Mikhail Valerievich, would you please describe the situation at Ural Turbine Works as a key asset of ROTEC? Which modernization programs have already been implemented and which of them are planned?
The year of 2013 has been fairly good for the business. Ural Turbine Works received enough orders. In the Soviet times, its maximum output capacity was 1.6MW per year. This year it will generate about 1.2MW. However, it can potentially produce 1.6MW. The capacity of the plant is restricted by the market conditions and major modernization being performed without interrupting the production cycle.
Implementation of the modernization program is an ongoing process because our products have long cycles. Furthermore, we have to utilize state-of-the-art technologies. Otherwise, we will lag behind.
The amount of the current investment program is about $30 mln. We have organized a new blade production operation. Now we are upgrading a balancing stand for rotors at high speeds. It is impossible to produce high-quality turbines or any rotary machines without such a stand. We have completely upgraded the production chain of the heavy components (meaning the production of the turbine cases and rotors) having installed new turning mills, lathes and boring units. In other words, today we have the equipment to produce any turbine, in terms of mechanics, within the size range we typically offer, according to the international standards. The next stage of modernization will depend on the commodity group, which we will be producing in future.
Which impact does the lingering power reform have on the business activity of the company and overall situation in the industry?
If the reform is lingering, it means it has never occurred. It adds uncertainty to the market. The power generating companies find themselves stuck between the regulated rates and the market lacking proper control mechanism for the raw materials. In the power generating sector, the investment resources have been almost depleted by the power supply agreements performed by the companies within 3-4 year time limit. This situation obviously does not facilitate long-term planning.
In your opinion, what does the government have to do in order to support the competitive ability of the power and mechanical engineering?
The government can and must help using such simple and easy things as laws and market regulations. All it has to do it to finalize the reform this or that way: either to create the market or not. It is impossible to live in the never-ending times of change. The generating companies shall be provided with opportunities for long-, medium- and short-term planning. Long-term planning is possible only if you know for sure that the existing rules regulating the market won’t change.
Power generation machine building has a long cycle. Today we sell the turbines that will be manufactured in 2015. In order to ensure the efficiency of this process, the customer shall know for sure what it will be doing in 2015-2016 during the commissioning of these turbines. We live in the “widened” timeframe: what some people see as “beyond the horizon”, we consider “tomorrow”. Currently, we are discussing the production program for 2015. The customer sees our production program for 2015 as the investment program for 2016. Do you understand? Today we don"t discuss the current year because all it means for us is the implementation of the plan. We almost never talk about 2014 because we have a clear understanding of what we will be doing then. We are more interested in 2015-2016. Therefore, lingering reform makes things complicated for us.
Do you feel the competitive pressure of the import suppliers? Do you export your products?
We are not talking about pressure. There is an environment, which has been competitive for quite some time: nowadays, all the leading international companies are already represented at the Russian market. All of them have various degrees of localization and joint ventures. Our market has been internationalized long time ago.
As to the exports, currently we are restoring the position of the plant, the one it used to have prior to perestroika : we are building a power generating unit in Mongolia, implementing a large-scale program in partnership with Kazakhstan, cooperating with Ukraine. That is to say, we are restoring the position at the traditional markets.
We are also establishing business relationships with non-CIS countries. So far, the inhibiting factor in this sector has been the lacking financing arrangements in export operations. Anywhere in the world, heavy power generation machine building is the industry with integrated financing arrangements. In the list of customers of the German export credit agency “Hermes”, EADS is on the first place, Siemens is on the second. It means that the manufacturer is approaching the customer with the tied purchase credits offering appealing conditions. We haven’t had such arrangements up until recently. They are emerging now. We have just established partnership with a newly organized Russian export credit agency. I hope it will change the situation. However, they are not magicians: they can insure the export contracts, have influence on the risk margin of the interest rates of the financing banks, which has no impact on the discount rate, i.e., we are still losing out to the European and Asian competitors in terms of the loan rates of the tied credits. It complicates the export operations in the non-CIS countries. In other words, it won’t work without the financial arrangements.
