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Engineering Industry 1991-2000
Engineering and metalworking account for about 18% of gross domestic product (GDP) in Russia, with an annual turnover of more than $55 billion. More than 8.5 million people work in these industries. Together with the military-industrial complex, which also produces civilian engineering products, the industry accounts for no less than one-quarter of the Russian economy.
About 90% of Russian engineering enterprises have been turned into share holding companies; the state owns a controlling interest in only 15% of the companies.
The engineering industry in Russia is mainly oriented to the domestic market. Industry exports are about $6 billion per year (including $2.5 billion from military-related exports), or about 10-12% of production. Since 1990, Russian engineering-industry exports have fallen 3.5 times, and their composition has also changed: in ten years, exports of power-generating equipment grew by 30%. At the same time, the products of foreign engineering firms amount to 30% of Russian imports.
The drop in production volume in the industry continued until 1998. In 1999-2001, an increase of 10-15% per year was recorded. Analysts predict that growth will give way to stagnation in 2002.
Overall, assessments of the fate of the Russian engineering industry are mixed. On the one hand, relying on the accumulated potential of the past years, the industry has managed to avoid major upheavals in the last decade. On the other hand, the first decade of capitalism in Russia was, with rare exceptions, lost time for the engineering industry, since structural reforms in the industry have barely started.
HISTORY: 1991-2000
The engineering industry turned out to be the least prepared for privatization. For all its diversity, only power-engineering and engine-building enterprises aroused any interest among investors: even against the background of a global drop in production, they have brought their owners stable income.
1991
In February, the Britosiko joint venture, set up by the Polosukhinskaya mine, the Kuznetskugol concern, the Novokuznetsk branch of the Kemerovo Railway administration, the Kemerovo Regional Executive Committee, and the British company Mons Cartright & Co., announced plans to create the first mining-engineering complex in the country based on the factories in Prokopyevsk and Kiselevsk. These plans were not realized, as the coal industry was hit by a deep crisis.
1992
In October, in the course of privatizing the Engine Builder (Motorostroitel) state enterprise, the open joint-stock company (OAO) Perm Motors was established, the largest manufacturer of aircraft engines in the country. Already at that time, the enterprise was on the edge of a crisis, as fewer and fewer aircraft were being produced in the country.
In November, Perm Motors' main competitor, the Rybinsk Engine-Building Plant, which produced D-30 engines for Il-76 cargo planes, was privatized. The joint-stock company (AO) Rybinsk Motors was created on the basis of the plant.
In December, the open joint-stock company (AOOT) Turbine-Blade Plant (ZTL) was registered; 51% of the enterprise's shares belonged to the labor collective.
1993
In January, the first engineering holding in the country, the Power Engineering Corporation (Energomashinostroitelnaya korporatsiya, EMK), was created. The founders were Leningrad Metal Works (LMW), AO Belgorodenergomash, AO Elektrosila, AO Podolsk Engineering Works, AO Chekhovenergomash, and AO Petrozavodskmash.
In April, an All-Russian privatization check auction of AO Urals Heavy Engineering Works (Uralmash) shares was held. The winner was Bioprotsess, headed by entrepreneur Kakha Bendukidze, who acquired 18% of Uralmash's shares. Bioprotsess later bought an additional 4% of Uralmash's stocks on the market.
In September, during a closed subscription, the labor collective bought out 51% of the shares of the Sergo Ordzhonikidze Machine-Tool Factory (Moscow); 49% of the shares remained with the State Committee for the Management of State Property (GKI). The factory's labor collective made the decision to privatize the factory as early as August 1992, but the GKI delayed approval of the documents for almost a year. In the opinion of the factory's director, Anatoly Panov, this was due to the fact that GKI's management did not consider him a suitable director of the enterprise.
1994
In June, the first meeting of the shareholders of AO Rybinsk Motors was held. A representative of the State Committee for the Defense Industry, which owned 37% of the company's shares, was not allowed to participate. In the absence of a state representative, Valery Anikin was elected general director. The reason for the conflict with the state structure was Anikin's refusal to participate with AO Perm Motors in a project for producing PS-90 engines for the new generation of Russian airplanes.
In July, the Moscow company Mikrodin, having bought 25% of the shares of AO Perm Motors at check auctions, appointed its own people to executive positions at the enterprise.
