Andrey Kurganskiy, Kamensk-Uralsky Metallurgical Works (KUMZ) - ОАО "КУМЗ"
Release Date: 2010-12-28
Andrey Kurganskiy, Commercial Director of Kamensk Uralsky Metallurgical Works (KUMZ), has been interviewed by Russianavia.net to discuss the evolution of the role of KUMZ for the Russian aviation industry, the current position of aerospace niche in KUMZ' business development and product portfolio and the major factors that drove the world aviation leaders to work with KUMZ.KUMZ was created in 1944 to provide semi-finished products for the Soviet aerospace industry. How has the role of the company evolved and is its focus still on providing semi-finished products for the aviation industry?
At the beginning of our activities 60 years ago, our production was specifically dedicated to the aerospace industry and we were reporting to Russian Aviation Industry Ministry as an exception because most of the metallurgical plants were under the umbrella of the Soviet Metallurgical Ministry. Then, after the famous collapse in 1990ies, the share of aerospace shrank to 2-3% of our output. However the situation started to change about 3-4 years ago thanks to the state support after the government announced support for some specific aviation programs – Sukhoi SuperJet (SSJ), PAK FA, as well as replacement of relatively old military fighter jets in the Russian Armed Forces and support of export of Russian military aircraft. Last year, the demand has picked up, and now we have over 10% of our output supplying the aerospace industry. However, we have to admit that SSJ is still at its first stages, and still undergoing additional testing of its avionics and flight characteristics by international authorities. As soon as normal production starts for this aircraft, we will increase our supplies for them.
How is aerospace, as a business niche, currently considered within your business development and product portfolio?
In 2004-2005, having such a long experience in aviation sector, we made our mid-term and long-term strategy for aviation, and decided to enter the international aerospace market. Our shareholders decided to invest about 100 million USD into our new greenfield project – an aluminum plate facility that we call Chkalovsky. We bought the best brand new equipment from Germany, Austria, U.S. and France. This strategy and investments gave us a chance to work with the world leaders in aerospace but these projects require lot of money, time and workforce for us to be able to comply with the international standards set by our partners. To achieve the proud status of official suppliers of these companies, we had to unfold qualifications for each piece of the equipment in the production chain back in 2006. As a result, we have received a general qualification, and now we are getting qualifications for each specific kind of alloy.
Boeing has awarded an international prize to the product manufactured by Kamensk-Uralsky Metallurgical Works…
Boeing has a system of awarding its international suppliers checking their stability, deliveries, reliability… In Russia, there are two main metal suppliers for Boeing: VSMPO-AVISMA for titanium and KUMZ for aluminum semi products, and of course we are proud that KUMZ’s products were highly appreciated by such company as Boeing.
Obviously, 2008 and due to not so happy financial events, was a very interesting year when Sual, your majority shareholder, merged with Rusal. But even under such merger, Sual has made the strategic decision to keep KUMZ separate from the merge. Why?
I believe this is a question more for our shareholders than personally for me. But nevertheless my understanding is that Rusal had an experience with semi-finished products, through their ownership of Samara (SMZ) and Belaya Kalitva (BKMPO) that are somehow direct competitors of KUMZ, specifically SMZ that is the newest and largest producers of semi- finished products and now part of Alcoa due to the fact that Rusal sold these two assets to them back in 2005. Therefore, we can assume that when the merger between Sual and Rusal took place in 2008, there was no reason to again incorporate a company like ours, which was also dealing with semi-finished products, whereas many challenges are very obvious: a large range of products, less profits… a different types of business. This is, probably, the reason why it made no sense to keep KUMZ in the portfolio, taking into account that in the past it was something that did not interest Rusal. But again, the shareholders are the only ones who can provide an assertive answer to this question - I am just sharing with you a practical perspective based on my business experience.
Was that independency given to KUMZ something positive to create a clear strategy - and which specific targets were given to you as Commercial Director in 2008?
According to my experience, I believe that to have a separate entity like KUMZ improves competitiveness, because a manager of a single plant would tend to do as much as he can, while managers directing multiple plants may tend to divert or grant different priorities to each asset. In our case, being a single asset has proven to be beneficial.
As per the commercial objectives given to KUMZ management, namely those which I am directly in charge, 2008 was a very particular year. It started extremely well because the sales were increasing daily in its first half until Russia started to feel that the crisis was approaching its borders in September-October 2008, and it was then that the people started to change their attitude. In the beginning of 2008, the aim was the extract maximum profit, develop new markets and increase sales of technically complicated products because aluminum products require different knowledge and people depending on whether you are producing a window frame or a skin-sheet for an aircraft. Thus, 2008-2009 were more of a matter of survival and keeping production and the people, especially the technical employees.
Who were the key customers that you wanted to stay with during the tough times?
