The Government Will Have to Reform the Defense Industry or Depend on Foreign Suppliers
Interview with Yuri Lastochkin, General Director of Saturn NPO
How did integration processes unfold at your company?
The design bureaus and serial plants have always formed a single production chain; therefore it was natural to vertically integrate designers and end product manufacturers. Before the appearance of Saturn NPO, Rybinsk Motors successfully aligned with the Rybinsk Engine-Building Design Bureau and acquired the production capacities of a major machine-building plant of the Atomic Energy Ministry. This allowed us to significantly enhance our scientific and industrial potential, expand the range of our output. But still, it was not enough for carrying out the strategic tasks of the industry, the most important of them being the development of a fighter of the fifth generation. The merger of Rybinsk Motors serial plant with the leading designer of military and civilian gas turbine equipment A. Lyulka-Saturn became a logical step.
Saturn NPO appeared despite the resistance of minority shareholders. The shareholder meetings of Lyulka-Saturn and Rybinsk Motors approved the merger agreement and the transfer deed. We introduced a common share. The Saturn Board of Directors was elected, the company charter was approved and registered, and the share prospectus is now being considered by the Federal Securities' Commission.
The pressure by minority shareholders resulted from the stiffening of competition in the industry, but it will fail to hinder the process of reforming the defense industry. At least, so far, minority shareholders have lost all court cases. In fact, all their lawsuits boil down to ordinary corporate blackmail on the part of Mr. Bodrunov, General Director of Aerospace Equipment Corporation. However, he will never make engines.
At a briefing at the LIMA-2001 exhibition in Malaysia Sergei Bodrunov said that the production of ground engines is what interests him in the engine-making business.
Mr. Bodrunov's interest is understandable. If he has money to invest in this business, he should invest his funds in an engine-making plant of the defense industry that is well known for having unused capacities today. Naturally, professionals in gas turbine making have doubts about the seriousness of such projects.
What are the plans of further advancing Saturn? Do you intend to merge with the Ufa Motor-Building Production Association (UMPO)?
The Ufa Motor-Building Production Association is a very solid big plant that independently manufactures AL-31 engines and their modifications. We cooperate with Ufa on a number of promising programs, including the development, of a new engine. The Ufa plant is a very important partner. There is a possibility that at the next stage of its development Saturn will form an integrated entity involving UMPO. We are now holding talks with UMPO and that is no secret, it has been reported by the press. The negotiating process, a fairly complicated one, is under way. It may be that a single company will be set up with a common share and common board of directors and management. I don't see insurmountable obstacles to that.
How do you see the future of the Moscow Salyut engine plant?
Salyut is a state unitary enterprise and the government should decide about its future. But I personally cannot understand why a plant that does not have its own design bureau is wasting money from state coffers on developing projects it never engaged in before. Salyut is a plant making engines serially. Nothing serious will come of this without uniting with a design bureau, even if Salyut brings together 200, 300 or 500 designers, provides them with computer hardware and software. No matter how loudly Salyut PR people may be speaking to the opposite.
But there are reports that Salyut is upgrading the AL-31F engine and has developed a thrust of up to 14.5 tonnes.
As far as I know nobody has given Salyut a request for proposal for upgrading AL-31F. Likewise anyone may start developing, say, an engine for a flight to the Moon. Engines are not upgraded that way. In order to launch the upgrading of an aircraft engine, a government commission led by representatives of the Air Force and consisting of designers of the aircraft in which the engines are installed has to work for a year. For instance, aircraft of the Su-27 family. Besides, Salyut has not developed anything so far: it only started engines with a well-known fan modification. But aircraft engines should be started in absolutely different conditions, not somewhere behind the screen at night. As for the 14.5 tonne thrust, it was achieved already ten years ago. Therefore, Salyut activities can be called only unjustifiably amateurish. I want to repeat that Salyut will be unable to develop anything serious without a professional design bureau. It lacks the necessary specialists. There are only three-four designers left in this country today who can develop or upgrade an engine. And they don't work for Salyut.
Besides, the contract and RFP for upgrading AL-31F have gone to Saturn, having a powerful design bureau and capability of fulfilling the task most effectively.
What plants and design bureaus may form the other pole of engine making in Russia?
Perm and probably St. Petersburg.
Could you say what R&D programs Saturn is currently working on?
On the whole work, is done in two directions. One the one hand, it is the development of a fifth generation engine. It differs from previous domestic designs by minimal dimensions, a high degree of aerodynamic perfection, a 15% boost in thrust, a 12% rise in the temperature of gas before the turbine, a significant reduction in the number of compressor stages, and increased pressure in the compressor. For the first time in the Russian aircraft engine making it will employ advanced composite materials of a new generation.
