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. Last Updated: 07/27/2016

After 100 Years, Dinamo Gears Up for Progress

Born on the eve of the 20th century, Dinamo - Russia's biggest supplier of electrical motors and motor parts - had looked like it would die with that century.

Coming off its best two years in 1988 and 1989 Dinamo tanked along with the Russian economy in the early '90s. The factory's output shrank from $80 million a year to barely $2 million, while its debts soared to $10 million.

But rather than folding, the factory celebrated its 100th birthday last November full of optimism for a shining future. After a diverse group of Russian and foreign investors bought control of the factory in the late 1990s and started on a major restructuring program, the firm was given a new lease on life. As well as introducing a fresh management team, the new owners set up a marketing department that both aggressively increased sales to existing clients and began searching out new niches in domestic and foreign markets.


That makes Dinamo one of the exceptions that prove the general rule for Soviet-era holdovers. Even though Russia now has many of the features of a market economy, barely a quarter of Russian enterprises work effectively. Most of those firms are in such a bad way that fresh investment hasn't a chance of turning them around unless it is either accompanied or preceded by drastic restructuring - starting with management, experts say.

"The main problem for Russia's economy is not to attract huge volumes of investments - as much as $2 trillion may be needed over the next 20 years it is believed - but to raise the quality of management," Igor Lipsits, an economist at the government-linked think tank Expert Institute told an economics conference in Moscow in November.

Yevgeny Yasin - the former economics minister who heads the institute - says that a mere quarter of all Russian enterprises have adapted in any way to market conditions.

For the first two-thirds of the 1990s, Dinamo was in fact a classic example of the kinds of problems that Yasin says plague most Russian firms: poor management, weak or non-existent marketing skills and an inability to either find fresh product niches or adapt existing products to consumer demands. In short, the factory stuck to old methods, focusing on the output side of the equation as though demand would continue to be guaranteed by the state.

The factory's behavior was influenced by the fact that just about every electrical train, trolleybus and tram in Russia contains at least some Dinamo parts.

But while that apparent promise of constant cash flow can often be a deadening curse for Russian businesses, in Dinamo's case it actually helped attract the right investors. Despite the factory's then-unpromising prospects, several Russian and foreign investment funds had bought into Dinamo during the mid- to late-'90s, accumulating 65 percent in the firm between them. In May 1998, these investors got together and decided to have their shares managed by First Mercantile Capital Group, a merchant bank specializing in full-cycle equity investments.

The bank promptly moved to take charge, seizing control of Dinamo's nine-member board of directors by putting five of its representatives on the board.

"Dinamo is one of those rare companies in Russia that work with infrastructure projects," said Gennady Lopatinsky, First Mercantile's director for corporate finance and deputy chairman of Dinamo's board. "And we think that the metro, trams and trolleybuses are something that will always be here. Their fleets will always be running and need repairs."

First Mercantile Capital Group dates back to 1993 when the group's members - Russian and foreign professionals - worked for Grant Financial Group, a Russian brokerage. In 1996 Grant Financial Group merged with Creditanstalt Investment Bank. In spring 1998 the group's members founded First Mercantile Capital Group.

Apart from managing Dinamo, the group is also involved with several Russian firms in the nonferrous metallurgy and chemical industries, including the Uralkaly potassium combine and the AVISMA titanium-magnesium combine, which are both located in Berezniki in the Perm region; VSMPO Verkhnesaldinskoye Industrial Enterprise in Verkhnyaya Salda, Sverdlovsk region; and Akron, a fertilizer company in the Novgorod region.

The bank also holds shares in several Russian blue chips, including national power grid operator Unified Energy Systems, LUKoil and Vimpelcom.

Once they were brought in at Dinamo, First Mercantile changed all the firm's top management including the general and financial directors, the chief engineer and head of sales. A marketing department was created.

"The employees of the distribution department were never looking for orders - they just were sitting and waiting by the telephones, typical for a Russian works," said Lopatinsky.