Firstly, we looked at the different industries, their requirements and their state of affairs. In Russia, same as in most of other countries, the government supports production for defense, military products, shipbuilding and the aerospace programs, and my understanding is that such programs for oil and gas, metals, commodities become the driving force for the Russian economy.
Currently, the state support is mainly directed to defense, energy, alternative energy and everything related to the state orders. We, at KUMZ, have made a decision to follow the most stable industries. As the Commercial Manager, I prefer stable growth rather than ‘ups and downs’. From another side, export is also very important for us, and as far as export concerns, we have always believed local presence is very important. That is why, for example, as soon as we began to see some improvements in the Asian market in spring – summer 2009, we opened an office in Hong-Kong which was a very good and timely decision.
The main reason for choosing location was that Hong-Kong, in our understanding, is a universal location with the best of the two worlds: formally part of China, Hong-Kong has a free and flexible economy. It is a good location to organize supplies to continental China, Taiwan and to entire Asia. Close to 20% of our exports goes to Asia Pacific.
For 2007-2015, KUMZ announced planned investments around 900 mln USD in the long term to upgrade production. Were these plans corrected after the outbreak of the financial crisis?
I am certainly not sure that this has something to do with our current plans. Our current plans were first re-defined in May 2009, when the Russian government announced support for segments with real potential to grow, so KUMZ tried to match its investment plans with the main development directions of the Russian economy. In order to fit our development plans into the economic reality, we realized we were good at ‘plates’ but less competitive in terms of ‘thin products’. Plates are more needed for large aircraft, so this area became somehow our focus. As for thin products, here we shall work hand by hand with regional aviation developers. But again, large apparels - where our products fit perfectly and where our production is excellent - are also a very interesting point, since large apparels are fundamental for global aviation.
I would also like to point out that despite any great idea we may have on how to increase sales and production, it is worthwhile to note that any Russian bank normally asks for an interest of 20% - so, of course, this has a great impact in margins that sometimes may not be as good as those of our competitors in other countries but this varies year on year. Generally, the margins in our business tend to be 7-8% across the whole world.
You have mentioned that aerospace represents today around 9% of your business portfolio which means you are managing a multi-sector industry portfolio, which surely requires specific approach for every sector… What, in your personal perception, is important for the aerospace segment?
One of the key factors in the aerospace industry is quality and reliability, namely Just-In-Time (JIT) deliveries and good and predictable quality. Comparing the global aerospace industry and the Russian aerospace system, the latter has a different approach in terms of quality control but this is changing.
Before, the quality control consisted of a lot of procedures for the different production stages and customer checks whereas companies in the international market prefer to allocate 1-3 years to carry out the qualifications and check that the production process is stable on a daily basis. Their aim is to have the right processes, and that is why they explain what has to be improved over a specific period of time. Now that Russia is gradually taking on good Western experience, we are also in a position to tell the Russian companies to complete the requirements and make their own qualifications. This proves that our international experience with foreign companies is already helping.
What, in your view, were the major factors that drove the world aviation leaders to work with KUMZ?
It is an entire combination of factors. Firstly, there is a competitive aspect: these companies are interested in diversifying procurement in different parts of the world. Russia is a more cost-efficient solution as compared to Western Europe or the U.S. As regards production, it is not as cheap as it used to be some years ago but our clients also recognize our experience and are aware of the fact that we have specific experience with specific products because the Russian military aviation was one of the best in the world till the 1990ies and we still have this experience. Thirdly, one of the other reasons is our geographic location in Russia that enables us to supply to Asia from a closer point than the plants in the U.S. or Europe. Lastly, these companies also seriously consider their development in Russia. For instance, Airbus is implementing one of its programs for space parts at IRKUT Corporation. Besides, having a supplier in Russia is a strategic decision for them.
As a supplier, how do you manage to ensure smooth bureaucratic procedures such as customs clearance?
This issue is more relevant for import than for the export because the Russian government supports export, just as any other government. Our long reputation, a very good knowledge and close contacts with the local customs are a great help to facilitate the import procedures. Now, the situation is even better because the crisis made both the government and the private sector understand that supporting business is an important source for the budget. In general, if you have a good track record meaning that you comply with the law for many years, it works for your benefit and for your business.
What would be your last message for our international audience?
When we fly an aircraft, one of our most important thoughts is about safety and reliability. I would like to say that our task is to give the aircraft manufacturers an opportunity to produce very reliable aircraft with reliable suppliers. The major goal for KUMZ is to be one of such reliable suppliers for aerospace and for any kind of industry that uses semi-finished aluminum products.
| Company: | Kamensk-Uralsky Metallurgical Works (KUMZ) - ОАО "КУМЗ" |
| Position: | Commercial Director |
| Country: | Russian Federation |