Yevgeny Zagorodny: “the model of the recent 15-20 years is collapsing”

Recently, Russia’s shipbuilding industry has been undergoing intense revival. Yevgeny Zagorodny, Vice-President for Civil Shipbuilding, United Shipbuilding Corporation, tells IAA PortNews about new promising designs of vessels, modernization of production facilities, state support measures, impact of sanctions, import substitution and development plans.

- Mr Zagorodny, could you please tell about the contract on construction of two cruise ships, the country’s first cruise liners over a long period of time.

- Moscow River Shipping Company has signed a contract for construction of one cruise ship of Project PV300. The ship has been already been laid at Astrakhan based shipyard Lotus in the framework of the special economic zone known under the same name. I would emphasize that USC is interested to attract manufacturers of components and equipment for river-class passenger ships to this zone. Together with SEZ and Astrakhan Region authorities, we are engaged in negotiations on the matter.

There are negotiations to sign a contract on construction of the second ship. 

There is a comprehensive interest to this matter as Russia has built no vessels of this kind for a long time. The interest is also seen from international market players as this suggests the possibility of entering the market of domestic tourist product in Russia. 

A task to develop this activity together with the Tourism Development Agency was set at the meeting of the Presidium of Russia’s State Council on the challenges of inland waterways held this year. The state is interested in expansion of this fleet. Up to 10 new cruise ships of Project PV300 can be required if the project succeeds and obsolete passenger ships are replaced (modifications are possible to meet specific customers’ requirements). The ships can be built both by Lotus and by our Krasnoye Sormovo shipyard. They are a competitive product that can be used in any region. 

Besides, at rivers tending to be more shallow it would be reasonable to use paddle ships like the Zolotoye Koltso built in Russia (draught – 1.2 m, passenger capacity – up to 120). Far East market players have expressed high interest in such vessels. USC management is in talks on loading Khabarovsk shipyard with such orders.  

- What is the situation about construction of dredging ships in Russia?

- There are organizations in Russia that have been historically specializing in designing of dredging equipment. They can hardly be referred to as modern ones but the work is underway since it is important for the Volga, Don and Siberian rivers. This task was set by Rosmorport and was brought up at the meeting mentioned above. Moreover, two dredging vessels of foreign company’s design have been built by Krasnoye Sormovo shipyard with the third ship under the final phase of construction. It will be delivered to the customer soon. The first two newbuilds ensure smooth transition of vessels to/from the Caspian Sea unlike the previous years. Everybody is satisfied with their operation.

On our part, we negotiate localization of foreign company’s manufactures (like IHC of the Netherlands) in Russia, also within the Lotus SEZ. 

As usual, the matter is in the shipbuilding programme: if Rosmorport confirms it we can embark on long-term planning. It is serial production that will ensure economic viability.

- What financial support measures are foreseen for USC customers?

- There are state leasing programmes, they are very successful. USC President brought up this issue at the meeting of the State Council Presidium and we hope the support programme will see further development. As a component of this mechanism we are responsible for the most vital economic parameters related to repayment of borrowed money but we are not a financial institution.

If we had an excessive liquidity we could build a stock of vessels without contracts – this would have a positive impact on the loading of our shipyards. Half-finished product finds its demand faster and more efficiently as compared with pre-contract negotiations and the search for mid-term and long-term financing mechanisms. We are mulling this and we keep in mind the market of the neighboring foreign countries. For example, Krasnoye Sormovo shipyard is building two vessels for the Caspian Shipping Company (Azerbaijan). There is a product we can offer jointly with EXIAR, a structure of the Russian export center, and with banks ready to provide long-term credits to the end users. 

The practice of vessels in stock is widespread in other countries (S. Korea, China).

- The customers often say that Russian shipyards loaded with state defence orders fund the civil ones residually. Is it true?

-  I would not say it is a general situation. Specialization of Russian shipyards for military/civil production was undertaken in the post-soviet period. Civil shipbuilding companies are not usually loaded with defence orders. Yet, this would be reasonable to ensure stable backlog of orders as we had situations when commercial customers found themselves short of resources to have their vessels finished and the hulls of such vessels (fishing ships and other) still occupy place at the shipyards. 

However, Baltic Shipyard “Yantar” is building both warships and trawlers, Severnaya Verf shipyard is also interested in orders for civil ships. The interest to civil orders is showing a growth trend. 

- Russian shipbuilding is often described as featuring low competitiveness and insufficient level of performance. Do you agree? What measures are undertaken to improve the situation?

- A ship is produced through efforts of different teams at different lifecycle phases. The key phase is designing, everything depends on it. In this context I can says that we arranged a ‘fair’ of domestic fishing ships designs in 2015 and none of them was supported by the professionals. 

