Conservative and Non-Competitive
The problems of the national machine building sector stretch back to the 1990s, when after the collapse of the USSR companies with large investment budgets took note of western technologies and began to buy foreign machinery. As a result, the competition in the market was unwelcome to Russian engineering companies. And there are many examples. For example, it happened to refrigerator car production, when the Bryansk machine building plant was restructured for a different function and started to produce rolling stock for perishables transportation. This sector was practically replaced by imported products. Some plants turned to be outside the RF territory (Riga Plant for Electric Multiple-Unit Trains Manufacture), enterprises in the German Democratic Republic got beyond the control of the USSR. Later it became more simple to buy machinery abroad, and all innovations were delivered from there.

There is no lack of new technologies. Piggyback transportation is actively discussed this year, and special rolling stock is to be designed for it. A double-deck passenger railcar – the first on RZD’s network – is scheduled for construction. Preparatory work is underway to carry out the first high-speed rail line project. Meanwhile, there are no Russian companies in the list of bidders, i.e. all innovations are developed with the help of foreign specialists. Why doesn’t the strongest sector of the economy have a strong position in the advanced technologies sector? Experts say that the country is too conservative. The first wave of globalisation, – the collapse of the USSR and Russia’s entry to the global market, – had drastic consequences for the industry. The second wave is now expected – the country has joined the WTO and the consequences of this step are still to be felt. Its supporters usually mention the experience of China as a positive example. It joined the WTO in 2001. It had a colossal effect on the economy of the Asian country: exports increased sixfold, the investment flow grew significantly. According to Philippe Pegorier, President of Alstom Russia, it happened because Chinese products have a low final cost. Speaking at the forum “Engineering Technologies - 2012”, he also noted that the major problems of this industry in Russia were the poor quality of products and high credit rates. “According to the level of technologies, the industry has fallen far behind the leaders, as for the wagon building sector, the gap is not that serious, there are up-to-date plants, for example, the Tikhvin Railcar Building Plant,” notes Dmitry Bovykin, Executive Director of the United Wagon Company LLC. “Despite the increase in the technological level, there is no mass replacement of old machinery by modern machinery – the lion’s share of the fleet is rolling stock produced using fifty-year-old technology. It is because of the common conservatism of the sector, and the long life time of a railcar. Even very old, it is able to generate profit, that’s why owners prefer to prolong the length of the railcar’s operational service.” Railway machinery manufacture is being updated, but slowly. One of the latest and the only serious innovation is the opening of the Tikhvin Railcars Building Plant. It is a success from the standpoint of advanced competitive production (it manufactures the modern Barber bogies developed in accordance with American standards) and its own casting, which allows greater competitiveness, and opportunities to attract the necessary number of specialists – the plant built houses for its employees.

The last aspect – the search for professionals – is in most cases the most important for the advancement of the Russian machine building industry. According to Flavio Kanetti, Senior Director for Business Development of Bombardier Transportation, no serious investment has been made in the transport sector in Russia in the last 25 years; few projects requiring engineers were carried out, and as a result, the profession became unappealing.

Specialist training remains at a low level in the country, which is why few patents come to the world market from Russia today. Although, according to forecasts of Valentin Gapanovich, Senior Vice President of RZD, their number will increase. The number of patents is supposed to be 1,160 this year, and it will grow to 1,610 by 2015. Four years ago the number of received patents was 206.

Machine Builders Not to Blame
Russia has every chance of success in the global engineering market. Mr Gapanovich notes that when talking about the current condition of the industry, one must understand about which sector he is talking.

The situation in cargo wagon building sector is good; the gap between Russian manufacturers and world-leading producers is gradually decreasing. In particular, work is constantly underway to develop next-generation railcars, and their pilot samples are ready. “Wagons with classic axle load – 23.5 tons and 25 tons and 27 tons – are offered to the market, and manufacturers are even ready to produce railcars with axle load of 30 tons,” says Senior Vice President of RZD. “We are glad that our wagon builders offer such solutions and are looking towards the future.” The progress in locomotive building is obvious as well – there is an order for new rolling stock, and new designs have appeared already – mainline electric locomotives EP20, 2ES5, 2ES6, 2ES10, GT-1 gas turbine locomotive amongst others. All these models can compete with foreign products and even surpass them. For that, time is needed to test the locomotives and prepare them for use. Again, everything depends on the contract purchase size. The main customer is Russian Railways, whose investment programme is limited. Therefore, the demand in this sector is indirectly regulated by the state.

