Published: 5/29/2001

The restructuring of the Russian aerospace industry, or the latest version of it, is always interesting to review, if not quite so convincing to read. In the case of the recent proposals, the overview is fine, but the detail slim - and it is precisely in the detail that the viability of the future industry lies. In the medium term, the government wants to create two entities to control the aerospace industry or, at least, its aircraft design and manufacturing elements. It imagines that these two integrated producers will sit in more or less in competition with each other, given a broadly similar range of products. However, Deputy Prime Minister Klebanov has already hinted that the two entities could be reduced to one, if either proved to be uncompetitive. In principle, the sentiment appears correct: rid the industry of its fragmentation, bring the producers and the designers together and create modern integrated producers. But it is going over the same old ground. The various plans of the last few years - now well into double digits -have always had the integrated model at the heart of the plans. The problem has not been in the nominal reshuffling of the pieces, but in the execution. It may be argued that Putin is not Yeltsin and, therefore, not dependent on the support of the regional power blocks to the same extent. It is also true that Putin has done much to reassert central control, but there is a substantial difference between simply toeing the line, as required by law and actually giving up control over large sections of the regional economy, as has been the case for the fighter producers in Siberia. The evidence of tension here is demonstrated in the length of time it has taken the proposals to be released and the number of delays. This reflects the political challenge of bringing a disparate group of interests to come together in reasonable equanimity. In this case, the challenge has fallen to Klebanov and, according to reports, he has had to employ considerable persuasion in order to bring the parties into line. The result of his efforts is a political compromise. There may be fewer entities than in previous plans, but it remains another re-shuffling of the pieces and the key question is still what will actually materialise. The government has made it public that it regarded the industry's original timescale of restructuring of 2010 to be overly long and has pushed for a deadline of 2004, although its remains unclear exactly what will be achieved by then. It has also said that the industry, despite its two-entity structure with substantial non-government holdings, would be overlaid with what government ministers have described as a “rigid centralized management of the defence industries”. Given the present state of the sector, this effectively gives it carte blanche and suggests that a serious warning shot has been fired. But will it work? Based on past record, this seems doubtful. The changes proposed offer little in the way of meaningful consolidation. Some plants might go, but the impact on total capacity is limited. The big issue of merging MiG into Sukhoi has yet again been avoided, with the two companies going into separate aerospace entities, although the recent fifth generation fighter contracts make it clear that Sukhoi is in the driving seat, somehow assisted by MiG and the ever-durable Yakovlev bureau. The government's policy may be to avoid the painful political decisions of actually closing these and other businesses and just simply let them die a slow and lingering death, as Sukhoi and the other core businesses will control the contracts. In the civilian sector, four major aircraft facilities will be maintained at VASO, Aviastar, Aviakor and KAPO. The fact that the latter three will be production units for one integrated company- Tupolev - suggests that the latter may emerge victorious, but the proposed plan again defies the logic of focussing of resources on one facility, such as Aviastar, in a manner similar to that pursued outside of Russia, in Europe and the USA. Recent discussions have indicated that the plants may be considering a more integrated approach to production, although, at the same time, Aviastar has been reported to be lobbying for the An-70 production, away from Aviakor. Klebanov has suggested that industry consolidation will be in a series of steps, from 20 entities to five, to two and, potentially, to one, if one of the remaining two fails to be competitive. The Deputy Prime Minister's stance begs the question as to why not go for it now and so save the sector from the bleeding of resources required, in order to sustain the illusion of a multiplayer industry. The answer is largely political but, in the end, that is an inadequate excuse when even the largest of the industry's players find themselves outflanked, particularly in the global combat aircraft market, by insufficient focus on product development, owing to the hungry mouths of the terminally ill.

Article ID: 2565