Dramatic leap

Western sanctions against Russia have provoked a decrease of our commodity turnover with certain countries and weake­ning of economy, at the same time they have cleared the market from imported goods thus stimulating domestic production. Moreover, thanks to the rouble devaluation, the Russian industry gained an added advantage in foreign markets and now enjoys profit coming from currency difference.

Since October 2018, the national project of International Cooperation and Export has been implemented in Russia. It was developed by the Russian Ministry of Industry and Trade pursuant to the May Decree of the Russian Pre­sident. The total budget of the national project amounts to 956.8 billion roubles. This sum will be divided between five federal projects, including industrial export. A weighty part in this trend is assigned to export of machine-building pro­ducts. Its volume is expected to grow from the basic value of USD 33 bln (2017) to USD 50 bln (2024).

According to the Fe­deral Customs Service data, the share of machines and equipment in the export structure was 6.5% in 2018, while the year before it had amounted to 7.9%. Nevertheless, machine building holds the honorable third place with only primary commodities and metallurgy ahead of it. The share of machine building in export to non-CIS countries has dropped to 4.9% from 6.4%, while in export to the CIS countries it stays nearly the same (17.8% compared to 17.5%).

The volume of imported rolling stock products has been increasing for no less than four years. While in 2017 the rate of growth was around 30%, in 2018 it reached 60% compared to the previous period. Export in this segment, according to the results of the last year, was evaluated in kind at USD 650 bln.

Anton Zubikhin, Chairman of Export and Innovations Committee, Association of Railway Equipment Manufactu­rers, says that such a dramatic leap can be explained by the fact that a number of major projects that had been in the making for a long time have finally paid off over the last two years. Among them are deep modernization of subway cars for the Budapest Metro by Metrowagonmash (part of Transmashholding), shipment of a large batch of modern gondola cars to Kazakhstan by the Engels steel structure plant and implementation of the Sinara - Transport Machines contract for supply of shunters for the Cuban Railways Union.

There is money, but you should be moving

International markets are highly volatile. In order to limit its impact on Russian economy at this stage, special attention must be paid to the non-commodity sector. Taking into account the overall growth of the machine building industry and it being the most rapidly develo­ping segment of non-commodity foreign sales, the Russian Government endea­vors to provide comprehensive support to this sector.

In 2015, Russian Export Center (REC) was established. It functions as an ope­rator integrating measures supporting non-commodity exports. Experts link the current growth of export shipments directly to the REC activities. REC partially subsidizes product transportation and certification costs, arranges participation of Russian exporters in economic forums and congresses, equips stands at international exhibitions and sets up business missions, where representatives of Russian companies can meet purchase decision makers. Thanks to government subsidies, Russian producers can offer competitive financial terms of transactions such as reduced product prices, offering buyers long-term low-interest credits or extended warranty.

Of course, financing by the government is not unlimited. Therefore, like with any other limited resource, targeted spending is required in this case. And this is of particular importance in the rolling stock building segment. The average manufacturing cycle, from the date of order to delivery to the customer, is at least 3 months for a batch of railway cars, and around 9 months for a locomotive. When it comes to custom orders implying development of new models, the period of contract performance may reach 1 year or more.

When the manufacturer accepts a long-term order and quotes the price to the buyer, it ought to know what kind of support it may count on. Subsidies provided for one year are generally spent within the first few months. Needless to say, they are usually received by the most promptly acting automotive manufacturers.

The above situation noticeably impacts domestic players' business planning. For example, it was this uncertainty about subsidizing combined with increased bureaucracy that caused Altaivagon, rather a successful exporter to the CIS countries, to shift its focus to domestic market, according to its 2019 plan.

"We perceive big demand for railway cars from the internal customer whom we must not ignore, especially as we know that it will support us during unfavorable market periods," explains Maxim Novikov, Marketing and Sales Director, Altaivagon. "Of course, we are aware that if we prepare the ground for development in foreign markets today, we will have fewer difficulties in the future. However, controversial as it may sound, now is not the best period for developing export."

Some economists consider it a wise tactic. The international success of railway manufacturers had the industry hooked on handsome foreign revenue, thus provoking a certain deficiency for domestic consumers. However, domestic market also has significant growth potential, and it does not require additional expen­ses. Moreover, this year, REC is planning to introduce regulations that will allow subsidizing based on project efficiency criteria and project outlook without compromising the principle of free and equal access to finance.

No visa needed for a tank

In spite of certain difficulties, the Russian rolling stock industry keeps on strengthe­ning its position in the international market. Rolling stock manufacturers expand their presence in the CIS and Eastern Europe, tap into new sales markets in South America, Africa and the Middle East. Nowadays Russian railway engineering companies are successfully integrated in the economy of a number of states. Kazakhstan, Belarus and Armenia, as well as Iran, Mongolia, Cuba, Zimbabwe, Kongo and Chad are our enthusiastic partners.

