Colonisation, spread and competition are three stages of the spatial growth process common to both biology and the business world. FDI can be viewed in this manner as companies move into new market areas with a few investment locations and plans to grow by spreading throughout the new territory. A good example of this three-stage model is the Finnish oil company Neste and its expansion into the Baltic region.

Neste was the first Western company to venture into the region with a regional marketing strategy for unmanned service stations beginning in 1989 in Estonia. Stations in St Petersburg, Latvia, Lithuania and Poland quickly followed. Neste’s strategy was motivated by an excess capacity at its Finland refineries, and by the plans to upgrade a major highway (via Baltica) that would connect Poland with Scandinavia, through the Baltic countries. Knowing that unleaded fuels and Western-style service stations were not available in the region, Neste decided to take advantage of the opportunity to be first to offer these products and services. St Petersburg was also seen as a large market without Western-style service stations and potential for growth in demand with sales of Western vehicles into Russia.

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To keep costs and prices down, Neste hired local employees and used Soviet trucks upgraded for hauling Neste fuel tankers. Its emphasis was on clean stations with amenities such as sit-down restaurants, Western product sales, credit or debit card capability, and clean restrooms with showers. Stations had covered islands and in some cases, Neste leased space to other Western auto-related companies for sales and service. Being first in the region meant that Neste got first pick of locations and the ability to establish a brand identity and reputation early on. This helped establish the company as a source of quality products and services.

The downside was that Neste had to have joint-venture partners in each country except Poland. Neste’s partner company in each of the Baltic countries and Russia was the state-owned former Soviet oil company. This requirement limited Neste’s freedom to make both operational and investment location decisions, but was necessary. Later, these joint-venture requirements were dropped, making it easier for other foreign companies to enter the market.

 

Teething problems

Neste’s initial problems with entering the immediate ex-Soviet market was the need to train employees to be customer friendly and the need for security in the mafia-controlled business climate of the early years. As Neste general manager for Estonia, Tapio Jarvenen, said in 1993: “We must teach our employees to smile. After years of not trusting anyone, they are too reserved and cautious with the public.” Such problems were offset by the high demand for Western products and the fast progress toward Western standards of business operations throughout the Baltic region. Neste expanded with new locations, reaching a total of 42 stations by 1995, and 289 today in Estonia, Latvia, Lithuania, Poland and Russia.

Neste soon began to feel the competition from other foreign firms and from local companies within the region. Shell, Statoil and Texaco entered the market in the early 1990s, followed by Lukoil of Russia. With the entry of the other big petrol firms, Neste noticed the effect of increasing competition for the small market of the Baltic countries. Increased demand for sites caused the price of real estate on the best commercial sites to increase and Neste did not have the money to compete.

Statoil became the leader among the foreign petrol retailers in late 1990s, while Neste (the only foreign petrol company in Russia) was hit hard by Russia’s rouble devaluation in 1997. According to Ingmar Dahlblom, Neste vice-president for the Baltic rim, during an interview in 2006, the three big oil companies were building full-service stations faster than the market was growing. If the market grew 10%, the network of retailers was growing 30% and economic results were very poor for the companies. At this time, Neste actually considered abandoning its Baltic operations.

 

Survival strategy

Neste’s survival can be attributed to how it adapted to the changing situation in the Baltic market area. Looking back, it is clear that Neste’s decision to be the first into the region offering Western petrol products and services was its major advantage.

It was able to get the best locations and to create an image of quality as the first Western standards petrol service company, and in the St Petersburg market, Neste gained from its familiarity with the Russian market based on the long tradition of business ventures from Finland into Russia. Another important strategy was to shed the joint venture partners in its Baltic and Russian operations. After temporarily establishing a daughter company (wholly owned by Neste) to use for building new stations, which was not popular with its partner companies, Neste decided on an expensive buyout of each of its state-owned partner companies and completed this by 1997.

 

Worth the money

According to Mr Dahlblom, Neste paid dearly for these buyouts, especially in Lithuania and Russia. But in hindsight, it benefited from the state-owned partners in the early years by getting the best sites and at lower prices than companies arriving later were able to do.

Neste then made two major changes that helped put the company back in a competitive position. One was to move to unmanned stations and the other was to rent out its shop space at each station. Neste adopted an unmanned strategy in 2000 for all stations from Estonia to Poland.

This move cut labour costs and simplified station management. It selected Finnish company R-Kiosk to operate the shops at each station as a concession. R-Kiosk had to sell Neste lubricants, but it was able to choose what other products to sell. In Russia, Neste has kept more of the traditional manned stations because Russian consumers prefer full-service stations with amenities.

In St Petersburg, Neste has moved out to ring-road locations and toward Moscow and the Leningrad Oblast. This mixed strategy has been successful in Russia where Neste has a strong image of quality and less competition from other foreign retailers.

Currently, Neste’s main investment targets are north-west Russia and Poland, where it was slow to invest until after 2002. It now has 80 stations in Poland and is marketing its convenience, along with modern and low-priced products. It is in competition with the major companies including BP, Shell and Statoil, as well as some local firms.

Neste is focused on cities where there is growth capacity and high car use, and it is the only unmanned station model in Poland. Each station is cared for by an outsourced maintenance company contracted to look after stations by city or region. Investment plans in north-west Russia will focus 50% in St Petersburg and 50% outside the city towards Moscow and Murmansk, and also towards Finland and Estonia. Neste now sells more fuel outside Finland than inside.

 

Established reputation

It is clear that the reputation Neste built during those early years and the sites it selected has served it well in the long run. In the competition phase, Neste’s brand image helped it survive tight competition through its identity with high-quality Western products that was established in the beginning of the market economy transition.

Now, Neste’s quality products and services have extended to the environmental quality of its service stations in the rapidly transforming Baltic region. With Estonia, Latvia, Lithuania and Poland in the EU, Neste can look back with some pride that it built stations to EU standards even when this was not a requirement. As Mr Dahlblom said about St Petersburg: “In the beginning, people asked, why pay $2m for a new station when we can do it for $1m? Now they don’t ask that question. Environmental standards are becoming important in Russia today and old stations will have to be fixed later.”

 

Harley Johansen is a professor of geography at the University of Idaho, US.