Out of competition: why industry came the good times

Unearned income

One day in 1990-e years we with the Director and owner of the Nizhny Novgorod plant “Hydromash”, Hero of socialist labor Vladimir Ilyich Luzyanin came to the shop floor “Troika Dialog” on tour, see the new economy. Seeing in the trading room, he immediately said, “What you guys are designing?” And when I learned than actually do traders, turned around and said to me: “to Live on unearned income — this is not serious”. Being a man of the old school, he didn’t understand how added value can be created by speculations on the stock market. In his view, the economy can only be industry.

Luzyanin was right in his own way. In 1998 financial crisis: financial markets collapsed, the GKO pyramid collapsed, the ruble depreciated. The real sector received an impetus for development. “GidroMash”, which for years suffered without the state order, there were our own and the foreign buyers, turnover of the plant began to grow.

The financial system in Russia has always been poorly connected with the real sector — we gave loans to its own customers, paying in advance, the shareholders, not banks, so the crisis of 1998 hit in the first place by financiers, not by Industrialists.

Something similar is happening now. Revenue our group’s machine-tool factories, the MILL had doubled every year. Main drivers — the policy of the Ministry of industry aimed at import substitution, modernization of fixed assets in industry and a weak ruble, of course.

Inefficiency as an advantage

We do processing machines in Russia our plants are located in Ivanovo, Russia, Kolomna, Ryazan, the engineering center in Moscow. On average, 80% of the components we produce ourselves, while 20% buy abroad. In world practice, the proportion is reversed. More recently, it seemed that such “subsistence farming” is ineffective that need to outsource high production operations. In General and for long distances this is true. But there are nuances. When 4 years ago we started to invest in real estate, we quickly realized that casting is good in Germany, treatment in China and Switzerland, etc. But each time we calculated the logistics costs, risks, and management costs (because suppliers, even overseas, you need to be able to control), it was decided to postpone outsourcing until later, but for now to do an internal efficiency of processes, to look for reserves in it.

Russian industry has a huge, though non-obvious, advantage for the start — inefficient business processes. If an investor buys a German, Japanese or American company, it is possible to reduce costs by improving efficiency difficult, we have to fight for a fraction of a percent in cost. Much more and faster you can save, when it organized in your company: concentrating machinery in one workshop, sets up a system of procurement and sales.

Huge potential savings in the management of the pricing. Previously, many Directors just didn’t know what the cost of their machines, and often sell the hardware at a loss, at prices that were ready to pay customers. We are building a system with the help of financiers who worked in retail trade are used to operating in a competitive field, to count every penny. Now we see the real cost of the machines, and this is necessary for making management decisions, which machines to issue and which are not.

Of course, the growth rate of currency in 2-3 times has enabled us to win the competition on price, but to rely only on it would be a mistake. On the machine tools market no one is interested in cheap goods, all interested primarily in the quality and after-sales service. If the goods are still cheaper, fine. Now we have two ways we can try to dump or work with a normal margin, investing it in the development of new products, training new personnel and modernization of its own production. The second way is much more promising.

Before the current crisis, imports of machine tools in General has reached 95%, and machines for specific operations is almost 100%. Modernization of all Russian industry until recently has been based on imports. Now everything has changed. Easy to grow, when nobody pays attention on you. If you have 30% of the market, it is impossible to quickly grow to 3 times. But if you only have 2% of the market, then no world leaders do not perceive you as a competitor, so it is possible to grow up to six-fold, to 12%. And there and up to 24% is “only” 2 times.

The course of modernization

April 19, at the Congress of the Union of machine builders of Russia, where I entered the offices of the Board, President Vladimir Putin, the priority task for the near future called the overcoming of excessive dependence on foreign technologies in the machine tool industry: “you Need to form your own modern machine tools, to continue its formation on the basis of the latest developments: both foreign and domestic”.

Changed the attitude of the government towards industry. Even 5-7 years ago in Russia in fact had no industrial policy. Now the Ministry of industry headed for the consistent formulation of its framework and its implementation, for example, at import substitution, according to which no matter what the name of the company and who the shareholders are foreigners or their own, the main thing — that its design and manufacture was placed in Russia. This is a very important signal for business. The Ministry of industry has established the investment contract entered into force the law on industrial policy. All this makes us confident that our investment (and it is long — 10-15 years) will build globally competitive in certain niches of the company.

Wear in the country reaches 80%. In fairness it should be noted that there is nothing wrong with that. The conventional wisdom that the plants here-here will rise because of decay, is a myth. Actually we have modern machining centers, which replace dozens or hundreds of obsolete machines, allowing you to quickly and painlessly modernize production. A huge shop, which have been, relatively speaking, 200 machines and a total of 800 people worked in three shifts, now you can replace dozens of machines, with a service which can handle 30-40 people. In fact, a modern machine — it’s a small plant.

At the already mentioned Congress of Soyuzmash of Russia Vladimir Putin has cited the statistics as dramatically upgraded in recent years, fixed assets in some sectors of mechanical engineering. So, at the facilities that have been introduced over the past five years, now produces about half of mainline diesel and electric locomotives, passenger cars and about 40% of buses, over one third of refrigerators, freezers, and washing machines. New facilities are being assembled TVs. In the production of gas stoves and water heaters updated about 50% of capacity.

However, other branches of machine building production capacity over the past 15 years has been renewed for not more than 10-15%, so that much remained to be done. For 10 years our company will definitely be provided with jobs due to the internal market.

When there is no money

Sanctions against Russian banks has had almost no impact on our sector. And before the sanctions, the banks gave us loans at the interest in which production would be competitive.

Most of the industry we like off from the credit and financial system of the country. As, for example, to get the credits machine tool enterprises? Liquid collateral is not, by definition, the depth of sales is small, as all orders under 44-FZ and 223-FZ on tenders. We can not with the consumer, such as oak, plants of Roscosmos, Rostec, to conclude a contract for many years, although understand that definitely going to win competitions and to receive orders, they have a great program of technical re-equipment. To formally comply with the conditions imposed by banks, it is impossible.

In some countries, our competitors engineers get credits even under negative rates. Moreover, in Switzerland, for example, plants receive financial support at the Federal, cantonal and municipal levels. Because all levels of government there in attracting productions to their territory. To open a supermarket full of “global” commodities can be very fast, but it will give the region only a few jobs and will displace local retail business which usually sells local goods. Another thing — the construction of the plant. At least 30-50 years it will provide jobs, pay taxes, and its employees will spend wages within the region.

We have this system of subsidies is not, and the financial system offers local producers the money at 18-30% per annum. Almost everything we produced due to the growth of management efficiency that benefit from rising currencies, draining monetary system.

To blame under the circumstances bankers is meaningless. The fullness of the Russian economy with money in times less, than in any developed country. The ratio of money supply M2 to GDP in Russia is 45%, while in China is nearly 200%. We are afraid of the issue because we are all the time afraid of inflation resulting from money and are so expensive. But not increasing credit load, it is impossible to develop production. This is true for individual companies, the same is true for industry as a whole.

The point of view of the authors, whose article published in the “Opinions” section, may not coincide with editorial opinion.