Russia’s shipbuilding reform nears completion

Vladimir Shmakov: “There is a need to use a divisional model” Vladimir Shmakov: “There is a need to use a divisional model”

The reform of Russian shipbuilding, which was marked by a spate of scandals and behind-the-scenes struggle for gaining control over the strategic industry, is nearing completion, writes Eugene Gerden.

The Russian government has approved a new strategy for the development of the national United Shipbuilding Corporation (USC), Russia’s largest holder of shipbuilding assets. This new strategy was conceived by Vladimir Shmakov, the newly appointed head of USC, with participation from the Ministry of Industry and Trade, as well as Krylovsky State Scientific Center (KGNT ), Russia’s main ship research and design centre. There was an acute need for the new strategy to solve the many problems of USC and the whole of the Russian shipbuilding industry.

Among the problems are the unprofitability of the majority of the industry’s enterprises (the annual net loss of many of them exceeds 500 million rubles), high level of wear and tear of the infrastructure alongside the low rate of renovation, as well as the imited range of production, of merchant vessels in particular. Other problems experienced in the Russian shipbuilding industry are poor quality standards of the finished products, despite the high cost of construction, which is typically 20% to 50% higher than in overseas yards. Finally, the time between order and delivery of Russian-built is 50% to 100% longer than in foreign yards. Adding these factors together it is hardly surprising that USC currently ranks only in 82nd place in the global ranking of shipbuilding companies.

According to the new strategy, the total volume of investment in the development of USC and the Russian shipbuiling industry by 2030 will amount to 1 trillion rubles (US$30 billion), 20% of which will be provided from the federal budget. The majority of the funding will be used to strengthen the scientific and technological potential of USC as well as development and restructuring of its capacities. This should help to implement one of the most important goals for USC in the near future, and to triple its current share in the global market of commercial shipbuilding by 2030.

It is planned, that by 2015 USC’s share of the global shipbuilding market should reach 3.5%, in value terms. By 2020 it is expected to increase to 8%, and to 10% by 2030. At the same time the volume of commercial shipbuilding production should increase by148% in value terms from 2011 levels by 2015, while by 2020 the figure is expected to grow by 320%.

Finally, by 2030 commercial shipbuilding should grow by 420%, compared to 2011, according to the strategy. At the same time it is planned that labour productivity should improve by a factor of 2.5 based on 2012 figures, with three times as many highly skilled workers.

According to the state plans, by 2030 USC’s annual revenue should grow to about 500 billion rubles (US$16,66 billion), compared to about 160 billion rubles in 2012.

In addition, the new strategy involves changes to the management structure of USC. Instead of the regional sub-holdings previously planned (excluding the Far Eastern Shipbuilding Center, which will be operated by a recently established consortium including Rosneft and Gazprombank), there are plans to form five production divisions, three of which will specialise in naval construction (including building surface vessels and submarines as well as provision of service) and two in the merchant sector (to be known as ‘strategic’ and ‘marketable’). According to USC sources, the strategic merchant shipbuilding division will focus on arctic shipbuilding and implementation of major offshore projects, while the marketable division will be involved in building river vessels and implementation of smaller orders for the shipbuilding and shipboard equipment.

Vladimir Shmakov, head of USC, commented: “There is a need to use a divisional model of the corporation’s management, based on project life-cycle management of production, instead of territorial. We decided to establish three strategic divisions, formed in accordance with their specialisation.”

According to him, such divisions will be established in the North-West, the South and the Far East of Russia. As part of this, there are plans to build new production facilities and to modernise those already in existence. These divisions will act as functional subdivisions of USC, and will be closely coordinated during the project implementation phase.

The new strategy is completely different from the previous version of the national shipbuilding strategy, devised by ex-President of USC Andrew Djachkov, which was based on decentralisation of the corporation and the transfer of powers to sub-holdings, and involved significant investment in building new shipyards. The new strategy aims for optimisation of existing capacities and the establishment additional facilities. As part of the new strategy, there are plans to transfer production capacities from the old facilities of the Baltic Plant and Admiralty Shipyards to new sites. At the same time, submarine buiding is expected to transfer to the Sevmash plant, and medium-sized merchant shipbuilding to the St. Petersburg Severnaya Verf or Kaliningrad Yantar shipyards. In addition, construction of nuclear-powered icebreakers will be transferred from Baltic Plant to Severnaya Verf or one of the new yards.

Russian analysts believe that the new strategy was based principally on concepts, proposed by KGNT and the Ministry of Industry and Trade, paying particular attention to icebreaking and offshore projects and the development of R&D activities in cooperation with KGNT. This is contrary to the position of Russia’s first vice-premier Dmitry Rogozin, who traditionally lobbies for development of naval shipbuilding in the government.

At the same time, in addition to shipbuilding activities, USC plans to become a competitive player in the global market of shipboard equipment during the next few years.

According to Mr Shmakov, in accordance with a recent state order, USC should present a cost-saving plan for consideration by Mr Rogozin, who has government responsibility for development of shipbuilding, by the end of October.

It is planned that the new strategy, when adopted, will help resolve one of the major issues in the country’s shipbuilding industry, namely completion of construction of the Zvezda shipyard in the Russian Far East. This is one of the largest shipbuilding projects undertaken in Russia, with an estimated total cost of around 111 billion rubles (US$4 billion). Its implementation has already sparked fierce criticism from some parts of the Russian government, and it became a catalyst for a recent management re-shuffle in USC and a change in its course of its development.

Under the new strategy, Zvezda will concentrate on production of offshore vessels, oil and gas platforms and LNG carriers. The project is funded by USC (through loans), however its direct implementation is to be carried out by a consortium of investors, led by Rosneft, which is expected to be a major future customer of the yard. Among the other members of the consortium are Gazprombank and Sovkomflot, one of Russia’s leading maritime shipping companies, specialising in petroleum and LNG shipping. There is also a possibility that foreign partners might be attracted to the Zvezda operation; these could include General Electric, Parker Drilling and some leading South Korean shipbuilders.

According to Denis Manturov, Russia’s Minister of Industry and Trade, USC will probably keep its 25% stake in Zvezda, though the total value of the investment and the extent of foreign interest has not been disclosed.

In the meantime, the new strategy has been approved in principle by Russia’s President Vladimir Putin, although he said he required greater clarity in the annual forecasts. Mr Putin commented: "These long-term programs are very hard to understand. I’d like to see what is expected to be achieved, say, by 2019 and after this by 2024. Show me a 10-year target for the programme. Maybe this has already been done, however I do not see this in the presented draft.”

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