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A chance for ‘Motor Sich’

Aleksandr Yaroslavskyi, Ukrainian ‘Major League’ businessman, is known for his interest in industrial assets with a painful fate. After the Kharkiv Tractor Plant and Dnipro Metallurgical Plant, he decided to deal with ‘Motor Sich’ located in Zaporizhzhia together with Chinese investors. It was officially announced on the website of his DCH group yesterday.

OBOZREVATEL decided to figure out what awaits this barely living enterprise after the arrival of Yaroslavskyi.


‘Motor Sich’ in Ukraine and the world

As of today, JSC ‘Motor Sich’ is already 113 years old. It has been manufacturing aircraft engines for 105 (!) years since the First World War. The primary goods are aircraft engines and gas turbines. The business system includes several production units and service organizations. The structure of ‘Motor Sich’ provides for the development of scientific and technical goods, manufacturing, and service. There are also several joint ventures abroad in the UAE (Dubai), China and Belarus, in addition to factories in Ukraine. However, in the former fraternal republic it did not work out very well as the Batka (translator’s note – the Batka means ‘father’ in Belarussian. Also used for referring to Mr Lukashenko, the President of Belarus) is too jealous of any attempts to do business on its territory without his participation.

‘Motor Sich’ system employed 26.5 thousand people; now it is 5 thousand (34%) less. The financial performance is steadily decreasing. The volume of product sales during this period decreased by 5.3 times, and the net profit from a profit of 3.1 billion turned into a loss of UAH 220 million.

Why is this happening? We shall return to this subject later when we get an idea of ​​what the uniqueness of this enterprise is.

The average person associates the aviation industry with an airport, an air carrier, and an aeroplane but not with patents, an assembly line, and the economic map of the world where we see the units of aircraft manufacturing enterprises. It is challenging to build planes but even more challenging to manufacture aircraft engines. It takes 15-20 years to develop and produce new aircraft models, and 20-25 years for the engine. That is, the engine will be first, then the plane! Moreover, the cost of an aircraft engine is 1/3 of the cost of the entire ‘iron bird’.

And already since aviation engine building is a capital and intellect intensive industry, only rich countries have the strength to maintain and develop it. Alas, Ukraine does not have enough economic strength for such an expensive toy. Motor Sich felt decent when the Russian market was open. Then the problems began tried to be solved by the then leadership in the person of Viacheslav Boguslaev, the well-known industrialist, by inviting Chinese investors.

Why Chinese investors?

Let us start with the fact that China is the #1 trade partner for Ukraine in terms of the volume of trade. The aviation is vital for the People’s Republic of China not only for reasons of defence and offensive power as it is commonly believed for some reason but also for entirely peaceful passenger and cargo purposes. At the same time, which is already essential for Ukraine and ‘Motor Sich’, the engines of Chinese aircraft lag behind the advanced industry level by 1-2 generations, and the technological gap reaches 20 years.

In terms of international economics and marketing, this means a huge sales market for Ukrainian aircraft engines. According to Boeing research, total Chinese civil aviation demand is estimated at $1.2 trillion, and demand for maintenance services at $1.5 trillion over the next two decades. Since a third of this amount will be accounted for by aircraft engines, the market for engines and services for them will amount to $1 trillion. Of these, at least $400 billion will be spent on the purchase of new additional engines for the Chinese fleet. There is something to fight for if you know what I mean. Especially, given that Ukraine is historically the largest actual supplier of these goods, as a result of which 1200 engines of our manufacturing are currently in operation in the People’s Republic of China.

Global competitors

Of course, the Chinese market is of interest not only to Ukraine but to all global players in the industry. Moreover, the People’s Republic of China government not only declares but also conducts a policy of economic openness in the aviation industry. The leading states in aircraft construction (the USA, the UK, Russia, France, Germany) have already built their plants in China and are desperately fighting for market share.

 ‘Motor Sich’ plant, which is now operating in the People’s Republic of China, is the small reserve that Ukraine has made for the development of the opening opportunities. Here they make SKD assembly and service the engines of Chinese aircraft. But that is all for now. Why? Because the Chinese investors (Skyrizon and Xinwei) bought shares of JSC ‘Motor Sich’. And even invested $100 million. But they faced the ‘charms’ of Ukrainian statehood while trying to change the corporate ownership structure to look more attractive on the Shanghai Stock Exchange and in front of China Development Bank, its essential creditor.

‘Svinarchuks’’ long arms

‘Motor Sich’ found itself in a very suspended state thanks to the previous government, which was very fond of making money on the military and industrial complex. The Chinese investors decided to concentrate 50% of ‘Motor Sich’ shares in Skyrizon, and the original investing entity Xinwei announced the suspension of trading on the Shanghai Stock Exchange for an M&A transaction with Skyrizon in December 2016. But when Skyrizon applied the concentration of that same 50 % to the Antimonopoly Committee of Ukraine in 2017, a ‘strange coincidence’ occurred. The Security Service of Ukraine initiated a criminal case, recommended the application to be withdrawn and enter into negotiations with the authorities. In a purely Svinarchuk-like style, under the pretext of particular national interests, the shares of Chinese investors were arrested by a court decision.

After that, the traditional rock and roll (smelling of corruption) under the previous government began. As a result, for 25% of the shares of ‘Motor Sich’, which were supposed to go to the State Concern ‘UkrOboronProm’, a ‘letter of enfranchisement’ were promised to the Chinese investors in 2018 (the permission of the Antimonopoly Committee of Ukraine) and the opportunity to work calmly.

The application went back to the Antimonopoly Committee of Ukraine in 2019, but the situation got nowhere in the end. Under the pretext of a foreign policy factor, of course. Allegedly, the United States is against the sale of an airline to an investor from China, its global competitor. First of all, because Chinese investors tried to solve the problem purely in the legal field, not feeding the elite corruption of the then ruling regimen. As a result, the transfer of shares to ‘UkrOboronProm’ did not take place, the agreements between the concern and Skyrizon were terminated due to the expiration of their validity period, i.e. due to the state’s failure to fulfil its obligations.

So, the appearance of the Ukrainian investor in the person of Aleksandr Yaroslavskyi at Motor Sich is a non-linear opportunity to break the deadlock. That is, this is a way out of the strategic stupor for the enterprise, and a way out of the traps set by their predecessors for the new Ukrainian government. Moreover, the departure from his post of Terentyev, who is strongly associated with the previous government, allows to coldly abandon the toxic legacy and make a decision in favour of legitimate investors.

The light at the end of the tunnel or the locomotive towards you?

Of course, now the ‘Svinarchuks’ on a payroll (a hybrid of porokhobots (translator’s note – Poroshenko’s followers) and the Svinarchuks) will start yelling at all corners about the inadmissibility of cooperation with communist China and that Ukraine’s pro-Western choice is under threat. But if Zelenskyi and his team really plan to reform the country, look decent in the upcoming local elections and run for a second term, they should not listen to them but its 73%, the South-East and industrial cities.

In 5-10 years, even such ