J ÖNKÖPING I NTERNATIONAL B USINESS S CHOOL JÖNKÖPING UNIVERSITY Entering Russian Market of Passenger Transportation Case of Veolia Transdev Paper within Thesis in Business Administration Author: Ilya Niklyaev, 920411-5514 Yuliya Samuseva, 910113-5086 Tulga Bayar, 820409-7052 Tutor: Magnus Taube Jönköping May 2013
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J Ö N K Ö P I N G I N T E R N A T I O N A L B U S I N E S S S C H O O L JÖNKÖPING UNIVERSITY
Entering Russian Market of Passenger Transportation
Case of Veolia Transdev
Paper within Thesis in Business Administration
Author: Ilya Niklyaev, 920411-5514
Yuliya Samuseva, 910113-5086
Tulga Bayar, 820409-7052
Tutor: Magnus Taube
Jönköping May 2013
i
Acknowledgements
- We would like to thank our supervisor and tutor Magnus Taube for his helpful guidance and support throughout the research study.
- Also we would like to thank the Veolia HR director Cyril Lombard for being our contact link with Strategic committee of Veolia Transdev headquarters in Paris that provided valu-able information for this research.
Each day more and more companies choose to become international and to expand to new markets looking for bigger profits. However, many of them end up carrying big losses only because they lack a deep and detailed analysis of a new market they have chosen to expand to. Therefore, the authors of this thesis decided to conduct a deep and profound analysis of Russian public transportation market. Russia presents a fast developing economy which shows very positive development signs. Russian market became more approachable and less risky in legal terms since Russian membership in World Trade Organization in 2012. Thus, Russia can be a very interesting market to expand to. For the accuracy of the analysis it was chosen to concentrate on the public transportation sector of the market of Moscow, as this city has 12 million passengers per day and big transportation and traffic problems.
It was chosen to conduct a case study and take a Veolia Transdev Company as an empirical example for the market analysis. This company was chosen due to its wide international presence and successful and sustainable growth. Now the company started to lose its grasp and lately has been experiencing financial problems. This company is not presented in Rus-sia, so it serves for this study as a potential entrant to the Russian market of public trans-portation. Hence, the analysis was conducted from the view of the company that is looking for new markets to expand to. The experience of Veolia Transdev was integrated with the market analysis conducted with a help of two models combined together: PESTEL and Porter‟s Five Forces.
As a result, it was discovered that Russian public transportation market limited to Moscow area can be very profitable; it has plenty of opportunities to be exploited by international companies of Veolia Transdev‟s size and experience. As for a specific case of Veolia Transdev, company could become successful in this market with a right integration of its experience. Moreover, after the conducted research authors believe that Russian public transportation market could help Veolia Transdev‟s future financial success and could be-come one of its major profit sources. This paper provides a very descriptive analysis of Russian public transportation market limited to Moscow area for Veolia Transdev. The chosen market proved itself to be open for new entrants; to be full of different domestic and international suppliers with a low negotiation power; to have a high popularity of pub-lic transportation and poor competition from local public transportation providers.
