President of Russia Vladimir Putin: Mr Rakhmanov, let us talk about the state of affairs in the corporation in general and about your plans.
CEO of the United Shipbuilding Corporation Alexei Rakhmanov: I have prepared a package of documents, Mr President. Essentially, these are performance results and charts that provide a good picture of the corporation’s geography.
Our operations have been stable for the past six years, including three years of steady profitability when it comes to company operations. Our net profit remains around one percent but this is due to the fact that the state defence order still accounts for 83 percent of our revenue.
Our employees’ wages are paid regularly and they tend to rise by around seven percent a year, taking into account the fact that output, labour productivity and, basically, people’s ability to make a decent living are growing proportionally.
I must also note that overall, we are paying around 8,000 to 9,000 rubles extra on the region’s average wages for specific categories because the wages at our facilities involved in engineering and design are higher than the average wages in production. At the same time, we are making great efforts to retain the workforce. The workforce is our greatest asset.
Of course, from this perspective, the measures we have been taking even during this difficult year help us to have confidence that our programmes will be carried out consistently.
Vladimir Putin: Wages in your company are growing steadily.
Alexei Rakhmanov: By around seven percent a year. In 2017, 2018 and 2019 wages grew at a rate of around 70 to 80 percent of the inflation rate but right now we are also taking increasing labour productivity into consideration, which results in figures just over the inflation rate but still within the limits of 7.5 to 7.8 percent. Of course, this is an important factor helping us to retain staff.
Regarding our key projects, of course, our main focus is on fulfilling the state defence order. We currently have 50 military ships under construction. This year, we have already commissioned the Knyaz Vladimir lead cruiser into service. The trial run was completed last year but we needed four more months to prepare it for its final transfer to the Navy.
In 2020, we plan to launch 14 combat ships, which is a record number for us even compared to the Soviet period. In Soviet times, we launched six submarines per year and now, in 2020, we are not so very far away from these figures. We hope to deliver at least three and, hopefully, even four submarines to the Navy because this is indeed a very intensive programme.
Our civil shipbuilding projects are also moving forward consistently. We have some impressive products to offer when it comes to civil equipment. Since we received your instructions to increase the share of civil production, our company has been boosting civil equipment production by an average of 30 percent every year. In 2019, our civil output was worth 58 billion rubles. In 2020, we expect to generate revenue of 92 billion rubles, reaching the two-percent advantage in the balance of military and civil production by 2030 that you set as a goal for our corporation.
What is most important is that we see a huge market. The entire scope of orders from Russian clients significantly exceeds our current plans and is close to 511 billion rubles. This is actually a serious challenge for us.
Vladimir Putin: Does this cover 380 ships?
Alexei Rakhmanov: In total, yes. If we are speaking about the programme until 2030, the scope of construction projects is over four hundred vessels, or 486 to be exact. Of course, these orders come primarily from the domestic market but we also assume that we will be developing exports at the same time.
This chart shows our main launches for civil products. This year, we plan to deliver 22 civil ships, including, as Alexei Likhachev [Director General of the State Atomic Energy Corporation Rosatom] reported, the LK-60 nuclear-powered icebreaker that will be officially handed over to Rosatom, and our first PV300 cruise ship that is currently undergoing its final trials at the Krasnoye Sormovo shipyard.
In fact, there is a lot of work, including thanks to the resolutions the Government adopted on fishing boats. We are building 42 fishing trawlers at our shipyards, including a 160-metre factory trawler at the Yantar Shipyard, the largest vessel in our production programme.
In addition to this, we are building our main river-sea navigation vessels at the Krasnoe Sormovo Shipyard. I will report on the production system and cost-cutting measures a little bit later. We used to build seven ships per year on average, but we have increased labour efficiency to make 12 ships per year without any additional investment.
Vladimir Putin: Do you make any catamarans?
Alexei Rakhmanov: Yes, we do. Let me show you. Mr President, when it comes to catamarans, there are two aspects. You may remember our presentation at the Agency for Strategic Initiatives on a student research vessel that we are building together with Sevastopol State University.
We have finally completed the design, and the ship is scheduled to be commissioned in the summer of 2021. It will be based on a platform with composite materials, i.e. carbon fibre. The 25-metre catamaran will be a fully-fledged seagoing vessel up to category three. It will be used to test all the possible future solutions in shipbuilding, including autonomous navigation, cutting-edge interior design we offer to our customers, research capabilities and navigation at low-noise speed, meaning electric propulsion.
Of course, moving forward it could serve as a primary vessel for all top research institutions and universities so that students compete for ocean studies opportunities. It could serve as a stepping stone for designing bigger research vessels for fishing, for the Russian Academy of Sciences. We want to build these too, and we have proposals to this effect.