Has the modernization program facilitated the development of the new production lines? Have you experienced a need in new types of metal products or alloys?
Modernization program involves using new types of metal products. In terms of mill products and general metal goods, the situation at the Russian market is fairly good. At the same time, we experience the lack of mold castings and complex alloys. Metallurgical plants in Russia have probably learned to meet the market demand for certain bulk products. However, when it comes to customized products, which are commonly used in complex machine building, not all the products, unfortunately, meet the requirements. Roughly speaking, you can buy a casting with 5cm allowance, cut off this allowance using a turning machine thus opening up the hollows and then fixing them, which will result in cost supplement. Otherwise, you can order a required casting abroad according to the drawings, get this casting with 5cm allowance and never think about its metallurgical treatment. The cost of both castings will be about the same. This is another factor contributing to the competitive ability of the metallurgists.
Another problem is complex steel grades. UTW is not the only facility we deal with: speaking about localization of products for the oil industry in Russia, for instance, pumps, according to the standards of American Petroleum Institute, they shall be made of duplex and superduplex steel grades, which are not produced in Russia. Localization is another niche for the metallurgical industry.
Which metallurgical companies are your key suppliers of the metal products?
A turbine consists of roughly 12 thousand metal components. Therefore, we have a lot of suppliers. When it comes to metal products, the purchasing policy is based on direct relationships with the metallurgical companies or their trading houses because only in this case we can get products with guaranteed quality and delivery terms, which is extremely important in the machine building industry. We cooperate with UMMC-NFMP, Magnitogorsk Iron & Steel Works, Achinsk Metallurgical Plant, Mechel Service. As to the tubular goods, we buy them from the distributors of TMK and Chelyabinsk Pipe-Rolling Plant. We do experience occasional delays in delivery. However, we always solve this problem in the course of negotiations with our partners by reaching a reasonable compromise.
Have your suppliers revised the prices in view of the current decline in prices for the metal products?
Yes, with our help. Procurements are always based on competition. We have been working with the metallurgical companies for a long time being their major customers. As of today, we purchase the metal products at a discount of 5-15%, as compared with 2012, depending on the type of product. It is related both to the worldwide trends and to our own efforts in implementation of the cost saving program. Price cutting also affected copper, alloy and stainless steel pipes, iron rolled sheet and some other types of metal products.
Are you involved in any joint research and development of the new types of metal products to be utilized in the innovative projects of UTW?
In this sense, power generation machine building is a rather conservative industry because our “experiments” with output of such complex products may come at a high cost to our customers. We buy little or no metal products manufactured to international standards. However, we explore on a regular basis the new types of products manufactured by the domestic iron and steel works and introduce them to our designers and engineers for review. Sometimes, we contact the manufacturers and ask them to initiate production of new rolled steel sections used, for example, for making the blades and vanes. Regular feasibility study of purchasing of this or that type of products and exploration of the new types of metal products facilitate the design and engineering improvements. Eventually, it enhances the marketability of our products.
Does ROTEC have its own design departments? Are you fully staffed with engineers and designers?
Yes, UTW has its own design department with about 140 employees. There are about 50 staff members in the engineering department of ROTEC. We also have an agreement with our partners – engineering companies – including those working for EADS. They assist us in those areas where we lack competencies. Furthermore, Swiss companies Sulzer and Oerlikon have enough highly qualified specialists. Having such competencies, we are quite confident in what we do. In 2012, we obtained about 15 patents in Russia. As to the Swiss group, they have thousands of patents and this number is growing by the hundreds.
Which advanced technologies developed by Sulzer and Oerlikon have already been implemented by ROTEC in Russia? Which high-tech developments of Sulzer and Oerlikon have already been integrated in the modernization project in oil production and refining, (petroleum) chemistry, power generation machine building and other key branches of Russian industry?
The export of technologies is not the reason why the assets are acquired. The assets are acquired to be developed and to yield the profit. In case with any transfer of technologies, the assumption is that the market is ready to accommodate them. We do it all the time, in a variety of ways, depending on the needs that we observe or create at our market.