"Russian machinery is considered a glo­bal standard according to price/quality ratio. In terms of reliability, our locomotives can compete with Western economy-class engines and bear comparison with the level of such giants as Siemens or Bombardier. At the same time, they are cheaper than widely promoted brand products," says Pavel Burlachenko, Export Promotion Director, Russian Export Center.

Russia has long been known all over the world as the largest supplier of military equipment. Respectively, our railway rolling stock has same image as Russian tanks—reliable heavy-duty machines with low repair requirements and easy maintenance.
Still the issue of pricing remains a sensitive matter for domestic manufacturers. In spite of the funding provided by the government, we are far behind China that invests enormous amounts in promoting its engineering products. In addition, an excessive fiscal load strongly affects the attractiveness of Russian product prices. For example, while the finished product export is VAT exempt, assembly components are not, and it affects the end product's price.

City transport with a Russian flair

"Russia has a high potential in the city transport segment, namely, subway, trams, pod cars," says Pavel Burlachenko. "In this case, the advantage of price and quality is enhanced by comfort and safety. Common visitors of international exhibitions, while examining a tram interior, are often surprised to learn that this tram was made in Russia. It is not inferior to city transport of global brands. It has the same level of comfort, aesthetics and information and is provided with a carefully designed safety system."

In May 2018, Metrowagonmash completed a large-scale project for retrofitting 222 Budapest Metro cars. They were almost completely reworked. The car body as well as control and safety systems were updated. The compressor system, braking equipment and the traction drive system were modernized. A state-of-the-art air conditioning system was installed, and the level of comfort of the passenger compartment and the driver's cab were improved. The whole train became more reliable.

It is planned to build 6 trains for the Baku subway by the end of 2019. They will have modern sound and thermal insulation, charger sockets, light annunciators and an info system adjusted to the local environment.

Oh, Cuba, oh, railway rhythms!

Our machinery is sold most actively in the former Soviet Union. Here, manufacturers do not have to modernize their products according to foreign standards, as our countries are united by the common 1,520 mm rail gauge. Nor do they have to perform additional R&D. Deli­very is also much cheaper than in case of supplies to Africa or South America.

Armenia and Kazakhstan are our customers for electric trains and for locomotives, passenger cars and cargo cars respectively. It should be no­ted that Kazakhstan cooperates with nearly all major Russian manufacturers, such as Altaivagon, Transmashholding, United Wagon Company (UWC) and Uralvagonzavod. All this takes place against the background of Kazakhstan assembling locomotives locally under licenses granted by General Electric, Siemens and other companies. At the same time, while trading with the CIS countries, Russian companies have to face tough competition with Ukrainian manufacturers, who can offer cheaper products to customers.

Russian machinery is highly valued in India and Iran. However, trading with these countries has plenty of very speci­fic aspects and strongly reminds of a bazaar. In their primary requests, customers specify advanced world-class machinery, yet after each round of exhausting negotiations the contract degrades both in terms of quality and price. Nevertheless, in 2018, we shipped locomotives, cargo cars, trams and subway cars to Iran.

Last year was remarkable for fruitful cooperation with Cuba, to which 30 high-performance TGM8KM diesel shunters were delivered by Sinara—Transport Machines. The company plans to ship a total of 75 diesel shunters to Cuba by the end of 2021 to satisfy the country's demand for this type of engines in full. In February, Sinara launched tests of a rail bus developed by Kalugaputmash specially for Cuban suburban lines.

RM Rail from Saransk has been cooperating with Cuba for a long time. It has delivered 428 railway cars to Cuba since 2017.

In January 2019, Transmashholding entered into a contract with the Cuban Railways Union for the supply of 23 LDE-2500 diesel locomotives. The locomotives will be manufactured for cargo and passenger transportation. These engines will also be adapted for tropical marine climate, since Cuba has one of the highest metal oxidation rates in the world due to high humidity and airborne salinity.

Our machinery is generally popular in developing countries. For example, the Holding company has shipped 114 hopper cars to Guinea, to which a large batch of rails manufactured by Mechel had been delivered earlier.

According to experts of Kubanzheldormash, a company which is also present in countries of Africa, Russian products are promoted by Russian companies using domestic tools for various operations in those countries. Proven quality and reliability, in combination with a certain cost advantage, further stimulate purchasing of Russian products. The main problems of this market are long and costly logistic legs and, sometimes, financially challenged customers.

Fighting to tap into the EU market

"We are not welcome in Europe," admits Kubanzheldormash. "The European market is open for all players, just like ours. Still this openness is rather relative. Many times, we came across tenders with such stringent requirements that virtually a single manufacturer's products could match them, and of course, it was a European one."

