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Ukraine
There’s a joke that goes like this: a Russian, Ukrainian and Belarussian meet in Belovezhskaya Forest…That’s it. After that, several new countries appear on the world map. One of them, Ukraine, is a bit bigger than France. Vladimir Gendlin and Sergei Mikheev went there to hunt for the ghosts of Soviet brands.
It is impossible to overestimate Ukraine’s role in the life of the USSR. It was the supplier of industrial volumes of general secretaries and Politburo members, wheat and singers, candy and missiles, airplanes and dump trucks, and electricity and electronics. Ukraine was our all, whether edible or inedible.
For a broad range of consumers, Ukraine was known for more than just pork fat, vodka, and dump trucks. Up to 40% of Soviet TV sets were made in Ukraine at the Elektron factory in Lvov (the USSR’s absolute champion in output), the Slavutich factory in Kiev, the Foton factory in Simferopol, and the Kommunar factory in Kharkov. We knew about the Dnepr Hydroelectric Station (DneproGES), the first All-Union shock-work construction, almost from first grade, although we were surprised to learn that it was not in Dnepropetrovsk at all or even in Dneprodzerzhinsk, but in Zaporozhe. Ukraine also produced some rather strange (even avant-garde according to present-day concepts) products like the so-called “car” Zaporozhets and supposedly a cross-country vehicle LuAZ. There were also KrAZ tractor trailers and dump trucks, LAZ buses, An airplanes, and generally a lot of heavy, moving, flying, and crawling things. Even those who had never been to Ukraine were well acquainted with Kiev-style cutlets, and no one who visited Kiev went home without a Kiev cake.
As General Secretary Khrushchev so aptly put it, the “hunchbacked” Zaporozhets was a “car for the working class.” Nearly all products made in Ukraine were for the “working class,” meaning they were plain, simple, and inexpensive. The companies that manufactured them were also for the “working class,” in this case vast capacious workplaces for this class. Therefore, nearly all of them are idle today. Ukraine produces hardly any TVs now, and production in the auto industry has fallen an average of ten times. On the other hand, production of vodka, candy, beer, and cakes has expanded mightily. Correspondents for Kommersant-Dengi magazine crossed Ukraine from east to west to learn first hand about the state of well-known and loved Ukrainian brands.
Remedies for Zaporozhets
It turns out that the well-known joke “Zaporozhets writes a letter to Mercedes” is not a joke at all. Mercedes actually received a letter, read it carefully, thought hard about it, and then agreed to Zaporozhets’ terms.
“Just don’t put too much emphasis on the fact that we assemble Mercedes,” said the head of ZAO Zaporozhets Automobile Plant’s (ZAO ZAZ) press service, Evgeny Kosachev, modestly. “So far, we only assemble two E- and M-class series and only in limited production.” Then he added cryptically, “This was a political move.”
As they explained at the plant, the politics was all about getting international recognition for the Zaporozhets auto plant by assembling Mercedes, as well as the Opel Astra. In turn, this would enable them to find a buyer for the block of shares owned by bankrupt Daewoo Motors, the once wealthy partner of the Zaporozhets mini-Hercules. We arrived at the company at the height of some gripping events: the Ukrainian Motor Corporation (Ukravto) had recently become the owner of the 81% state block of shares in OAO AvtoZAZ, and the Swiss investment company Hirsch & Cie. had bought up Daewoo Motors’ 50% block in the ZAO ZAZ joint venture.
One hundred and forty years ago, farm-implement workshops of the Dutch settlers Kopp, Lepp, and Volman producing reapers, mowing machines, and seeders were located on the site of the Zaporozhets auto plant. Their factory was destroyed during the revolution, but diligent Bolsheviks revived production, and in 1929 the Kommunar plant produced the country’s first combine harvester. In 1942, the plant was evacuated to Krasnoyarsk, where it switched to producing military equipment. After returning to Ukraine, the factory continued to produce a lot of military equipment, but in 1958 by decree of the Council of the National Economy (Sovnarkhoz), it was ordered to start producing minicars.
Of course, there will be snide remarks about how they just took and copied the famous Fiat 600. Yes, there was such a prototype but it was no more than that. It is said that skilled workers at the Zaporozhets plant introduced many innovations to the car, improving its specifications. In 1960, a group from Zaporozhets went to the Kremlin, where they met with a group of Politburo members. Some of them, including Leonid Brezhnev, who was an ardent car enthusiast, and Nikita Khrushchev himself, went for a drive in Zaporozhets and came away satisfied. This was how mass production of the “hunchbacked” 965 model began.
