Russia Eyeing Up English Machine Tools

09.12.2009 — Analysis

British companies should not count on large sales of machining equipment in Russia. The machine building sector of the country is yet not ready for a large scale modernization. Igor Bazhenov, the Director of the Russian representative office of the British Manufacturing Technologies Association (MTA), spoke about the possibilities for the joint resolution of the problem in an interview to RusBusinessNews.

- Mr. Bazhenov, what goals does the MTA set for its office in Russia, why has it been decided to have the representation in Ekaterinburg?

- I will start by saying that the Manufacturing Technologies Association of Great Britain is a nongovernmental not-for-profit organisation. It includes about 260 manufacturing companies and dealers of machine and tool products. First of all this is machining devices and everything involved in machine-tool building - cutting tools, machine attachments, robotic technology, large quantities of software. MTA regularly writes to the British Prime Minister regarding the state of affairs in the sector, lobbies the interests of the members of the Association in the Government and the Parliament. The MTA's opinion is taken into account to a certain extent.

The MTA representative office in Russia was opened in 2006. Ekaterinburg had been chosen as the location for the office as most of the country's machine building sector is concentrated in the Urals. Moreover, Ekaterinburg is a good transportation hub. Another important factor is that there is a British Consulate General here.

They were looking for a metal machining engineer with a good knowledge of English to fill the position of the Director of the representative office. The core function of the Russian representative is informing Russian machine builders of what is happening in the machine-tool building sector in Great Britain. I assist the establishment of links between Russian and British companies. Sometimes I draft contracts, represent English machine-tool builders in Russian tenders for the supply of products. In general my activities are judged by the amount of links established.

- How hard is it to establish these contacts?

- As a rule a company representative coming to Russia would not speak Russian and does not know the country. My goal is not only to help him organize a meeting but to look after him during his stay. Sometimes the English ask me not to organise meetings with particular companies but simply give me their interests profile. I then have to look for several partners for them to meet.

For instance a Renishaw PLC representative is coming to Ekaterinburg very soon; the company makes measuring and metrology equipment. He is interested in nanotechnology centres. I have offered him to visit 2 such centres, in the Urals State University and the Urals State Technical University - UPI, and the nanotechnologies centre in Chelyabinsk.

Representatives of all companies have a purely commercial reason to be here, that is to sell their equipment.

- What kind of trends can you tell us about in terms of sales of British machining equipment in the Urals?

- First of all a state of the art metalworking machine is an expensive knowledge-intensive product. This is why negotiations regarding such purchases take long time, sometimes as long as two years. Before a decision is made Russian machine builders negotiate for a long time, take business trips, participate in exhibitions. This is because the Russian market of machine tools is very much saturated, the competition is intense among foreign manufacturers. Virtually any British company would have competition from Germany, Italy, Spain, China, or Taiwan in this sector.

Another thing is that many British companies just want to find dealers in Russia. At the moment I have a request from the Association to help three or four companies in this way.

- In 2009, a year of crisis, have the contacts increased or dropped?

- Sales of machine-tool equipment have rapidly dropped, and this applies not only to British companies. They, on the whole, are not in the leading position amongst the Russian machine builders. This is why the Brits are trying to reach out here now, so the intensity of contacts remains roughly the same as before the crisis. I have an impression, however, that many British machine tool building companies, having found themselves in a difficult situation, begin seeing Russia as a potential sales market for their products. Hoping too much for the beginning of large sales. This is a mistake as it is more difficult to sell in Russia during the crisis.

I have on average 12-15 British companies approaching me in a year. I also work with dealers of British companies which we already have quite a lot of in Russia.

- What kind of help does the British Government give for the promotion of the machine tool equipment in Russia?

- Governmental support to British companies is mainly in financing the Russian company buyer. The interest rate in this case is significantly lower than in case the loan is taken out in a Russian bank. Also there is a Governmental leasing scheme.

Unfortunately, these schemes do not work very well. The British demand repayment guarantees from Russian companies whilst the latter cannot provide them. This is one of the reasons why leasing companies encounter problems. In a situation when an enterprise stops repayments the equipment purchased becomes property of the leasing company. What can you do with these machines then, how do you find a new buyer if the equipment if in many ways unique and was designed for a specific production need?

