Vladimir Shlyomin

    A case without example has taken place in the practice of developing industrial holdings. Severstal JSC, a steel rolled products maker, and Russian Aluminum Group acquired large blocks of shares of Russian machinebuilding companies, induced a management change and virtually took care of several machinebuilding plants. It would be natural to suggest that steel companies establish their control over one of the most valuable markets of their steel products. However, the representatives of these companies declare that they pursued quite different aims. Here is what was claimed to Eurasian Metals by Sergey Emdin, Director (Automotive Business Development), Severstal Group, a member of the Board of Directors (UAZ JSC and ZMZ JSC).
"There are few objectives before us. First, a diversification of our business. An export-oriented steel company improves stability by incorporating production operations of mostly domestic orientation into its structure. Second, long-term investments in the industry that, in our opinion, has a significant potential and can ultimately become competitive by the measure of world automotive industry. In Russia this industry is still low-capitalized, and therefore it is relatively cheap to enter this sector.

Third, we have pursued a particular aim – to take Uljyanovsky avtomobiljny zavod (Ulyanovsk Automobile Plant or UAZ) out of bankruptcy. It was evident for the managers of Severstal that UAZ had no required tools for overcoming the crisis situation but the normal operating cycle could be restored with the help of point investments. That was the task solved in 2001".
Severstal JSC is the owner of two automobile plants: UAZ and ZMZ (Zavolzhsky motorny zavod – Transvolga Engine Plant). It possesses a controlling block of shares at each of them, 60 and 65 %, respectively. UAZ is well-known as a military jeep maker. Besides, it produces off-road capability automobiles: vans, minibuses, light trucks, ambulance and life-saving service cars, etc. ZMZ is a supplier of engines for UAZ, GAZ (Gorky Automobile Plant), the only Russian producer of medium cars, and PAZ, a bus producer.
The controlling black of shares of UAZ was consolidated by Severstal JSC in autumn of 2000. According to Sergey Emdin, the appearance of new owners did not cause any antagonism from the operating managers of UAZ.
"Taking into account that automobile production and steel industry are two quite different types of business", Mr.Emdin clarifies, "we decided to set up a new managing team step-by-step. Candidates were selected out of young promising staff members at the plant itself and at other plants as well. Therewith the general director remained. Sure, this method of updating takes a lot of time but it goes painless, permitting a substantial increase in the corporate management quality".
In 2001 forty young specialists came to the plant, and 250 more will be employed in 2002. Further on, the managing personnel change will go on even faster. Just now 30 percent of upper and middle managers are under 30 years of age.
The managers of Severstal believe that the greatest success of 2001 was that the unprofitable situation has been overcome and the debts of UAZ have been restructured. Sergey Emdin referred to several figures that allowed, in his opinion, as assessment of the work fulfilled. In 2000 the plant had a loss ratio of 22 %. Here it had to make settlements with all its partners for supplies and services and to pay taxes as well. The debt to the federal budget was the largest one – 1.5 billion rubles (about US$50 million). New plant‘s owners redeemed a considerable part of the debts and managed to restructure the outstanding debts. In this way the bankruptcy was prevented. The market of corporate securities positively responded to this change. The shares of UAZ climbed in value 2.5 times.
Favorable changes in commercial activities should also be noted. For a number of years UAZ sold automobiles at a price below the prime cost. This policy was not aimed at new market niche to be won. It was due to a weak economic position of the plant, dictation of dealers and corruption of some top managers. Having been incorporated into a powerful corporate structure, UAZ got a chance to normalize commercial relations with suppliers and dealers. The buying prices for units and accessories were reduced 20 % while the selling prices grew by 30 %. Dealers had to come to a ten-fold decrease in their revenues that they are still at a quite acceptable level: 1 to 2 % per each sold automobile.
From the viewpoint of steel business, it is of interest to examine the situation with steel supplies after the Ulyanovsk Plant was incorporated into Severstal JSC. As would be expected, Severstal alone sells steel sheet for all UAZ car makes. While the company‘s representatives ascertain that they are prepared to make use of the products from other steel works if more attractive prices and offers are given, the competitors are unlikely to have a serious chance of success. The corporate ties between the owner and the automobile subsidiary constantly expand, gaining a nature of strategic partnership in the field of technologies as well. One of joint programs implies a set-up of galvanized steel sheet production for certain UAZ makes. Pilot lots have already been produced. In 2002 the plant will begin small-lot production of galvanized steel bodies.
This program will be implemented with a technical support by Usinor. In doing so, high product quality and conformity to European standards will be secured. Here an idea of possible widening of the sales area arose. Sergey Emdin acknowledged that such plans do exit: already in 2004 Severstal intends to enter the European market with galvanized sheet to be offered to big automakers.
As to the Ulyanovsk Plant, Severstal JSC designs the program as below. This year the plant is to produce 110,000 cars, among them, 20-22,000 urban jeeps. This car make is extra popular in Russia but not a single automaker in this country managed to put into practice its production. The demand is met due to imports which, based on high import duties, raises the cost of the most prestigious makes (Mercedes-Benz of G class, Toyota Land Cruiser, Range Rover, etc.) by US25,000 to 30,000. Less well-to-do buyers have to abandon their plans of purchasing a new car and content themselves with a second-hand one. Ulyanovsk jeeps are intended for this category of motorists, and, as the managers hope, the production of jeeps will bring a stable profit.
A modernization of car makes was placed by Sergey Emdin into the line of the most important tasks of 2002. In April the car under a pilot name of UAZ-31520 will come off an assembly line. During this year 15,000 cars of this make will be produced, with a gradual improvement by installing better units and parts – gear box, transfer case, axles, engine – and, at last, the body will be replaced.
The consumer quality properties of UAZ cars, as compared with the world level of automobile production, are not high as yet. None the less, Severstal JSC intends to reach success in the markets where this make is of common knowledge, above all, in CIS, Baltic and East European states. In Russia, the army and the village are potential sales areas for UAZ. The army has long been in need of re-equipping but the Russian defense budget limits cause this requirement to be put off. As to the villagers, their concern is not a change of make series but an improvement of sales conditions. With due regard to this requirement, the company‘s management intends to widen a dealers network, use leasing and create other benefits.

