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. Last Updated: 07/27/2016

KamAZ Switches Gears to Enter New Markets

MTOne of the Japanese specialists operating high-tech equipment brought to KamAZ.
NABEREZHNIYE CHELNY, Tatarstan -- A Japanese man in light blue coveralls monitors the digital display on a high-tech Mitsubishi machine that turns chunks of raw metal into finely honed engine components. Another tweaks the regulators of an identical machine a few meters away.

But they aren't in a sleek modern laboratory in Tokyo -- they are more than 1,000 kilometers east of Moscow on the sawdust-covered floor of the KamAZ plant in Naberezhniye Chelny.

The country's leading truck maker has imported computer technology and brought in specialized operators in its efforts to modernize the plant. KamAZ is using the new equipment to produce motors to European emission standards, allowing it to break into new markets, which will hopefully lead to larger profits.

"We are constantly designing new engines and finding other companies to sell them to," said Vladimir Barinov, the head technician of KamAZ's engine-making branch.

It's not the first time foreign experts have visited this sprawling complex of factories in the heart of Tatarstan, but it has been a while. The last time was in the late 1960s, when the Supreme Soviet decided to build the biggest truck factory in the Soviet Union.

It was a huge undertaking that required more resources than the country had at its disposal. Seven hundred European and U.S. companies were contracted to provide machinery for the plant. Even though Washington had a trade embargo in place against the Soviet Union at the time, auto-machinery producer LeSalle was able to secure a deal to supply the factory "through third countries," said Barinov, who has worked at the plant since the 1980s.

When the factory was completed and the first truck rolled off the conveyor belt in 1974, KamAZ was one of the most modern facilities in the world, able to churn out an amazing 150,000 trucks per year.

KamAZ was the main supplier to Russia's heavy industry and the Red Army, and the truck made its name during the 1979-89 Soviet campaign in Afghanistan -- where some 6,000 remain. The plant recently resumed shipments of trucks designed with the war-torn country's rugged terrain in mind.

The 1990s were devastating for

KamAZ, one of the first companies in the former Soviet Union to be privatized, bearing a registration number of 1.

In 1993, its diesel engine plant burned to the ground and the truck maker put itself into heavy debt to rebuild it and restructure production lines. KamAZ eventually traded off stakes for debt with a number of its creditors, including the regional and federal government and some banks.

The federal Property Ministry now holds a 34 percent stake in KamAZ, while Tatarstan's Property Ministry holds 11 percent. The European Bank for Reconstruction and Development and Vneshtorgbank received 7 percent and 19 percent stakes in the company, respectively, in a series of debt-for-share swaps beginning in 1998.

The Interros holding owns less than 4 percent, as does state-owned Sberbank, making the federal government a controlling shareholder in the company, with a combined stake of around 57 percent.

The plant's biggest problem is that it is equipped with what industry insiders call hard machinery -- permanent fixtures that are difficult to re-tool -- meaning it is only possible to produce new parts and new trucks by modifying KamAZ's entire production line.

Hard machinery comes with another problem: It takes as many resources to run the conveyor when producing 20,000 trucks per year as it does to produce 150,000, meaning costs remain high when production is low.

KamAZ officials said they were working to change this by "conserving" parts of the plant. Workers have sealed off a number of facilities and stopped operation on some production lines, lowering the plant's capacity to 75,000 trucks.

KamAZ, however, doesn't expect demand in Russia for its trucks to go higher than 41,000 trucks per year. The plant produced 22,000 trucks and 30,000 engines in 2001 and reported a profit of 71 million rubles ($2.3 million).

KamAZ now is looking to shift some of its facilities toward producing parts for foreign truck makers and engines for trucks used to transport goods to the European Union, and the Japanese equipment is being used for this purpose.

"With our old technology it took five years to go from the design to the actual production of a new part," said Barinov, who is the head technician of KamAZ's engine building. Now that period is closer to three months, he said.

