Engine-Building is Priority Number One for Vnesheconombank

Engine-Building Portal
Moscow, 04.11.2011
http://www.mashportal.ru/nterview-21405.aspx

OJSC Avtodiesel (the Yaroslavl Engine Plant) incorporated in GAZ Group (The Russian Machines Corporation) is launching a batch production of a new family of medium-class diesel engines in line with ecological standards of Euro-4 and Euro-5 with a life cycle of at least 20-25 years. Vnesheconombank provided credit resources for developing and manufacturing YAMZ-530 engines. In his interview Deputy Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’, Executive Secretary of the Commission on Investments and Technical Retooling of Mechanical Engineering Enterprises and Related Industries of the Union of Russian Machine-Builders told us about specifics of the project and the Bank’s participation in supporting Russian auto engine building.

Information:

The project aims to develop a new competitive family of YAMZ-530 diesel engines using the world’s best practice in developing and testing engines as well as to build a new plant as well as to start up a production of YAMZ-530 engines in line with Euro-4 and Euro-5 standards. The project provides for purchasing new imported equipment from leading foreign manufacturers. Medium-class diesel engines of YAMZ-530 family will be manufactured at a new production facility. The engines were developed by the Yaroslavl engine plant’s designers with the participation of the world’s leading engineering company - AVL-List (Austria). The new family is comprised of row diesel engines with four and six cylinders and with a swept volume of 1.1 liters per a cylinder and a capacity from 120 to 315 horse powers with a life cycle of no less than 25 years. The project’s unique feature: the project provides for the construction of the first plant to manufacture engines in the past 30 years. It will be the most technologically advanced engine-building production facility in Russia with an operations automation level of more than 80%. The project’s innovativeness: the project provides for developing and manufacturing a new medium-class diesel engine with the use of the world’s best practice which meets the requirements of Russia’s automotive industry, the engine is in line with ecological euro-4 and euro-5 standards, has an extended mileage of 700-900 thousand kilometers. Socio-economic effect from implementing the project: the number of jobs to be created is 1250.

- Why did VEB decide to fund the Yaroslavl project?

- An answer is pretty simple. At a time that we started to consider this project in 2008 there were few projects in the automotive industry aimed at building new enterprises initiated by automakers themselves. And there is a rationale for this: it makes sense to build plants that manufacture new innovative products but this is rather expensive and requires significant investments in purchasing know-how and licenses. It took a long time for automotive enterprises to understand it but at some point relevant decisions were taken. We started to fund two pretty similar projects almost simultaneously: building an engine manufacturing facility under the license of Cummins Company at KAMAZ plant in Naberezhnye Chelny and creating a new production faculty at the Yaroslavl engine plant to manufacture YAMZ engines. In terms of sectoral priorities these are number one projects. In all mechanical engineering sectors engine manufacturing is the most high technological production and in actual fact engine building and research and development associated with it are a driving force of mechanical engineering; they use the most advanced materials and technologies. The engine is the heart of any machine.

- How are you going to market new engines? What categories of consumers are they intended for?

- All the latest models of KAMAZ vehicles are equipped with Cummins engines manufactured by KAMAZ plant under Cummins’ license. This is a pretty advanced production facility and the whole model line of KAMAZ is to be equipped with Cummins engines. As far as YAM-530 engines are concerned the product line of these engines will be intended for auto models manufactured by GAZ Group (Russian Machines Corporation) and this is a wide range of such trucks as URAL, Sadko, and buses ( PAZ, KAVZ, LiAZ and GolAZ), road building machines and others. By the way, Yaroslavl’s engines can be installed on KAMAZ vehicles.

- Can YAMZ-530 engines compete with its foreign analogs?

- When you praise something or somebody it always looks like advertising. But the Yaroslavl engines are fully in line with the world’s best models in terms of specific horse power, torque and fuel consumption. And the price of these engines is their serious competitive edge over foreign products.

- What’s the project’s value? How much money has been made available? What’s the structure of investments?