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Table of Contents
List of Figures................................................................................... 5
List of Tables .................................................................................... 5
3.1 Research philosophy ............................................................................ 16
3.2 Research approach .............................................................................. 17 3.3 Research Strategy ................................................................................ 17
3.3.1 Case Study ........................................................................................... 18 3.4 Data sources ........................................................................................ 19
3.4.1 Primary data ......................................................................................... 19 3.4.2 Secondary data .................................................................................... 19
3.5 Data collection ...................................................................................... 19 3.5.1 Sample Techniques .............................................................................. 20
3.5.2 Interviews ............................................................................................. 20 3.6 Data analysis ........................................................................................ 21
3.6.1 Reliability and Validity ........................................................................... 21
4.3.1 Supplier Power ..................................................................................... 37 4.3.2 Buyer Power ......................................................................................... 38
4.3.3 Threat of entry ...................................................................................... 38 4.3.4 Threat of substitutes ............................................................................. 39
4.3.5 Industry rivalry ...................................................................................... 40
8.1 Appendix A ........................................................................................... 63
8.2 Appendix B ........................................................................................... 65 8.3 Appendix C ........................................................................................... 66
5
List of Figures
Figure 1 Russia and G7 countries GDP growth rate .......................................... 8
Figure 2 Porter’s five competitive forces........................................................... 13
Figure 3 Purchasing power of people ............................................................... 27
Figure 4 Dynamics of Passenger Transportation ............................................. 30
Figure 5 Import of transportation services ........................................................ 32
Figure 6 Exports from EU to Russia ................................................................. 33
Figure 7 Bus Market in Russia ......................................................................... 37
Figure 8 Investments into a transport sector in Russia ..................................... 39
As an empirical example for this research authors have chosen the multinational company Veolia
Transdev. To collect all the necessary data the official website of Veolia Transdev was used together
with the interview conducted through the email with the strategic committee of Veolia Transdev
headquarters in Paris.
Veolia Transdev is a merger of two world‟s biggest transportation companies Veolia Transportation and Transdev implemented in April 3, 2011. The company is a provider of public transportation services and one of its major activities is to assist local authorities with project management of pub-lic transportation operations. The revenue Veolia Transdev generated in 2012 was 7.6 billion euro (Veolia Environment, 2013b).
Veolia Transportation was a subsidiary of Veolia Environment founded in 1876 in Paris, France. As financial results were worsening, in 2011 Veolia Environment took a strategic decision to withdraw from the participation in Veolia Transdev and quit the transportation business. (Veolia Transdev, 2011). Transdev was an internationally known public transport group, a subsidiary of Caisse des De-pots et Consignations, a French state-owned financial institution (Veolia Transdev, 2011). The num-ber of its acquisitions and joint ventures was changing constantly and the company became one of the biggest operators in Europe.
Veolia Transdev is positioned today as a multi-modal transit operator. It provides connections through 14 different transport modes: bus rapid transit (BRT), car sharing, light rail, bike, metro, fer-ries, tram-train, bus, transport on demand, coach, rail, paratransit, taxi and share-ride airport shuttle (Appendix 4).
The board of the company has seven members, including one independent director, and three committees: strategy, compensation and audit. (Veolia Transdev, 2011). Veolia Transdev is partly owned by French waste and Water Company Veolia Environment SA and other part by the Caisse des Depots. As in the late 2011 Veolia Environment, owner of half of the shares, announced a di-vestment project, it was planning to sell its part of shares of Veolia Transdev. It was planning to concentrate on the main 7 markets (France, Netherlands, Germany, USA, UK, Asia and Australia) and divest from the rest. At the mean time French-bank controlled fund was willing to get the own-ership over the half of Veolia's stake in Transdev. At the same time Veolia Environment wanted to reduce its share of Veolia Transdev to give the control to The Caisse des Depots (Veolia Environ-ment, 2013a).
Company claims its major values are passion, performance, partnership and commitment, while it is
pursuing the goals to optimize urban assets, to protect environmental assets and to develop human
assets (Appendix C). Veolia Transdev is presented today in 27 countries across 5 continents. It pro-
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vides its services in Sweden, China, USA, Czech Republic, Poland, France, Slovakia and other coun-
tries. (Veolia Transdev, 2013b).
The strategic committee of the company says that Russian market today can be very attractive due to
its sustainable economic growth, also because Moscow is a big city with a lot of potential customers.
