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U.S. COMPUTER MAKER HALTS RUSSIAN PRODUCTION

by

Dr. Pyotr Johannevich van de Waal-Palms

Sovetnik Pravitelstva CWA, Tovarichestvo Palmsa, Inc.

Investment Bankers. Washington, United States of America.

IBM has decided to stop assembling its own PCs at the Kvant enterprise in Zelenograd, near Moscow, AFP reported on 27 February. The joint venture at the former defense plant began in 1993, and was producing 40,000 units a month. The Moscow authorities granted the plant an exemption from taxes on imported components, but in 1994 in response to a Duma law barring such waivers they reimposed the taxes, adding 8.5% to the final cost. IBM was unable to compete with imports of finished PCs by Russian trading companies which continued to enjoy tax exemptions. In 1995, Russians bought roughly 1 million PCs." [this means that this factory was supplying almost half of all the computers sold in Russia last year]

In a nutshell, this demonstrates the problem for economic advancement in Russia today, especially related to foreign investors. If the article is correct, this business was shipping units with an estimated retail value of between $40 and $80 million a MONTH. Thats $960 million a year in the retail economy! I can't imagine a more positive example of successful free enterprise, or an operation with more positive effects on the people and economy of Zelenograd, or Russia. Now how many people will go back on the street with no job, needing public assistance? How many local stores will close because these people have stopped feeding the economy with their wages? How much government revenue was lost?

So now the jobs will go outside Russia. Dell and HP in the U.S., and Taiwanese, Korean and Japanese suppliers will now take over the market with imports taking money out of the economy. A few trading companies will make some money instead of 1000's of people working in Zelenograd. I have spent many years in the computer industry, I know the business well, and I can't imagine a better, cleaner, more productive business for establishment in private Russian factories. I also know that it is a very low margin business, and 8.5% could easily knock someone out of the market, even in this country. Also, for import duties to push the finished cost up by 8.5%, the duties must have been extremely high. I had been looking for clients to do some electronic work in Russia myself, but now this example virtually destroys any near term chance of convincing anyone of the viability of such a venture.

The establishment of economic "free-trade" zones for foreign investors, with tax, transportation, customs, and other incentives, is the best way of priming the pump of a sick economy, bringing in outside cash, and encouraging export (which brings in more cash). An added benefit, offsetting the revenue loss of the special incentives, is that 1000's of people are paid (taxable), buy (taxable), and the people's businesses that they use also are paid (taxable) and spend (taxable), etc.. Something needs done to assure that these kinds of disasters -- and it is a true disaster just as much as from a flood or fire in the town -- never happen again.

Its really a sad situation. Forgive my candor but this makes me a little sick of heart for a country with such great promise, such talent, and with such wonderful opportunities in its future if it will only wake up and realize what it is doing to itself. I'm looking for suggestions, comments, and dialogue on the subject, with the goal of somehow influencing the situation.

If it will help, feel free to pass my comments on to someone that might need to hear.

Best Regards,

Douglas Keene

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M. Douglas Keene & Associates

Worldwide Manufacturing Consultants

San Diego, California USA

e-mail: mfgman@cts.com

Phone: 619-944-0397

FAX: 619-944-0619

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Do you want a U.S. journalist/reporter/correspondent for 5000 ruble per month salary? Articles available to Russian newspapers about any economic or financial or management education or busines subject of interest from your reporter in America. Send request to <palms@PeterPalms.com>


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