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| This was what the first Soviet car for the working class looked like |
This model later underwent a number of modifications, but these did not spoil its charming hunchbacked look. Further revolutionary changes gave the Zaporozhets an equally charming “big-eared” look. After independence, the plant came out with the Tavriya, first produced in 1987.
In fact, things might have ended there. Demand for the Tavriya lasted until 1994, when used foreign cars, which were imported duty-free at the time, completely crowded it out of the market. The plant did not operate a single day in 1995–1996, and in 1997 it produced only about 1000 cars (90 times fewer than in the past). Wage arrears and debts to creditors and the government amounting to $102 million hung over it. Collapse appeared imminent.
The plant’s managers began searching for investors to develop new models and tried to set up a joint venture first with Bulgaria and then with the Czech Republic, but nothing much came of this. Management dreamed of Prince Charmings like Fiat, Volkswagen, Renault, or General Motors, but the princes behaved less than charmingly: Volkswagen began an affair with Skoda, and GM made an altogether indecent proposal to set up local component production for its European plants.
Then Daewoo appeared. Company head Kim Woo Choong had started a vigorous expansion around the world supported by unprecedented amounts of financing. Before advancing on Europe, he showered gold on Poland ($1.2 billion) and Romania ($700 million) and then came to AvtoZAZ with a $1.3 billion investment program. Kim wanted to create an automotive empire of three Eastern European plants that would produce up to 1 million cars per year. Hopes began to grow for an upturn in the auto industry and the economy as a whole (the factory had about 400 suppliers in Ukraine alone).
A joint venture with an authorized fund of $300 million was formed on a parity basis: the plant contributed its share in property and Daewoo paid $150 million. Another $50 million went to pay off the plant’s debts. Before long, 140 superorganized Koreans arrived at the plant.
First of all, they took several Tavriyas back home to study them. Then they did a more in-depth technical audit together with Porsche. The Germans considered the car salvageable, but it would be necessary to introduce about 400 changes in both the frame and design of the car, use Daewoo’s quality system, and implement more stringent tolerances.
The plant’s managers admitted that implementing the new quality system was difficult at first. The Koreans introduced so-called zones of responsibility, whereby each worker was assigned several square meters in the workshops, which were his responsibility for keeping clean and tidy. They hung up racks with scoops, shovels, and brooms like a sort of fire screen. People snickered and stole the brooms. Then senior Korean executives set up their own zones of responsibility and pointedly began sweeping the floors. Then people were ashamed to spit on the clean floors.
The Koreans’ persistence paid off. According to Oleg Papashev, chairman of ZAO ZAZ’s board of directors, whereas previously about 50% of output had been “problem” cars, now it was only 4%. The warranty increased to two years and 50 000 km. Recently, a commercial sedan-type Slavuta popular in taxi fleets went 150 000 km without major repairs.
However, the careful Koreans were in for a surprise in Ukraine: the plant designed for the production of 350 000 cars sold only 6000 in its first year of operation, 11 700 in 2000, and 14 800 in 2001.
“The market wasn’t ready,” sighed Oleg Papashev. “There are about 200 000 new registrations in Ukraine each year, mainly of used foreign models imported duty-free.”
The term “foreign model” is a bit misleading, because imports to Ukraine under this proud name are mainly Russian VAZ’s. As if that were not enough, relatively poor Ukraine has not ventured to impose high duties on imports, so Ukrainian duties on Russian cars are several times lower than Russian duties on Ukrainian models. Thus, the Russian market is virtually closed to Tavriyas; in any case, the quality of a comparably priced Zhiguli is higher. Today, no more than 7% of the cars in Russia are Tavriyas.
At that time, the management of AvtoZAZ–Daewoo did something they are still being reproached for: they lobbied the government for concessions aimed at reducing taxes and simultaneously protecting the market. Thus, in 2002, in response to Russia’s imposition of special duties on Ukrainian pipe, Ukraine introduced an analogous special duty on VAZ cars. Then quotas took the place of the special duties, but these measures reduced VAZ sales by only 10%.