In November, on Viktor Chernomyrdin's orders, the contract with general director of Rybinsk Motors Valery Anikin was terminated.
1995
In January, Bioprotsess won an investment tender for 5% of Uralmash's shares, which brought its presence in the factory's charter capital to 27%. Bioprotsess' sole competitor was the British brokerage firm Smith New Court Investment Services Ltd., which offered $500 000 for the stock. This information was confidential; however, Bioprotsess learned of it through its man on Uralmash's board of directors and "spoiled" its competitor's bid by offering $550 000.
In April, at a meeting of the shareholders of AO Rybinsk Motors, the enterprise's general director was replaced by the factory's former chief engineer, Valery Shelgunov, through the efforts of the State Committee for the Defense Industry. However, the joint project with Perm Motors was still not realized.
In July, a tender was held for the acquisition of 20% of the shares of AO Turbine-Blade Plant. Leningrad Metal Works (LMW) and the Dutch firm Stoomhamer expressed an interest in the shares. According to the tender conditions, only those with the manufacturing capacity required for producing turbine blades could bid. It turned out that Stoomhamer did not have this capacity, and so LMW won the competition.
In August, Viktor Chernomyrdin issued instructions to sell the federal block of shares (37%) in Rybinsk Motors. The governor of Yaroslavl region, Anatoly Lisitsyn, named the main contenders for these stocks: RAO Gazprom, the Tupolev aircraft holding, and General Motors.
In December, the chairman of Perm Motors' board of directors, Mikhail Makarov (a representative of the firm Dinamika, which was part of the Mikrodin group of companies), demanded the resignation of the company's general director, Vladimir Kinderknekht. Kinderknekht, in turn, suggested that Makarov himself resign. A vote on the issue failed to resolve it, since the board members were equally divided in their opinions. The dispute between the shareholders and managers came to a head.
1996
In April, at the annual meeting of the shareholders of Perm Motors, implacable enemies Mikhail Makarov and Vladmir Kinderknekht were again elected to the company's board of directors.
In July, a meeting of the shareholders of AO Rybinsk Motors elected Aleksandr Novikov, the general director of AO Rybinsk Engine-Building Design Office, as chairman of the company's board of directors. The day before, the shareholders of the Design Office elected Valery Shelgunov, the head of Rybinsk Motors, as chairman of its board of directors. This was the first step toward a merger of the two enterprises.
1997
In May, the Property Fund of Sverdlovsk Region signed a sale contract for 9.32% of the shares of AO Uralmash with the Cypriot company Regent Pacific Nominies Ltd.
The holding Urals Engineering Works (Uralmash-zavody) was created by combining the controlling block of shares of AO Uralmash and its subsidiaries. The holding owned 42% of the voting shares of AO Uralmash and 30% of the voting shares of AO Welded Engineering Construction Works.
In November, the American company Pratt & Whitney acquired 25% of the shares of the company AO Perm Motor Works (PMZ). The Americans were regarded as strategic partners in the enterprise, who could modernize the output aircraft engines and bring their specifications up to world standards. After the foreign investor appeared, Perm Motors and the regional administration reached an agreement on deferral of the enterprise's budget debts to the amount of 800 billion rubles.
In December, a meeting of the founders of OAO Russian Engineering Corporation for the Agricultural Industry (Rosagromash) was held. The corporation was established with the participation of the Ministry of Agriculture, the Ministry of Economics, the SBS-Agro banking group, and 30 enterprises producing agricultural machinery. Vyacheslav Chernoivanov, the deputy minister of Agriculture and Food, became chairman of Rosagromash's board of directors. Leonid Khlystun, Minister of Agriculture and Food and Vice-Premier, Yakov Urinson, Minister of Economics, and Aleksandr Smolensky, the head of the SBS-Agro banking group, became members of Rosagromash's board of trustees.
1998
In February, an agreement on integrating OAO Uralmash-zavody and OAO Izhora Works was signed.
In April, Andrei Egorov, the director of AO Turbine-Blade Plant, was found dead. According to preliminary reports, the entrepreneur had committed suicide.
In May, the Electric Engineering Corporation, which united several dozen Russian engineering enterprises, set about creating a financial alliance on the basis of the banks that formed part of its structure. At a meeting of the holding's shareholders, development of the future integration project was assigned to one of the group's largest affiliated banks, Energomashbank of St. Petersburg.
