OAK: brave new world or return to the past?

Farnborough Air Show » 2006
November 15, 2006, 5:59 AM

Five months ago, on February 20, the long-awaited creation of Russia’s new Unified Aircraft Co. (OAK, in its Russian acronym) became official when President Vladimir Putin signed a decree ordering the immediate amalgamation of all Russian aircraft building enterprises into one large group. This move is the culmination of a trend in the Russian defense industry to form large consortiums–such as the Almaz-Antei Air Defence Enterprises or the Tactical Missiles Corp.–to create some economies of scale and increase efficiency. According to Putin, OAK has been created to “maintain the scientific-industrial potential of Russia’s aircraft manufacturing complex and to ensure the country’s security and defense capabilities.”

During Soviet times, Russians became known for mammoth projects such as hydroelectric power stations or huge steel mills. Russians, it was said, were victims of weaknesses. One was the addiction to gigantomania, the idea that huge, wasteful projects were always better than smaller, properly managed ones. The other was the tendency for these monstrous entities to become a dolgostroi, a construction project that goes on forever with no apparent end to the process.

Company Leadership

Critics of OAK are already saying that it has both characteristics in that it may be too large and diverse a collection of enterprises to create any new efficiencies. And, its creation has been in the works for years. Several years of discussion, studies and planning finally produced a plan that was put in motion almost two years to the day that Putin signed the decree. Throughout this protracted gestation, there has been endless maneuvering and infighting by various personalities to try to gain the upper hand in the organization–what Russians offer refer to as “the struggle beneath the carpet”–before it had even officially been created.

However, from day one there seemed to be little question that the new company would be headed by Aleksei Fedorov, the former general director of the Irkut production enterprise and, more recently, of RSK-MiG in Moscow. Fedorov seemed the logical choice from the beginning with his experience in privatizing the Irkut plant and expertise in successfully managing several programs at one facility simultaneously.

More importantly, Fedorov enjoys extremely good relations with senior government and aerospace officials in India, which has become one of Russia’s biggest export customers. But the list of difficult tasks ahead now that the OAK is an official entity would be a challenge for anyone–even someone with Fedorov’s skills.

According to the original plan drawn up for the OAK some two years ago, the first phase of the consolidation of these enterprises is to audit all the production companies and design bureaus and determine some valuation of their production and engineering capacity. After the audit, all enterprises will be divided into two categories: the “viable” and the “endangered.” Those that are officially categorized as endangered enterprises will either have to change to a different product line or will be closed down. Those that will remain will make up the structure of the new OAK. Ambitiously, this phase is to be completed by December.

Should this phase be carried out successfully (and this is by no means a given when one considers the history of Russian enterprises continuing to operate long beyond the point of economic viability), there still remain numerous difficulties with Russia’s aerospace sector.

One is that the commercial portion of the Russian aerospace industry is at a very low ebb. Only small numbers of the Tupolev Tu-204 and Ilyushin Il-96 airliners have been produced, and the Tu-334 program that was to have been produced by RSK-MiG has failed to launch into full-scale production.

Military programs are still doing fairly well, but most of the business for Mikoyan MiG-29 and Sukhoi Su-27/30 fighters are from three main export customers: China, India and Algeria. The Russian air force has not purchased any substantial numbers of these aircraft for years.

Few New Designs

The lack of any real domestic orders has, in turn, damaged the capability of the industry to produce any new designs. Earlier this year the Russian defense minister, Sergei Ivanov, paid a visit to the Chkalov Aircraft production plant in Novosibirsk to announce plans for the state to place orders for the Su-34 fighter-bomber. “Two Su-34 aircraft will be purchased in 2006, followed by six more in 2007, ten in 2008, and so on,” Ivanov pledged during the ceremony. “Thus, by 2010 we will have purchased an entire air regiment of Su-34 aircraft, a total of 24 planes.”

But critics of the government’s policy are not impressed by such commitments. Aleksandr Golts, a Moscow-based defense reporter, hammered Ivanov and the air force for “pretending” to modernize the armed forces. The Su-34, as he pointed out, is not a new airplane. It is a derivative of the 1980’s-era Su-27 design and first flew in 1993.

“This means that the air force will have to wait another four years for its first air regiment of a fighter that will be out of date before full-scale production even begins,” said Golts. “And the military needs to replace ten air regiments of front-line Su-24 attack bombers. If procurement continues at this pace, the air force won’t receive its full complement of Su-34 fighter-bombers until mid-century, by which time the planes will be hopelessly obsolete.

“The defense industry is simply incapable of developing and producing state-of-the-art military hardware,” continued Golts. “The best it can do is to update Soviet-era designs to meet today’s demands. This is the price that the military pays for pretending that it is still capable of producing the entire spectrum of weapons and hardware, from pistols to ballistic missiles.”

Under Putin, the Russian state now owns the major moneymakers in Russia. Even Rosoboronexport, the state arms export agency, is controlled by the Kremlin’s presidential apparatus, and the arms exporter also has taken over Russia’s largest automobile firm, Avtovaz. This gives the impression that government officials would rather see the aerospace sector become another corporate giant like Gazprom, the Russian natural gas monopoly, than have it operate as separate aerospace enterprises that sometimes compete with one another.

Nonetheless, there may be benefits to having Putin’s people so closely involved in OAK. The running of Gazprom is no more transparent than it was before, but since the energy group became an adjunct of the Kremlin it has been a top economic performer. However, if the OAK is not operated in such a way as to encourage risk-taking and innovation, it could prove to be a net minus for the enterprises that are part of its lineup.

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