The second issue is the personnel level. We have just started to revive continuity of generations in the industry. In my opinion, personnel training including that in the framework of USC Corporate University  programme should cover the entire chain of production phases as it was in the soviet times. The period of stagnation did not let to preserve experienced personnel. It is not a problem of shipbuilding alone, it is a general problem. There is a gap between the generations of professionals, between the young people and those above 60 y.o. Meanwhile, modern production requires special education since workers should be able to operate computer-controlled equipment today. But education is not enough. For efficient transition of experience a permanent work is needed – it is one of the reasons to struggle for serial production and stable orders. 

To improve competitiveness, USC, as a vertically-integrated structure, is reducing excessive production facilities, getting rid of overlapping functions and developing cooperation between the companies.

One more factor of competitiveness is the cost of debt financing.

However, our industry cannot be compared with the western one when it comes to consumption of resources per unit of output. The shipyards in the southern Europe (Italy, Spain) enjoy low expenses for heating and construction of covered facilities. In the northern Europe (Finland, Sweden, Norway) they used to have a disguised state support. When it stopped their shipbuilding found itself in a crisis. In Sweden it disappeared, in Finland we have a subsidiary – Arctech Helsinki Shipyard – and we struggle for its economy. It passed from hand to hand and neared pre-bankruptcy more than once. Shipbuilding industry in Norway is also in a deep crisis though it was well developed with its cluster-based organisation. As for other regions, let’s take a shipbuilding giant – South Korea – last 2-3 years have been seeing billion dollars of quarterly losses. If not for the state support, shipyards in S. Korea would have disappeared long time ago. 

Wherever in the world, shipbuilding industry depends on macroeconomic forecasts. It would not develop amid negative forecasts.

As for the quality and the terms, design errors and failure to maintain time frames is possible in other countries as well. 

When it comes to productivity of domestic shipbuilding, I do not agree with those who describe it as “extremely low”. They usually calculate it through dividing the company’s revenues by the number of personnel. However, it includes power consumption costs and climate related costs that are higher in Russia as compared with the southern countries. 

Secondly, this method does not take into consideration the economic models. If a model is based on outsourcing the personnel number will be low and the productivity will seem to be high since payments to third-party companies are not taken into account. The results would be absolutely different if these costs are included into calculations. Besides, pricing principles should be considered. For example market principles are not applicable to state defence orders. If we compare our civil segment with that of the acknowledged global leaders, we do not look worse, especially when it comes to well developed types of vessels.

It should be noted that social orientation of business is very high in Russia. In western countries, the personnel are surviving on their own if a shipyard has no orders. Most shipyards there are private and are not focused on state and social tasks. The companies are smaller and there are more of them located closer to each other, so it is easier to find a new job, personnel mobility is higher. Our conditions are absolutely different. Remobilization of personnel from one region to another is very difficult in Russia.

- Have rouble devaluation influenced the domestic shipbuilding?

 - Yes and no. We have seen two opposite directions. On the one hand, low rouble has considerably increased the cost of civil ships as imported equipment became more expensive in rouble prices. On the other hand, it raised our competitiveness in the external market due to reduction of labor cost value. By the way, now we sign bi-currency contracts – all equipment to be imported under the project is nominated in foreign currency. This allows for more efficient management of risks related to currency fluctuations. In general, sanctions and macroeconomic perturbation have lead us to crucial decisions on localization of foreign manufactures in Russia and on revival of much shipbuilding competence at domestic shipyards.  

- How is the programme on import substitution going on?

- It is a state programme under the umbrella of the Ministry of Industry and Trade. All of us are involved in it. Among the challenges is a wide scatter of components manufacturers. Design specifications set forth performance characteristics while details depend on price/quality ratio, referentiality, availability of Russian certificates, readiness of foreign manufacturers for long-term localization etc.  Therefore, it would be good to integrate those processes in Russia under fair conditions. We welcome initiatives on establishment of coordination centers. It would be perfect to have three manufacturers per each item. USC has a procurement department responsible for this work and interaction with customers.

- What was the impact of sanctions on USC activities in civil shipbuilding?

- The impact in the segment of civil shipbuilding was not strong. The sanctions generally influenced the development of special vessels (drilling, seismic survey vessel for offshore projects). There is a task of import substitution in this segment but it has not been solved yet. 

Closed access to international financial market brings the most serious implications. They affect the end customers who lose the access to relatively cheap money. 

Sanctions affect primarily those who initially worked with equipment of foreign origin but a vacant place never remains unoccupied and western manufacturers can be replaced with Asian ones. Anyway, the model of the recent 15-20 years is collapsing. 

- Krasnoye Sormovo shipyard has been recently building vessels of mixed sea/river navigation. What are the capabilities and the loading of the shipyard today?

- The shipyard is able to build about 14 vessels of this type every year. However, actual loading depends on the capabilities of the customers, both financial and those related to their business-model, cargo base guarantees.

Interviewed by VItaly Chernov