Andrej Reus, UIC Oboronprom- ОПК «Оборонпром»
Release Date: 2008-09-01
Oboronprom's highest priority was to transform poorly structured but strategically important sectors of industry into effective businesses. Why was consolidation key for the success of the assets Oboronprom manages in the field of helicopters, defence systems and engines and how advanced is such consolidation?Currently, the common understanding at a state level is that strategic sectors can be consolidated. The state should regain control in certain strategic sectors, one of the most obvious reasons for that being that it invests a huge part of its budget there. The sectors where Oboronprom operates – helicopter engineering and engine construction – are precisely such strategic sectors. There is no country in the world where hi-tech scientific sectors are not subsidized by the government. Here, the government’s task is to provide consolidation for modernization and to create opportunities to ensure efficient competition on the world markets. That does not imply total control over each single step of the enterprises. It is planned to take consolidated holdings to capital markets, meaning to attract private investments. Some enterprises which are part of Oboronpom (Moscow Helicopter Plant (MHP) named after Mil, Kazan Helicopter Plant, Perm Engine Plant, etc) already have private, among them foreign, shareholders.
As regards helicopters, we’ve accomplished the state task of creating an integrated group. Last year we made a crucial change in the management concept of helicopter construction enterprises. It was decided to give the daughter company of the corporation - JSC “Russian Helicopters” - the functions of the managing company of all core enterprises. The key objective of these mass-scale transformations is to centralize the management and implement a unified policy of the group in the sphere of production, marketing, sales, servicing and create necessary conditions to switch to helicopter construction association.
Why was it so important to include engine construction companies in Oboronprom?
In the sphere of engine construction our task is to form a “United Engine Construction Corporation,” the creation of which was initiated by presidential Decree in April, 2008.
According to the Decree we’re establishing a group of companies that will include the largest core enterprises: “Saturn”, Ufa Engine Industrial Association, enterprises of the “Samara” and “Perm” associations, as well as a group of engine construction enterprises which are part of UAC (MPP named after Chernyshev, plant named after Klimov and “Krasny Oktyabr” plant).
The main issue of the industry is that the national gas and turbine engine construction sector is not competitive. In the course of the so-called ‘post-privatization feudal atomism’, 13 independent engine production plants, 14 design bureaus and over 10 spare part production enterprises emerged in the sector. Besides, there are also over a thousand small spare-part production enterprises from the neighboring sectors.
At the same time, the sector is characterized by low production efficiency, high costs and complicated financial conditions of many enterprises some of which are or used to be close to bankruptcy. The HR potential of the sphere, as compared to the Soviet times, decreased 2.5-fold. Scientific and technical potential needs consolidation and significant expansion.
Given a yearly production volume of $2.5 bln, the Russian gas turbine engine construction sector employs about 120,000 people. To compare: engine department of UTC (Pratt & Whitney) employs 38,500 people and the yearly production volume is $11 bln; Rolls-Royce employs 27,800 people and the yearly production volume is $12.5 bln; Safran (“Snekma”, “Turbomecca”) – 21,400 people and the yearly production volume is $5.6 bln.
It is evident that the branch needs deep structural reorganization. Its purpose is to consolidate the sphere for its upgrade to a world market player.
Engine market is developing together with Russia’s industrial development. For instance, the yearly increase of our helicopter construction group “Russian Helicopters” is 20%. Consolidation of the aviation construction sector opens new prospects for engine constructors in this sector as well. We estimate the market of gas turbine engines and gas turbine units for the period of 2008-2015 as 586 bln rubles. Engine construction enterprises should also manage the preparations for this boom in terms of structure, finance and production.
Our objective is to create a cost-efficient holding that will provide aviation, aeronautic, power engineering and helicopter construction sector with our products. Besides, the Russian engine construction sector should be able to compete with the world multinational companies. The key tasks that we face are to increase labour efficiency, decrease costs, stabilize the financial condition of enterprises and eliminate non-efficient internal competition.
Sergey Ivanov, deputy Prime Minister, announced at HeliRussia 2008 that Russia needs mass production of modern helicopters. What are the development plans of helicopter production in Russia till 2015? Implementation of the development plan will require capital investments of 150 bln rubles. Where from will the financial resources come and how will they be allocated?