On the other hand, the AL-31FP is being overhauled to guarantee an increase in thrust, the transition to digital control systems, the removal of overlapping systems and an extension of its service life. Such an overhaul will allow stepping up and improving aircraft combat capability. This is a flexible concept applied both in this country and abroad, and it will remain on the agenda for a long time.
The development strategies of Saturn rely on the belief that the company designer division is the biggest and most effective in Russian engine making. The company itself combining the potential of over 5,000 experts on engine-making R&D with two test manufacturing facilities, is the leader in R&D in the military-industrial complex.
Does the Air Force oversee this work?
Of course it does. The job simply cannot be done otherwise.
Does Saturn have plans of entering the market of financial instruments the way IAPO with its note program has?
The development or upgrading of any high tech product requires very big financial resources. Profits or ordinary bank loans cannot guarantee such resources. Hence it is necessary to use financial instruments. These can be additional share issues, bonds, notes, ADRs or others. However, such complicated programs cannot be developed overnight. A credit history, an organizational infrastructure, a competent personnel and openness of information are necessary. One of the purposes of setting up Saturn as a high tech and transparent company was to apply such instruments. To this end we have to complete the process of registering the share prospectus, which should allow a sharp rise in capitalization. Our ultimate objective is the blue chip market in high tech.
Are you planning to enter the Russian Trading System (RTS) listing?
We would be interested in trading on foreign floors, not so much the RTS in order to be able to sell our shares. The entire program of entering financial markets is designed for three years. For that purpose, we should seriously restructure the company and streamline non-core productions. It is necessary to change the entire system of expenses and the engineering infrastructure, to engage in modernization. We should work to make the positioning of the company more definite.
Did you mark a profit in the year 2000?
Yes, in 2000 we were a profit-making company. We are the only engine-making company in Russia that has been paying dividends throughout the past five years. We annually pay up to 40-50 million rubles ($1.4-1.7 mln) in dividends, to the state among others. In 2001 the production volume grew 15% against 2000 in comparable prices. I find that quite satisfactory considering that the growth was achieved in conditions of a transition in the generation of products and beginning of a huge ground program. We will complete 2001 with a profit too, of course.
What does Saturn manufacture at the present stage?
We annually repair approximately 400-450 D-30KU/KP engines and produce 40-50 new engines. In addition we develop and manufacture ground equipment ordered by the Unified Energy Systems and Gazprom, carry out large-scale R&D on military aircraft engines and lately we have also conducted successful R&D on short-life small engines for unmanned spacecraft. And we can say that we fully satisfy the domestic and export needs of the Russian Defense Ministry without any involvement of Ukraine. In the two past years we developed test benches and composed all the necessary documents. Saturn service centers have been formed in the Armed Forces to maintain rocket engines, primarily the existing ones, and later gradually replace them with new ones. We would want to set up a facility where the production of all engines for high precision weaponry would be concentrated. One the one hand, the engines are cheap, on the other, they have very high performance parameters: low fuel consumption, very small size. All this work is done under a decision of the General Staff, the Air Force and in the framework of the government program.
Does Saturn carry out international programs as well?
Unfortunately, Russia does not have experience in funding large-scale international cooperation in engine making. It would be a big mistake to call the cooperation with Ukrainian engine-makers international because the standard of designs and technologies in that country is far below international and all the exiting unilaterally lobbied projects are definitely directed at the Russian domestic market, which means Russian design bureaus and plants are being left without work.
We have a long and successful history of cooperation with SNECMA company and several others. As of this year international cooperation is conducted at an absolutely different level. I mean the CFM46 program, i.e. the development of an absolutely new engine on the basis of the French gas generator that had been designed for the successful M-88 military engine. We are developing all the rest, including the power turbine. We are taking part in the program on a parity 50/50 basis. The engine has to be developed, refined and tested, all the parameters permitting the application of the engine on the Western market have to be achieved. The engine should be installed in medium-distance aircraft. For instance, the aircraft that Sukhoi Corporation is planning to make together with Boeing, the upgraded Tu-334. To give you an idea what kind of engine I am speaking about, I will say that when the D-436 engine with which T-234 is currently equipped will replaced by a new one, its range will double. Russia has not had civilian engines of such a class.
In general it should be recognized that while Russia is still capable of making military engines, it is probably not even worth attempting to make civilians single-handed. It is vitally important to encourage international cooperation given our history of civilian engine making, considering the growing lag behind international standards and the low quality of government management of the process. Participation in international cooperation not only brings real money to an enterprise but also the possibility to study up-to-date technologies and train its personnel.
What is the relation between military and civilian production at Saturn?