Moreover, European laws which regu­late goods turnover deter many of our businessmen due to enormous organizational and financial expenditures, usually standardization and certification procedures required for introducing a product onto this market.

Nevertheless, in February last year, United Wagon Company won a tender for the supply of Sggrs80 articulated container flat cars to Deutsche Bahn, the largest European railway operator. It is remarkable that these cars, developed by VNICTT (All-Union Research and Development Center for Transportation Technology, part of UWC) and featuring rather a complex design, beat compe­ting products by American and European manufacturers. United Wagon Company passed a most stringent audit of its quality management system to secure the order for 130 cars. Deutsche Bahn assessed over 20 aspects of the Holding company's operations. With the status of a DB supplier, UWC has become the first non-EU railway car manufacturer who has got the right to supply railway cars to Europe.

In addition, UWC reached second place on the global scale in terms of cargo cars production volumes. For 3 years in a row, Russia has been among the top 3 and top 5 global exporters of cargo cars in terms of quantity and value respectively.

Time to rise off the ground

Russian aviation export is mainly focused on the military sphere with only 17% of the total output being civil aircraft. The share of Russia in global production of civil airplanes and helicopters is below 1%. It means airplane manufacturers have room for growth. Russia is planning to increase export of passenger airplanes as much as ninefold, from USD 0.5 bln to USD 4.42 bln. These target figures are included in the guidelines for main activities of the Russian Government until 2024.

Great expectations are linked with the MS-21 project, which is currently implemented by Irkut Corporation. It is a medium-haul airplane designed to compete with Airbus and Boeing pro­ducts in the segment of airliners for more than 100 passengers.

CR929, a long-haul wide-body airplane for 250−300 passengers, is ano­ther promising Russian-Chinese project. It is developed jointly by United Aircraft Corporation and the Commercial Aircraft Corporation of China (COMAC).

Export of civil helicopters is limited to the Mi-17 and Ka-32 heavy machines, and to the super heavy Mi-26. Export of the Ansat helicopters, as well as the Ka-226T, Ka-62, Mi-171А2 and Mi-38 models is also possible. "The helicopter segment has good export potential, while in case of airplanes it nears zero," says Andrey Kramarenko, the leading expert of the Center for Infrastructure Projects at the Higher School of Economics National Research University. "MS-21 is the most promising among airplanes. If Irkut puts out a reliable machine with an efficient operation economy, there will be a chance to fill some secondary niches."

In the expert's opinion, the market of narrow-body airplanes is divided between Airbus and Boeing, and, moreover, the plan has already been fixed for years to come, thus even a successful new airplane (made in Russia or in China) will have to struggle hard to find its customers. The two giants are currently processing orders for around 11,100 units in total, i.e. for about 8 years of continuous production.

Apart from objective constraints, the industry has internal issues that impede promotion of Russian products on international markets. Among them are lack of competence for export-targeted production, insufficient skills for operating global supply chains and setting up aftersales service, and low operational efficiency of manufacturers.

Foreign status of the Russian aircraft registrar is another problem. In 2015, the government transferred air equipment certification authority from the Interstate Aviation Committee (IAC) to the Federal Agency for Air Transport (Rosaviatsiya). Up to now, the latter has not entered in bilateral agreements on mutual recognition of airworthiness certificates with the leading air transportation agencies of the world such as ЕАSА, FAA (USA), ENAC (Italy), etc. These agencies do not accept export certificates issued by Rosaviatsiya.

As reported by Alexander Neradko, Head of the Federal Agency for Air Transport, in January 2018, the Russian agency and EASA signed a working agreement on airworthiness. This year, procedures for its performance are to be agreed on, and mutual evaluation of certification systems is in process. The European party has conducted a check of Russian evidentiary documents which revealed that, according to certification tests, assessments and calculations, materials fully conform to EASA's requirements.

And this is it for now. "Rosaviatsiya lacks resources, competence and international recognition," admits Andrey Kramarenko. "The situation is gradually, although, slowly, improving, especially concerning recognition of certificates issued by the Russian agency. Unfortunately, the Agency is not capable of a step change. In its case, like in the well-known joke, the whole system has to be replaced."

Hopes crash into reality

Export volume of Russian automotive industry remains very low. Nevertheless, a goal is set for its more than twofold increase by 2025. The base case includes growth from 94 thousand units to 240 thousand units or USD 4.9 bln.

Igor Nikolaev, Director of the Strategic Analysis Institute, FBK, believes that it is impossible to double performance within the available time period. "Of course, goals should be ambitious, but we must not ignore the reality either," says Mr. Nikolaev. "In February 2019, production of passenger cars grew by 7%, while sales decreased by more than 3%. It is hard to imagine that a falling, or, at best, a stagnating production could yield growing export."

