TOP INTERVIEWS Interview with Mr. SERGEY NEDOROSLEV President of Kaskol and Mr. IGOR TEMIROV   Kaskol, 5th June, 2002 Mr. Nedoroslev, one year ago you said that the Russian aircraft industry is going through very difficult times. Is it still the case? Nedoroslev: Concerning the aircraft sales, this year has not seen any big changes; the Russian industry is still in stagnation. In 2001 the whole industry delivered to the market four civil aircrafts, and the situation now is more or less the same. In the military the situation is much better. In the civil aviation industry 15 years ago we had 25% of the market, today we have gone down to an almost zero%. Around 4000 civil aircrafts are in operation, but the problem is, as we have not delivered many of them, we do not have the subsequent replacement demand. This is the down side. The upside is the huge change of mentality. Now you can see the next generation of managers emerging. The aircraft manufacturing business is very complicated  unlike IT companies, when you go to your mother, borrow two thousand dollars, start up your own business, and you are worth two billion dollars in two years  the product is very sophisticated, requiring a huge fundamental knowledge, and there are so many regulatory institutions in the sector. If we take Coca Cola as an example, it is the number one soft drink in the world. Theoretically anyone could do it at home, but 99% of the product s value is in the brand. Whilst anyone can make coke, no one will be able to sell it - even if it was free of charge, no one would take it. The brand is a very important part of an aircraft, although the ability to produce it is no less important. From this point of view, Russia still has the technical ability to work in the global market, but there are other elements to consider first, such as strategy, branding etc. The people responsible for building this strategy and brand are just a handful of people in the company, less than 1%. Even for these people it takes years to streamline all the costs, and to elaborate and adopt general strategies. However, I am quite optimistic about this process in our companies. Last week at EU forum you said that the industry has to increase its competitiveness. The Kaskol s subsidiary  Gidromash facility - has around $50 million in revenues, which is growing steadily. How are you looking to increase your profitability, what is your profitability now and how are you looking to increase efficiency to make you more competitive? Temirov: First of all, it is now time to develop a new agenda for the Russian aerospace industry, because it has been through its toughest time in its history. Graduates from the top Russian aviation schools were not entering the industry, because they did not see a future in it. And if you want to attract right people you have to show them a future. For the last two years we were actively searching for a new agenda, and what we found was that there is no such thing as a national aerospace market. The complexity of the industry is such that it does not exist. From the philosophical point of view, once the key players in the aerospace industry rejected the idea of a nationalised aerospace they became the market leaders; for example, Germany had to admit that it was no longer the leading aerospace manufacturer and by joining the international cooperation forces they immediately went to the first rows of the industry. For us, we now understand that integration is the key for success, you cannot establish an aerospace industry within the Russian borders, even though we have a unique school and heritage. Sadly, despite all the positive things that happened during the perestroika, Russia was shut down within its borders. You have said that you have to think in market terms, and not just build aircrafts. Have you been able to achieve this in Kaskol? What are you greatest achievements now that you have started thinking of the market? Nedoroslev: First of all, I would like to draw your attention to the fact that we were not the founders of these huge factories and plants with 25 000 employees. Actually the founder was the Soviet Union some 50 years ago, and this founder had some ideas but today these ideas could be not this much on demand. To analyse the details and start to change something in the factory works you need to invest five years at least, and only now are we prepared to make effective changes, even though there are no immediate effects. Now we are working on the things that will benefit us in the near future. Today, however, we can show the results of the work we did 4-5 years ago. Temirov: A good example of global business is the Volga Dnepr Air Cargo company, which is a truly globally operating company. The management is based in Ulianovsk; they are truly global in their performance having technical support staff in UK and Houston. Their operation is really effective. We are also in charge of looking at our internal portfolio, at what is working and what is not, and it looks like the things that work are always outside of Russia. So integration into the global market will definitely bring us much benefit. From the strategic perspective, we have made the decision to apply it to the aerospace industry. The whole industry used to be vertical, from A to Z. Now there seems to be a shift in strategy, which you demonstrate. Do you think that the future for Kaskol lies in finding its own niche? Nedoroslev: if you talk about the Kaskol strategy, it is true. We have certain assets, our production facility and so forth, but our strategy is also an asset and we try to analyse how we could be globally competitive. We try to establish what we can do best and then try to deliver this product to everyone. Imagine if you invest 25 years in developing something, and then in 25 years you understand that you made a mistake 25 years ago. You went the wrong way and time is irreversible. We are at an initial stage of the new strategy shift because we were isolated as a country for 80 years and had a corresponding strategy; we did not have the chance to communicate with our potential overseas partners. Even for an effort (which was doomed to failure before you started it) you would have been put in jail