The Urals "Plant Of Plants" Refuses To Die

27.01.2010 — Analysis

Gazprombank does not disclose the details of the investment programme for Uralmash so it is not known on what conditions the bank will be giving money for the modernization of production, even the spheres of activity to be revived are not named. But the truth will out, Aleksandr Misharin, the Governor of the Sverdlovsk Oblast, said that the production of drilling, metallurgic and crane equipment has a good future. Having orders for oil production and agglomeration equipment will enable the production volumes to grow by 50% per year.

Experts, meanwhile, doubt that Uralmash will be able to implement the programme. Aleksandr Kotelnikov, a former manager of the plant, now the manager of CJSC SPE Mashprom, reckons that Gazprombank's interest rate will not be lower that 13% per year. This will translate into the same margin on Uralmash's products the production cycle of which is two years long. The price growth by 26% just due to having a bank loan, the expert claims, will make the plant non-competitive a priori. All heavy machinery manufacturers in the world operate at interest rates varying from 0.5 to 4%.

Leading foreign companies - Voest Alpine, SMS-Demag, Danieli - whose engineering is far from being cheap have long since relocated their production business to China which enables them to offer finished metal structures at 50 cents per kilogram while in Russia this is just the price of the production preparation stage.

Russia is totally unprepared to compete with China as the Celestial Empire gives free land and interest free loan for 20 years for the construction of a new plant while buying back the previous facility taking it as a part of the back payment of the loan. The result was pretty much immediate, the plants like nothing in Europe are mushrooming in China.

Russian Government so far has only ripened to support metal makers, and partly agriculture. This is why investing in today's machine building plants is a business without a future, which is why most likely nobody will actually do it. In current conditions the only way to survive, it seems, is increasing the domestic intellectual potential whilst placing orders in China, of course. Some Ekaterinburg engineering companies do exactly that and this gives them a chance to grow into large machine building companies given favourable development of the situation.

Uralmash is a classic Soviet enterprise. Aleksandr Sagalovich, a former UZTM manager, says that the structure of the enterprise was difficult to understand even to its managers. Practically unmanageable "plant of plants" had to be reconstructed in the seventies of the last century. The chance was missed and in the nineties they started cutting up the living tissue, the then proprietor Kakha Bendukidze split Uralmash and sold it piece by piece. Drilling rigs with workshops and designers went to Integra Group; the heavy machine building research and development institute with its technical documentation, to OJSC Severstal. Some drawings were simply copied by the competition and Uralmash lost the engineering.

In the mid noughties people at Uralmash came to their senses and decided to get the institute back. In this time the design subdivision, having changed the sphere of activity, has lost many specialists. Uralmash bought it back paying twice more than it was sold for. Out of the six thousand employees only 200 remained. The average age of the specialist is 50 and Yuri Tulayev, the Head of the Mechanics and Machine Building Department of the Ural Technical University, claims that the plant does not offer any vacancies to graduates. This means that in this state of the engineering Uralmash will not be saved even by its brand which, by the way, according to Aleksandr Mokronosov, Doctor of Economics, has a bad reputation since the quality of products dropped.

Developing the investment programme Uralmash counts on the might of its proprietor. Gazprom, according to the plant's employees, decided to get back the production capacities lost to Integra. The gas monopoly has reconsidered its decision on purchasing hydrocarbon production rigs in China, five out of seven of them will have to be made at the Urals enterprise.

The problem is in that Uralmash has always made just the tower and the hoisting device which does not exceed 30% of the total cost of the drilling complex. Integra used to supply the drilling equipment. This is why it is unclear what Uralmash will do about drilling pumps, diesel engines and the rest of the infrastructure equipment whose production still remains in Integra's property.

It will be extremely difficult for Uralmash to compete in the market of metallurgical equipment as foreign brands came to the Russian market. The Government of the RF actively helps them by providing concessions. Magnitogorsk Iron and Steel Works, for instance, will have the customs duties and VAT waived if purchasing equipment abroad and will have to pay VAT if placing the order with a Russian company.

Attempts to diversify Uralmash's production are unlikely to change the situation. Once before Uralmash had decided to make equipment for nuclear industry having designed a decent gantry crane. There were not enough orders for sustainable production, however.

Some Urals experts claim that the most valuable thing in Uralmash is land it stands on. At a time of the construction boom it could have been sold at a profit. Now, however, even property developers are not interested in the plant's land. So, can a new page be written into the history of the famous Ekaterinburg enterprise? Gazprom says it can.

Vladimir Terletski