In June, the board of directors of AO Uralmash-zavody elected Kakha Bendukidze, who had previously held the post of chairman of the board of directors, to the post of the company's general director. Bendukidze also became the head of Bioprotsess-NIPEK, which owned 46% of the shares of Uralmash-zavody. The former head of the enterprise, Viktor Korovin, submitted his resignation, citing difficulty in combining the management of Uralmash-zavody and its main subsidiary division, AO Uralmash.
In July, the merger of OAO Izhora Works (St. Petersburg) and OAO Uralmash-zavody (Yekaterinburg), which should have resulted in the appearance of the largest engineering-industry association in Russia, was postponed. Uralmash-zavody was forced to extend its share exchange to the maximum period allowed by the issue prospectus, that is, to August 28. This was caused by its inability to gather a controlling block of shares of Izhora Factories.
The government issued a decree, according to which Perm Motors and Interros financial and industrial group had to transfer 49% and 1.4% of the shares of Perm Motor Works, respectively, to the Federal Property Fund as a pledge to cover Perm Motors' liabilities for budget debt repayments.
In November, the Perm administration tried to forcibly replace the management of Perm Motors. Men with machine guns blockaded the factory's management building. The guards put up no resistance. General director Viktor Kobelev, who was urgently summoned to the place of the drama, later wrote in a statement to the public prosecutor that "in order to avoid an armed clash, he was forced to break the admission rules." The invaders demanded that Kobelev write a letter of resignation, but he refused.
In December, general director of the Leningrad Metal Works (LMW) Valery Chernyshev proposed to all employees (5000 people), that they quit voluntarily and apply for jobs at OAO Power Engineering Corporation (Energomashkorporatsiya). Two weeks earlier, 1500 workers at AO Turbine-Blade Plant had gone through the same procedure. However, the LMW had a shareholder with a slightly different name - Power Machine-Building Corporation Energomashinostroitelnaya korporatsiya (EMK). So, the union committee of LMW recommended that workers refrain from submitting any applications and applied to the Public Prosecutor's Office in St. Petersburg with a request to examine the legality of Chernyshev's actions.
1999
In January, the workers at LMW drove out general director Valery Chernyshev, he was literally thrown out of his office along with his chair. These actions were initiated by the shareholders consolidated around OAO Energomash Corporation. On this company's initiative, Viktor Shevchenko became head of the factory.
In February, the board of directors of OAO Turbine-Blade Plant terminated the contracts of the company's entire management including d Valery Chernyshev, chairman of the board and previously the general director of the Leningrad Metal Works, and Aleksandr Stepanov, the enterprise's general director and general director of OAO. Aleksei Balashov, who until December 10 had held the post of general director of Turbine-Blade Plant, was elected to the post of chairman of its board of directors. Valery Gudovskykh, who had previously held an executive position at Leningrad Metal Works, became the factory's new general director.
On August 5, the Leningrad Metal Works sold a 34% block of Turbine-Blade Plant shares to nine legal entities that were affiliated structures of Energomashkorporatsiya.
2000
In February, Gazprom announced its intentions to increase its share of charter capital in AO Perm Motors from 2.9 to 25% and in AO Aircraft Engine from 16.3 to 25% and to acquire 25% of the shares of AO Perm Motor Works. The gas company calculated that as a result it would monopolize the manufacture of gas-transfer stations. The increase in Gazprom's share of charter capital in Perm Motors was to occur through an additional share issue, but the project was not implemented.
In March, the St. Petersburg Court of Arbitration imposed a ban on the activities of OAO Turbine-Blade Plant's board of directors, which had been elected at an extraordinary meeting of the shareholders.
In April, the Moscow Court of Arbitration de facto invalidated the issue of Leningrad Metal Works shares. This was a tangible blow to the Interros Financial and Industrial Group, which intended to gain full control over the enterprise from its chief shareholder, AO Energomashkorporatsiya, through the placement of the new issue.
In June, at the annual meeting of the shareholders of AO Rybinsk Motors, the company's management was replaced. Veniamin Mezhibovsky, the former head of OAO Volga Engineering Works, became the executive director of the enterprise. Yury Dmitriev, the head of a department at Rosaviakosmos, represented the state's interests on the board of directors of Rybinsk Motors. The shareholders also approved OAO Rybinsk Motors becoming one of the founders of OAO Stend and the company's entry into Soyuzagromash association.