Still, lately, due to divestment program, company does not plan to enter new markets. Instead, it has
chosen to focus on the most profitable markets: USA, France, Germany and Netherlands. The
company representatives believe that USA market is the most profitable one due to an early entry
and smaller number of competitors. The most profitable projects in American market are the bus
rapid transit and shuttles. Even though the company is currently pursuing divestment program, it is
still planning on focusing on Asian, Australian and UK markets as very potential ones. The company
sees a lot of opportunities in Asia for its fast growth and success. (Interview with Veolia Transdev,
Appendix A)
The company discovers new markets by analyzing the new growing markets and comparing their
profitability, and then by finding an appropriate local partner to work with. The most attractive fea-
tures of a potential markets can be transport culture in terms of high popularity of public transporta-
tion and a high number of passengers, the economic conditions of potential passengers and stable
legal system allowing low risk when conducting business in a new market. It is obvious that for the
transportation company like Veolia Transdev the costs of entry can be sometimes quite high, be-
cause of expenses on marketing, logistics, legal establishment (joint venture creation), purchase of
new transportations, and paying the local professionals for tax and legislation consultancy. (Inter-
view with Veolia Transdev, Appendix A)
Veolia Transdev is already presented in three countries which are the part of Eastern European
market: Czech Republic, Slovakia, and Poland. It faced some common problems in these markets.
First big one was a cultural difference to maintain which the company started to hire managers from
that country and mix their cultural and professional approach with company‟s one. The second
problem was corruption which was handled with a help of a partner‟s expertise and network. Also
the legal and political risks could have been eliminated by a great network, which the partner could
offer. Thus, the company got the excess to suppliers in local area and enriched its networks in mar-
keting as well. And third and biggest problem, which the company faced in every new market, was
finding a good partner. To do so, the strategic committee was always focusing on public companies
to be able to see the real condition of the company.
Today Veolia Transdev calls itself the best company in public transportation in Eastern Europe with
contracts in such big cities like Prague and Warsaw. The company makes its biggest revenue on bus
rapid transit and shuttle services in eastern European markets and promotes itself as the most relia-
ble company with excellent performance. Its competitive advantage over there is its high level of en-
vironmental protection. The company characterizes its services as safe, reliable and efficient. Fuel ef-
ficiency, high technological level and high level of personnel training are the most important factors
in company‟s activities. Veolia Transdev has a lot of suppliers all around the world, which are social-
ly responsible and have a great performance, for example, Fleetech Company in Sweden. (Interview
The theoretical value of this paper is in the detailed analysis conducted by the combination of
PESTEL analysis together with Porter‟s Five Forces model (Porter, 1979) and case study of a public
transportation multinational company Veolia Transdev. There is considerable literature about the
companies that have entered Russian market, therefore, this paper analyzes the situation of the Rus-
sian market from the view of a company that is not presented there yet, which brings this paper
much closer to a real life situation. It is known that the Company should investigate the situation of
the potential markets in order to take a decision whether to plan and develop an entry.
The value of this thesis is in an implication of two analyses in parallel on the particular market seg-
ment in Russia. Russian market was always famous for its big size and high risks, but the thesis
showed all the aspects of Russian market by concentrating only on one biggest city - Moscow. After
all, it is not only the risks that are being too high, but the economical and cultural differences. Also
with a special knowledge gained from experience it is possible to eliminate or leverage the risks and
discover a big profitable market.
The authors, being native speakers analyzed documents, statistics, news reports, informational bulle-
tins, articles, financial reports, state programs and investment plans originally produced in Russian
language. The case study research method was used to find out more about the company‟s specific
experience to adopt analysis to company‟s strengths and weaknesses. The applied basic theories
were presented by Porter‟s (1979) Five Forces and PESTEL and the structures of these models were
used to structure the analysis of the public transportation market of Moscow for Veolia Transdev.
The paper concludes with a detailed analysis of the market and by offering it in English, makes it
more accessible to a wider audience.
The authors believe that this paper made a practical contribution as well, this paper may influence
the decision of the company whether to enter the Moscow public transportation market, and more
importantly, it can be used by Veolia Transdev in strategic decision-making if the company wants to
enter the Russian market. This thesis may also be a framework for other public transportation pro-
viders, and the methods and analysis structure of this thesis can be used for any other company no
matter from which foreign country of origin.