Nevertheless, the factory’s sales almost doubled in 2002 to 24 000 vehicles (along with Daewoo-licensed Lanos, Nubira, and Leganza), and according to Papashev, it ended the year with a profit for the first time in ten years.
However, ZAZ will spend next year without the Koreans. Kim Woo Choong’s strategy proved to be too risky, and his empire entered the world crisis year of 1998 with debts that considerably exceeded the value of its assets. Kim has been sought around the world since fleeing Korea in September 1999. Meanwhile, AvtoZAZ–Daewoo had to find a new partner quickly.
At the end of last year, Ukravto bought the Ukrainian share in the joint venture for 54 million hryvnas, and the Swiss investment company Hirsch & Cie. bought the Korean share. Everyone in Ukraine knows that the Ukravto emerged from the depths of the Soviet Ukravtotekhobsluzhivanie and is a dealer for many global automotive concerns. However, even at the plant they could not answer our questions about Hirsch & Cie. It is known that it is a “respectable investment company founded in 1994.” This “respectable” age and the lack of information have led many to suspect that Hirsch & Cie. is a cover for Ukravto itself.
Still, management assured us that the new owners are determined to implement the Koreans’ investment program. A new model called the Matiz will be added to Daewoo’s model line. A license has been obtained for coarse and then fine subassembly of Opel Astras (65 cars have already been assembled), as well as for several Mercedes series (assembly of 527 cars is planned for this year). The overall production plan for 2003 calls for 48 000 vehicles. Thus, Zaporozhets has become a producer of the world’s leading car models.
The Investor Took the Whole KrAZ
Halfway along the Zaporozhe–Kiev highway sits another auto giant, the Kremenchug Automotive Plant (KrAZ). The distinctive KrAZ hood evokes a pang in anyone who has served in the army, worked at logging, or watched military parades in Red Square.
The heavy truck plant was established in 1958 on the site of the Kremenchug combine plant, which in turn was set up on the site of a factory producing bridge structures. This last factory was built in 1945 to reconstruct bridges destroyed in the Second World War. In 43 years of operation, the AvtoKrAZ Production Association (PO AvtoKrAZ) produced about 800 000 trucks, 40% of them dump trucks. In August 2000, the holding company AvtoKrAZ was added to the list of companies having strategic significance for Ukraine’s economy and security.
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| Kremenchug trucks always staunchly withstood severe climatic conditions |
At one time, 20 000 AvtoKrAZ workers produced up to 30 000 trucks per year. However, the company went through a crisis in 1995–1999 and it stopped receiving orders from the Ministry of Defense. Today, MAZ, Ural, and KamAZ want to position themselves in the niches where KrAZ operates, i.e., 15- to 23-ton trucks. Although the plant now has a private owner (the Ukrainian–German joint venture Mega Motors), business is not exactly booming: the 7000 remaining workers produced 827 trucks in 1999, 1428 in 2000, 2012 in 2001, and 1408 in 2002. Output is limited by the number of orders, and work builds up towards the end of the month. During the crisis, the plant amassed huge debts that the investor repaid. Now salaries are paid regularly but they are small, averaging 339 hrvynas (about $63).
Russia is the main sales market for KrAZ trucks. In Soviet times, auto plants were assigned tasks as follows: KamAZ produced trucks for construction and agricultural work, MAZ produced long-haul tractor trailers, and KrAZ produced off-highway trucks for work under severe climatic and road conditions, for example, lumber trucks and dump trucks. The most popular models were the 255 and 260. The plant also produced more than 60 types of specialized items such as reactive salvo systems, tractor trailers, and pontoon systems.
Chairman of the board and general director of AvtoKrAZ Sergei Sazonov: Throughout Russia to this day you can still see a fair number of 30-year-old KrAZ’s that have withstood unmerciful operation and overloading, where a 15-ton truck carries 20 or even 24 tons. KrAZ’s always start in the North.
Mikhail Korsun, the plant’s chief designer, was equally patriotic. According to Korsun, the transportation infrastructure of forest industry companies in the North and Far East consisted of roads that radiated out from the base settlements for a distance of about 120 km, and where they ended the roadless tracks to the forest plots began. KrAZ’s were the best suited of all for these barbarous conditions.
“What about the Japanese?,” we asked.
