S.D. Executives Help Russian Firm to Adapt

As of last month, the Lenin statues had not yet been removed from their perches around Saratov, a Russian city of a million inhabitants about 500 miles southeast of Moscow.

What had fallen with the Soviet Union’s recent collapse was state ownership of the massive Saratov Aviation Plant, which historically has manufactured military and civilian aircraft.

In one of their last official acts, Soviet authorities in January agreed to transfer ownership of the Saratov plant to its 18,000 employees in exchange for 250 million rubles. The transfer is significant, because it serves as a potential model for other state-owned plants that will be privatized, according to San Diegans who are assisting Saratov’s managers with the difficult transition.

“If it succeeds, they will have a success story to tell to other (residents of the former Soviet Union) so other plants can follow,” said Ron Bernstein, associate director of the La Jolla-based Foundation for Enterprise Development.

Bernstein met with Saratov plant managers earlier this year, along with a team that included Steven C. Cosentino, a vice president at La Jolla-based Science Applications International Corp., or SAIC, an employee-owned company that provides substantial financial support to the foundation. SAIC executives were invited because the company is one of the nation’s most successful employee-owned companies.

The San Diegans traveled to Russia under the auspices of Stanford University’s Center for International Security and Arms Control, which is advising plant officials in Russia who face the daunting task of converting state-owned defense plants into privately owned facilities that manufacture commercial goods.

Team members spent several weeks in Russia, presenting a crash course in free-market economics for Saratov’s managers. Course work ranged from simple accounting methods through to stock valuation techniques. Cosentino, who teaches college-level business courses, described the Russians as quick and willing students.

Saratov’s managers are driven by the realization that, if privatization doesn’t succeed, “there’s the prospect of massive unemployment, massive unrest . . . (and) a brain drain as their scientists go elsewhere,” Cosentino said.

Plant managers face significant barriers.

Already, some of the plant’s more profitable divisions are reluctant to share their wealth with their cash-strapped parent. And, supply and coordination problems among divisions are growing as divisions compete for scarce resources.

Alexander Yermishin, Saratov’s general director, has told visitors that Russia’s cash-starved government might try to cancel the deal approved by the now-defunct Soviet Union and negotiate a new deal with a higher price tag. Consequently, plant managers are scrambling to complete key elements of their deal before Russia’s legislature can adopt legislation governing the sale of state-owned plants to private interests.

Sealing the deal has taken considerable time. Plant managers are “almost writing the (corporate) law as they go along” because the Soviet Union’s legal infrastructure failed to address questions of private ownership, Bernstein said.

Inside the massive plant, production teams are scrambling to fill the void that was created as orders from the Soviet Union’s free-spending military branches evaporated. Although 50% of the plant’s historic production had been driven by military orders, defense contracts now account for just 6% of Saratov’s business.

And, although Saratov still manufactures a commercial passenger jet, that program is mired in problems. Plant managers hold contracts to build planes for the Russian government, but “they’re going to lose money on each one they build” because the government is refusing to pay fair-market prices for aircraft, Cosentino said.

Consequently, Saratov, which also sells passenger jets to China, is attempting to sell aircraft to Western airlines. Managers face an uphill fight because their aircraft are not yet capable of meeting certification requirements set by the U.S. Federal Aviation Administration.

Using spare materials, plant managers have retooled part of the plant for commercial work, and Saratov is now manufacturing tea pots, toy trucks and bicycles. The plant also makes low-tech appliances and “one standard doll that everyone in Saratov seems to have,” Cosentino said.

Besides finding new market niches, Saratov’s managers are attempting to solve the accounting nightmare that resulted from decades of dependence upon the powerful central government.

The plant is ill-equipped to compete in the free market because “cost was not a consideration” with the central government’s financial backing, Cosentino said.

SAIC executives used their visit to Saratov to teach managers basic accounting methods that can be used to determine the plant’s manufacturing costs. Plant managers also are struggling to factor in costs generated by the wide array of social programs formerly paid for by the central government.

The deal that turned over the massive plant to employees also included a wide range of additional assets, including workers’ houses, a hotel, a vast farming operation with 3,000 employees, a hospital and a “Palace of Culture.”