Two aerospace holdings to emerge by 2004 (1,233 words)

Published: 5/15/2001

On 11th May, the long-awaited decision on the restructuring of the Russian aerospace industry seems finally to have been made at a government meeting. The decision rejects the first of the restructuring options: namely, the creation of integrated entities specialising in particular areas, such as engines, avionics, military aircraft etc. into six or seven major holdings by 2010. The approved plan, developed by Yury Koptev, of the Russian aerospace agency, Rosaviakosmos (RAKA), involves the consolidation of the country's industry into three holding companies, developing and manufacturing both military, civilian aircraft and helicopters, with the preservation of the individual manufacturer's groupings within the holdings. A third holding company will bring together the country's 33 engine production plants and designers. Ilya Klebanov, Deputy Prime Minister, stated that he did not rule out the possibility of reducing the two aerospace holdings into one, if competitive pressures so dictated. The plan calls for two broad aerospace holdings, predictably called the Aircraft-Helicopter Building Complexes (SVSK). The first will bring together ten entities under the title SVSK-1, while SVSK-2 will incorporate 15. These are as follows: SVSK-1 - MiG and associated companies (RSK MiG and production plant Sokol) - Tupolev and associated companies (ANTK Tupolev, production plant Aviastar-JV, production plant KAPO, production plant Aviakor) - Kamov and associated companies (OAO Kamov, production plant Progress, production plant KumAPP) SVSK-2 - Sukhoi and associated companies (OKB Sukhoi, production plant KnAPPO, production plant IAPO, production plant NAPO) - Ilyushin and associated companies (AK Ilyushin, production plant VASO) - Yakovlev and associated companies (OKB Yakovlev and production plant SAZ) - Mil and associated companies (MVZ and production plant KVZ, production plant Ulan Ude, production plant Rosvertol) The government made it clear that, in contrast to the earlier Koptev plan of amalgamating the various elements by 2010, it was seeking to achieve the creation of the entities by 2004, so suggesting a markedly less tolerant attitude to the past procrastinations of senior management within the industry, demonstrated by the way in which the creation of the original joint stock companies was executed. The stated goal of the restructuring is to achieve aircraft and helicopter sales to the value of $34 billion in Russia and abroad between 2002 and 2015: a considerable improvement on the 21 military aircraft sold abroad in 1999.The estimated financing for the improvement is predicted to be $7.7 billion over the period, with 14.1% coming from the federal budget over two periods, between 2002-2010 and 2011-2015. The balance will be made up from other sources, including the diversion of funds that may have been spent on foreign aircraft to Russian .The state hopes to recoup $700m of tax revenues a year from the recovering industry. According to Klebanov, the state intends have controlling interests in all the companies in the holdings. It already has such control of 60% of the entities, but some producers, notably Rosvertol and IAPO, have only minority government holdings of 31% and 14.7% respectively. It may be assumed that those not subject to government controlling ownership will be encouraged into joining the new entities through the promise of orders. According to the Ministry of Industry, Science and Technologies, state orders are unlikely to exceed $0.5 billion each for military and civilian aircraft. However, as all the entities owe large debts to the state, the alternative method may be to apply pressure through debt restructuring: something alluded to by Klebanov at a press conference on 11th May. As ever, the question remains as to when the changes will actually happen. A number of industry members, interviewed in the domestic press, have made it clear that they consider this to be just another shuffling of paper with little in the way of concrete proposals, although most agree that something has to be done. A number believe that the industry should resolve its own structural problems and that the state - currently accounting for only 14% of the industry's sales - has tried to force a merger in the past, without success. Others, however, comment that without the state forcing some kind of agenda for change, the deep divisions between the major producers make meaningful restructuring an unlikely scenario. In fairness to the plan's critics, the formation of the two entities does little, on the face of it, either to streamline or to rationalise the industry. Both entities look to be competitive groupings, producing largely the same range of products for much the same domestic and international markets, although Klebanov said that he sees the two entities as emerging as integrated competitors to the US and European giants; although, even by the most generous measure, these amount to four. Specifically, in the case of helicopter manufacture, struggling and bankrupt MZV may have won a stay of execution with an associated plant, but to what end is unclear. The intense competition between the Kamov and Mil camps has already created a great deal of unnecessary pressure on Russian producers competing in overseas markets, whether they be in Malaysia, in contracts for Mi-17s, or attack helicopters in South Korea, or for funding for the next generation of helicopters. MZV's involvement with the international Mi-38 consortium may help to preserve its place, but the logic of maintaining two production groupings is questionable, given the amount of capacity relative to production. The retention of two fighter organisations also runs counter to the thinking, expounded over the last couple of years, that MiG would ultimately be absorbed into the Sukhoi structure and so create one producer to fulfil the needs of the domestic and the all -important export markets. Klebanov said that the development of the fifth generation fighter would continue to develop competitive designs, but has offered little in the way of information on who would develop and build it by 2010. He also commented that a future merger of the two has not been entirely ruled out, despite Sukhoi and MiG objections. According to Klebanov, a draft of a restructuring plan for the entire military industrial complex will be discussed next month. The decision effectively to divide the major producers in each segment between the two entities suggests that the Soviet strategy of two producers in each major product area remains, despite the lack of both present and future orders. The structure of some of the groupings suggess the potential for rationalisation or more effective manufacturing integration, as in the case of Yakolev and Saratov, that are struggling after a series of setbacks. Within the Tuplolev grouping, the Samara governor has already suggested, presumably with the support of the plant, that Aviakor should become a supplier of wings to the two other producers. Sukhoi also made it clear in subsequent press interviews, that it expected plants to perform if they are to be supported within the its grouping. Klebanov's hints that the two could become one, if competitive forces dictated it, suggests that the government would not be opposed to such a scenario. It also implies that this particular plan is simply a step on the much longer route to rationalisation of what is a deeply political industry, at a speed acceptable to both industry and politicians. Dramatic change is, however, absolutely essential, while it is plainly recognised that consensus takes time and, also, that the authorities must make sure that they retain a manufacturing base to reorganise.

Article ID: 2527