Dinamo's corporate history started in 1899 when the Belgian Central Electric Society founded a factory in Moscow to make engines for trams that were just beginning to replace horse-driven konka - coaches - as the city's main means of public transportation.

The factory's shareholders back then were predominantly French and Belgian, and included some of the biggest international electrical engineering companies of the day.

In 1906, the company was sold to U.S. giant Westinghouse's Russian office, but the Americans' interest was short-lived and they sold the factory to the Russian Dinamo Electric Society, the organization that gave the factory the name it holds today.

However, it held that name only for a couple of decades. Like the rest of Russian industry Dinamo was nationalized and later became the Sergei Kirov Electrical Works, named after Sergei Kirov. A monument to Kirov, a great comrade of Lenin and Stalin - though the latter is rumored to have had him assassinated in 1934 - still stands in the works' grounds.

In 1992, the works was privatized by its employees, who still comprise the numerical majority of its 2,000 shareholders, and its historic name was restored.

Dinamo became a public company with 805,665 shares, then costing 200 rubles each. The shares have never been traded publicly, neither have any dividends been paid on them.

The firm became a holding company, earning about 15 percent of its revenues by renting its premises to commercial enterprises. Dinamo now has 100 percent ownership in its two subsidiaries: a research institute and the Dinamo Plus company that deals with Dinamo's production and sales, general director Alexander Ladygin said.

While the early to mid-1990s had not been good for Dinamo, the August 1998 crisis, which came just a few months after First Mercantile took the reins, was even worse. Production froze for a month after the crisis decimated the banking system and the catastrophic plunge in the ruble's value left Dinamo unable to buy hard currency it needed to pay for many of its supplies.


But once the economy started to right itself, Dinamo was in a good position to charge ahead. For one thing, while there has been no overt government help, the state remains a major, essentially captive client, one that would hate to see the factory close down.

"Dinamo's engines have been used in trams, the metro, trolleybuses all over Russia ever since it appeared," said Andrei Derkach, head of the electric transport department with the federal Transport Ministry.

"Dinamo's production is the best you could have here in terms of cost-effectiveness," Derkach said. "These engines are very good, even after repairs. And our conditions here are very severe and not every piece of good machinery could stand them.

"Just look at our roads - trolleybuses are jumping and dashing between holes. They have to work in awful conditions. Dinamo's engines are the best option for our environment."

However, Dinamo has no monopoly on making electric equipment for public transport. Its biggest competitors are Tatelelectromash in Tatarstan's Naberezhniye Chelny, Krosna-Motor in Moscow and Electrosila in St. Petersburg, which make engines using Dinamo's blueprints.

But then, Dinamo has other arrows in its quiver. The firm also builds large motors for huge machine tools for metallurgical enterprises and smaller motors for cranes, excavators and ships' electric mechanisms.

"It is hard to protect our brand name here in Russia, but it is good that no other enterprise except Dinamo makes the complete set of electric equipment for public transport," First Mercantile's Lopatinsky said.


The works also used to get a fair amount of military orders, but those dried up almost completely. Dinamo therefore diversified, switching one section of its factory that once made large electrical equipment used to demagnetize ships to producing a tiny pump, called Malysh - or baby - that can fit inside a shoe box. The Malysh pumps well water from underground - as deep as 25 meters to 50 meters - and is aimed at sales to dacha owners.

But the biggest innovations introduced by the new management have been in the way the company does business.

Many of Dinamo's traditional sources for orders have dried up. Governments in the former Soviet bloc countries of Central and Eastern Europe have found other suppliers. Meanwhile, cash-strapped administrations across the Commonwealth of Independent States have not been ordering new engines.

If Dinamo were to survive, it would have to adapt to these realities.

"We revived old contacts in the shipbuilding and mining businesses and started to look for new market niches. Sales managers are now traveling and actively seeking new clients," Lopatinsky said.

"The crisis actually helped in the end. Many enterprises that had imported electric appliances and parts from abroad, started to get them cheaper from Dinamo," Lopatinsky said.

"Dinamo has only $500,000 of debts left at this point," he said.

