Manufacturer of railway components moves production from Luhansk to Rostov

Sign of the times: take out all that lies bad, but it can still work

Photo: UNIAN

Ukrainian engineering companies are shutting down their operations and moving them to a new site in Russia. The production of components for railway rolling stock will be launched by the end of the year at the Kamensky Transport Engineering Plant (KZTM, Rostov oblast). The Luhansk Electric Machine-building Plant (LEMBP) will invest around RUR 475 mn in the development of the newly established enterprise. The memorandum of cooperation for implementation of the project was recently signed at the International Investment Project Sochi 2014 conference by Governor of the Rostov Region Vasily Golubev and CEO of KZTM Vyacheslav Krayushkin.

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LEMBP specializes in the production of electrical equipment, rubber-metal products, composite press materials, as well as gears for railway rolling stock. The equipment produced by the plant is used in the VL, ER, ED, ChS, 2TE116, 2TE10, 2M62, TEP60, TEP70, ChME and TEM2 series of locomotives, many of which are common in Ukraine and the CIS overall.

Almost a third of all manufactured products are used for mining machines. In 2013 the plant earned UAH 138.8 mn in net revenue and its operating profit reached UAH 1.2 mn, according to Eavex Capital. However, in 2011, according to the Art Capital Investment Group, the figures were UAH 226.90 mn and UAH 23.39 mn, respectively. Before the 2008 crisis the company mainly worked for the Ukrainian market. Orders from Ukrzaliznytsya (UZ) accounted for 70% of its output.

Reasons

The idea of moving the Ukrainian company to the territory of Russia appeared some two years ago, says Krayushkin. Since then the site and new equipment were purchased. General Director of the Investment Promotion Agency in the Rostov region Igor Burakov said in a conversation with Capital that his agency began developing the project a year ago.

The company plans to create 800 new jobs and 200 people will be involved in the launch of the project. At present, KZTM shops are already producing gear wheels for traction gear boxes and the company is installing equipment at other industrial sites that should commissioned by the end of 2014.

Golubev says that currently officials are working within the framework of the import substitution road map developed by the regional government: “We are creating not only a new enterprise that is demanded on the market, but also jobs in our region”. Products of the new plant will be in demand directly in the region. In particular, Golubev says the Novocherkassk Electric Locomotive Plant is the partner of the new company.

Krayushkin says the company already has enough orders for the next three years. “Setting up production in Russia has brought the Luhansk company to its customers, seeing as the LEMBP supplied over 90% of its products to the Russian market. Its main customers are Transmashholding and Sinara Group – the leading manufacturers of railway rolling stock. Therefore, the change of location was a logical solution for reducing the costs of administration and logistics,” explained Burakov. Vice President of Russian Railways Anatoly Meshcheryakov commented on the situation saying that the products from the Ukrainian plant were supplied for repair shops, as locomotives, for which it makes components and spare parts are not manufactured in Russia.

Consequences

Industry experts are convinced that the main reason for the Ukrainian company to move shop is associated with the conflict in the eastern part of the country. Senior Analyst at the Art Capital Investment Group Oleksiy Andriychenko says that in conditions of the trade war companies operating on the Russian market have an incentive to obtain Russian registration. “However, this is a very difficult step, coupled with investments, the loss of jobs at the old plant and the opposition of city and state authorities,” said Andriychenko.

Head of the Analytical Department at Eavex Capital Dmytro Churin says the plant is located in Luhansk on a territory that is not controlled by Ukrainian authorities and industrial production levels in the region in August dropped by 85% per annum, so moving the business appears to be economically justified, unfortunately for Ukraine. Moving the production to Russia was apparently stimulated by the administration of the Rostov region, says Director of the Russian agency Infoline-Analytics Mikhail Burmistrov.

For now it is still early to speak of any trend, but it will be visible in the future, as Russia will cut itself off from Ukrainian goods in connection with the signing of the free trade agreement with the European Union, says Head of the Analytical Department at the Concorde Capital Oleksandr Parashchiy. “Accordingly, the Ukrainian companies that are highly dependent on Russian demand will try to move parts of their production chains to Russia to hold onto the market and attract Russian consumers to their products,” assumes the analyst. “This could lead to the loss of companies valuable for Ukraine’s economy and the need to replace them,” agrees Andriychenko. “In this case, Ukraine has other companies that supply parts for locomotives of Ukrzaliznytsya. So, moving LEMBP will not result in a desperate situation and, if necessary, the missing products will be manufactured quickly. Theoretically, the prices for a number of components may slightly increase due to the withdrawal of the traditional supplier”.