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A snapshot of Ukrainian industry, as seen from the helm of Azovmash

Interview - October 27, 2011
Alexander Savchuk, President of Azovmash, speaks about the future of business in Ukraine

How do you personally assess the business climate in the country and what is needed to improve it?

One of the most important problems of our country today is a lack of awareness in West about the Eastern mentality. We are a young country. The history of Ukraine is very complicated. Over the last 300 years, we have rarely enjoyed independence, as our state is on the border between East and West. Nevertheless, we want to make Ukraine free and rich, and create all necessary conditions to ensure that people live here as comfortably as possible. However, this is a very difficult task.

How do you feel about the implementation and progress of PPPs  to improve the business climate?

I’ll tell you: we have no other choice. I will tell you very accurately the differences of the era of Leonid Kuchma, the era of Viktor Yushchenko and the Viktor Yanukovych era. When Mr Kuchma came to power, Ukraine did not have a functioning private sector and was not a state. It was a confusing time. Leonid Kuchma deserves a lot of credit for his 10 years in power because Ukrainians came to understand that they have their own country.  The first wave of privatisation began, and we started to build something. As for the Orange Revolution, I want to say that its ideas were right and good. However, those in power paid more attention to clarifying their relationships between each other than to the promotion of Ukraine’s progress, the establishment of international contacts, and the improved efficiency and effectiveness of the public and private sectors. It’s not their fault, but it was difficult for them. Therefore, what a challenging legacy Viktor Yanukovych inherited after his election for president. Believe me, it was very sad. Today the situation has stabilised, but not all at once. I can say that if a person works in a different direction, and works effectively, the pressure he feels from the state has significantly decreased compared to previous years. The question is, what is important for private business? It is important that the business is less interfered with from outside. Unfortunately, one of the main problems in Ukraine is excessive powers of officials. Today, efforts are made to reduce bureaucracy in the country. Sometimes these measures are successful, sometimes they are not. We feel these changes and we can say that the direction taken by the current Government is the right direction. Of course, not everything, but we are at the beginning of a long journey. Despite the fact that the will of the President is the fundamental basis for the direction, not everything depends on him. Likewise, not everything depends on the will of PM Mykola Azarov or VPM Sergei Tigipko – top officials in the government. It is important that the entire chain of command works cohesively. If any official of a regulatory inspection – whether it be fire, tax or any other service – is not kept under strict control, it can hurt small, medium, and even large businesses. The main task today is to clean all that vertical bureaucracy and military officials that prevent the development of progressive movement in Ukraine. This is achieved through public and government control and supervision of law enforcement. I see that today the country’s leaders want to address this issue, which is a positive, because the previous government, declared the same desires to change on paper, but they were afraid to implement them in reality. The fact is that undermining the power of government officials is a big risk for any leader. I can see how it is done today and I must say that it is very complex. I see concrete steps that have been made throughout the previous 20 years. I am an optimist. I think that we will achieve significant progress.

Based on your experience as an MP, what do you think should be done to optimise government operations and cooperation with representatives of business structures?

On top of all the points that I have listed, it is necessary to bring in the proper legal framework. Raising the responsibility and discipline of officials, and establishing over them the social and governmental controls on the legislative level is important. I believe that we can have different attitudes to the current tax code and other defining codes that are adopted or are in the planning stages. At least we finally have a comprehensive document on the most important areas. Similarly, is the case for pension reform. You can easily raise all sorts of populist slogans, and I want to give you an example. Mariupol is one of the most important industrial centres of Ukraine, accounting for  9 per cent of gross domestic product of the state, despite the fact that the proportion of people living here, is only 1 per cent, with almost a third of them being senior citizens. Pension reform is vital to us. Unpopular measures, which are now taken by the Government, are unavoidable. We must have the strength to take them, just as France, Germany, Italy, Spain and other European countries are doing. I repeat: there is no alternative to such measures. We must have the courage to start such reforms at the cost of popularity to benefit future generations.

What does it mean for you personally to be at the head of the company that plays such an important role in Mariupol?

You must understand that “Azovmash” is very diversified. The main industrial centres and headquarters are located in Mariupol, but “Azvomash” is not limited by this as it has a very complex structure. Moreover, Mariupol is not only “Azovmash”, which is good for our company, by the way. There are, in addition to our plant, powerful iron and steel plants and ports. Thus, Mariupol is a poly-industrial centre providing the synergy of connecting powers in different spheres of activity. Mariupol is therefore a very important part of Ukraine, regardless of whether there is “Azovmash” or another enterprise. It is one of the largest industrial centres in the country. However, “Azovmash” certainly contributes to the life of the city, being a significant part of a larger organism. Today in Mariupol at our facilities there are more than 20 thousand employees. Furthermore, “Azovmash” is the largest machine-building enterprise in the entire state, not only with regard to production volumes, but the number of employees as well.

How are your export markets proceeding?