for 10 years. This isolation was one of the reasons for Soviet power collapse. There is no such a society or other system that could exist and grow in isolation. So time was lost and together with it the opportunity to develop other technologies, but now we have to cooperate and to be mutually beneficial, to exchange conclusions and experience. Regarding your efforts to adapt to the market, your brands strategy and the name of the Russian aircraft and Kaskol; what is now going to be the strategy to continue your growth and to diversify as well, bearing in mind your cooperation with EADS. Nedoroslev: One of the elements of the strategy is cooperation, and we are lucky to have found partners in Europe, and we are trying to find other partners. Through this cooperation we can share our experience and get their experience, their know-how, not only technical but also managerial. And we are trying to become more familiar with the technical standards situation. The first thing is to enter this market, first maybe with a small share and then to increase it. You can ask me why Russia, with the 26 % of the market, wants to study ways of doing things even better. To explain, I will use the following example: Pepsi Cola and Coca Cola are different soft drinks; it is not that one of them is better they are just different. But, being better is not synonymous to being first; Coca Cola obviously is not the best soft drink, but it is the first. What we are learning now is, for example, that we have certain technology in our factory, which is better. When we came into the market we realised that not everybody who is the best is the first. There are many guys in Russia that will be right in saying that they have the best technologies, unique processing, etc. but they are not the first. We try to be the first. Temirov: It is better to have a 5 % share in an active market than a 100 % share in a stagnant one. The meaning of  better today is not only the quality but also the concept. That is what we have also learnt. You may develop one ideal advanced product, but if you do not have this overall concept you will never succeed. This theory can be fully applied to the aviation industry. Nedoroslev: We also try to analyse why we are not the first, while being the best, by so many ratings of our products: the planes, produced in USSR have set so many records! Why does Martin Backers, a British company that produces an emergency eject-seat for military aircraft, have 99% of the market? And why did we not sell even ten seats on the global market, while our K-36-Zvezda is world-famous for its quality. And once we understood that, we could improve the situation. Will the restructuring and consolidation of the industry be something that will help Russia to boost its exports? Obviously we have an overcapacity, but basically there is no aviation industry worldwide that is not over-capacitated in this or that moment. It is due to the cold war, the end of cold war, and so on. Everybody now faces this problem, but the main problem is that Russia does not have enough managers to fight it effectively. It is a question of the right strategy of restructuring, and it is not a simple question. How do I see the consolidation and the future? I suppose the winner will be not the company that has the best equipment and technologies; but that which has the best team, they will attract more money and at the end of the day acquire other companies that have better technologies and equipment. Kaskol is also involved in the IT sector. Do you feel that the future of Russia is in its intellectual capital? There is no country worldwide whose future is not in its intellectual capital. If they do not develop it, they will not be able to speak of the  future . In using the word  future , I am not implying just 10-15 years. The future of civilisation is in research and development, and finally we will have another civilisation. It may take another million or two million years to modernise and develop ourselves biologically. It is the first time that we have started to modify ourselves and no parliament on the planet will stop the process now. So my answer is that the future of any country is in its intellectual potential, rather than in oil or other NR production. What would your final message be to our readers? Temirov: We are definitely enjoying certain improvements in the macroeconomics of Russia, this is happening not only in Moscow but also in the cities where our group s companies are operating  people get paid, they get a higher quality of services from the state, and the process fortunately seems to be irreversible. In the aviation industry we see that there are, and will be, possibilities for investment because the industry is restructuring, there definitely will be new people coming in from other areas, who see a future in aviation. Nedoroslev: The main message is: we are making money for money. We are not only dreaming of building aeroplanes, we are building an aeroplane to make money. As for the general situation in Russia, I adhere to the fact that a new generation of managers is coming. My children speak four languages each, and they speak English as a native one. There are 200,000 Russian children studying abroad, being educated in international schools, learning how to live with any other nationality. It is a new quality generation. Temirov: I would like to add that Sergey and I worked and lived in the west, we worked for top western companies, and we belong to a club of top Russian managers which is the 2015 Club. We spent much time abroad, then one day we made up our minds to return to Russia, because we wanted to participate in the improvements of this country so our children would be able to live here better. And we adhere to the principle that, if you want something to be done well, do it yourself. This is what we are doing, we are another generation, and we are bringing western advantages and know-how in all aspects of life and business and the Russian culture together. The future of Russia and its integration into the world depends upon this mixing together. Note: WINNE cannot be held responsible for the content of unedited transcriptions. ©World INvestment NEws, 2002. Developed by WINNE