After a difficult start, Western aerospace players are taking Russian industry more seriously and employing local engineers in increasing numbers
Leonid Mazin recalls the recruitment interview that led to him heading United Technologies’ (UTC) first aerospace joint venture company in Russia. “I was asked: what was the biggest challenge you can see,” he says. “My answer was how to bring together two different mentalities, and I still believe that. It was two different worlds.”
A decade on, Mazin is one of a handful of Russian managers who have succeeded in melding the Eastern and Western mentalities with growing success, in his case as general manager of the Hamilton Standard-Nauka joint venture heat-exchanger specialist.
This small but thriving Moscow-based firm is a far cry from the clumsy, sales-oriented, efforts of Western companies in the early days of glasnost. Mazin says: “In the early 1990s a lot of Western companies were looking for business in Russia. They did it in the hope of equipping the huge Russian aircraft market. The government showed them hundreds of new aircraft designs that would fly soon. That was the goal for all these foreign manufacturers, including UTC. A lot of joint ventures were formed, including this one. They were interesting times and we were pioneers.
“UTC took the historic decision to switch to just targeting the Western market. That was the reason why we survived and prospered. No other company managed to do that. Most died and others barely survived. It was an easy decision to make, but it was not easy to implement. I hired young engineers. I was criticised at the time because people said they knew nothing. I saw that as an advantage. Now they are all leading managers.”
Today the plant, in UTC’s Moscow building, is still staffed entirely by Russians, but on one floor Airbus A380 heat exchangers are under construction, and on another the same equipment for the Boeing 787 is being designed on-screen in co-operation with Hamilton Sundstrand engineers in Connecticut.
Production continues for in-service models from Airbus, Boeing, Bombardier, Embraer and Russian manufacturers. HS Nauka’s low cost base has let it take half the 747 major repair market where Hamilton Sundstrand was previously absent – a $2 million revenue stream.
UTC’s chief in Russia, Richard Brody, is pleased with progress under the more sophisticated approach that followed Pratt & Whitney’s painful attempts to re-equip Ilyushin airliners with its engines – a $50 million misadventure, say individuals familiar with it. The US conglomerate is a major Russian employer, although the bulk of its staff are the 3,000 at elevator-specialist Otis Russia rather than in aerospace.
Explaining the Russian “value proposition”, Brody says: “Russia offers incredible technical capability, both in terms of people and technologies; and a good market and extensive manufacturing capabilities. We bring our own technologies and access to markets – which is critical in aerospace.”
Market opportunity
That is not to say that domestic aviation sales are off the agenda. “Russia has an aircraft fleet of about 1,000 aircraft operating,” he points out. “Most of those, if not all, will have to be retired and replaced with a combination of Russian and Western products. It is a great market opportunity for anyone able to do local projects and their own projects.”
P&W is still working closely with Russian engine interests, Pratt & Whitney Canada’s St Petersburg design centre is healthy, Sikorsky remains a minority shareholder in Mil, and UTC’s space programme in Russia is a big success. So the company is naturally keen to see a stable business environment in Russia, and Brody, a veteran of the 1998 financial collapse, is increasingly optimistic.
“It is important to recognise that Russia has made some very good progress in economic reform in the past few years – in the levels and system of taxes, and in their enforcement, and the ability to litigate successfully,” he says. “There will be challenges ahead. We would look to see administrative reform and modernisation of the financial sector. The Cape Town convention [on leasing] is important.”
Major moves on foreign investment and the restructuring of the domestic aerospace industry with the possible formation of a “unified aircraft company” lie ahead. Brody says: “The upcoming law on strategic enterprises is a very important opportunity for the government to decide what are defence assets and are fenced off. But we need clear rules to decide what these are and for the others to have unlimited investment rights. Reform of the aviation sector is obviously crucial.”
He also welcomes the more positive attitude towards long-term Western investors: “In the last five years I have seen the business climate become more sophisticated. Russians are very good business people themselves. There might be some people who still believe we are here to squelch the competition. But usually that comes from people who have other commercial goals, and we don’t see it so much now.”
The biggest Western aerospace player in Russia is Boeing, with its design centre spread over seven floors in the McDonalds building where engineers work on 747 drawings as shoppers throng one of Moscow’s more upmarket streets outside.
Boeing’s ambitions in Russia are more complex than those of UTC and it has grown from around a dozen engineers in 1998 to more than 900, of varying levels of seniority, in Russia today. Another Russian – Sergey Kravchenko – heads the operation and constantly fights to secure more and higher value work from Boeing.
Earlier activities centred on relatively modest 777 and 757 modifications, but today the Moscow business has major roles in the design of the 747 Special Freighter conversion and Large Cargo Freighter for transporting 787 modules.
A handful of US staff are seconded to keep engineering practices on the corporate track and the use of a so-called “middle shift” for some senior staff ensures they can conference-call with Seattle across 11 time zones at a tolerable hour for all.
Secondary benefits
Boeing Commercial Airplanes vice-president engineering Mike Denton explains that a primary objective is to hire world-class engineering talent globally, but he adds: “When you talk about doing that in Russia there are some secondary benefits. That process has, in our way of thinking, been influential, if not a big determinant, in terms of the relationship building we have need to do, and wanted to do, with the Russian government.”