- The project’s total budget set forth in the business plan and discussed by Vnesheconombank is almost 10 billion rubles. Vnesheconombank’s participation share is 5.8 billion rubles; this is more than comfortable own/borrowed funds ratio for us. This ratio evolved historically as originally Russian Machines Company planned to implement the project on its own but the crisis changed the situation and when the Company turned to Vnesheconombank, a significant part of funds had been already invested in the project including R&D, which the Company was doing together with Austria’s AVL Company to develop engine models and adapt them to the Russian market.

- What were the tenure and cost of the credit?

- The credit tenure is 10 years; its investment phase is 3 years. The funding was opened up in early 2010 and now the investment phase is coming to an end. As of today, 4 billion rubles out of the credit line worth 5.8 billion rubles were already used up. The production facility is scheduled to be opened till the year-end. But as in the case of any project in the mechanical engineering additional investments will be needed for a pretty long period of time, at best it will take a year to achieve rated capacity.

- What can you tell about the project’s recoupment?

- Project recoupment is one of the key criteria we are guided by when examining investment projects. Unprofitable, money-losing projects can’t be funded under Vnesheconombank’s requirements. By preliminary estimates the project’s payback period for the investor is about 15 years and is naturally longer that our credit’s tenure. We believe that rather comfortable and acceptable conditions were set for this new engine manufacturing project unprecedented for Russia. The project might prove to be very effective.

- What other advantages for the Russian automotive industry the Avtodiesel project can give?

- I think it should be noted that another result from implementing the new project of GAZ Group is that it can accelerate the creation of Russia’s component base which is an objective of the Russian Automotive industry development strategy for a period of up to 2020. The strategy was approved by the Russian Government. The project’s implementation will make it possible to bring localization level to 60-70% set forth in the business plan upon achieving a rated capacity of up to 50 thousand engines per year.

- Recently, the Government announced that it would put off dates for moving to euro-3 and euro-4 fuels on a mandatory basis. To what extent is this decision painful for automakers that invested in the development of new generation engines?

- There is no doubt that the decision to allow using fuels that do not meet the current ecological requirements is detrimental to the interests of those automakers who invested significant funds in the development of new engines designed to consume more qualitative types of fuel and it has a negative impact on the economics of relevant projects. But taking into account the structure of new engines’ potential consumers I wouldn’t overestimate potential damage from putting off dates for moving to Euro-4. According to Vice Premier Sergei Ivanov, oil industry’s interests and lobbying capabilities took the upper hand this time. But progress has always to beat its way through barriers. But I am hopeful because history shows that the triumph of progress is inevitable.

-Are there any other projects in the engine building sector besides the Yaroslavl project in VEB’s portfolio?

- Yes there are. Providing support for engine building is our priority number one. The auto engine building sector’s distinguishing feature is that investment cycles are very long and regrettably these cycles in the Russian mechanical engineering were interrupted for certain reasons. No investments have been made in the sector in the past 15-20 years, during these years we have lost personnel and competences and only now companies are starting making investments. We are working with almost all machine-building holdings in the aircraft construction sector, automotive industry, shipbuilding and of course in the fuel and energy sector (because engines are the heart of not only machines but also of oil and gas pipelines). We are cooperating actively with the United Engine Building Corporation, which incorporates all the surviving enterprises operating in the engine building sector in aviation, helicopter building and those working for Gazprom. For example, this July we have started to fund the project aimed at building a plant for the Klimov Company worth 6.2 billion rubles. The Company is a well-known design bureau in Saint- Petersburg. It’s a designer and manufacturer of several types of helicopter engines. A credit line opened by the Bank worth 4.95 billion rubles is intended for funding the startup of production of a new type of helicopter engines. By the way, a spillover effect of our investments is that we are addressing a task important for Saint-Petersburg as well as for other “old” Russian cities, above all, Moscow, here I mean a task of relocating production facilities from historical centers where many defense enterprises are located. The new production facility is located in the suburbs of Saint-Petersburg in the shore area far away from residential quarters thus vacating areas in the city’s center, which will be used to implement projects Saint-Petersburg needs badly as a cultural capital.

I hope that in the near future we’ll have new projects with the United Engine Building Corporation.