There are other issues as well. Experts note that even with governmental support, the cost of Russian cars on international markets is too high. To a great extent, this situation is caused by the level of customs duties, which, in absence of special agreements between countries, affects the cost-effectiveness of export. Low quality of distribution and service is also observed.

"This is an endless circle," states Igor Nikolaev. "On the one hand, absence of quality aftersales service limits international promotion. On the other hand, if you are not present in a market, it is difficult to develop the required service infrastructure."

Russian automotive manufacturers are reluctant to speak on their plans for implementation of decisions made by the government. UAZ (the Ulyanovsk Automobile Plant) was the only one to share its outlook on export development. In 2018, the plant delivered 4,451 units of to foreign customers, launched local production in Kazakhstan and opened first dealership centers in Mexico, Lebanon and Costa Rica. Most commonly, the greatest part of UAZ cars are exported to the CIS: Kazakhstan, Belarus, Uzbekistan, Armenia, etc. Their share remains at the level of 70−75% of the total export.

"The domestic automotive industry does have export potential, however, controversial as it may sound, it is related with foreign manufacturers who have established their production facilities in Russia," says Mr. Nikolaev. "They could export from Russia, if not assembled vehicles, then at least sets or specific assemblies. As for finished cars, the potential is limited here."

Freedom of the seas

Russian ship manufacturers face even more shady prospects. The industry stra­tegy implies concentration of potential in military shipbuilding. The civil segment is mostly focused on meeting the needs of domestic customers. Over the recent years, the share of exported military ships has reached around 10%, while civil ship export has been as low as 2%.

The major share of civil ship export is taken up by mixed navigation (river- and sea-going) tankers with the deadweight of 4–12 thousand tons and auxiliary ships. Сompanies of Azerbaijan, Kazakhstan and Turkmenistan, as well as ship owners ope­rating in the waters of the Caspian Basin are the key trading partners of Russian manufacturers.

However, according to expert opi­nions, this market is limited, and even the volumes that have already been reached are expected to fall in the future. Export of relatively small and cheap vessels is spontaneous rather than systematic. Frankly speaking, the sole reason for its existence is shipyards of Asia and the Pacific being loaded with more expensive orders, as well as the market's remoteness and geographic isolation.

Meanwhile, government officials are certain that in the mid- and long-term perspective Russian manufacturers can reckon on a certain share in the global market of civil marine equipment, for example, in the small-tonnage high-speed passenger segment. Moreover, they can expect orders for ice-class equipment from foreign companies. Fishing vessels may be supplied to customers from Africa and certain Asian countries. "A promising export niche could be found for anchored floating structures, namely, floating power plants and desalination plants," states the strategy.

Generally, the government believes that the potential export volume of shipbuilding sector's products and services can be increased 1.5–2 times for any and all products and services. Still it is mentioned that this is only possible on condition of proper development of scientific and engineering potential and reaching advantage of domestic machines compared to foreign competing products. As of now, market players do not have much to boast of.

Deus ex machina

"As global practice shows, export potential of any machinery depends on four aspects: the product's competitiveness, "cheap" money, history of successful supplies and smoothly operating service," says Vladimir Savchuk, Deputy Director General of the Institute of Natural Monopolies Research. Selling a tram, a locomotive or a whole train is only the start of the story. In order to secure your position on a foreign market and to make your machines needed and wanted by the customer, you must ensure conti­nuous availability of spare parts, 24-hour support and urgent repair.

"Creation of own service points must become the key task for further deve­lopment of Russian service," states Mr. Savchuk. And then he reasonably adds that the observed export growth is dri­ven by the most complex projects, which require preliminary (before order placement) development of local sites and training of personnel.

Domestic experience proves the same. The greatest success is attained by those companies that invest in export rather than just sell abroad. For example, UWC stays focused on technology development and pays special attention to its R&D centers. This approach helps it to enter new markets with standards and requirements that far beyond the competences of Russian railway companies. The company has representative offices in North America and Europe. It employs agents in countries with lack of steady demand.
Transmashholding has chosen expansion of geographical footprint as its strategy and is opening representative offices in regions that it deems to be the most promising ones. This is the company's future opportunity to not only export but also to assemble products in fo­reign countries. The company's assets include plants in Lugansk, Kazakhstan, Argentina and South Africa, as well as a joint venture in Iran. Essentially, it is a form of direct investment, that provides the company with a secure position on the international market while decreasing export risks and costs.

Consequently, Russian rolling stock building sector is rapidly turning from an outsider, that it was at the beginning of the 2000s, into a profitable and priority industry of the non-commodity sector of economy. Russian manufacturers have made a quantum leap in the span of a few years. However, manufacturers are still facing numerous issues and have to cope with a number of tasks. Nevertheless, further success of Russian railway car and locomotive building sector can be certainly expected against the backdrop of the current economic and political environment and the go­vernment's support of export. The rest of machine building segments are yet to catch up with the leaders.