In July, the courts declared EMK, one of the largest Russian engineering associations, bankrupt. The enterprise's creditors headed by Leningrad Metal Works were very displeased with the bankruptcy, as they now lost any chance to get anything at all from the corporation, since all of its assets had long been transferred to another company, AO Energomashkorporatsiya.
In August, the shareholders of the shipyard Krasnoe Sormovo (Nizhny Novgorod) agreed that all members of the enterprise's board of directors should be elected rather than appointed. At the meeting, which was conducted by Vice-Premier Ilya Klebanov, it was decided that at the next meeting the Ministry of Property and the Russian Fund for Federal Property (RFFI) would jointly vote to support changes to the clause in Krasnoe Sormovo's statutes stipulating the electivity of all board members. Kakha Bendukidze, general director of the holding United Machine Works (OMZ, formerly Uralmash-zavody), Nikolai Zharkov, general director of Krasnoe Sormovo, and representatives of Nizhy Novgorod Region, the Ministry of Property, and RFFI took part in the meeting. It was also decided to impose a two-year moratorium on the sale of state shares in AO Krasnoe Sormovo (8.05% of the charter capital).
In September, opposing groups of the Urals Chemical Engineering Works (Uralkhimmash) shareholders tried to seize the factory's management building. At a meeting of the Sverdlovsk region administration, a decision was made to introduce outside management at Uralkhimmash in case the meeting of the company's shareholders was improperly conducted. A representative of one of the parties, entrepreneur Pavel Fedulev, announced that he was selling his shares to Gazprom. According to Fedulev, he had already sold 11% of his shares, and that after the transaction was completed, Gazprom would have a controlling block (50.26%) of Uralkhimmash's shares. General director of the enterprise Aleksei Glotov declared that the sale of shares to Gazprom was "just another one of Fedulev's machinations."
It was decided to transfer a block of shares of the Izhmash concern amounting to 25% plus one share to state ownership against repayment of part of the parent enterprise's bills payable. After the transfer of the block of shares to the state, Izhmash was left with about 73% of the shares, and approximately 2% of its shares belonged to other legal entities. In the future, a state's share in Izhmash's charter capital was planned to increase to a minimum of 51%.
An amendment to AO Krasnoe Sormovo's statutes was adopted at a meeting of the enterprise's shareholders, according to which the shareholders all members of the board of directors will have to be elected. Kakha Bendukidze, head of United Machine Works and one of the enterprise's major co-owners, had been trying for two years to get this amendment adopted.
by Aleksei Belov
PRESENT
The engineering industry is the basis of any economy. In Soviet times, the industry was developed according to the requirements of a planned economy and it could hardly be expected that it would make a full transition to market relations in the ten years between 1991-2002, a task that takes decades to accomplish. At present, although the state controls no more than 25% of the capital of engineering companies, private financial and industrial groups account for no more than a third of the industry's enterprises.
Debris of the Industrial Era
In 1991, Russia inherited a very respectable industry, even excess capacity, from the USSR. The Russian engineering industry is one of the factors that allow the Russian economy to be assessed as being stronger in the long term than the economies of China, India, Brazil, Argentina, or Australia. However, at the start of capitalism, the Russian engineering industry had many deficiencies. First of all, there was its interdependence with the military-industrial complex, which was in deep recession in the 1990s. Then there were problems with introducing scientific developments into the production process. In addition, a large number of factories were built to produce standard-series machinery and did not carry out their own development work, which left them with few prospects under market conditions. These problems have only been solved in individual sectors of the industry.
Peaceful Atoms for Private Capital
Over the last ten years, both foreign and Russian investors have shown most interest in the "heaviest" segments of the industry, namely, power engineering and metallurgical engineering. As a result, by 2002, they became the most structured segments of the industry and have given the country three accomplished oligarchs.