Currently it is approximately 80:20 in favor of civilian output. But we think that ideally the share of military output should be 35-40% of total, the share of civilian aircraft engines 35-40% and civilian power engineering equipment 30%. That is the objective we are working to.
Do you think the PS-90 engine still has any chances on the market? Why do you think the situation is so poor in civilian engine making?
But the market is almost nonexistent. Russia manufactures almost no civilian aircraft. Airlines are not buying them as the passenger flows are small and the purchasing power of the population is low because the state is not performing the functions it should.
The industrial structure in engine making is very poor today. In the Soviet Union 30-40 institutions were involved in the construction of aircraft engines: plants, design offices, research centers. Now all of them are divided and split, their financial indicators are close to nil. If you take the PS-90 engine, neither the shareholders of Perm Motors, nor the management are interested in developing such an engine at all. Neither Pratt & Whitney, nor Interros group need it. While Interros is simply indifferent to the business, Pratt is doing everything for it not to exist. In these circumstances there will be no upgrading, such as PS-90A2, this is only empty talk. So I personally have great doubts about the future of aircraft engines of this family. It is a different matter that fairly good domestic ground engines have been made, but this is a slightly different thing. The PS-90 engine has been under work for almost 20 years. A total of 200-220 engines have been built and only 60 of them fly. Perm has lost its serial technologies. It has problems with the personnel; professional management is absent. And if orders should appear now - and there is a very high probability of that - they will simply be unable to fulfill them. The people have fled, some 30-40 poorly managed companies have been set up at the plant. There is a whole knot of problems there the solution of which will require enormous organizational effort and resources.
What can you say about the state of AL-41 engine for advanced combat aircraft systems?
Combat aviation is facing a huge number of tasks. As a result, combat systems are becoming very complex and multifunctional. Our strike aircraft systems are heavier than in the West. They are not worse, but our radars are heavier, our avionics is heavier. There is a whole family of AL-41 engines with varying lengths of service life. Correspondingly, this weight requires guaranteed additional thrust. We are trying to reach this objective in our work on AL-41.
Saturn is the only entity in Russia today developing such an engine. It has been flight-tested on the 1.44 aircraft developed at the MiG design bureau. A comprehensive program has been mapped out. An engine with thrust vectoring capability, a new fan and thrust of 14.5 tones will be assembled on the basis of AL-31FP this year.
Saturn is taking part in the work at orders from the Defense Ministry. The facility in Rybinsk will manufacture test samples of the fifth generation engine and correspondingly adopt new technologies on a mass scale. According to plan, the core assembly facility will also be located there. One engine costs over $3 million. It takes 3 to 5 years to launch its production. This is a very big and important job.
The capacities of Al-31F and AL-31FP engines no longer guarantee the necessary thrust-to-weight ratio for the latest Su-30MK modifications - Su-30MKK or Su-30MKI. Does this mean that India and China would want more powerful modifications of AL-31 with a thrust of up to 13.5-14 tonnes?
In the framework of Defense Ministry programs Saturn is working to fundamentally upgrade engines of the AL-31 family to guarantee an increase in thrust among other things. Besides, the more advanced AL-41 engine has absolutely the same size as AL-31. This advantage permits the painless replacement of engines. That is one engine will be removed and another installed in its place in the engine nacelle.
So far, Rybinsk Motors has been manufacturing engines of the third generation. There is the opinion that the production capacities of your plant simply do not meet the production requirements of fifth generation engines.
On the whole, Saturn is the leader in its sphere today. We are the second in the country after Irkutsk Aviation Production Association in the application of computer technologies in designing. Both the production and test-designing facilities of the company are furnished with modern equipment permitting the production of qualitatively new goods.
The industrial potential of Saturn meets the requirements to the production of fifth generation gas turbine equipment. Otherwise there would not have been the decision of the Russian government to give us the status of the core developer and producer of the AL-41 engine. All the rest is idle invention and black PR that can be accounted simply to competition in the industry.
Where is the country's best casting production located? At the Moscow site of Saturn. Where is the most modern facility for testing military engines located?
In Turayevo near Moscow at the Saturn facility, where thrust vectoring engines are tested in conditions simulating actual operating situations. The preparedness of production is the main quality on which the fast and high quality production of any engine depends. This aspect has become one of the most important for us. Comprehensive computerization has been carried out and a program of computer technologies covering the entire enterprise is under implementation. Go-through technologies of designing and manufacturing are being mastered. The reconstruction of research and testing facilities has been completed.
Indisputably, we have problems the same as any other plant. But there are no more of them than elsewhere, and they are resolved at Saturn much faster.
What has been the size of the Saturn investment program in the past few years?