6.2 Limitations
One of the limitations with this paper is the small number of interviews conducted. Furthermore,
the region of Moscow was taken as a representation of the whole Russia. However, the research
51
could have considered differences between various regions in Russia as there might be a slight diver-
sity in economic, social and technological aspects from one city to another. However, this is closely
connected to the lack of resources, such as time, to carry out all the necessary investigations.
Lastly, there were no calculations made showing the forecasted profits and expenses of the company
entering the Russian market of public transportation. Even though it was not one of the goals of
this paper it would be valuable for the companies in order to get the full picture of market entry.
6.3 Future research
This research conducted a basic market analysis that is crucial when taking a decision about entering
a new market. However, the results have demonstrated that this analysis can be continued in order
to find the best mode of entry for Veolia Transdev. First, the appropriate analysis is needed to
choose an establishment mode between acquisition and greenfield and to choose the ownership type
between wholly-owned enterprise and a joint venture.
Tan (2009) insists that the choice of establishment mode depends on the MNE‟s (multinational en-
terprise) general strategies and structure or the “inside” of the company, while Dikova and Witte-
loostuijn (2007) take a look at this decision from the outside and offer to consider the institutional
advancement of the country additionally to MNE‟s strategies to make the most efficient choice.
Based on transition cost economics (TCE) theory their focus is limited to the institutional environ-
ment of a host country.
When it comes to the ownership structure, again, Dikova and Witteloostuijn (2007) offer the pers-
pective from environmental point of view: the advancement of institutions of the host country in-
fluences the ownership decision. The other authors, Karhunen and Ledyaeva (2012), talk about the
impact of corruption distance on this decision, which also represents the institutional advancement
of the country, but they take a view from the both sides. Going farther than Dikova and Witteloos-
tuijn (2007) they compare the institutional advancement in host country and native country of the
MNE. Meyer (2001) joins this group of researchers and also supports Dikova and Witteloostuijn
(2007) on their findings.
To summarize the findings, the lower the institutional advancement of a host country - the more
probability for joint venture (JV) type of entry, and the lower the institutional distance between the
host and home country – the more popular wholly-owned enterprise type is. Most of the foreign
firms choose JV as the best type of entry into Russian market, but some companies from countries
with a low institutional advancement distance still prefer wholly-owned enterprise, which can be a
good decision especially if they are not first movers.
Second, the time of entry can be analyzed as an important factor when deciding on which activities
to perform in a new market. Cui and Lui (2005) suggest that for each type of entry (first or follower)
there is a best strategy to succeed. They proved using the resource-based view (RBV) that first mov-
ing firms in high-growth and/or higher competition industries have a better market performance,
the first movers who are large firms and/or have a large resource commitment tend to perform bet-
ter in market and in profits, and first movers with a high level of market intensity are better in prof-
its compared to other first movers. When talking about followers they proved that those who have
high resource commitment perform better in profit and those who have high level of market intensi-
ty are better in profit and in market, compared to other followers.
52
Basically, Cui and Lui (2005) provide strategies for companies depending on choice of entry time.
They are also convinced that a follower can reach better success in the market or in profit perfor-
mance than a first mover. Hence, time of entry is a very important factor to consider when entering
the Russian market, to make the right choice of entering strategy.
Finally, the best type of foreign direct investment can be chosen by future research and analysis.
McCarthy and Puffer (1997) analyzed the cases of companies which entered the Russian market and
pointed at six basic types of foreign direct investments. They focused on successful stories. The ad-
ditional analysis of failures can be conducted in order to figure out the possible mistakes and to pre-
vent entering companies from repeating these mistakes. Also the concentration on public transpor-
tation industry while conducting such research may lead to different results. Hence, authors recom-
mend narrowing down the future research to the public transportation market focusing on Veolia
Transdev as an empirical example.