Two recognized leaders that are simultaneously sworn enemies operate in the field of power engineering in Russia: Power Engineering Corporation (Energomashinostroitelnaya korporatsiya, EMK) and the concern Silovye mashiny (Power Machines) of the Interros Group. Founded in 1993, EMK is a relatively old corporation. At that time, nearly all the major power-engineering enterprises in the country joined it as founding members, including manufacturers of equipment for nuclear power plants, such as Atommash (Volgodonsk), Belenergomash (Belgorod), and the Chekhov and Perlov power engineering plants. A second element was made up of St. Petersburg power-engineering enterprises, such as the famous Leningrad Metal Works (LMW) and the Turbine-Blade Plant (ZTL). However, PEC head Aleksandr Stepanov and his strategic partner Inkombank failed to hold on to the "St. Petersburg group" as part of EMK. In a battle for these assets that lasted several years, EMK was defeated by Vladimir Potanin's Interros holding. In October 2000, LMW and the Elektrosila factory were united into the Power Machines power-engineering holding. Later, still another enterprise from the former PEC "estate" joined it-the Kaluga Turbine Factory (like LMW and Elektrosila, its co-shareholder has been the German concern Siemens).
The third major industry player was the holding United Machine Works (Obyedinennye mashinostroitelnye zavody, OMZ), the brainchild of Kakha Bendukidze, one of Russia's most colorful businessmen. OMZ, formerly the Urals Engineering Factories (Uralmash-zavody), include the Izhora Works, and the multispecialized Urals Heavy Engineering Works (the famous Uralmash). OMZ is the major market-oriented lobbyist for the Russian engineering industry. That is why at meetings of the directors of the Russian Union of Industrialists and Entrepreneurs (RSPP) with the president, Bendukidze is always more interested in issues of institutional structure, such as taxation and the accounting system, and government economic strategies, than in political problems.
The plants concentrated in the Moscow region, such as the Elektrostal Heavy Engineering Works (EZTM), Elemash, and the Podolsk Engineering Works have still not found an owner. EZTM, which is controlled by the Tyazhenergomash financial and industrial group created by Vladimir Velichko, one of the first entrepreneurs in the country, was recently involved in a scandal-the Moscow company ZAO Atlant, a partner in a number of construction firms, tried to get control of it. However, the scale of the conflict was out of proportion to its size. Atlant was mainly interested in EZTM's production of mining equipment, and to a lesser extent, of metallurgical equipment and by all accounts had no need for power engineering.
The owners of the Taganrog Metallurgical Combine have showed an interest in power engineering, and in 2001 bought AO Krasny Kotelshchik, a major manufacturer of equipment for thermal power stations. However, most of the enterprises of this industry segment have remained under the control of either the state (which has refrained from putting them up for sale only because of the low demand for these assets) or the Soviet-era directors. Roughly the same situation prevails in the metallurgical, chemical, mining, and petroleum engineering industries.
Buyers usually have little interest in allied enterprises. Thus, of the numerous manufacturers of oil well drilling equipment, the only major facility of interest to investors has been the Volgograd Drilling Equipment Plant (VZBT) controlled by the local group NOKSS, which had close ties with the factory's management. However, it was not oilmen who were interested in the plant (although there were rumors that Surgutneftegaz was), but OMZ. To take over the administration at VZBT, the latter hired a team of students of Aleksandr Volkov, a professor at the Higher School of Economics and simultaneously the head of the company MINFIN specializing in management and merger and acquisition techniques. However, they failed to seize the enterprise.
A Propensity for "Iron Machines"
Another relatively well-structured group of engineering-industry sectors is associated with transport. The alignment of business in transport and propulsion engineering began only a year or two ago, and it is still unclear whether the new owners will be able to carry out their plans.
The driving force of the revolution in railway engineering was the expected restructuring of the Ministry of Railways and the forthcoming admission of investors to the business. On the eve of the reforms, three major manufacturers of electric and diesel locomotives found new owners. Severstaltrans, a transport subsidiary of the Severstal metallurgical combine, bought a large block of shares of the holding company Kolomensky Zavod. In case of the Bryansk Engineering Works, the new owners were companies closely connected with the Urals Mining and Smelting Company (UGMK), which were rivals of the GALS group for control over the enterprise. Companies close to the Taganrog Metallurgical Combine (Tagmet) acquired control over the Novocherkassk Electric Locomotive Plant. Abakanvagonmash, a Russian monopolist in the production of shipping containers, had been transferred to the control of the Sibal industrial and financial group even before that. The appearance in this industry sector of players associated with metallurgy is quite understandable. Metallurgical combines are the largest customers of railway services in the country and are looking to expand into the freight business. However, as long as it is unclear how the reform of the Ministry of Railways will be carried out, the outlook for the investments of Severstal, Tagmet, UGMK, and Sibal in electric and diesel locomotives remains doubtful.
