Andrei Karunos

O

n the face of it, the two Russian largest holdings signed recently a quite unexpected contract. The Severstal Group acquired a metallurgical equipment business from United Heavy Machinery (OMZ). From now on the company Severstalmash incorporated in this group will use the system of selling and engineering metallurgical equipment concentrated in OMZ’s business division Metallurgical Equipment and Technologies. Severstalmash also obtained the right for appropriate trademarks. As agreed by all sides, the transaction value was not announced.
General director of Severstalmash Alexei Evgeniev said that now his company had significant opportunities for expanding its business in metallurgical engineering. In particular, the case in point is to manufacture high-technology equipment and enter the market of servicing metallurgical enterprises. "We expect that through extending the range of our services and entering new markets the turnover of Severstalmash will exceed $150M in 2003", he noted.
Until now OMZ was considered the national leader in manufacturing metallurgical equipment. The personnel of OMZ’s business division Metallurgical Equipment and Technologies numbered over 300 specialists. They were managing projects of supplying machinery and installations to Russia’s metallurgical enterprises as well as projects of export shipments. The personnel was also engaged in engineering and modernizing sintering plants, rolling-mill machinery, press-forging equipment, continuous casting machines made at OMZ’s plants. In 2002 the sales volume of this division exceeded $30M (without taking into account mill rolls since their production remained at OMZ).
In the words of OMZ’s executive director Sergei Lipsky, selling Metallurgical Equipment and Technologies is connected with the holding’s restructuring and has one goal: "to focus on those directions, where our positions are especially strong". He stressed that "the selling concerns the engineering and marketing component" and, thus, "the deal does not change the structure of OMZ’s productive capacities". Lipsky expressed confidence that Severstalmash would remain the strategic partner of OMZ and "will continue placing orders at our production facilities".
Earlier general director of OMZ Kakha Bendukidze repeatedly said that the vertical integration in some sectors of the economy (meaning, first of all, engineering) was no longer effective. In his opinion, that results only in dissipating efforts and funds. As he put it, in a situation like this "managers have to whip up the herd of dinosaurs that moves slowly but eats unjustifiably much". Three years ago after acquiring Izhorskiye Zavody and Uralmash, Russia’s leading high-capacity enterprises of heavy machinery, United Heavy Machinery started to remove from the newly created holding those divisions, which it found being "non-specialized". The management of OMZ intends to focus on several main business directions in the engineering sector. Among them are the manufacturing of equipment for the mineral resource industry, nuclear power engineering industry, shipbuilding as well as making special steels.
The present deal is not the first one in the history of relations between Severstal and OMZ. In April 2000 OMZ let steelmakers have Russia’s only mill-500 that, by the decision of Severstal and EvrazHolding, will now serve as the basis for producing large-diameter pipes.
To all appearances, by acquiring "the dinosaur" steelmakers know for sure how to make it move quick and bring benefits. This step is quite in line with the company’s strategy that was announced a year ago by general director of the Severstal Group Alexei Mordashov. In connection with Severstalmash’s transformation into the holding’s self-dependent division he named then two major tasks for this company: gradually replace third-party purchases for Severstal with equipment of its own make and enter foreign markets with its engineering products.
The conversion of Severstalmash into a full-fledged engineering company was the result of developing Severstal’s repair shops. In December 2001 Severstal’s External Investment Administration established an engineering center with the management structure considered a prototype of administrations on production, economy and finances, sales, purchases, personnel. The engineering business was successfully developing: in 2001 export shipments increased 6.8 times as much, the share of more complex and expensive products in the order portfolio also rose. For the first time shipments of nonstandard equipment for Norilsk Nickel and VSMPO, Russia’s leading metallurgical companies, were made. Since 2002 Severstalmash has been independently planning production and expenses proving its capability of bringing profit.

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United Heavy Machinery (OMZ) is Russia’s largest company of heavy machinery. It incorporates the whole number of production and designing organizations in Russia, Ukraine, Romania, the U.S. They include the Ural Plant of Heavy Machinery (Uralmash), Izhorskiye Zavody, the plant Krasnoye Sormovo, the Central Design Office Korall, Friede&Goldman, Upet. They specialize in engineering, production, sales and service of equipment and machinery for the nuclear power engineering industry, oil-and-gas complex, mining industry, shipbuilding as well as in making special steels. In 2002 the company’s sales volume reached $398M that was 13% more than in 2001. As of April 2003, the portfolio of existing orders exceeded $1B. Products of OMZ are marketed in over 30 countries of the world. The volume of sales outside Russia amounts to $131M.

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The company Severstalmash was set up on the basis of the repair-and-engineering complex of the Severstal Group. The number of employees exceeds 10,000 people. The company does designing, developing and servicing equipment for the steel industry. Its strategic task is to establish engineering production facilities capable of competing with world engineering companies. One of the instruments for achieving this goal is to consolidate the experience of the Russian metallurgical engineering.

In the opinion of experts, the company had originally competitive advantages: the availability of complex engineering developments, comparatively low level of costs, the know-how in the service area. Precisely because of this it was decided to build up Severstalmash in three directions: engineering, service and production of a new high-technology equipment.
Until now Severstalmash provided 80% of its products and services to the parent holding. But in the future, as volumes of production and export shipments of more complex products grow up, the proportion of sales inside the holding and in the open market should come close to the 50-50 ratio. It is obvious that the last acquisition is directed at reaching this goal.