Russian modernization – with no purpose and no money

24.12.2012 — Analysis

Ekaterinburg hosted the presentation of technologies and equipment from Saxony. The representatives of German machine-tool and engineering companies offered their Russian colleagues to take advantage of the innovative solutions to optimize the manufacturing processes. The proposal hung in the air: The Russian engineering companies have neither funds for modernization nor clear views of prospects for future business development. They hope that the Germans will help them to get incorporated into the world production chains. However, as the RusBusinessNews columnist has found it out, foreign investors are reluctant to enter into partnership relations: The present-day economy brings forth tremendous risks relating to depletion of liquidity in the real sector.

Saxony has become home for many world-known brands: Siemens, Bombardier, Volkswagen and others. However, the main contribution to its gross product, according to Manfred Liebl, the Saxony economic representative in Russia, is made by medium and small-sized enterprises. The region has more than 1,200 companies operating in the sectors of precision engineering, fundamental research and innovative engineering. The Saxons are ready and willing to pass on their know-how in improvement of production efficiency to different countries of the world.

The Russians are interested more than anyone else in the German technologies: The functional obsolescence and physical deterioration of equipment at Russian machine-building factories exceed 70%. To stay afloat after joining the World Trade Organization manufacturers need to re-engineer their production operations within the shortest possible time. The market offers numerous innovative solutions; however, generally, Russian machine-building companies are not able to use them.

According to Igor Bazhenov, the director of the Russia-based representative office of the UK Manufacturing Technologies Association, the purchasing of new equipment will not boost manufacturing that requires profound changes in technologies, which is beyond the power of most of the companies. The spectacular example is the conceptually new method of friction welding used in manufacturing of high-speed trains. In the Sverdlovsk Region, this method is not used and no one has ever made any attempt to buy the welding equipment. The expert is aware only of three contracts signed with Russian companies, one of which was unsuccessful. The technology patented back in 1991 does not take root in Russia, though it is by 30% more efficient than the traditional welding method.

All over the world, most of the companies try to upgrade their functionally obsolete equipment through fundamental modernization that helps to cut costs by 50%. During the survey, the managers of machine-building enterprises of the Sverdlovsk Region said that in the next five years they intended to upgrade 413 machine-tools, which was equal to approximately 80 items a year. I. Bazhenov states that even these plans that can hardly be seen as ambitious remain to a large extent on paper, and manufacturers share his opinion.

Alexander Makarov, the vice president of the Ural Chamber of Commerce and Industry, says that machine-building companies do not have sufficient equity funds, and modernization supported by borrowed capital is impossible (due to the lack of collateral property) and unfeasible. Bank lending is not the only issue: Russian manufacturers have a very limited range of vision; they do not know how to position themselves on the market, what products to manufacture, where to move and who to choose as alliance partners. On the other hand, they cannot afford services of professional consultants who would help to prepare a consolidated business plan, as they do not have "extra" 10-20 thousand euros. As a consequence, off-market enterprises cannot raise funds from development institutions and obtain support from the government.

A. Makarov gave a hint to the German companies interested in promotion of their equipment – they could take care of development of strategies for machine-building enterprises of Russia. It will account for approximately 1% of the total cost of an upgrading project, but it must be done, as Russian engineering companies will not be able to get incorporated into global production chains without help of European advisers and, therefore, they will not need advanced equipment.

In fact, the vice president of the Ural Chamber of Commerce and Industry offered the Germans to take some of the risks and to become partners in the business aimed at sales of finished products on the world market. If investors are interested in such cooperation, the Chamber of Commerce and Industry will find enterprises that need to be modernized and will render assistance in obtaining of government support.

Patrick Korn, the representative of iXmind GmbH & Co.KG, publicly agreed to consider the proposal of the Uralians; however, during the negotiations he conveyed an explicit message that he is not going to venture his money let alone to make gifts to anyone. The attempts to persuade P. Korn that he will not be able to find customers in the Urals unless he follows the recommendation had no effect. A. Makarov was able only to talk the German expert into making the presentation of the company’s capabilities in optimization of manufacturing processes at specific enterprises.

Tatiana Yurchuk, department head at Pumori – Engineering Invest LLC, is sure that the Germans are not interested in setting up joint ventures and providing non-repayable assistance. This business approach is typical not only for the Germans, but also for the Japanese who back in the 1990s made attempts to start production operations in Ekaterinburg, but had to give up the idea later on. Today, they are working only under the contracts with the guaranteed prepayment and shun buy-back transactions involving loan repayment through sales. Japanese machine-tool manufacturers tend to be cautious about the seemingly favorable economic situation.

According to the data from T. Yurchuk, the sales are going down in all the companies manufacturing equipment. The downward trend is especially strong in Europe, which is still unable to recover after the crisis of 2008. Therefore, foreign entrepreneurs prefer words to actions in any projects of joint ventures with Russian manufacturers. The expert has no doubt that in the next year and a half investors do not intend to take risks, investing their money in new projects. Therefore, Russian machine-building companies will have to rely on their own resources until the economy recovers. In the meantime, Russian machine-building companies do not have sufficient funds despite the massive outflow of capital from Russia.

The experts point out that the real sector experiences the shortage of liquidity through the fault of stock jobbers who are responsible for huge disproportions in the economy. Actually, the crisis phenomena came into being as the response to the malignant tumor that developed in the virtual economic space. That is why an increasing number of politicians talk about the importance of revision of the existing world order that is based on siphoning of funds from manufacturing sectors into financial structures. The series of crises can be interrupted only by regulation and supervision of the global financial markets. Then, Russian factories may be lucky enough to find investors.

Vladimir Terletsky