VR). This indicator rose by 5 p.p. in the past six months. Representatives of the FSI industry (60 percent of respondents) became leaders in using this technology.

• The number of respondents experienced in cryptocurrency markets has significantly increased by 11 p.p. in the past six months. The most frequent users of cryptocurrencies were found in the healthcare industry, with 50 percent of them having had experience in buying a cryptocurrency (bitcoins).

• 10 percent of respondents used a smart home technology.

Highlights

• The most experienced in using the above‑mentioned technologies are CFOs from companies with revenues exceeding RUB 50 billion (21 p.p.,5 p.p., and 15 p.p. above average).

• Overall, last year’s data lead to the conclusion that the respondents interested in a given technology tested it in practice. At the same time, those who were not interested in these technologies did not become interested in them.

25%

33%

42%

10%

69%

21% 15%

40%

45%

Yes No, although I would like to test it

No, this technology is of no interest for me


32


33

Our respondentswere representatives of foreign companies with production facilities in Russia

were representatives of Russian companies

Revenue in 2017

Industry

Number of staff

Geography of operations

Form of ownership Strategy implementation horizon

40% 60 %

51%26%

27%

18%

33%

27%

4%

25%

71%

11%

80%

2%13%

40%

RUB 0–10 bn

RUB 10–50 bn

Over RUB 50 bn

Consumer business

Technology, media and telecommunications

Manufacturing

Healthcare and pharmaceuticals

Financial services and insurance

Energy and resources

Up to 250 employees

251–1,000 employees

Over 1,000 employees

Public

Private

Government-owned

1–2 years

3–5 years

6–10 years

Over 10 years

Nor

th C

auca

sus

Fede

ral D

istr

ict

Far E

ast F

eder

al D

istr

ict

Cent

ral F

eder

al D

istr

ict

Volg

a Fe

dera

l Dis

tric

t

All

regi

ons

Nor

thw

est F

eder

al D

istr

ict

Ura

l Fed

eral

Dis

tric

t

Sout

h Fe

dera

l Dis

tric

t

Sibe

ria

Fede

ral D

istr

ict

0% 7%36%

13%

42%

16%

9%7% 15%

7%

24%

15%

9%

7%


34

Ian ColebourneCEODeloitte CIS

Lora ZemlyanskayaManagerResearch Centre Leader,Deloitte [email protected]

Vladimir ElizarovPartnerCFO Programme,Deloitte CIS

Dmitriy KasatkinSenior SpecialistResearch Centre,Deloitte [email protected]

Joe PacelliPartnerHead of Business Development,Deloitte CIS

Authors:If you have any questions regarding the survey,please do not hesitate to contact us.

Contacts

Yulia Afanasyeva InternResearch Centre,Deloitte [email protected]

Артем Беляев

Дизайнер компании «Делойт», СНГ[email protected]

deloitte.ruAbout Deloitte

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Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries bringing world-class capabilities, insights, and high-quality service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 264,000 professionals make an impact that matters, please connect with us on Facebook, LinkedIn, or Twitter.

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Key Trends CISCFO - Deloitte United States€¦ · Deloitte CFO Survey of the Leading Companies in Russia 04 Key findings • Overall, by early 2018, the positive expectations concerning