Russia’s future depends on hi-tech engineering partnerships

2 Nov '09
Oleg Kouzbit, Online News Managing Editor

Dmitry Lavrov, chairman of the board at Nizhny Novgorod’s Industrial Technologies management company, spoke to Marchmont about the role of engineering to bring innovation to Russia’s lagging economy—specifically in the energy sector.

Engineering and innovation

“I see innovation as any new ‘first’, any new quality that never was before. Engineering is a technology to create many new ‘firsts.’ In industry, engineering can spawn innovation in management, create a new product, and boost efficiency.

Russian industry in particular needs to learn how to become far more efficient and how engineering can play a critical management role. We can no longer count on our manpower muscle or the state to keep us competitive,” he says.

Mr. Lavrov feels that we’re at a point in time where Russia simply can’t afford to miss the boat like the USSR did in the1970s when it failed to jettison its bloated state-run economy in favor of developing digital, hi-tech, knowledge-based industries.

“Now, we’re playing catch up,” he says, “if we opt to treat our current technological depression with the same old industrial ‘pills,’ we won’t get anywhere and worse, we’ll squander our national resources in the process. Engineering is the best ‘ointment’ we can use to help keep us healthy through the transition.”

What kills innovation in Russia

Mr. Lavrov feels that what’s holding Russia back is its lack of receptivity to investment. “Entire sectors are simply unable to generate any added value no matter how zealous an investor would be in having them reproduce obsolete technology. These sectors need much more than a mere face-lift.”

Unlike the West’s dynamic knowledge-based economy, Russia is still sleep-walking in the past. And it’s not just the West, Mr. Lavrov worries; Russia is facing an avalanche of competition from Asia.

His “tough love” solution is to shut down whole sectors of the Russian economy which are hopelessly inefficient. While he admits such a move would unleash a tidal wave of social and political protest, in pure economic terms, it’s the only solution that makes sense.

He also puts a lot of blame for Russia’s economic woes squarely on the shoulders of factory owners. “More than half of former Soviet industrial ‘babies’ are still infants. They can barely walk because their owners’ suck every nickel they can from cash flow instead of investing in better technology and efficiency to increase profits.

Mr. Lavrov’s list of other ways Russian companies are milked includes over-valuing real estate, purposely loading companies with more and more debt, dumping stock at fire-sale prices and reducing production levels.

A global shift in economic power centers

As Mr. Lavrov sees it, the current financial crisis we are witnessing has little to do with mortgages or derivatives. What is really going on is redistribution of global economic wealth and power.

“Pillars of finance, production, innovation and commodities are all being repositioned. Derivatives are minor-league; they were once invented to lay the groundwork for this very redistribution process, and are a scapegoat for the current crisis, not its root-cause,” Mr. Lavrov feels.

He believes the world economic community is pushing Russia to assume the role of a global commodity province, hardly an incentive for innovation. Unlike most other experts, however, he’s surprisingly upbeat about the future and feels that innovation in the energy sector could have the same impact it did for the IT and nanosectors.

A ‘Silicon Valley’ of energy services?

“If Russia’s future is to become little more than a commodity province the critical issue for us is what kind of province should we be?

There’s nothing wrong with being commodity-driven if we are also capable of meeting the global demand for top-quality energy—oil as well as other resources. This is ‘commodity hi-tech,’ an energy-focused economy driven by innovation.

To Mr. Lavrov, continuing to dream about Russia as Eurasia’s new darling for broad-based technology, a bustling consumer goods provider or a global knowledge center is fantasy.

“We need to develop the strategy and leadership to re-assert our new role as the global leader in upscale energy markets,” he asserts.

“I’m not just talking about oil and gas. The market also includes energy-related services and nuclear and hydro-energy. Efficiency in hydrocarbon energy has barely scratched the surface. If Russia can successfully assume the pole position in this market, few will ever again question this country’s place in the global economy.

“Politically,” Mr. Lavrov continues, “no one will want to chop Far East regions off mainland Russia if we can develop enough economic capacity to meet Asian demand for what they really expect from us.

It’s innovation that will secure Russia’s place in the post-crisis world, not ‘world-class machine-building’. “In my opinion, this kind of talk is just another way to squander national resources.”

Through engineering to innovation

Mr. Lavrov’s approach is to apply innovative engineering to all aspects of the commodities sector. “It’s applicable to the nuclear energy sector, to resource-saving efforts, to bio-fuel technology and more,” he says.

All of these are hi-tech sectors, but every time we hear about the ‘commodity economy’ we automatically think of oil and gas, ignoring not only bio-fuels but even nuclear power.

And technology engineering is the best way to revitalize our presently depressed sectors. “What engineering does is revolutionize production philosophy rather than simply evolve what is altogether archaic.” To illustrate his point, Mr. Lavrov talked about how hi-tech engineering transformed the cutting tool industry.

“Look at laser sintering technology in metallurgy. It doesn’t require new lathes. What is required is world-class, computer-based mathematics and developed (or imported) laser technologies.”

Too often however, Russian firms waste time, money and energy by insisting on ‘inventing’ something that international producers already have--like high efficiency boilers that we already import from China in mammoth quantities.

