• 2023 March 28

    Race to escape import dependence

    The withdrawal of foreign suppliers has become an endurance test for the domestic industry including the shipbuilding. Many companies have managed to pass the stress test successfully but in some cases the difficulties are inevitable. There are problems with the critical ship equipment: engines, power plants, steering machinery, etc. An efficient interaction between private investors and the state supported by mutual guarantees is to be established to solve the problems.

    Last year it was time for domestic manufacturers and their ideological integrator, RF Ministry of Industry and Trade, to present the results of over eight-year work on import substitution to the end consumer. Despite the loud name, the idea is reduced to the revival of the domestic industry and the launching of mass production of high-quality and cost-effective products for all participants of the production chain.

    Marathon of import substitution

    In the framework of long-term state programmes, an interconnected system of goals, tasks, and activities was established and regularly adjusted. State support mechanisms were introduced for their implementation. Among them are co-financing of R&D and capital investments (including those foreseen by the federal targeted programmes), partial subsidizing of expenses for retrofit and modernization of fixed assets, and stimulation of the demand for finished products. In the defense related industries, the prime mechanism is the state defense order. In the segments of civil product manufacture – state and municipal procurement support, subsidizing of loans for the purchase of certain engineering products (cars, aircraft, shipbuilding products), as well as the creation of infrastructure for the implementation of complex investment projects, particularly those within the innovative territorial clusters.

    Over the recent decade, the most popular state support measures in shipbuilding included the subsidizing of interest rates on loans and lease payments for acquiring new vessels, the ship recycling grant, the mechanism of providing fishing quotas for investment in construction of fishing ships. These mechanisms proved to be the most effective ones as they created conditions stimulating domestic customers to have their ships built at Russian shipyards. However, the issue of using domestic ship equipment lacks attention.

    As of today, the foreign components account for 40 to 85% of the total costs in the segment of civil shipbuilding and for 50 to 60% in the segment of military shipbuilding.

    The Strategy for the Development of Shipbuilding until 2035 approved in 2019 foresees that the cost foreign components should range between 35% and 75% of the total construction costs depending on the purpose, type and structure of ships. Thus, a gradual increase of the share of domestic equipment is foreseen at about 3–5% per year.

    From walking to running

    However, the import substitution rates and plans had to be revised in 2022, especially in the part of ship components. Domestically produced equipment was in demand everywhere at once. Due to the withdrawal of the European, Japanese, Korean and other manufacturers representing unfriendly countries, almost all the projects being implemented by Russian shipyards faced the deadline disruption risks.

    Despite the favorable situation amid the retreat of the world's leading competitors, Russian manufacturers have not passed this test in full. A number of companies made the best of their opportunities, especially those implementing the State Defense Order. Pumps, cargo equipment, hydraulic stations, separators and many other types of equipment are being produced in Russia in almost two shifts.

    However, there are serious problems with the production of critical equipment, primarily main engines, main and auxiliary power plants, gearboxes, mechanical pod drives of over 1.2 MW, electric pod drives, thrusters of over 1.1 MW, steering gear, rescue and duty boats.

    Expert estimate the primary development of critically important components at more than RUB 21 billion. RUB 17 billion rubles were allocated for these purposes by RF Government’s Decree dated 20 October 2022 (No. 1872) with the completion of works scheduled for 2024.

    However, the full-scale development, testing, improvement, test operation, preparation of production lines and final launching of mass production may require ten times as much although there is no guarantee of stable demand for such products.

    The absence of a guaranteed order is the main explanation of private investors’ reluctance to invest in the development of new production. The state does not have enough free money, especially for a prompt financing of specific private problems bypassing bureaucratic procedures. It is not a secret that the development of new products sometimes requires targeted and timely financial injections.

    In this respect, the only way out to ensure import substitution in the segment of critical ship equipment is the effective interaction between private investors and the state supported by mutual guarantees. The main condition for the investors’ involvement in the creation of new equipment is a stable demand or a guaranteed order, which even better. If there is a guaranteed order and such equipment is used in all construction projects, the state should have obligations to shipowners which need to be sure of the equipment quality. A significant role in this chain is played by a designer, who determines the possibility of using certain equipment on ships at the initial stage of designing and construction.

    Thus, even in the current situation, import substitution cannot be implemented by instructions or orders alone. The previous year was an illustrative example of suppliers from unfriendly countries being replaced by friendly ones from Turkey, China, etc. Meanwhile, foreign suppliers are stereotypically, or maybe not, given the priority by domestic shipowners.

    In areas where Russian companies managed to maintain their competencies and continue production the production process is mostly successful. To establish new production, all stakeholders need to make a great efforts. A consolidation and a common approach of designers, customers and equipment manufacturers is needed as well as a guaranteed possibility of the equipment use on ships from the initial phases of design, guarantees of its timely supply, ease of installation, commissioning and regular maintenance. Albums showing typical units and products, similar to those used in the Soviet planned economy, could probably serve towards this purpose.

    Aleksey Timofeyev

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