With the New Year holidays over, President Dmitry Medvedev went to the Salyut plant to see how aero-engines are made there. Vladimir Putin had previously formulated the principles of reform in the engine-building branch and the President wanted to know how it went, but Salyut Director Yury Yeliseyev took advantage of the visit to pursue his narrow interests and lobby the President to allow Salyut not to join in the effort. This practice of using VIP visits in corporate interests is not new and does not always achieve its aims. Worse still, such intrigues sometimes jeopardise long-term reform plans for whole industries.
Reform principles revised?
The ball was set rolling in August 2007, when then-President Vladimir Putin toured St Petersburg's Klimov Company. The decisions made at that time were rather conservative: it was first planned to set up four integrated plants, although it was clear that the scheme was far from optimal. Global experience suggests that an engine-building branch with its tremendous scientific and investment potential needs highly concentrated resources. Even in the United States, with its mammoth economy, there are only two engine companies incorporated, moreover, in large and diversified groups. The United Kingdom and France, whose GDPs are smaller, have one company each. Understandably, the Russian economy, which is smaller still, can afford only one holding capable of competing on the global market.
It looks likely that the decisions made at the time were hasty and not too thorough. The Industry and Trade Ministry, however, must be given its due for deciding to concentrate on a single United Engine-Building Corporation. Such a strategy, as the experience of the United Aircraft Building Corporation shows, is a challenging one, but the choice was right. Most surprising of all, the Ministry and the state-chosen promotor - Oboronprom - suddenly made rapid progress. For starters, Oboronprom consolidated and rehabilitated the Samara cluster of enterprises, and at the end of last year, persuaded private companies - Saturn and the UMPO (Ufa Engine Industrial Association) - to accept state control, paving the way for a larger group that combined them with the Perm cluster of plants. Mr Putin took the most direct part in the merger. State control had removed the main obstacle to a United Engine-Building Corporation, making the whole branch more effective.
All of a sudden, when President Dmitry Medvedev was visiting Salyut, Director Yeliseyev said the project had to be postponed - for a year, or two, or even longer. It was a direct attack on a correct and successful programme of restructuring. Understandably, the President has no time to look deeply into the matter, and has to trust directors. It appears the Salyut Director set the President up. No one can understand why a plant weighed down with problems, including financial ones, should stay away from the process of integration. Alas, this was nothing but an attempt to breathe new life into the old practice of plan revisions in the defence sector. The first clearly formulated concept of such restructuring was prepared by Deputy Prime Minister Yakov Urinson, a member of the Viktor Chernomyrdin Government. The concept was revised by Deputy Prime Minister Ilya Klebanov, who in turn advanced a plan for merging two plane and helicopter building corporations (SVSK-1 and SVSK-2). But it was Boris Alyoshin, succeeding Mr Klebanov, who proposed setting up the United Aircraft Building Company.
This step, taken in 2003-2004, marked a real, if slow, departure. Apart from the UABC, helicopter building has made good headway, and plans have been drawn up to create a United Shipbuilding Corporation. Recent months have seen rapid strides toward consolidation and now, unexpectedly, the old practice of lobbying, not calculating, industrial restructuring is showing signs of rebirth. Salyut has not only attempted to revise a sound policy, but is undercutting its stability, predictability, and continuity.
A debate is good when plans are aired, but impermissible during their implementation. It is strange to see such opposition on the part of a state company director, especially at a time when private companies are already involved in the project.
Salyut has problems
Meanwhile, despite high-ranking visits, Salyut is not performing well. Its losses in the first nine months of the year totalled 800 million roubles, earnings dropped to 6.5 billion roubles from the previous 12 billion, and its backlog of debts is believed to be as high as 20 billion roubles.
Natural factors and management mistakes have combined to produce these results. In the past year or two, practically all engine-building plants have suffered a setback.
The reasons are growing costs, especially in metals, workforce, and electric power. The second adverse factor has been the strengthening of the rouble, which made many export contracts less attractive or not acceptable at all. Being located in Moscow is also a disadvantage. A large industrial plant consuming lots of power and employing a mass of workers is nonsense. Its products, namely AL-31F engines, cost more than those made at the Ufa plant and are bought less readily, not because Rosoboronexport engages in intrigues. Mr Yeliseyev's complaints against Rosoboronexport look strange: over the past five years, Rosoboronexport company has sold 350 to 400 engines worth $1.2 to 1.3 billion according to list prices. Furthermore, if some contracts failed to be signed, it was not because the state exporter was to blame, but because Salyut pushed its prices up.
Salyut's business hinges almost entirely on a mono-product - the AL-31F engine. The market for it seems to be sated, however, and demand is falling, unlike that for Ufa's AL-31FP. Prospects for another of Salyut's products - the AL-31FN (which differs from the AL-31 by having its accessory box located underneath) look more promising, but engine sales are thwarted by political and commercial considerations: Russia cannot allow the re-export of AL-31FNs mounted on Chinese F-10 fighter jets to all countries. Two other Salyut products - the Ukrainian-Russian D-436 and AI-222 - offer no optimism, either. D-436s for AN-148 civilian regional planes to be made at Ukraine's Motor-Sich plant are less expensive than Salyut's and will therefore enjoy higher demand from for-profit airlines. In the case of the AI-222, the lion's share of the market - Chinese L-15 training aircraft - is already cornered by Zaporozhye manufacturers. Salyut has only a small contract signed with Russia's Air Force for 12 Yak-130 training aircraft.
These difficulties are compounded by the management's uncertain technological and corporate policy. The best answer here would be Salyut's integration with the other AL-31F producing companies concerned - Saturn and the UMPO. Such cooperation could optimise technological policy and production through vertical integration with Saturn and horizontal integration with the UMPO, followed by concentration of manufacturing at the Ufa plant. In reality, however, the opposite has happened - all these years Salyut has been in conflict with Saturn, a process that occasionally took grotesque forms.
For example, Salyut tried to set up a design bureau of its own, spent tremendous resources on it, and achieved nothing. It planned to upgrade the AL-31F and develop an engine for a fifth-generation fighter, but instead of integrating with other engine manufacturers, Salyut attempted to create a corporate structure with Omsk-based Baranov MPO (Engine-Building Production Organisation). A more logical step would have been to merge the MPO with companies producing helicopter engines and RD-33 engines for MiG-29 fighters. The plant is also in a difficult financial situation. Ideally, a corporate structure is expected to increase the economic efficiency of its component parts, but in this case, the opposite has occurred: the merger with the Omsk facility only worsened Salyut's financial standing.
Also doubtful is a policy of large investments in new and modern equipment. The existing order book does not provide for the full use of this costly and highly productive equipment. Real economic benefits look questionable.
To sum up: Salyut's problems mirror the difficulties experienced by the whole engine-building branch. They should be addressed not separately, but as part of a nation-wide strategy, that is, within a United Engine-Building Company.
Ruslan Pukhov
