BENEFITTING FROM THE CRISIS

Russia's Factories Gear Up for Efficiency

By Jason Bush in Chelyabinsk, Russia

05/08/2009 11:00 AM

Some companies have hired Western consultancies to help redesign Soviet-era plant floors, cut costs and boost productivity. It's working.

At first glance, the Chelyabinsk Forge-and-Press Plant looks like a relic. A notice near the factory gate proudly relates how, in the grim winter of 1941, hundreds of men and women evacuated from Moscow built the facility from scratch. Inside the vast production halls, murals of Lenin and stern-jawed proletarians still gaze down on toiling workers. Overhead, a red banner proclaims: "Glory to the Working Class!"

REUTERS

A number of factories in Russia are modernizing during the crisis.

These days, though, the plant serves more as a showcase of management smarts than as a model of socialist industry. Sure, sales of the factory's auto parts and other forged-metal products are off by half since last summer, and the workforce has been cut from 4,400 to 3,500. But Andrey Gartung, the 26-year-old CEO, believes the global economic crisis offers an opportunity to boost productivity. This year he is adding new product lines, ordering every department to trim costs by 15 percent, and asking workers to ferret out waste wherever they find it-with prizes of up to $300 for the best ideas. "The companies that will survive are the ones that are efficient," Gartung says.

Despite Russia's 7 percent-plus economic growth recently, much of its industry is little changed from Soviet times. Factory productivity is just 16 percent of the US level, according to Strategy Partners, a Moscow management consultancy. Over the years, a buoyant domestic market, high oil prices, and monopolies inherited from Soviet days let dinosaurs stay in business. But now some companies are changing.

Take Chelyabinsk Forge-and-Press: It remains Russia's only producer of the huge wheels used on the Ural truck. And for years after the collapse of the Soviet Union, the plant had few other customers. But in 2005, owner Valery Gartung, a former engineer at the factory and now a member of Parliament, put his 21-year-old son, Andrey, in charge. "Everybody was shocked," says the junior Gartung, who holds a management degree from South Ural State University in Chelyabinsk but had little practical experience.

One of Gartung's first decisions was to reduce the factory's dependence on the Ural. He sought out untapped markets and added new products such as components for railways and the oil industry-just in time, it turns out, as Ural sales hit the skids late last year. Early attempts to interest foreigners in his wares didn't go well: In 2006, Gartung says, a delegation from Daimler told him he'd be better off leveling the factory and starting over. But he persevered. This year exports will likely represent 8 percent of sales, up from 2 percent last year. By 2011 he's aiming for 50 percent.

On the shop floor today you wouldn't know the world is suffering an economic crisis. Workers proudly show off metal links produced for Koch, a German manufacturer of conveyor belts. In April the factory signed up ZF, a German company that builds transmissions and other parts for the likes of BMW and Mercedes-Benz. The Russians will make transmission gears for trucks. "The most important thing is that we now make far, far more kinds of parts," says Alexander Gorkushka, a section head in the forge.

Holistic View

Much of the progress is due to Gartung's decision to engage a consultancy called the Kaizen Institute. The firm, which evangelizes Toyota Motor's production methods and counts Ford and Lockheed-Martin as clients, found plenty of inefficiencies at Chelyabinsk Forge-and-Press. Brian Saylor, a Kaizen senior consultant from Texas who started advising the plant in 2007, says the first thing he noticed was piles of unfinished products lying around. The factory was organized "to make as many pieces as they could at each operation, but not to work as a whole," Saylor says. He recommended factorywide goals rather than production targets for individual employees.

The plant's layout also forced workers to constantly step off the line to fetch parts. Simply by reorganizing production, Gartung managed to boost productivity 50 percent on some lines. He is trying similar changes in accounting, sales, and other white-collar departments, where countless hours are wasted on unnecessary paperwork.

That's typical in Russia. "There's an assumption that the more reports people make, the more the situation is under control," says Konstantin Akimov, deputy managing director of Basic Element, a sprawling conglomerate. "In Japan, only the problems get reported to the top." Akimov, a 37-year-old with an MBA from the University of Chicago, earned a reputation as a management whiz after turning around Poliar, the country's largest maker of commercial refrigerators. There he doubled revenues by identifying production bottlenecks and figuring out which products were most profitable. "The biggest problem in Russia is that everybody's busy, yet it may only be one section that needs to work harder," Akimov says. Now he is attempting to use the same strategy at Basic Element.

For many Russian factories, it may be too late to change. Back in Chelyabinsk, Andrey Gartung gleefully predicts bankruptcy for his less nimble competitors. "Some companies are chronically incapable of making quality products," he says. "Sooner or later, they'll exit the market."

Such a shakeout could be just what Russia needs to rid itself of its inherited industrial weaknesses and give dynamic companies the chance to grow. "The crisis has given a very positive push toward increasing efficiency," says Alexander Idrisov, managing partner at consultancy Strategy Partners. "If you want to survive and emerge stronger from the crisis, you have no alternative."

Bush is BusinessWeek's Moscow bureau chief. With Jack Ewing in Frankfurt.