KamAZ received the new computerized technology from Mitsubishi as part of a $150 million credit line from the Japan Bank for International Cooperation that was frozen after the 1998 financial crisis but reopened last year.

When fully operational, the new equipment will allow KamAZ to increase its capacity for heavy truck production, which analysts say will be a key niche for the company in the coming years.

"The new truck will cost 35 to 40 percent more than KamAZ's current common models, which is still much less than a foreign-made vehicle of the same class," said Andrei Kormilitsin, an analyst at Troika Dialog. KamAZ trucks currently cost around $25,000.

The equipment also will allow

KamAZ to produce engines that comply with the Euro 3 environmental standard, with which all vehicles operating in the European Union must comply.

But the new machinery comes with a major drawback, Barinov said.

"Employees will have to be qualified on a different level. You can compare the new technology to cars: It takes one kind of worker to put together a Zaporozhets and another to construct a Mercedes," he said, referring to a Soviet compact car legendary for breaking down.

Naberezhniye Chelny, however, lacks the proper training facilities, so some of the 220 employees who will operate the equipment were trained in Japan.

KamAZ will pay those specialists 1 1/2 to two times more than the plant's average salary of 4,000 rubles ($127) per month.

Barinov said that once KamAZ's profits begin rising, the company will be able to offer higher salaries and attract more qualified employees from outside the city.

KamAZ's industrial prospects are looking bright, said Yulia Zhdanova of United Financial Group, adding that the company can finally restructure some of its debts with the commercial banks following a management change earlier this year.

Former KamAZ general director Ivan Kostin resigned in March, and he was replaced by a former Tatarstan finance minister, Sergei Kogogin.

"Some foreign creditors were saying they would only restructure debts if Kostin left the company," Zhdanova said." KamAZ wouldn't agree to this arrangement, but finally the banks gave in anyway and restructured the debt, receiving their stakes.

"Relations had been strained, though, and this management change can be viewed as positive," she said.

Zhdanova warned, however, that the company's finances are less than transparent. "They don't have an international audit and their Russian accounts are not reliable," she said, adding that the accounts contain a large share of barter arrangements. "It's impossible to see what their profits really are."

Kogogin has initiated some improvements at KamAZ, Zhdanova said. "We are starting to see positive things like asset restructuring, plans to rid themselves of assets that don't fit in with their core activities and a lessening of vertical integration."

Vertical integration means that

KamAZ's various production facilities fit together like links in a chain: The smelter, forge and metal works, along with plate, mechanics and engine facilities, depend on each other to make a truck.

The plant's branches, however, are now being made independent so that the plant can produce parts separately and form ventures with foreign companies.

"Ideally, we would find strategic investors for each part of KamAZ -- any one of our factory complexes would be of great value to one of the country's industrial holdings," said KamAZ spokesman Nail Galiulin.

The motor factory produces rudimentary parts for Sweden's Scania and German-American DaimlerChrysler. The factory also is developing motors for Russian tractor and bus factories.

"Our main goal for next year is to start producing engines industrially and start installing them in highway haulers and supplying them to other bus makers," Barinov said.

"While we are installing new equipment we are developing new parts as well. We're working to improve fuel efficiency, less smoke and exhaust, less pollution. These are the basic things required by the European standard," he said.

Truck makers worldwide need to move to outsourcing to remain profitable, Troika's Kormilitsin said.

"The truck manufacturing business is largely about production of several key units of a vehicle, and divisions producing each joint could be attractive to strategic investors on their own because that means smaller investment into modernization and a larger and more diversified market for sales," he said.

A potential investor could create a joint venture with one of KamAZ's factories to produce separate parts for the market as a whole, he added.

Foreign truck makers do not pose a threat to KamAZ trucks, even after Russia joins the World Trade Organization and a reduction in trade barriers makes it easier to import goods into the country, said Kormilitsin.

KamAZ trucks compete better with foreign trucks than Russian cars compete with foreign cars because their price-to-quality ratio is more proportional, he said, adding that import tariffs on cars may be raised before WTO entry to protect the domestic industry.