MOSCOW - United Technologies Corp. (UTC) first came to Russia in 1893 when Otis elevators were installed in the Kremlin. Today, the company has over 25 joint projects with leading Russian industrial and aerospace companies and has invested $400 million in Russia. Richard Brody, president of United Technologies International Operations in Russia, talked to The Russia Journal about his company's investment in Russia.
THE RUSSIA JOURNAL: What convinced the company to make such a substantial investment in the often volatile Russian marketplace?
RICHARD BRODY: We came to Russia because we saw the possibility of a fruitful marriage between Russia's world-class technology and engineering and our advanced manufacturing and marketing know-how. That applies to all the industry sectors that we are involved in - the aerospace industry and the construction products side.
UTC consists of six divisions. [The first is] Pratt and Whitney, which makes jet engines and industrial and rocket engines. [The second is] Sikorsky Aircraft, a helicopter company founded by a Russian emigre, Igor Sikorsky. We also own the Hamilton Sundstrand Company, which makes a variety of aerospace systems for both aircraft and spacecraft, and it also makes space suits. In addition, we own OTIS, the world's largest elevator company, and Carrier, the world's largest heating and air-conditioning company. We have a division called UTC Fuel Cells, which is a pioneer in making electricity by combining hydrogen and oxygen. We have around 4,000 direct employees in Russia ... plus a further 8,000-9,000 employees in enterprises of which we own less than 50 percent.
RJ: UTC is unlike the majority of Western companies investing in Russia in that it has set up extensive production projects here. Why was UTC willing to take the big leap, at which many have balked, of manufacturing in Russia?
RB: UTC has a global corporate philosophy and a long-term view of all the countries in which we are active, and one of the basic components of that view is that, to be a global company, you need to act locally; you need to become part of the local market. That means not only selling things here but also making them here too when it is appropriate and when it makes business sense.
There is obviously a very big business case for manufacturing elevators here given the demand for new elevators and the availability of production capacity. On the aerospace side, Russia has tremendous manufacturing and engineering capabilities from which we can jointly profit with our Russian partners.
RJ: The Russian aviation industry has experienced a serious decline over the past decade. As one of the main foreign investors in that industry, what do you believe has to be done for it to reestablish its former glory?
RB: There are basically four elements essential to the Russian aviation industry's ability to recover and grow again. We need to see reorganization into economically rational enterprises that can bring engineering and production together in order to serve the needs of the customer directly. We need to see consolidation; a reduction in capacity so that government and private resources are not spread thin.
We need to see an end to restrictions on foreign investment. The 1998 law on aviation prohibits foreign companies from owning more than 25 percent of any aviation enterprise. This hurts only Russia - foreign investors will simply go to other markets, such as China, Latin America or Eastern Europe, to make investments in those aviation industries while Russian aviation starves for capital. They need to lift those restrictions so Russian companies can form mutually beneficial partnerships with foreign companies.
And, finally, Russian government funding needs to be targeted to specific high priority projects where the funding can have impact.
RJ: How do these restrictions specifically damage the industry?
RB: Under the International Civil Aviation Organization [ICAO] Convention noise standards, very few Russian airplanes can fly abroad. Only the Tu-154M, the I-96-300, the Tu-204/214 and the Yak-42D meet international noise standards. In 2006, even-more-stringent rules will come into effect, which no Russian airplane currently meets.
Since foreign-investment re-strictions prevent Russian aviation enterprises from attracting the investment they need to develop new models of aircraft to comply with international standards, these restrictions directly affect the industry's ability to grow. They also reduce the ability of Russian airlines to acquire domestic aircraft at a competitive cost that will allow them to compete on international markets.
It is not just a question of ICAO standards, but also a question of the aging of the fleet. Russia has a very large civil-aviation fleet, but it is also getting older, and, over the next decade, most of the fleet will be forced to retire because of obsolescence. They will need to be replaced, and, again, to the extent that the Russian industry is not able to provide those aircraft, both Russian industry and the airlines will be hurt. They will have to import aircraft from abroad.
RJ: With Sikorsky aircraft and Pratt and Whitney, UTC also operates in the Russian helicopter industry. Have Russian helicopters experienced the same decline as Russian planes?
RB: The helicopter industry has also experienced a decline, but it is different in that the industry is more military in its orientation than the aviation industry. Russia and America were the world's two largest producers of helicopters, and there are still thousands of Russian helicopters around the world.
Russia continues to produce new helicopters, the Mi-17 mainly, but also the world's largest, the Mi-26. But the Russian helicopter fleet, like the civil-aviation fleet, is aging, and we anticipate there will be a need over the next decade to start replacing a large portion of that fleet. There will also be increase in demand as the Russian energy, oil and minerals industry expands.
RJ: Can you divulge details of any future projects in the making for UTC?
RB: We are concentrating on completing the investments that we are committed to and making those investments work.
One of our main current projects is our involvement with Perm. We have a commitment to invest $125 million in Perm. A major component of that investment is the modernization of the PS-90A engine, this is Russia's only modern large commercial jet engine.
We plan to improve its performance so it is compliant with international noise restrictions, and also to improve its reliability. The PS-90A2 project is under way, and we anticipate having the first engine completed by the end of this year and certification by the end of 2004. We are proud of that.
RJ: What sort of hurdles are UTC and its divisions coming up against?
RB: Hamilton Standard Nauka, a joint venture between Hamilton Sundstrand and NPO Nauka, faces a major issue related to the return of value-added tax (VAT) on products that are exported. Under Russian tax law, if you export a product, you are entitled to a refund of VAT paid on the components that go into that product. HS Nauka exports about 80 percent of its products, and it is exactly the kind of enterprise that we know the Russian government wants to see grow; it is a high-tech exporting enterprise. Unfortunate-ly, the Russian government has not refunded HS Nauka's VAT, and a debt has built up, almost $1 million, and this is for a $5 million enterprise.
We were forced to go to court to try to get the money returned to us. We have won 15 out of 15 court cases so far, and we expect to resolve the problem, but these are the kind of things that need to be fixed in order for enterprises like ours to grow. This enterprise is lucky, because UTC can stand behind it and be patient about the return of the money, but for smaller investors, this kind of problem could be lethal.
RJ: And UTC's other divisions?
RB: The lack of an effective housing-finance system dampens demand for renovation of buildings which could greatly improve the quality of life for Russian citizens.
Renovating buildings and replacing worn-out equipment could obviously create business for our OTIS and Carrier divisions.
We see opportunity in many places, but we do see impediments on both the aerospace side and the construction side of our business. Some of these impediments are based on specific restrictions in Russian law or tariff problems, and others are related to the need for Russia to fully implement general economic reforms.
RJ: Despite these problems, UTC evidently remains confident in Russia. What part have Russian engineers played in your success?
RB: The RD-180 rocket engine is one of the world's most advanced liquid-fuel rocket engines, and it is produced in Russia, by Russian engineers. It is one of the finest products of Russian engineering. We think it has a great future, and its technology has many potential applications, both in Russia and the West.
We also employ Russian engineers in St Petersburg to work as part of Pratt & Whitney, Canada's worldwide engineering operation. HS Nauka has just developed its own design bureau and the first product it will work on is the heat exchanger for the new Airbus A380, the new Airbus jumbo jet. That product will be designed and produced exclusively in Russia.
We have confidence in Russian engineering, and we have confidence in Russian manufacturing operations, in Russian technologies. We think that, in partnership with Western companies like ours, in a business environment where the problems have been fixed, there is a great deal of potential.