Over the last three years we set up a chemical equipment production facility in Serpukhov, a coating center in Elektrostal, two repair and service facilities for industrial pumps. We have localized engineering of the turbines (maintenance of the gas turbines), to a certain degree. We also have a plan for localization of the gas turbine hot-gas-path production. We have signed an agreement with VAZ for production of tools and equipment at their facilities. We are growing at this market, localizing the technologies at the same time.
A number of companies within ROTEC engage in developing alternative sources of energy. What type of renewable power sources can become the most popular in Russia in the mid-term perspective?
There is a territorial insolation map showing which regions in Russia can benefit from the alternative sources of energy. Thus, solar energy can be used in Krasnodar Territory, Baikal and certain parts of Eastern Siberia with high level of solar exposure. We shall be developing the hydraulic power industry due to quite obvious geographical reasons. I believe so called distributed power generation will become very common due to the lingering reform, i.e. small-scale electric power stations will be generating electric power for industrial facilities and remote areas. Biological fuel shall also be taken into consideration. I think waste heat and turbines of smaller capacity will be used far and wide within the next 10 years or so.
Which tasks do you as the Renova Group Director for High-Tech Assets Development, face?
The group strategy involves relocating the assets from the raw materials into the high-tech sector. We strive to improve the overall performance of our business in metallurgy, machine building and telecommunications through application of high technologies. We have organized an engineering committee attempting to achieve the synergistic effect. First of all, almost all the companies in the Group are currently developing programs for modernization and enhancement of the production and energy efficiency. Secondly, if necessary, we are ready to acquire the assets with competencies that can benefit the Group. In the third place, we have organized three venture funds targeting new businesses, new ideas and startups arising both within the Group and outside. For example, the project for the supercapacitors and slow-speed wires of a new generation has received venture financing. One more example is a research group, at Skolkovo, developing the biodegradable implants for the cardiostand facility under construction. Not so long ago the employees of the Kirov CHP put forward a project for the in-house heat supply stations.
How closely do you cooperate with Skolkovo? What do you think of the criticism?
Only those who do nothing don’t get criticized. Academician Kuleshov commented that Skolkovo could be considered a successful project because it prevented the immigration of several thousands of the most brilliant young professionals. The critics try to compare Skoltech with the system of public education improvidently. However, who will dare to blame our basic schooling for providing education of poor quality? I go to the international scientific and technology centers quite often and can definitely say that Russian is the second most common language there, after English. What we do lack is the skills to apply our knowledge at the market. In the Soviet Union the government provided the graduates with the job placements. In post-Soviet times, a graduate from the high-profile educational institution has two options: either to sell boots at the Cherkizovskiy market or to continue education in Massachusetts. Skolkovo fulfilled a dream of any MIT student: to study and turn knowledge into money without having to immigrate. This project is unique. It does have some faults and errors. However, it works!
Do you think the 21 st century will be associated with the technological revolution in machine building?
The revolution may occur primarily in material sciences and developing new engine types. The operational concept of the turbine has been the same, ever since it was invented. Nothing has changed since an aircraft flew at supersonic speed: it still turns kerosene into sound at a different level of efficiency. Just about the same can be said about the combustion engines: nowadays they are more efficient, smaller and quieter but still working on the same principle. What should really make a difference is an innovative engine for the aircraft and rockets. By the way, Skolkovo is working on a detonation engine that may be “just it”. If successful, this engine will have Russian origin.
You do a lot of brainwork. What do you do when you are off?
I have been piloting planes since 1979, when I became a student at a glider-borne school. What do I like about the air? Words are not enough to describe certain things. You should rather check them out. I like my job. However, business can be very stressful and diversified. There are a few things, which can help me “forget” about it, for example, flying. It is a refreshing experience, when you feel free during the flight. The business does not “exist” there. You can’t see the dirt from there. There are no stupid people up in the sky. The flying community is unique. There is no place for fools and scoundrels over there.
I also enjoy riding motorcycles. Personally for me, the speed is not the goal. Speed is just a tool.