On the other hand, there are no doubts about the success of investments in the engine-building and diesel sector. As the owners of the Ulyanovsk and Gorky car factories, both Severstal and Sibal need control over engine production. Sibal needs the diesel-manufacturing complex (the Motor Works and Diesel Equipment Plant in the city of Yaroslavl, as well as the Transport Engineering Works in Barnaul (Barnaultransmash) for truck production. The plans of Sibal, headed by Oleg Deripaska, are said to extend to Likhachev Car Factory in Moscow (ZiL) and even to Minsk Car Factory in Belorus.
The Siberian manufacturer of agricultural machinery Sibmashkholding (Siberian Engineering Works Holding) began its business in 2001 by building up a similar chain, which included the Krasnoyarsk Combine Factory, AO Altai Diesel, and the Altai Tractor Factory. In addition, the New Cooperation group, which owned Rostselmash (Agricultural Machinery Works in Rostov-on-Don), the largest combine manufacturer in Russia, tried to create this kind of structure by acquiring the parts manufacturer AO Selmash in Uryupinsk. However, the assault of the New Cooperation team headed then by Grigory Popandopoulo failed, and the enterprise in Uryupinsk remained independent.
On the whole, the agricultural machine industry in Russia generally attracted investors by chance. Thus, the Volgograd Tractor Factory passed to the MDM Group on the instructions of the local governor, more likely as a mandatory extra to the Volzhsky Tube Plant than as a valuable asset. The demand for agricultural machinery has been too low for making these acquisitions in anticipation of future growth.
The same is true of the lifting and road-building machine industries. For the most part, only "bankruptcy" specialists, the managers of the enterprises themselves, operators on the industrial real estate market, and local authorities have showed an interest in them.
In addition, enterprises in these segments of the industry experience strong competition from Western companies. For example, in the food-processing and light engineering sectors, secondary production of simple goods for domestic consumption or even assembly of cheap electrical appliances was often more profitable than their regular specialized work. The multibillion turnover in the Russian engineering industry has been maintained mainly by repair orders and stimulated by what has been noted by writer Andrei Platonov as a specifically Russian trait -- an ineradicable, almost childish propensity for "iron machines" that would lead humanity to prosperity.
Equality of the Poor
Attempts at restructuring other segments of the engineering industry in the last five or six years have been isolated and very rarely associated with private capital; in general, they have concerned the creation of financial and industrial groups in the military-industrial complex. However, the financial and industrial group model, even for conservative industries like engineering, seldom help to improve the situation in enterprises that belong to these groups. The only exceptions are financial and industrial groups in the field of aeronautical instrument making, for example, the Russian Avionics holding, which includes the ELARA instrument-making factory (Cheboksary) and Tekhpribor (St. Petersburg).
Of the large engineering projects with foreign investors in the area of machine tools, the foreign economic activity of a major St. Petersburg enterprise, the Sverdlov Machine Tool Factory, and the contacts of the Sedin Machine Tool Factory (Krasnodar) with the German firm Schisse have been of significance. Not that machine tool companies are poor; deliveries from the most productive Russian machine tool factories to countries of Southeast Asia and Europe have continued without interruption and amount to a sizable share of Russian engineering-industry exports, which are generally based on energy-converting machinery. However, engineering companies often use outdated methods for organizing exports. Thus, Nikolai Panichev, head of the Rosstankoinstrument company-a rather precarious structure-is considered the "emperor" of the Russian machine tool industry. Essentially, it amounts to a voluntary association of enterprises with tangled corporate ownership of the kind that was fashionable back in 1990-1992. Nevertheless, more than 50% of Russian machine tool enterprises belong to Rosstankoinstrument and the association Stankoinstrument.
In the area of bearing manufacture (the Soviet bearing industry was considered the outstanding achievement of the socialist economic model), two large holdings have formed in the past three years. These are the European Bearing Corporation (EPK) of Oleg Savchenko and Artem Zuev and Avtoprompodshipnik, which was set up by managers of the Vologda bearing factory and has expanded its activity to the Kursk APZ-20 bearing factory. However, the promised consolidation of bearing manufacturers, which was to be the major event of 2001, did not happen. Consolidation of capital in this sector of the engineering industry was less effective than the creation of trading companies that could set up profitable schemes for marketing products without buying existing factories. This is still the main model (a tandem of a "nobody's" factory and a network of specialized traders) for the majority of engineering enterprises.