In three years we invested $100 million, and in volume, the speed should grow. Investments in fixed capital, in its active part, of course, amount to $25-30 million a year. I think the rate will be kept up.
The notion that fundamental studies should be financed by the state alone is erroneous today. If we have made our choice in favor of developing science-intensive high tech production, Saturn is capable of shouldering part of the expenses and risks of scientific-technological progress.
You should realize that the price of our workforce is exactly half of what it is in Moscow but the quality is not inferior in any way. The situation is such and so far we are unable to change it. Can you find a worker in Moscow where living standards are much higher than in the provinces who would do something for 6,000-8,000 rubles a month? 15,000-20,000 rubles ($500-700) is the minimum. It is simply impossible to manufacture engines in a place where the price of the workforce is two-three times higher than competitors.
Is Saturn paid for the sale of the license for the AL-31FP engine?
Yes, Saturn is getting money under the contract. We are transferring all the technical documents to the Indians, and the Ufa plant under the same contract is responsible for preparing production, equipment and several technological processes.
Is it possible to sell a similar license to China as well now?
The decision to sell a license is a prerogative of government bodies. If we intend to make the next engine, this should be made regular practice. If we don't, there is no sense in doing so. By the way, we have already delivered nine AL-31FN engines that are being adjusted for singe-engine aircraft. India is also interested in the engine for its LCA project. I see nothing wrong in selling a license to China or developing a new engine together with China and India, in particular an engine of the next generation. Because if the United States slightly loosens export controls over its military output, we will simply drop out from the Indian and Chinese markets. Therefore we should attract them through industrial alliances and joint projects.
If Russia is incapable of guaranteeing normal government procurements, that is because this country is poor. And in this sense the prospects are quite sinister because it will take a very long time before government financing reaches an acceptable level. Is there a way out?
We want to develop a fifth generation engine. It is very expensive. The government has the reserves, for instance, high durable alloys, nickel, titanium, cadmium, aluminum but they are either not used at all or used extremely ineffectively. It would be better to give them to designers. What are the government reserves meant for? For use in extraordinary situations. Isn't the situation in the aircraft industry extraordinary? Yes, it is extremely extraordinary.
Assets are crumbling, personnel is dwindling. In five years Russia will have no skilled workers because the system of vocational training has been disrupted. Nobody wants to stand at the machine tool. In Soviet times both we and the West made a new engine in 10-11 years. Now due to the disintegration we have slipped to 15-16 years while the West has already passed the stage of 5-6 years and is now at a stage when an engine is made in 2-3 years.
Thanks to CALS technologies?
I would be more careful with CALS technologies. There people who write about CALS technologies and earn money that way. The West went ahead thanks to computer technologies and thanks to technical headway. We lost not only the revolution in computers but in engineering. And engineering is the heart of the industry. In the United States 35% of the gross product is generated in engineering, in this country - less than 10%. Though in Soviet times the correlation was absolutely different. We have lost machine-tool making. Today we in Russia cannot find the necessary machine tools to manufacture engines. Only some auxiliary equipment can be bought. We've missed the revolution in welding, in high-precision processing, in grinding.
Yes, we have a program of developing domestic aircraft making written a long time ago. We have well-written programs of developing other industries. Everyone and at all levels understands what should be done. But nobody does a thing. The government does not have the money to reform the military-industrial complex, to resolve many other serious problems. What we now have in the economy is the logical result of the government policy in this sphere. But the market is developing according to its own laws, and sooner or later the government will have to do what it should or fully depend on foreign suppliers in this sphere.
How many engine-making corporations do you think Russia should have?
In terms of the GDP one company would be enough for Russia the same as for Britain or France. But if the actual situation in Russia is taken, probably two. But the problem is that this country has thirty three, not one or two. Therefore, big corporations should be formed that would be self-sufficient and capable of operating on the market on their own. Today we are actually losing traditional engine-making centers. Name at least one plant in Russia that would unite with a design bureau. First we merged with the Rybinsk Motor-Building Design Bureau, then with Lyulka. But nobody except Saturn has done that.
There is the approved program of restructuring the military-industrial complex, though.
The defense industry complex should be restructured with the purpose of advancing it. That is why I think that two diversified companies should be set up to develop and manufacture both civilian and military engines. Today one company is a designer, another is a manufacturer and the third is a supplier. But if there will be two or one companies, the effectiveness of management will grow significantly. The government will be able to closely control the use of resources and demand results. I think that the future belongs to the enterprises that will be able to unite and act in an absolutely different way. At this the emphasis should be on core enterprises where production facilities are operating at relatively full capacity.
Centre for Analysis of Strategies and Technologies (CAST)