At this point, Korsun related the following story. In the late 1980s, KrAZ sent some trucks for testing to Dallesprom, which had traditionally used Japanese lumber trucks. When the Japanese saw the competition, they were frightened and out of fear agreed to set up a joint venture to produce a combined lumber truck. They even conducted tests with Komatsu and Mitsubishi engines, but the venture collapsed along the USSR.
Nevertheless, the fact remains that KrAZ’s operated successfully in the North in temperatures to –55°C, in the rarefied atmosphere of the Osh–Khorog road in the Pamirs, and in the Kara Kum and Kyzyl Kum deserts. After the collapse of the USSR, said Korsun, Russian companies were given order to switch to Urals and KamAZ’s, but these were not very sturdy under extreme conditions.
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| The Kiev cake has been the Ukrainian capital’s trademark for almost half a century |
The plant’s managers admitted that KrAZ had damaged its reputation somewhat during the crisis period.
“Did you start doing poor work?”, we asked.
No, it was worse than that: KrAZ became a victim of pirated fakes. It turns out that pirates counterfeit not only greenbacks and CDs, but also heavy trucks. During the crisis, a lot of tiny companies sprang up that took old vehicles, repainted them, put a new cab on them, refitted the chassis, and sold them as new ones abroad in Russia, Vietnam, Africa, and the Middle East. They sold hundreds of these vehicles per year. Fortunately, Russia introduced the Euro-1 environmental standard in December and put an end to the fakes. As usual, the pirates learned of this in advance and so pirate deliveries peaked at the end of last year.
In its struggle to survive, the plant had to put some work into improving the quality of its machines. The designers succeeded in increasing the running life to 350 000 km, although this was still two to three times less than European competitors. They also increased the number of wheel arrangements, and now there is even a unique 10x10 articulated truck, an energetic semitrailer capable of traveling in a tank column. However, the plant’s management believes that hydraulic truck tractors with 30–40 cu. m tipping semitrailers are especially in demand
Following its Russian competitors, AvtoKrAZ switched to custom orders: each vehicle has a set of options ordered by the customer (there are about 200 versions of 16 base models). Since Russia is still the plant’s main client, they have increased output of parts and opened their first service center in Moscow in December. Incidentally, up to 40% of components, including rubber, bearings, and power units [Yaroslavl Motor Works (YaMZ)] are supplied from Russia.
The main problem is how to improve sales. In an effort to popularize the brand, the plant has concluded an advertising contract with the Tatu group. This year, they plan to produce 2500 machines, although a profitable operation for AvtoKrAZ starts at 4000 trucks per year.
Karl Marx’s Sweet Capital
Another four hours on the bus and we arrived in Kiev, the mother of Russian cities and the capital of Ukraine. Every traveler to this city at all times has gone to sign the register at the Kiev Pechera Monastery, eaten those tiresome Kiev-style cutlets, and gone to the Karl Marx confectionery factory for a Kiev cake.
“The cakes are for the soul,” said Vladimir Yarandin, technical director of the Roshen confectionery corporation. “For a long time we thought about whether it was worth continuing to make them and decided to increase production five times.”
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| Today, each LAZ is produced for a specific customer who chooses the set of options |
Roshen is part of the Ukrprominvest Financial and Industrial Group (FPG Ukrprominvest), and in 1999 it bought the Karl Marx confectionery factory in Kiev. It was here in 1956 that Konstantin Nikitin, the foreman of the biscuit workshop, created the recipe for Kiev cake. This cake became the city’s trademark, and in Soviet times the factory produced one ton per day and this was considered too little. There was an advantage in this, since one item in short supply could be exchanged for another.
The Karl Marx factory itself was founded by the merchant Valentin Efimov in 1886. Back then, production was 200 tons of confectionery per year. The factory received the name of Karl Marx on the 105th anniversary of his birth in 1923, and by 1940 was producing 32 800 tons of products per year.
After FPG Ukrprominvest purchased the Karl Marx factory (one of the largest in Ukraine), its confectionery division, which already owned four confectionery factories, made it responsible for the “chocolate and biscuit group.” The factory’s output of 6 to 12 tons of cakes per day is only a small fraction of its total production.
According to Vladimir Yarandin, the original recipe for Kiev cakes was restored when Roshen arrived. In Soviet times, substitution of certain ingredients had been allowed, for example, ground carob for cocoa powder and peanuts for cashews and filberts. The new owners did some research and settled on filberts (bought in Turkey). They also investigated oil: many producers add vegetable oil to animal fats, but Roshen buys 82%-fat sweet butter.