As a former manager at Nizhny Novgorod-based Termal, a thermal-electric company, Mr. Lavrov talked about how engineering helps attract new technology.

“Over its 50-year history Termal was content on turning electricity into heat using helical or tubular heating elements. In the West, however, there is a raft of technologies that offer alternative ways of getting thermal power, like ‘thin-and-pliant’ heating class, for example.

Devices that incorporate this technology are four times as efficient as a conventional convector or a heat gun. It’s nonsensical to ‘create’ a technology like this in Russia; it will take us another 20 years to design, build and test it, only adding to our technology lag. Using engineering methods to attract this technology here makes more sense.”

Grieving and hoping…

Despite the obvious advantages of using engineering as an innovation production management technology, there are few companies willing and ready to invest in such change. Mr. Lavrov feels the root cause is lack of competition. But there are a few bright lights.

“Here in the Nizhniy region we have some outstanding companies that have seen the future and embrace it--VNIEF, Sarov Nuclear Center and OKBM, for example.”
We should have hundreds and hundreds of these 21st century companies, he says, but instead, we’re adrift in a sea of economically inefficient, depreciated and antiquated remnants of the Soviet industrial epoch.

The famous GAZ automobile plant is a prime example.

“It is a wartime ‘polutorka truck’ of the past century that is still puffing and panting in a scramble to hit the main road, and dragging down an entire Nizhny district with it.”

Just look east to Tatarstan’s KamAZ—that’s the future of the automotive sector,” he adds.

“KamAZ cut its production sites and personnel by 50% and then re-invested in innovative technology. The result was a huge increase in quality and productivity. How did they do it? Through outsourcing, collaborative engineering with leading technology firms and nurturing fierce competition among its component suppliers.”

Mr. Lavrov went on to say how the rapid adoption of hi-tech in Tatarstan’s automotive sector has triggered Daimler-Benz to come to Russia, “which will introduce even more state-of-the-art Western technologies here.”
“We all hope for a similar GAZ renaissance with Opel and Magna – but unless GAZ bites the bullet like KamAZ, there’s still a lot of uncertainty,” he concluded.

Is there Russian bait for outside technology?

Does Russia have what it takes to set up Western shops here and revamp our own factories using innovative principles? Would the West, as a key world technology center, even want to further its know-how here?

Dmitry Lavrov thinks Russia does offer a number of advantages.

“First of all, we have very low industrial taxes, half of what, say, Germany imposes. Second, we still have a relatively low labor cost. Third, this country still has a very well educated labor force.

Fortunately, Russia’s economic elite has initiated a turn from spawning a mediocre working class to raising ‘classy’, highly-qualified workers. Coupled with what is still retained from the USSR’s fundamental science legacy, this new middle-class staff will give us a chance,” the expert told Marchmont.

All of these advantages must be maximized. According to Mr. Lavrov, sustainable interaction with Western technology companies is key.

‘Mentality trap’

Relations with foreign companies can be painful. What usually throws a spanner in the works is the pitfalls of Russian law, lack of or too stringent technical regulations and standards, not to mention the notorious ‘mentality trap’.

The way to avoid the pitfalls is for western hi-techs to join efforts with Russian engineering companies instead of working directly with producers.

“Over the past decade attempts to do business directly with Russian factories have killed a zillion project ideas. There have, of course, been some success stories orchestrated predominantly by personalities, but there is hardly any systemic work between international technology firms and our factories.

This is yet another proof of how unreceptive many post-Soviet industrial enterprises are to innovation—their industrial mentality simply doesn’t mate well with a hi-tech mind set.”

Bridging the cultural divide

Mr. Lavrov believes that a major cause of friction between Russia and the West is more than the cultural divide.

“The shift to a knowledge-based, hi-tech economy that the West made 30-40 years ago is just beginning here. The key to catching up is putting the focus on engineering. Engineering is the common ‘translation link’ between international firms and post-Soviet industrialists.”

Innovate or die!

An engineering company as a technology operator can also force Russian company owners to reform and do business Western style.

“With foreign technology in hand, engineering companies will be well-positioned to successfully compete with industrial enterprises at tenders. At the same time, the former will need the latter to launch actual production.

Factories will see that technology is no longer far away but right here in Russia, and they will have to either accept terms that engineering companies set for cooperation, or die because they won’t win a tender.”

Western technology + Russian engineering = a new promise

Mr. Lavrov described a typical scenario:

“A Russian engineering company that possesses an advanced Western technology comes to a plant and says, “Want to take part in the tender? You’d better do it with us. Our technology is much more efficient and much less costly; your ‘sledge hammer’ approach won’t win anything. But if you go with us, we will run the show regarding quality management and business culture.”

Mr. Lavrov pointed out what happened when Rosatom opened its doors to foreign technology – but only when Russian engineering firms were partners. Traditionally a closed entity, Rosatom was for all intents and purposes off limits to an international company.

“Partnering with a Russian firm now makes it possible,” he said, “and there’s no reason why this procedure won’t work in many other sectors of Russia’s industry. It’s a win-win situation for everyone--foreign partners get a new and potentially rewarding way of expanding to Russian energy markets and Russia’s economy takes a giant technological leap forward.”
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