We have developed a Complex Target Program “Development of Helicopter Construction in Russia till 2015” that is to define the sector’s mid-term strategy. Its main parameters are to bring Russian helicopter construction sector back to the world leaders, increase the sales market share to 8% by 2011 with further target growth by 2015; income growth up to 300-350 bln rubles by 2015. The program envisages up to 150 bln rubles of investments half of which will be formed through the income of helicopter holding, private investments and borrowed funds and the other half – especially for the “breakthrough” projects – should be budget-based.
Helicopter production increase up to 400 items will require not only financial but also human resources. Are you worried about the current lack of staff in such a specialized sector?
Indeed, the HR issues are a burning-hot topic, not only in helicopter construction but more generally in machine engineering. Growth of industrial production, including aviation, requires new qualified staff - workers, engineers, designers. Currently the average age of designers in helicopter construction is about 50 years and the inflow of young highly qualified workers to the plants is low, as well as that of managers capable of solving production management issues, marketing, etc.
In order to solve this problem we make direct contracts with Russian higher education institutions, according to which the graduates will go under target staff distribution to enterprises of the Group. We guarantee interesting work and competitive remuneration.
Another activity in this sphere is the creation of our own corporate “Oboronprom” university. Globally speaking, it’s a system of planning and managing education aimed at development of the corporation and its enterprises. Our approach implies interactive training based on the experience of the participants and not of the instructor. In the framework of the University we train people for work in specific spheres and, more importantly, exchange experience and knowledge between people and thus introduce unified standards of work and management in all the Group’s enterprises.
Overall revenues of Oboronprom seem to be progressing smoothly year on year; they have increased from 28.2 bln rubles in 2006 to 29.6 bln rubles in 2007. Are such revenues representative of the business and assets managed by Oboronprom? What are your expectations for 2008? Do you expect most of your revenues to come from Russian Helicopters?
In helicopter construction we plan a yearly equipment production increase of 20-30%. By 2010 we plan to supply about 280 machines to the customers. Our target for 2015 is to increase this figure up to 400 machines. By 2011 we hope to increase Russian Helicopters (RH) share on the world market up to 7-8%. It’s an extremely ambitious task, especially given the fact that the world players are currently very active and are growing at tremendous speed. Income of RH exceeded 29.5 bln rubles in 2007 and an increase of 20-30% is planned for 2008. Net income of the Group’s enterprises amounted to 2 bln rubles. From 2011 we plan to provide an average yearly sales volume of helicopter equipment at the level of 75 bln rubles.
International cooperation is an important element for the implementation of the helicopter development program and a great development tool Oboronprom as a whole…
Oboronprom will be the distributor of AgustaWestland AW109 and AW139 helicopters in Russia. What is the benefit of selling competitor-manufactured helicopters in Russia and the CIS?The next stage is to create a joint venture for joint production of Italian helicopters and their sales in both domestic and international markets. How does Oboronprom plan to use this experience for its future development?
Strengthening of globalization trends in the sphere of hi-tech, enhanced cooperation among countries and companies, in aviation in particular, show us the need for active cooperation with our new Western partners. We view the strategic cooperation with AgustaWestland as one of the important directions in this respect. Our versatile and long-term partnership with AgustaWestland began with the establishment of a joint venture for distribution of helicopters manufactured by these companies and a joint venture for servicing. The Russian market is becoming more and more attractive for Western manufacturers: Eurocopter, Bell, Robinson already have their rep offices or distributors here. We have offered mutually beneficial cooperation to AgustaWestland for promotion of its equipment (mainly light helicopters and helicopters not manufactured at Russian plants). First of all, we are interested in getting new production technologies and adapting to high standards of servicing. Of course we are also interested in maximum localization of production of these helicopters and we’ll work in this direction. The demand for helicopter equipment is growing throughout the whole world and Russia is not an exception. That’s why we hope to offer the necessary product to our customers with models that we produce in the joint venture and that are currently not manufactured by Russian enterprises.
Creation of our joint venture is a project of possible cooperation between Russian and foreign manufacturers of aviation equipment. Its distinctive feature is the fact that helicopters manufactured in Russia will be sold not only in Russia but also through AgustaWestland’s international network. This means including Russian helicopter manufacturers in the international cooperation system in aviation.