There were times when we exported goods to more than 40 countries, but the crisis has not spared us. Today we should not talk so much about the countries but the results. For example, if we talk about our products like carriages, we should note the following fact: railroad tracks found in the former Soviet Union and Poland are different from European tracks. They are wider. We also have other GOST requirements for railroad cars. For these kinds of products we are together with the Russian Urals railcar plant, located in Nizhny Tagil, sharing 30 per cent of the market. Thus, our work does not depend on the number of countries in which we export or the type of track. You can see one more example in the metallurgical sector. We produce converters for making steel. We do not cooperate with individual countries. We are working with Arcelor Mittal, delivering products to the factories in Krivoy Rog in Ukraine, as well as in Algeria, India, Pakistan, Kazakhstan and other countries. We work with international companies. Our cooperation with “Severstal” does not mean that we only supply products in Cherepovets. Working with the Novolipetsk MC, does not mean we only supply good in Lipetsk. We work with the Industrial Union of Donbass, but send products to more places then just Alchevsk. For example their operations in “Dunaferr”, Hungary also need our products. The modern globalised world is not based on how many countries you supply a product, but on the companies with which you work. To date, only very large international companies have the resources to develop. This applies to companies operating in our sector, and using our equipment because the equipment is very expensive and requires significant investment.

Your year on year sales have nearly doubled. What is the reason?

There are no secrets. This is the consequences of the crisis. In 2008, the crisis hit us, probably much harder than other companies, like ours, because just before its onset, we invested more than $200 million in reconstruction and technical re-equipment of our plant, but did not manage to put it in action. That is when the crisis struck and we should have been using it to service loans. It was a very difficult time for us, perhaps the worst in the history of “Azovmash”. However, when the world began to emerge from the crisis, thanks to new hardware and more modern technologies, we were better prepared to work. This allowed us to increase production volumes 50 per cent compared to pre-crisis times. This figure is more correct, because during the crisis, production figures fell by half. Compared to the pre-crisis period, we invested in modernisation, increased production by 505 and decreased the number of employees by 20 per cent. The positive results we achieved were the result of these actions. Thus, after a very hard period for us, we finally experienced a number of advantages. This is the real specifics of “Azovmash” that explains a lot about our business.

What are the main competitive advantages of the enterprise which allowed it to achieve success and reach its current level?

In fact, you asked a very difficult question. Our main strength is not one single factor, but a symbiotic relationship and the sum of many terms. I want to note the importance of our top managers. This is crucial because of the scientific and technological base created in the enterprise. Our market, like any other, has its limits. The crisis has forced us to revise our concept of development. We concluded that the main thing is quality products and customer requirements. The market can not grow indefinitely. The leading position is occupied by the one who offers the best products and most favorable terms. Therefore, we don’t hesitate to spend huge sums on the development of new technologies as we understand that this is a necessary step. One of my wishes would be for everyone from general manager to the ordinary worker to get used to change. In this respect, the crisis helped us a lot, oddly enough. It is because of the crisis that our people realised that we must differentiate ourselves from the competition through higher quality and more efficient workflow, or we will be without work. In Germany, I saw the most powerful production lines stopped because the people had no incentive to work and upgrade. I once offered to buy a lot of German and French companies that were manufacturing wagons. These companies were in poor condition, and one of the main reasons was the fact that people did not have the interest and desire to continue the development of the company. Despite the fact that, for example, in Germany the state and legislative levels have established all necessary conditions for the promotion of its development such as exemption from federal and state taxes, and so on. It is useless to invest in such enterprises, because it all depends on mentality. Mariupol is a working city, and people realise that the factory is the breadwinner, on which the future of workers and their families depend on. In Mariupol there are many examples of how people work at the factory with their families for generations. Many families exist in which the grandfather, father, and son have dedicated their entire lives to working in “Azovmash”. For us it is important to keep these traditions and to assure people understand that the plant is also a family, and if someone from the family has problems, we can help each other. These are the two main reasons for our success: technical upgrading and the mentality of our people.

How are you investing in your employees further education and professional development?

Of course, this aspect is of great importance for our company. Without this, further work would be impossible. Each year, about 12 members of our staff receive specialised training. We are very seriously engaged in this, sending employees to various business trips. For example, when we supply our products to the company Arcelor Mittal, the largest of our partners and customers, our people go to India, Algeria and other countries to monitor the installation of equipment. They live there for a long time, training local workers to the rules of operation of our machines. In turn, our staff must themselves be competent and trained to the highest level. For us it is very important, so we give this issue a lot of attention. Moreover, we work hard to ensure that people have developed an understanding of the importance of the educational process. Employees should be aware that for them it is even more important than for us, because no courses will help if a person has no desire to educate themselves.

What is your vision of the future for Azovmash over the next three to five years?

We always think about it, because our market is great, but the country has huge resources. We are now working on a new car. The project is tentatively called “East-West”, and our aim is to build a train, we develop, that could go from Vladivostok to the English Channel. This is a very difficult task, because in the CIS tracks are wider than in Europe, and require a special truck that can automatically narrow. Therefore, the project is innovative and not very easy. In another line of our products - Metallurgical Equipment – it should be noted that its production is not particularly relevant for Europe at the moment, because the steel industry is concentrated mainly in Eastern Europe, Africa, India and China. But in this regard “Azovmash” has partnered with companies such as Siemens. For example, today we are launching a new line of casting steel using the latest equipment. This is important because Europe needs a high-quality alloy steel for the automobile and energy industries. We closely work with companies from Switzerland, Germany and Italy, and I think that next year we will deliver our steel in Europe. We also have a large project in the field of wind turbines.

Does your focus include any British company?

We cooperate with international companies. Some have offices in the UK, but we do not see Europe in terms of countries. For us European companies are everywhere. The world is changing, becoming more globalised, and now there are no such boundaries as before.