Site: Varyag
Varyag Plant
Russkaya Street 94
Vladivostok, 690105, Russia
Phone: (4232) 327824
Fax: (4232) 327715

Date Visited: October 26, 1995

WTEC Attendees:

D. Walsh (report author), H. B. Ali, R. Blidberg, S. Chechin, M. J. DeHaemer, L. Gentry, J. Moniz, J. B. Mooney

Hosts:

Evgeniy N. Leonov

Director

Yuriy A. Filchenok

Vice President for Foreign Trade & Relations

Iosif N. Kanevsky

Director, Joint Stock Company, Dalpribor

(WTEC team visit to the Dalpribor site scheduled for this day was canceled, but Kanevsky briefed them on his company during the visit to Varyag. His comments are written up as the Dalpribor site report).

BACKGROUND

Varyag was formed over 15 years ago to manufacture both military and commercial equipment. During the Soviet Union era, this facility was a state-owned factory producing equipment primarily for the navy and merchant marine. The types of products produced were: electrical and electronic equipment, robots, machines, and plastics. The majority of their business supported the Soviet shipbuilding industry, 90% for the navy and 10% for the merchant marine.

Procurement of equipment for naval and merchant vessels was usually in small production runs. Therefore, the present organization and layout of Varyag is more like a "job shop" than a manufacturing company. Understandably, this results in higher manufacturing overhead than for a company set up to mass-produce products.

Most of their military business orders, along with most of their government work, were lost in 1992-93. The volume of this work was reduced by 500% during this period of just two years. At this time, Varyag was privatized and become a "joint stock company" with shares held by both private investors and the government. Now, the primary business of the company is the manufacture of consumer goods and medical equipment. However, Director Leonov stated that in terms of sales revenue, civil orders have not matched the former revenues from government business. He estimated that they have lost 50% of their business. There have been big problems in making the conversion from defense to the civil sector.

Since the organization of Varyag as a joint stock company, the management has had contacts with various foreign companies and businesses. Some overseas sales have been made, but this business has been limited by Varyag's increasing costs of operations and high taxation of its products. This taxation is a major, if not the primary, factor in limiting the company's viability. The taxes are a series of national and local government taxes which, added together, can add up to 90% of the value of the products produced.

In this high tax situation, Varyag cannot be competitive in international markets. Similar products made on West Coast of the United States and in Japan are actually cheaper, even though Varyag's overhead, facilities, and labor costs are only a fraction what they are in those countries.

An additional difficulty was the loss of component supplier companies when the Soviet Union dissolved. Many of the companies in the former USSR that were suppliers to Varyag are no longer in Russia. Development of reliable, alternative sources of components has been difficult. The situation has been made even more difficult by their isolation from European Russia.

Finally, the close proximity of Japan has permitted low-cost, high quality products from that country to enter the Russian Far East. Many of these products (e.g., telephones, radios, etc.) compete directly with products manufactured by Varyag.

The WTEC team spent about two and a half hours at Varyag. Most of this time was occupied with the briefing presented by Director Leonov and Vice President Filchenok. At the end of the briefing there was a brief (30 minute) walk-through of one of the production areas. The quality of the work products seen was excellent, and both machined and electronic items were shown to team members. The shop area was clean, and the production machines appeared to be well-maintained. The production machines were numerically controlled but were older types.

The buildings occupied by Varyag were quite extensive. Photographs in the "Varyag Factory" brochure show multistory structures. However, the team was told that only two or three of the shops were presently working due to electric power shortages in the Vladivostok area. Director Leonov did say that these shops were working three shifts.

There are 1,700 people presently employed at this site; prior to Perestroika, in 1989, there were 3,700 employees. A high percentage are engineers.

RESEARCH AND DEVELOPMENT ACTIVITIES

Varyag does neither research and development nor prototype development at present. The engineering staff is primarily concerned with production engineering rather than design and engineering of new products. In the future they would like to develop a design staff to do full product design, prototyping, and development in-house. In this way Varyag could eventually become a vertically integrated manufacturing company for limited-volume production runs.

COMMERCIAL ACTIVITIES

Varyag currently offers the following products:

Not all of these lines are in production at present, and those that are being produced are in small quantities. However, the company can quickly adjust production quantities. What they cannot do very well is to mass-produce large quantities. A considerable investment in new production equipment would be required to do this. At present, this is not affordable for Varyag.

Director Leonov indicated that the company still gets a small number of military orders as well as orders from the shipbuilding industry for merchant ship equipment.

The company hopes to get new contracts from a joint Canadian-Russian nuclear power plant development to be built in the Vladivostok region. The project is not yet fully approved. Varyag's "perfect world scenario" would be to supply their shipboard products to a major shipyard which would be built in the Vladivostok area. At present, there are seven repair yards and one small shipyard (fishing boats, ferries, etc.) but no large, newly built yard.

SUMMARY

Varyag has a trained work force and relatively good production facilities. Location in the largest seaport in the Russian Far East, good railroad service connections through to European Russia (and beyond), and an international airport nearby provide the necessary facilities for importing raw materials and components as well as shipment of finished goods. Labor costs are very low for the skills and type of products available. However, high taxation by all levels of government has created a situation where at present this company cannot be very competitive in the international marketplace. In addition, the company needs to reconsider its product lines to avoid direct competition with better-known and lower-cost (at present) Japanese products.

Vice President Filchenok told the team that one of his responsibilities was foreign business development. In estimating his company's costs to produce any given item, he said that if the government tax burden was substantially relieved, then Varyag could be a very low cost producer of high quality goods.

REFERENCE

Varyag Factory. Undated brochure.


Published: August 1996; WTEC Hyper-Librarian