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August 17, 2008

Russian Helicopter Maker Spins Outside Its Niche

Richard B Gasparre investigates where mergers are taking Russia's air industry.

By cms admin

Whether by accident or design, the ongoing restructuring of Russia’s military aerospace industry looks like a lab experiment in managerial economics. Laboratory economics admittedly sounds like an oxymoron, but Russia’s airplane and helicopter sectors are analogous to a good pair of experimental subjects – similar but not identical.

As discussed in the recent ‘Russia Reconsolidates Military Aerospace Arena’ article, Russia’s fixed-wing (airplane) sector will soon be equivalent to just one company, United Aircraft Corporation (UAC). Similarly, Russia’s rotary-wing (helicopter) sector is essentially one firm: United Industrial Corporation (UIC) Oboronprom.

“The ongoing restructuring of Russia’s military aerospace industry looks like a lab experiment in managerial economics.”

From Many, Two

Both companies emerged through the consolidation of the numerous entities that comprised the Soviet-era aerospace industry. Whereas the fixed-wing sector underwent a two-step consolidation process (first vertical integration of design and fabrication, then horizontal integration), Oboronprom was created in one step – a consolidated consolidation, so to speak.

Oboronprom was chartered in 2002, after the major precursors of UAC had vertically integrated but before these divisions were horizontally integrated to form UAC. The timing was fortuitous in that the price of commodities generally, and oil especially, had just begun to rise. With the entire economy piggybacking on increasing profits denominated in hard currency, a new aerospace consolidation initiative benefited from an economic margin of safety that MAPO, the first vertically integrated airplane maker and the initial incarnation of RAC MiG, had lacked at its inception.

By 2005, the Oboronprom conglomerate had demonstrated its ability to operate effectively without the managerial and corporate governance problems that had plagued MAPO. Given that UAC was created in 2006, Oboronprom arguably served as a blueprint for UAC’s creation, and at a minimum demonstrated that full intra-sector integration could work.

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Similar to the other first-stage vertically integrated firms, such as RAC (MiG), Oboronprom was initially established as a closed joint-stock company (JSC) owned by a handful of public-sector entities, with majority control in the hands of the Russian Federation. Although Oboronprom subsequently became an open JSC, the federal government still retains direct majority control (as it does with UAC), and the firm’s owners are all public-sector entities, either directly or indirectly.

Entering another dimension

Like UAC, Oboronprom is vertically integrated, with a number of production plants downstream, design divisions upstream, full-cycle component manufacturers feeding the value chain, and ancillary operations such as leasing. As holding companies, both firms control a number of subsidiaries that produce different types of aircraft.

Unlike UAC, Oboronprom operates a number of independent businesses outside the vertically integrated aircraft brands.

“Russia’s airplane and helicopter sectors are analogous to a good pair of experimental subjects.”
  • On 6 May 2008, Oboronprom established an engine manufacturing business that rivals those of GE or Rolls-Royce in scope. The United Engine Building Corporation designs and fabricates engines for not only helicopters, but also military and commercial airplanes, missiles and space rockets, naval vessels, and even purely commercial applications such as power generation and oil and gas pumping. UEBC combines assets from within Oboronprom with entities that were previously independent.
  • Oboronprom also operates a standalone electrical machinery division that specialises in vehicular equipment as well as aviation components

Moreover, Oboronprom is in the air defence systems business. Through a subsidiary jointly held by Russia and Belarus, Oboronprom is the systems integrator and upgrader for the S-125 Pechora and a component producer for the S-300PMU.

This subsidiary, IFIG Oboronitelnye Sistemy, also builds a variety of surveillance and EW/ECW systems.

In fact, the only niche where UAC but not Oboronprom operates seems to be unmanned aircraft (UAVs). However, Oboronprom’s entry into this niche is probably only a matter of time and R&D roubles.

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