The English were called to clean up the industrial stable of the Urals

03.12.2010 — Analysis

The government of the Sverdlovsk Region offered the British Manufacturing Technologies Association (MTA) to set up a joint venture for repair of metal-cutting equipment in Ekaterinburg. As the RusBusinessNews columnist has found it out, having to face tough competition with Chinese equipment manufacturers, British companies are interested in upgrading of the Russian machine-tool stock, but are not willing to invest in a joint venture. The main reason is low paying ability of Ural machine-building factories and substantial country risks in Russia.

Factories of the Middle Urals have several hundred thousand machine-tools. Most of them were purchased during Soviet days and need replacement. According to Valery Turlaev, Deputy Minister of Industry and Science of the Sverdlovsk Region, from 2006 to 2009 the equipment import to the region increased four times. However, the emphasis was placed on purchasing of cheap multi-purpose machine-tools manufactured in China, Turkey, South Korea and Taiwan. In 2009 the investment in new equipment totaled 113 million US dollars - quite a moderate amount that demonstrated another time the interest of machine-building companies in modernization of the machine-tool stock.

Within recent years the Middle Urals saw many new companies that embarked on reconstruction of equipment. The region has research institutes and enterprises that are able to develop software for machine-tools as well as to manufacture the required equipment and tools. However, very few machine-tools go through upgrading, which does not suit the Sverdlovsk Region's government that announces its plans of investing 1 billion euro in machine-building by 2015.

First of all, something must be done with heavy-duty processing centers, the number of which at local factories is quite impressive. In order to equip them with advanced control systems, reconstruction must be put into the flow-line. The government authorities decided to use the UralNITI facilities to launch a regional center for repair and modernization of metal-cutting equipment, and MTA was invited to take part in its organization.

The government of the Middle Urals expects that the new joint venture will operate as a factory for industrial assembly. V.Turlaev is sure that the region is able to manufacture up to 80% of components. It is confirmed by a number of joint projects announced by manufacturers. Zavod Iset OJSC is organizing together with Chinese partners manufacturing of machine-tools based on Russian components; the machine-building corporation Pumori-SIZ has reached agreement with OKUMA about construction of a machine-tool factory in Russia. The government provides them not only moral support, but also promises preferences. British machine-tool companies can also count on support. V. Turlaev believes that first of all there should be mutual economic interest.

In the meantime, the future of the joint venture is rather vague. Mikhail Malyshev, scientific secretary at UralNITI, says that British companies are ready to participate in upgrading of machine-tool stock, share their technologies, but they do not want to invest money in the authorized capital of the joint venture. The regional program of modernization of the machine-building sector and development of machine-tool building in the Sverdlovsk Region also has no provision for the money on this project, at least for 2010-2011.

M. Malyshev cannot say how much money it will cost to create a successful center: costs have not been estimated so far - and the size of the potential market is still unknown. The preliminary survey showed that 80% of the machine-tool stock available in the region has become obsolete, and only few machine-building companies have replaced their equipment. Such information is clearly insufficient to start up a substantial business project; but the technical audit of the machine-tool stock requires money. Vladimir Semyonov, advisor to the president of the Sverdlovsk Union of Industrialists and Entrepreneurs, is sure that the British partners must do diagnostics of equipment at their expense. Moreover, they should set up a diagnostic center that would employ not only foreign engineers, but also Russian technologists, electronic engineers, programmers. He states that only such team will be able to perform adequate audit and to convince factory owners in appropriateness of machine-tool stock modernization.

David Smith, MTA Director for Business Development, promised to think over the proposal of the Ural manufacturers. However, experts doubt that the British are willing to set up any outfits in Russia. At the moment, they cannot even name the price for their services, which is decisive for making a decision on the expected amount of orders. Vladimir Borodin, head of the NPO Avtomatika, the Federal State Unitary Enterprise, states that the company's technologists are studying proposals of potential suppliers of equipment. The decision will depend exclusively on the quality and the price of the offered services. They do not have any information about possibilities of English companies, though they have been analyzing the equipment market for a long time. Today, manufacturers are quite satisfied with cheap metal-cutting equipment made in China and Taiwan.

The British admit that China is a very strong competitor; therefore, they try to play on its field. British companies build factories in Celestial China and manufacture machine-tools that are demanded by Chinese machine-building companies. Igor Bazhenov, Director of the MTA representative office in Russia, says that the Chinese market is enormous. The need of Russian factories in equipment is also sizeable. According to the estimates of the Stankoinstrument Association, 50 thousand machine-tools for the amount of about 1 billion US dollars are sold in Russia annually. At the same time, the domestic equipment accounts only for 1%. Such a low number is explained by the fact that customers have become very demanding to Russian products, trying to buy import equipment whenever they can. Home-made machine-tools, according to Sergei Sukharev, head of the Department for Prospective Technologies at Pumori-Engineering-Invest, are used by machine-building companies mainly for rough work on off-spec stock, as Russian casting is still of very low quality.

Though foreign machine-tool builders have no competition in Russia, it is much more difficult to sell equipment in Russia than in China. The demand is seriously constrained by insolvency of companies. Machine-building factories that have survived the crisis need funds to upgrade their production. There is more than enough money in the country, but, as Alexander Petrov, Minister of Industry and Science of the Sverdlovsk Region, informed, companies cannot take loans in banks: interest rates are exorbitantly high, and the appraised value of collateral property is very low. Besides, bankers are not interested in issuing long-term loans.

Alexander Trachtenberg, Director for Strategic Development of the Lorry Company, says that foreign banks are different from Russian banks, as the former see themselves as a link in the economic chain, whereas the latter perceive themselves solely as the source of receiving revenue. At the same time, he is sure that most of the manufacturing companies are not able to receive loans due to high country risks: nobody can say what is going to happen with manufacturing in Russia in two years.

The stable exchange value of the ruble in the context of high inflation contributes to actual strengthening of the Russian currency, making home-made products non-competitive even on the domestic market. Revenues from hydrocarbon sales, which used to stimulate consumption, today are earmarked at covering the deficit of the Russian budget. The slowdown of the GDP growth can lead to economic stagnation, which will freeze up all modernization projects. Mikhail Zadornov, Chairman of the Board of the BTB-24 Bank, asserts that stagnation will take place when the GDP growth goes down to 3% and oil price reaches 75 US dollars per barrel. Russia has never been as close to these levels as it is now.

The country is not able to change significantly the downward trend in consumption of machine-tooling equipment. Over the last 20 years, it rolled down from the second place to the 17th in terms of the world machine-tooling consumption. Construction of new machine-tool factories requires immense investment; however, the amount of funds shows no growth within the sector: even solvent Russian companies take loans and invest them in foreign projects. Experts think that this negative trend will prevent British companies from full-featured participation in establishment of the joint venture for modernization of machine-tool inventory of the Middle Urals.

Vladimir Terletsky