As it was stated in the interview with Veolia Transdev, the most important part that can be very dif-
ficult when entering new markets is finding a reliable partner with a good network. Hence, the re-
search on possible partners in the Russian market can be conducted with a goal of finding the best
partner for Veolia Transdev as a representative foreign company in the public transportation indus-
try.
6.4 Conclusion
The general analysis of the public transportation market of Moscow showed that this market is very
open to new entrants. The government of the city allocates a large part of its budget to finance the
development of its public transportation services. The city size is growing too fast so that big territo-
ries remain uncovered by public transportation. The supplier power in Moscow public transporta-
tion was discovered to be quite low and a choice of international suppliers presented on this market
tends to grow fast because of the openness of the market. This simplifies the entry of foreign pro-
vider of public transportation services such as Veolia Transdev. Also the buyer power was not very
high, as the city has a high culture of public transportation, meaning that citizens of Moscow use
public transportation daily. And the possibility to easily switch to private transportation is very low.
Moreover, many people use private transportation but most of the times they tend to use public
transportation.
The Moscow market of public transportation is becoming more competitive each day, but the level
of competition cannot be compared to the European one. Due to low technological and service le-
vels of local providers there is a big gap that can be filled in this market by foreign entrants. The in-
ternational company like Veolia Transdev can compete with small local service providers by using
the economy of scale, and big providers like Mosgortrans by advanced technology and service, and
by using its experience.
Also the terms of legislations became more favorable for the foreign companies. Since Russia be-
came a part of World Trade Organization, all the foreign companies are under the protection of the
organization‟s legal system. Generally, the requirements for public transportation are very basic and
common, except for the rule of implementing global navigation satellite system in each vehicle oper-
ating in public transportation service.
53
The analysis presents the opportunities for development in this market for foreign entrants and the
way these opportunities can be used by international companies such as Veolia Transdev. Some of
the most observable opportunities are presented by increasing average salary in Moscow: high infla-
tion; fixed taxation of income and no value added tax on public transportation services; and by in-
creasing public transportation passenger turnover which today is about 12 million people per day.
According to these economical opportunities it can be assumed that the public transportation mar-
ket in Moscow can be profitable for new companies. And in case of Veolia Transdev it can probably
be a best source of profits. International companies can use the failure of the Moscow public trans-
portation providers to implement the special bus lanes, or to implement Wi-Fi in public transporta-
tion vehicles. Also it can offer solution to other unsolved problems like air pollution and make a
great input in developing public transportation in the city. It is possible to use the failure in perfor-
mance of “transport on demand” services introduced by the local supplier as an additional opportu-
nity. It can also be interesting to investigate deeper on the topic of implementation of such services
as “car sharing” or “bike sharing” presented by Veolia Transdev in other markets.
International companies should use their strengths to create competitive advantages in the Moscow
transportation market. For example, Veolia Transdev can use its experience gained in Eastern Euro-
pean markets to deal with corruption problems that may occur in Russia. Also the company might
use the same strategies to overcome the cultural differences. To build up a new and reliable network
the existing contacts with foreign companies and suppliers may be useful together with the devel-
oped network management. When it comes to developing a strategy to deal with public transporta-
tion overload in Russia the international company may adopt its experience from the markets with
similar characteristics. For example, the overload problem can be solved by using the experience
Veolia Transdev gained in Asia. To deal with other big problems such as speed of public transporta-
tion, development of new routes, Veolia Transdev can use its network with suppliers and experience
for implementation of its services. Also Veolia Transdev has a bigger experience with alternative fuel
and environmentally friendly vehicles that it can use as a competitive advantage.
To summaries, this research has shown that the Moscow public transportation market is open to
new foreign companies and can offer opportunities for profits and development. Moreover, using
an example of Veolia Transdev, this research provided the framework for international companies
about the ways of adopting the experience in order to succeed in this market.
54
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