Vladimir Putin: Does anyone make large catamarans around the world?
Alexei Rakhmanov: Yes, Australia’s Austal is the leading builder.
Vladimir Putin: Right, 40 knots.
Alexei Rakhmanov: Indeed.
Vladimir Putin: I think that it can carry 200 vehicles on board.
Alexei Rakhmanov: Exactly. We want to build a similar catamaran for crossing the Caspian Sea. We are currently working on a ferry that would cross the Caspian Sea from east to west. So far, what we have is 160 cars and 35 knots.
Vladimir Putin: Quite some speed.
Alexei Rakhmanov: True, but this is all a matter of cost.
We have one more interesting solution for the Caspian Sea, which I would like to point out, a container carrier that can travel from the north Iranian port of Bandar-e Anzali to Helsinki in 17 days.
This was discussed at your meetings on the development of the North-South Transport Corridor. In this context, Astrakhan could become a reloading hub for containers, which are very effective for transporting grain, as well as refrigerated containers for perishable fruit and tank containers for sunflower oil.
It turns out that when large 12,000-tonne tanks are used, it takes a very long time to clean them. Tank containers can be reloaded within a matter of 24 hours.
This is a very profitable business, especially if all your instructions are carried out and the internal Russian waterways are used to their rated capacity. This would help us ensure Russia’s transport security.
Our military technical cooperation is developing quite effectively.
Our best accomplishment in the past three years is the progress we have made in the area of efficient manufacturing and the production system. As you can see, our production system allows us to save up to 7 billion rubles a year. Take the Krasnoye Sormovo Shipyard, which I mentioned before, where we have reduced ship manufacturing times from nine to five and a half months, and without additional investment, only through better organisation.
We can see huge potential in increasing the manufacturing of civilian products. If we look at the Russian market, which the Industry Ministry has assessed at 4 trillion rubles, our share could reach 57 percent.
However, we will have to work hard to claim this share, even though it may seem small for a company that accounts for 80 percent of shipbuilding in Russia. However, Mr President, we are taking into account the development of the [Far Eastern] Zvezda Shipyard, which will manufacture expensive one-of-a-kind large capacity vessels. We are clear about our capabilities.
At the same time, we have decided to establish competence centres in order to control manufacturing costs and promote localisation. We will focus mostly on propulsion systems from propellers to engines, the design and construction of ship interiors, electrical equipment and marine engineering, as well as electronics installation, which will allow us to increase added value and hence make more attractive offers to our clients.
Here, using the fishing boat as an example, we see that the current level of localisation – 25 percent – is, unfortunately, very low. Our joint efforts with the Ministry of Industry may help us increase it to almost 70 percent. Actually, this is a major challenge for us.
Vladimir Putin: This should be a consistent and targeted effort.
Alexei Rakhmanov: Mr President, we have found it to be a very challenging task, because we have been left one-on-one with this problem with the Ministry of Industry. Customers who are used to imported components tell us, “Look, we need reliability.” Therefore, these recent decisions will force us to build our own service network with global coverage so we can repair Russian-made engines, units and ship equipment anywhere in the world, be it Cape Horn or the Pacific. In this regard, we would like…
Vladimir Putin: What are the contractors criticising you for?
Alexei Rakhmanov: Contractors or customers?
Vladimir Putin: Customers.
Alexei Rakhmanov: Mr President, in terms of serial production, the customers do not criticise us. When we are making one-off or pilot products, then the questions are about deadlines and price. This is our biggest challenge, but there is a snag. We often start building a ship without knowing its price.
If possible, I will return to the presentation. It reflects several of our key vulnerabilities. First, the Finance Ministry believes we are engaged in the construction of buildings, that is, they equate us with capital construction. But in building construction, they first go to the Main Department of State Expertise, get an expert analysis, and then start building. There is nothing like that in shipbuilding. The customer sets a price they believe to be fair. We take part in a competition and try to prove that this price is good for us, and then, during construction, the customer starts adding all sorts of small changes that ultimately lead to…
Vladimir Putin: So you are now putting all the blame on the customers?
Alexei Rakhmanov: No, Mr President, not at all. In this sense, our preferred customer, the Defence Ministry, uses the estimated price method in the construction of prime orders. In this case, my system-wide proposal is as follows. If we had a body, most likely, the Ministry of Industry and Trade, which would have the regulatory right to approve pricing for the construction of prime orders, this would resolve all our problems. We could show our customer the actual cost of construction, and we would not be losing money either, which, unfortunately, happens.