UAZ-3160 and UAZ-3162. As considered by the manegers of Severstal JSK, a car of this make will be able to compete with foreign second-hand jeeo in the Russian market.

When examining the outlook for automobile production in Russia, one cannot but notice the forthcoming entry of this country to WTO. A majority of experts singles out two sectors, steel & nonferrous metals industries and automobile production, when viewing the consequences of this action for various branches of the national economy. It is thought that the first sector will get some benefits while the second one will suffer the most significant damage. In this connection, it would be instructive to get to know the viewpoint of the management of the company representing the interests of both sectors. The stand expressed by Mr.Emdin in his conversation with the correspondent of Eurasian Metals was as follows.
There are two ways of developing the Russian automotive industry. The first way is a full liberalization of the market. In this case, most probably, nothing will happen with the Russian producers since they have their own price niche. However, the industry will not be able to progress further. The automakers will continue to produce cheap outdated models designed for low-income consumers. Meanwhile a greater part of the population will more and more purchase second-hand cars of foreign make. Speaking in images, steel will come to Russia on four wheels.

The second way deals with unpopular measures to be taken, including high duties on import of cars. But it is necessary at the same time to establish favorable economic conditions for foreign investors and producers. The Russian plants will receive an access to newest technologies and original suppliers of accessories. Competition will help to revive the industry, to breathe new life to it.
"As far as WTO is concerned, we have no apprehensions", Director (Automotive Business Development) of Severestal JSC reaffirms, "because within this organization 35-% import duties are permitted: they are now valid in Russia. As it happens, China and India joined WTO with much higher duties. On the other hand, having joined WTO, we shall receive an access to latest technologies, be able to make duty-free purchase of accessories not produced in Russia as yet, and get an entry to the markets of East Europe for our products".