Some detractors think that these deals - the deal with Augusta/Westland or the Pratt & Whitney deal for joint development of PW127T/S engine - can be interpreted as not favorable towards Russian made products. How, in your view, can Russian production benefit from such cooperation and experience?
Before starting to work with our foreign partners in the sphere of helicopters and engines, we had conducted a thorough analysis of both the manufactured equipment and the available developments with experts and specialists. As a result, we have put together a model range of helicopter equipment and engines that we are capable to develop in the next 3-5 years, given state financing and private investments. This is exactly the term that is required to win the share of, as I have already mentioned, the fast growing market of helicopter equipment. For this reason it was decided to develop part of the projects that require longer terms in the framework of international cooperation. That will allow reducing the terms of adjusting the projects for mass production, get an access to the newest technologies and implement the programs of production localization on Russian sites. I’m convinced that within globalization we can only operate in cooperation of our manufacturers with Western companies. There is no other way for Russian companies to develop the world market, as I see it.
Cooperation with foreign markets is also crucial for the future development of sales of Russian products, namely sales of helicopters in India and, of course, China....
Why would joint production be a good strategy for such emerging large markets like India and China, which have very little know-how on aircraft building?
Joint-production of the Mi 171 in China is currently being negotiated. Could you please comment about the advantages of such a deal for both parties?
Mi-171 is a modern modification of the famous Mi-8 helicopter. Mi-8 and Mi-17 are some of the most popular models on the world market. Their mass production started in 1965. Over 12,000 have been constructed. No less than 7,000 have been exported. They are operated in over 100 countries. They are in the armed forces of over 80 countries (to compare: Kalashnikov assault rifle is present in 58 countries only!).
We continue to create newer modifications of Mi-8/17. The demand is relentless. Mass production plants are loaded with orders for a few years ahead. Under such conditions one of the ways to solve the problem is to assemble an agreed number of helicopters on production sites in other countries.
China has long been considered one of the key importers of Mi-8/17. It buys Mi-8/17 helicopters since the 70s. Currently about 150 Mi-8 are operated in China. This machine is well-known there and there is the necessary expertise for its operation and repair. Given our long cooperation, we have all the chances of getting a good position in the Chinese market.
China sticks to the policy of “technology in exchange for market” and is interested in different offset programs, production localization. That is why we are looking for acceptable forms of cooperation, comfortable both for us and for our Chinese partners. According to our market research, Chinese market might fully “swallow” another several hundreds of Mi-8/17 helicopters.
Organization of Mi-171 assembly in China will allow, on the one hand, meeting the needs of our great neighbor in Russian aviation equipment. On the other hand, it will give a convincing argument for the competitors, world manufacturers of helicopter equipment, that have long and consistently been creating assembling and other forms of joint ventures on the territory of People’s Republic of China.
What do you have in mind for the integration of maintenance centers - traditionally the weakest point of Russian aviation?
Russian aviation constructors have indeed long been ignoring the servicing of supplied equipment. Having created an integrated group in helicopter construction, we have dramatically changed the business concept of the Group’s development from specifically the product itself, the helicopters, to sales of its entire operation cycle, “production-service-repair-utilization”, and started to move in this direction. This is the only way to regard equal competition with the leading Western manufacturers of helicopter equipment.
The issue is that the modern world economy is infrastructure-based. New rules of global trade and financial interaction appeared in the 20th century. For instance, it is actually impossible to sell one’s products to a region where a developed servicing and repair network is not available. In terms of infrastructure, availability and continuity of goods supplies are more important than their costs and amounts.
In this regard, the issue of servicing and spare part supply gets especially topical for the Group. Currently we implement a program of creating such centers in our key regions. At the Farnborough exhibition we have signed documents for creation of joint production for setting up a service center in India. Besides, during his state visit of Dmitry Medvedev, the President of Russia, to China in May of 2008, Russian Helicopters and Chinese companies China Taly Aviation Technologies Corporation and China Y Best Group Ltd. Corporation signed a memorandum of understanding for creation of a service center for Russian helicopters in China. The center will specialize in support for operators of Russian equipment and provide spare parts. Thus, we see a huge potential for beneficial cooperation on the Chinese market.
| Company: | UIC Oboronprom- ОПК «Оборонпром» |
| Position: | General Director |
| Country: | Russian Federation |