A classic design was also created for the Kiev cake. Previously, each decorator had worked in her own style. The factory did a customer survey, made a model of the best design, and hung it in the work areas. Now the rule is leaflet on the right, floweret on the left, and pattern just so.
They also considered various ways to extend the period of freshness (36 hours). One of them was to make the cake in the day and stamp it in the evening, but that was dishonest. Then they followed the example of French bakeries: prepare only the cake layers during the day, then assemble the cakes, spread on the cream, and decorate them between 10:00 in the evening and 6:00 in the morning. Shipments start at 6:00 a.m., and by 9:00 a.m. the factory gates close, so that dealers who are late will not get any cakes.
The personnel question has also been difficult. Wages at the factory are fairly high for Kiev, but generally, preparing the cakes is laborious women’s work. Increasing efficiency meant excluding creativity. The only person at the factory who is allowed to be creative is a confectioner named Zhdanov, who has worked here for 40 years preparing cakes on special order, for example, for general secretaries and other high officials.
The factory’s management has not made an issue of the fact that other factories and bakeries produce the famous Kiev cake—the Kiev Bakery and Confectionery Combine (BKK) is the main competitor. Evgeny Vovchanovsky, Roshen’s director of corporate development, believes that the problem of rights to old trademarks has been settled in a more civilized manner in Ukraine than in Russia. In Ukraine, whoever registered the old trademark first is the owner of it. So we have not accused our competitors of piracy but have simply increased production. In any case, customers rate Kiev cakes made at our factory more highly.
However, Vovchanovsky himself likes custard pastries made by BKK but does not like Kiev cake.
In Search of Lost Time
Sixty kilometers from the Polish border, in the old city of Lvov, the giant Lvov Bus Plant (LAZ) is still alive and operating. At one time, 15 000 people produced up to 14 000 of the distinctive rounded buses with rear engines. Last year, 3500 people produced only 307 buses; and in 2000, the factory stood idle for nine months. Prior to that, the Ukrainian state property fund had tried for three years to sell the state block of shares in the plant until it finally found a buyer in October 2001: the Russian–Ukrainian joint venture SIL-Avto bought 75% of the shares for 27 million hryvnas at an auction. In Ukraine, questions about a company’s origins are considered somehow improper, but the local media kept insinuating that structures belonging to Roman Abramovich were allegedly behind SIL-Avto.
According to Valery Stepanov, deputy chairman of the factory’s board, LAZ buses had a reputation for being undemanding vehicles for any climatic conditions. Their competitors operated in other niches: Likinsk buses were for cities, Pavlovo buses were for rural areas, and Ikarus buses were articulated city buses. LAZ specialized in suburban, intercity, and tour buses, and so LAZ buses were considered more expensive and of better quality.
However, the brand has been partially forgotten in recent years. Marketing showed that the market was no longer receptive to the old models. In 2002, the new owner invested $3.5 million in acquiring new equipment and technologies. The objective was to design a unitized bus for various uses, i.e., the 1414 model with a 9-m body for cities, the 4207 (10 m) for intercity traffic, and the 5207(12 m) tour bus.
In contrast to Likinsk and Pavlovo buses with their all-metal bodies, LAZ buses are made with frame bodies. The frames increase the body’s durability and eliminate the need for bulk stamping. However on the old LAZ 695 and 699 models developed in 1957 and taken out of production only a year ago, the side frames were spot welded, and the buses developed bulges, their plates flapped, and they clanked. The plant has now acquired modern technology for bonding the side frames from the Swiss company Sico. The windows are also glued, so nothing clanks or rattles any more.
Like KrAZ, the company offers custom option sets, for example, several different colors, engines from YaMZ, Cummins, or Deutz, and soft or hard seats. The ISO-9001 quality certification system has already been introduced, and preparations are being made to introduce ISO-2000.
Valery Stepanov: Russia is our main customer, accounting for 60–65% of our deliveries. About the same percentage of components comes from Russia, but the quality of our suppliers is not always satisfactory. Our prices are very reasonable, but the market is unstable: in contrast to Ukraine, most passenger transport in Russia is a government concern, but municipal organizations never have enough money. But our main rival is time.
by
Vladimir Gendlin and Sergei Mikheev (photos)
All the Article in Russian as of Feb. 24, 2003
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