5Companies targeting the energy and defense industries remain points of growth in machine building. In the future, consolidating the agricultural machine sector could lead to faster growth for the industry.

Statistics show that Russian machine building companies are not doing too well. The total revenue at 41 machine builders that made this year’s Expert 200 only grew by 11.8%. Growth rates in the large machine business were less than half of what they were in the previous year (Chart 24). However, it would not be right to call this a crisis. At the moment, the machine building industry is gradually achieving the very configuration that will allow it to expand fairly rapidly in the future. Companies manufacturing equipment for the energy and defense industries and for agriculture will be at the center of this growth.
Auto manufacturing is the main culprit behind the industry’s stagnation. Car factories make up around half of the sales in our rating’s machine building section. Their earnings compared to last year not only did not increase, but declined somewhat even in ruble terms (the decline totaled 0.5%).
By regularly increasing prices for its products and decreasing the number of the least expensive models, AvtoVAZ is losing its only competitive advantage and is intentionally pulling out of the least expensive market segment, leaving plenty of room for Russian and foreign competitors.
Agricultural machinery is far more deserving of state support than auto manufacturing. Agricultural equipment companies, thrown to the winds by crisis, are beginning to slowly increase their turnover. The industry is consolidating. Of course, this process requires time, though the first results are already noticeable. This year, three of the largest companies made the Expert 200: Rostselmash (83rd), Agromashkholding (80th), and the Uraltrak Chelyabinsk Tractor Factory (120th). Average earnings at these companies increased by 9.6% in 2002. Their profitability remained rather modest (only 1.6%). However, they should be able to recover soon.
First of all, they will be able to expand in the post-Soviet region. In early 2003, Agromashkholding acquired a Kazakh company, Kostanai Diesel Factory, to supplement existing Russian assets. The management of the new holding company plans to continue its expansion on NIS markets. These plans involve acquiring related factories in Ukraine, Belarus, and Kazakhstan. The owners of Rostselmash and the Novoe Sodruzhestvo (New Fellowship) Company have just as ambitious goals. According to press releases, they are currently negotiating to merge several tractor factories, including the Kharkov plant.
Secondly, demand will power this segment’s expansion. In two or three years, Russian agriculture will be forced to update its equipment. At present it consists mostly of machines purchased in the late 1980s and early 1990s (Chart 25).
Equipment for the energy and defense industries. Machine builders’ current woes are often caused by reduced investment demand on the part of oil companies. The results of our ratings show, however, that this demand’s effect has been highly exaggerated.
Yes, capital investment in the oil industry did fall by 12%. However, major energy-oriented companies did not suffer much from this decline. Despite reduced investment demand on the part of oil companies, sales at United Machine Builders (Obedinennye Mashinostroitelnye Zavody; rated 45th) rose by 46.6%, and sales of oil equipment increased by more than 1.5 times.
Companies producing equipment for the energy and natural gas industries also performed fairly well. In contrast to the oil industry, investment in these two industries continued to increase (Chart 26). The largest producer of energy-related equipment, Power Machines (Silovye Mashiny) took the opportunity to increase its earnings by 31.7%. Gazprom contracts for pipeline engines and gas-compressor units helped the Saturn Research and Production Concern (NPO Saturn) grow. In the future, this company will be able to expand thanks to its work with companies in the defense industry. Engines produced by Saturn will be used in fifth-generation Sukhoi fighter jets.
Regardless of whether this project is a success or not, Russian manufacturers producing components for the military will not stand idle. Defense companies continue to expand rapidly. Revenues at defense companies in the Expert 200 increased by 23%. One of the rating’s leaders in terms of sales growth is the Irkut Corporation (36th), whose earnings increased by 2.6 times in 2002. With its long-term contracts with India and recent agreements to supply planes to Malaysia, Irkut’s position among Russia’s defense contractors will remain very stable in the future. Despite the fact that Russia’s improved position on the arms market means that other companies could also see rapid growth. For example, Uralvagonzavod’s revenues will increase by 86.5% as it fills tank orders for export.
In the near future, the Russian defense industry will also be able to make some money on the domestic market. 2002 already saw a significant increase in defense orders, and the government was finally able to pay off its debts to defense contractors acquired between 1996 and1999.

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