General director Ladygin added that production volumes for the first 10 months of 1999 were up 25 percent compared with the same period of 1998.

"In the last two quarters we started to make profits, we now show about 5 percent to 10 percent profitability," Ladygin said. Dinamo projects annual turnover of $8 million for 1999 once the accounts are finalized and plans to hit $10 million turnover in 2000.

Elsewhere, the new management has slashed the use of barter payments from 80 percent to 25 percent of accounts received.

It also rationalized the factory's personnel situation, firing about 500 employees, but handing out pay raises to those it retained.


But one area that is much harder to restructure is the aging factory itself. The Dinamo works are old and the equipment and buildings run down, Ladygin said.

Dinamo's biggest workshop was built in 1932, but its oldest workshop is as old as the factory itself. Built 100 years ago and badly maintained, it evokes memories of Soviet history textbook pictures of pre-revolutionary factories where workers once toiled like slaves.

But there are no slaves in this outdated and shabby building now. In fact, the huge workshop has just three workers. Only 2,000 workers are employed throughout Dinamo's 21 hectare site.

Some workers in fact look about as old as the shop itself. The average age of Dinamo employees is about 50, officials say. And despite the recent sackings, the firm faces a potential shortage of skilled labor.

"One of our biggest problems is that our workers are aging and there are no young people to replace them," Ladygin said. It's not possible to attract young professionals with the 2,100 rubles ($80) a month that Dinamo offers.

"Youngsters will earn more than that in a day if they trade at markets," said Yan Gepner, deputy director for production. "And it takes time to train a highly qualified specialist who is able to perform precise manual operations. For some operations it takes a year before you could trust a worker."

Despite the huge machine tools filling Dinamo's workshops, a lot of the work is done by hand. Workers insert wires into the right gaps and use small knives to cut untidy bits off plastic forms.

"Modern machine-tools that would save us doing manual work are expensive. Some of the equipment we have here is 25 years old, but it still works well," Gepner said.

All the same, the aging machine tools are being replaced and repairs are being made, but "slowly, because we don't want to take much money from our working capital," Lopatinsky said.

Workers dress in dark shabby clothes, but say they feel quite enthusiastic about the works' prospects.

One staff member, Ivan Ivanov, said: "After the new managers came, we got new orders and have more work. This is good, our salaries increased by about 30 percent after the crisis."

Others were more cautious in their assessment of First Mercantile's stewardship.

"It is too early to evaluate the new ownership," the Transport Ministry's Derkach said. "But at least things are not changing for the worse and that is inspiring. I know they are active - they are talking to Engels [Saratov region] whose trolleybus factory is building the new Stolitsa trolleybus for Moscow that is scheduled to be approved soon."

Gepner added, "What is great is that this summer we started to feel that the economy was beginning to grow. We got new orders and we are negotiating with new clients."


Dinamo is also struggling to get back its old clients: One is Belarus' Belarus Automobile Works, or BELAZ, whose huge trucks traditionally used Dinamo parts. After perestroika made Russian rubles unattractive for Belarus and the Belarussian ruble devalued even further than the Russian version, BELAZ cut its links with Dinamo.

"We still have spindles for BELAZ," said Gepner, indicating a big pile of huge shafts rusting in Dinamo's courtyard. "Our motors for BELAZ are good quality and are much cheaper for the Belarussians. I hope we will work together."

Among other new projects, Dinamo's research institute is working on tiny engines to operate pumps in oil pipelines and to move water in nuclear power plants' cooling systems.

First Mercantile is also helping Dinamo look outside Russia.

"We are bringing in new potential partners, including Czech Republic's Skoda and SKD, we are talking to General Electric and other Western companies. We are investigating former export markets such as the former socialist bloc, India, China, South America," Lopatinsky said.

"We are talking only about cooperation at first.

"But we are bearing in mind that if they work several years with us and production develops together with the [improvement of the] economic situation here, new export markets can be found for Dinamo - maybe they would want to buy into Dinamo.

"Should they become major shareholders, they will help with know-how and their own distribution network."