The tangible help from the British Government is the regular sponsoring of trips for Russian machine builders to the technological equipment exhibition which MTA holds in Birmingham. Virtually all European countries do this. It is hard to imagine that the Russian or some regional government would pay for a visit, for instance, of a Chinese delegation to see the industrial products of the Urals.

- What are the prospects for the establishment of a joint venture in the machine tool building sector in the Urals?

- The English are considering this option. The MTA management has been informed of the interest of the Sverdlovsk Oblast authorities in carrying out the modernisation of the machine tool fleet at the region's industrial enterprises, and in the establishment of metal cutting machines production in the Mid Urals. So far this is just a fresh idea as there are hundreds of kinds of different machine tools. It has to be decided what particular machines will be made here as there is no single company in the world which would be capable of manufacturing the whole range of machining equipment.

So far the Sverdlovsk Oblast Government made a statement that it will be consulting foreign companies on the issue of the establishment of the machine tool production and that the degree of their involvement in the project will depend on how proactive these are.

The MTA management has took it very seriously. A British consulting company specialized in machine building technologies has been engaged. A list of about 30 British companies potentially interested in the project has been compiled. Their representatives have to come to Ekaterinburg in the spring 2010 and while being here to find out about the implementation of the Regional Programme for the Modernization of the Machine Building Sector and the Development of Machine Tool Building on the Territory of the Sverdlovsk Oblast for the Period until 2015.

- Is the establishment of the machine tool building production not just a purely business project? Why do Regional authorities have to be involved? The machine tools will be purchased by particular Urals machine building companies independent of decisions made by the Oblast authorities.

- In many respects approaching governmental circles has been initiated by myself. It is true, the majority of industrial companies in the Urals are private, with the exception of federal unitary enterprises which work for the military industrial complex (they are under even less influence from the regional authorities). Nevertheless, governmental circles are still capable to carry out certain organisational functions. For instance it is much easier to gather in one place directors of several Urals enterprises and inform them about the planned project having first found ensured the support of the regional government. This is why I very much value the government's support.

Then there is the question, where does the money for the establishment of the machine tool building production come from? Foreign companies will be honoured to take part in the project, but they would not do it gratis. The British consulting company which is going to come here and attempt coordinating the British efforts in the implementation of this programme has already implemented two such projects. In Poland this has been funded by the World Bank, in Cyprus - by the European Union. It would be good if they manage to make similar arrangements for the Urals project.

The Oblast authorities hinted that German and Italian companies are also going to take part in the implementation of the project. I do not know, however, the exact stage of negotiation with them. I do know, however, the exact stage of negotiation with them. They have made their fundamental concept known. It has been translated into Russian and submitted to the Oblast government. The next step is the organisation of the visit of British companies to Ekaterinburg.

We have to remember that the modernization of the machine building sector and the establishment of the machine tool building production are two different things. The Sverdlovsk Oblast has a huge machine tool fleet, the average age of equipment is 15.5 years, the level of wear is 55-60%. This is a whole lot of equipment that cannot be replaced overnight. Those machine tools which are not yet outdated, however, have to be maintained and modernized. A lot of companies in Great Britain specialize in the equipment refurbishment. A modernized machine tool may well have the technical characteristics comparable to a new machine while incurring only 60% of the cost.

The machine tool modernisation programme in Russia and in particular in the Sverdlovsk Oblast is not carried out in any systematized fashion. There are machine tool repair plants in Kurgan and Ufa. These are the plants which specialize in the equipment modernization. They do not, however, use the state of the art refurbishment technologies. This sphere does seem very promising to me.

- Do British machine tool building companies establish production facilities in China?

- Not just establish. They build large plants there. Equipment made there is sold exclusively in the domestic Chinese market which is huge. The market in Russia is also large but machine building companies are insolvent. Virtually the entire Russian machine building sector is stagnating now. The establishment of the machine tool building production here will require huge investment. In order for it to pay back in 8-10 years there must be quite big annual sales of machine tools in order to reach the break even point and move further. Nobody can guarantee these sales today.

Interview prepared by Pavel Kober