It was vital, for example, in negotiations over opening up Polar flight routes and also in talks with Russian titanium producer VSMPO, where Boeing sought “not just the quantities of titanium, but also access to the intellectual property rights on Russian titanium alloys, where they are probably world leaders”.
But Denton adds: “We also hope it helps us with future sales of aircraft. Employees of Boeing get nervous about losing their jobs, but part of our rationale has been that we want to sell aircraft.”
The brutal truth is that lower costs in Russia and elsewhere are crucial. Denton explains: “We can get really good talent in structural design at more affordable prices than for the same kind of engineers in the USA. That can make a business case go from negative to positive.
“The airlines would love us to do more work. For example conversion work – but they tell us over and over that we cost too much. They say that if you want to really get a job done with lots of integration then Boeing is the place to go, but we are so expensive. So to the extent that we can find capable engineering resources that we can bring into the Boeing fold, we can make our business more affordable.”
In future much of that resource will have to come from new Boeing business targets like China and India, something which will put a brake on further expansion of the Moscow workforce.
Ironically, at the same time as defending its actions at home, Boeing finds itself in a tightening labour market in Moscow. As the earlier entrant, and with a much bigger workforce, it is seeing some staff it trained being hired away to Airbus’s more recently created ECAR engineering centre.
A bigger issue is understanding what work can be placed abroad while remaining within the US International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR).
Denton explains: “Probably if I think what causes me to worry the most it is making sure we are complying with US government requirements and what we can legally put over there. It is crucial that I understand the law correctly and am up to speed with the latest interpretation of it.”
Airbus’s equivalent of the Boeing centre is its ECAR engineering centre, formed in co-operation with Russian holding company Kaskol. It is much younger than the Boeing operation, having emerged from a government-to-government agreement spearheaded by France. An initial 25 engineers were trained in Toulouse, growing to 120 today and a planned 200 by the end of 2006.
In many ways its functions and ambitions are similar to Boeing’s; the VSMPO titanium source is equally crucial to it for example, providing 55% of Airbus’s needs. ECAR general director Vladimir Raschupkin is one of Russia’s most experienced international aerospace executives, having run GE Aircraft Engines’ Russian operation for seven years and also managed UTC’s St Petersburg centre.
Critical size
He says: “We have to reach this healthy size of 200-plus staff. That is a kind of critical size and after that you can match it to the actual need. It gives productivity and economic efficiency.” That presents its own hiring challenges, he explains. “In Moscow there is very strong competition. A lot of players have centres in Moscow and here we have key requirements, one of which is a command of English. Traditionally the technical universities of Russia were not so strong on languages. “It’s not just salaries – it is the satisfaction of the task, and being a good place to work. Not just nice desks and tables – but showing people we care and we look after them. Making them comfortable about security and ethics.”
ECAR cut its teeth on transferring 1970s-era two-dimensional engineering drawings into modern 3-D versions – a major task for Airbus – and it moved into ongoing design work on the narrowbody family. That activity continues, but Raschupkin is determinedly pushing ECAR up the Airbus value chain. He says: “What is most interesting and where we are developing our activities is the development programmes. Our stress and design engineers can do the full cycle from concept to digital mock-up to engineering drawings.”
Like Boeing Moscow, ECAR is focused on fuselage work. It grew quickly enough to secure A380F work – the cargo-door surround and upper-deck barrier wall that protects the cockpit – and has moved on to the high gross-weight A340, working on a rib design. Future growth depends partly on the Moscow operation being responsive to Airbus’s emerging needs. Raschupkin says: “Now Airbus told us that it has a need to develop expertise in electric harness design. So it is what we can do and what we should develop. We will hire the group of people, then send them for training, and then move the activity here and grow the group here.”
Talks are under way on A350 work packages, and Airbus is negotiating possible manufacturing contracts with Russian suppliers on the aircraft – potentially opening new opportunities for ECAR. “The plan is to merge design and sourcing, When Airbus is planning to place orders in Russia then it is logical for us to design them and supervise production,” says Raschupkin.
He cautions that Russia’s cost advantages are certain to decline over time, but suggests that Airbus is reasonably relaxed about the issue. “Cost is important in any business,” he says. “But it would be wrong to consider that Russia will continue to be cheap for a long time. What is important in this country is unique expertise for a reasonable cost. If Airbus had only cost in mind then the engineering centre in the USA [at Wichita] would be a nonsense. Russia is a good source of engineering expertise and it is good value for money.”
Investment needs
The partnership with Kaskol may yet have further importance, particularly if investment is required. Raschupkin explains: “We are a Russian company and Kaskol helps us to navigate in this not very simple environment. The money so far has come from our shareholders. But we don’t exclude going to the banks or other sources. Now the operation is getting profitable and theoretically we can support it, but we might need some short-term money sometimes.”
Whether the West can support the growing aspirations of Russia’s reinvented aerospace industry in the long term remains to be seen, but it is all a long way from the stumbling steps of the early 1990s.
KIERAN DALY/MOSCOW
Source: Flight International