An obvious weak link in the national machine building industry is its passenger sector. It is not the fault of engineering companies who are ready to offer new technologies. The problem stems from the lack of orders, and the imperfect system of passenger transportation regulation, which does not provide adequate funding of transporter investment programmes. “Tver Railcar Building Plant is ready to produce railcars with any level of amenities – even with walk-in showers and satellite TV in every compartment,” says Mr Gapanovich. “The current order volume, however, provides enough work for just 50% of full output capacity, so the plant faces difficulty in reaching its full potential. Although, even in such conditions it managed to bring to the market a double-deck railcars, and a double-deck electric train will appear soon.”

More Attention to Leasing
One of the serious achievements of the railway sector reform is liberalisation of the market of rolling stock supply for loading. “The bulk of investment is made by private companies, and this scheme shouldn’t be given up. The task of the state is to create conditions for private companies to invest not in the number of railcars (there is a surplus of them on the network), but in qualitative renewal of their rolling stock,” says Mr Bovykin. In his opinion, the private sector fears not long-term investments, but uncertainty. An advantage of the wagon market is that the demand for rolling stock is practically guaranteed in the long-term.

The quality, mentioned by the expert, will only be achieved if engineering sources (the lack of which currently seriously impedes the sector’s development) are renewed. For that, according to experts, attention should be paid to the mechanism of leasing – it can be used either separately or in combination with a credit. The equipment is badly worn (often up to 60-80%); and banks are afraid of investing in the sector, because a lessor needs to understand how much time it will take to sell this equipment in case of the lessee’s default, what the discount will be, and whether it will be possible to sell it at all. “Factors making the machine building sector less attractive for a lessor include a non-transparent second-hand market for equipment and a serious decrease in its cost after it is dismantled. Financing of industrial complexes – equipment and the building where the machinery is used – may be used to decrease the lessor’s risks. In this case, the lessor does not need to dismantle the equipment, consequently, its cost will not reduce seriously, and a potential buyer of the facility will receive an enterprise ready to work, in fact,” says Mr Zotov.

A possible efficient financial instrument for the sector is the leaseback, which allows an enterprise to get funds to expand its production. The state could support the sector by subsidising a part of the interest rate or the pre-payment. Similar subsidising programmes were applied to aviation, national road transport, agricultural machinery, and within the network of small and medium business support in the regions.

Still Cooperation Only
The only way for the sector to develop today is in cooperation with foreign manufacturers. Cooperation is necessary so that Russian engineering companies not to spend needless effort on developing machinery that has already been used abroad for a long time. Technologies are always borrowed in the railway sector, but three conditions must be fulfilled: adaptation to Russian norms and standards, civilised transfer, and correct localisation. “If these conditions are fulfilled, the technology may be put into operation quickly and developed independently. It is the way chosen by the specialists of the Tikhvin Machine Building Plant when developing innovative running gear – the Russian company purchased the innovation of the worldwide bogie market leader – Barber. It is a shining example of correct and useful transfer of technologies,” says Mr Bovykin.

Russia’s largest manufacturer – Transmashholding – also recognises the positive effects from joint work with foreign specialists. In December 2009, an engineering center – Rail Transport Technologies was set up in cooperation with Alstom Transport. Today 200 specialists, including foreign ones, work there to develop new rolling stock. It allows mastering new approaches and the principles of development and saves time. In such alliances, the R&D cycle is much shorter, and the manufactured product meets global market standards.

“The joint work has borne fruit already and fulfills the tasks envisaged when the JV was formed. In particular, the new electric locomotives of the fifth generation EP20 and 2ES5 were formed within a short timeframe, and active work on them is underway now,” says Artyom Ledenyov, Head of PR Department of Transmashholding.

The times when a foreign train had to be bought, will pass gradually, believes Mr Kanetti. “The technological gap can be eliminated through well organised cooperation with manufacturers. Just importing foreign trains will not help the development of Russian specialists, therefore, this way has no promising future. It is important for a foreign company to show local authorities its interest in a long-term project. Our company’s policy is based on launching engineering and manufacturing internationally, so we have 62 production and engineering enterprises in 37 countries around the world. For example, our partnership with Uralvagonzavod envisages joint design works from the very beginning, joint usage of resources,” he says.

According to experts, despite its falling behind the leaders, the national machine building sector can still become competitive in the global market. The financing is to be enhanced, and the gap may become smaller due to cooperation with foreign enterprises. In the opinion of Mr Gapanovich, the gap can be reduced within a short time – from three to five years – by means of technologies transfer. Then, the sector will be able to rely on the potential of its own national machine building companies.