At present, the engineering industry, the very sector of the economy whose state determines Russia's industrial potential, is waiting until the development of all other sectors that use machinery, systems, machine tools, and production lines leads to an increase in orders for its products. Only then will it be possible to assess what the last ten years have given the Russian engineering industry.
by Dmitry Butrin
TRENDS
On the Web sites of engineering-industry enterprises, one can find a tempting offer: "We make all kinds of equipment to the customer's designs", while innovative firms offer to prepare project and tender documentation for industrial equipment. Wherever the owners of two such firms manage to find a common language, new types of engineering companies appear, which are more and more certain to take markets away from old-style manufacturers.
The state of one or another sector of the engineering industry can be determined by three factors: the wearing out of equipment, production profitability, and the competitiveness of its products on the domestic market. Thus, for instance, 90% of the textile machinery at Ivanovo textile enterprises might be worn out, but if the cloth produced on domestic looms turns out just as well as Chinese production, while the owners of the Ivanovo textile factories have money to buy new machines, an investor thinking of putting his capital into textile machine building would not lose out. However, in practice, investing in the Russian engineering industry is considered a fairly risky business.
As Kakha Bendukidze, the head of OMZ, has repeatedly stated, the problem is that none of the engineering factories is a company in the market sense of the word. They are merely the production component of a future company. Engineering divisions are the key element in engineering-industry concerns around the world; they allow an individual company to offer comprehensive services from designing production equipment to organizing its construction and later servicing and modernization.
In Soviet times, the enterprises of a particular engineering-industry sector (power, metallurgical, mining) were single specialized concerns-at the beginning of the 1990s, attempts were even made to unite them into manufacturing associations or financial and industrial groups-with a structure that was suited to customers' requirements. The basis of such a concern was the central factory, which included a design department, a specialized research institute for carrying out basic development work in its field (which could then be offered to the customer), a network of allied enterprises that could fulfill part of the order (they generally fulfilled mass-production orders that did not require investments in development), and a sales department.
However, each enterprise within the structure of such a financial and industrial group tried to divert a large part of the production volume to itself, since they had no common coordinator. In addition, there was no place for an engineering division in this structure, since it had no means of supporting itself. As a result, the industry ended up in its present state. A large number of engineering firms exist separately from the manufacturing structure (they are more likely to use the resources of the research institutes), and their connections with engineering-industry enterprises are limited by a contracting system. The money that the owners of engineering firms make is not enough to buy the assets of partner companies. In addition, equipment manufacturers do not allow engineering firms to do repair or modernization work on equipment; if they did, they would be left without working capital themselves.
Meanwhile, the experience of the most successful Russian engineering-industry companies, the Power Machines holding, ORMETO-YuUMZ, and the Power Engineering Corporation (EMK), shows that unifying these two indispensable components of an engineering-industry company and transferring them to a single balance sheet results in a sharp increase in labor productivity at both. The most significant results of this integration can be seen in the power-engineering industry. In the three unified holdings, OMZ, EMK and Power Machines, both enterprises which are part of these holdings and allied companies have access to Russian and export orders. This is very important, as every major engineering or metalworking enterprise is multidisciplinary; therefore, there is no point in building a production chain by simply buying shares and replacing the management of enterprises. The outlays for this consolidation will be far greater that any possible profit.
Nevertheless, at present, primary concerns, which are able to support smaller partners with regular orders because of their size and strong scientific, manpower, and financial potential, exist in only a few sectors of the engineering industry. Primary concerns are generally consumers. For the shipbuilding industry, these are oil and shipping companies; and for mining equipment manufacturers, they are coal-mining concerns. However, they have no long-term operating plans in the engineering industry. Russian Aluminum could place large orders for modernizing the equipment in its aluminum factories in Russia or buy a number of allied enterprises and specialized engineering firms, but this is not its profile business.
As long as there is no money for consolidating engineering, construction and equipment-manufacturing companies, the speed of this process, which today in many respects is based on chance, will depend on investment activity in the Russian economy as a whole. One can only hope that the example of integrated engineering-industry concerns already existing in the country will attract more and more outside investors prepared to make venture-type investments in the industry.
Dmitry Butrin
All the Article in Russian as of Feb. 19, 2002
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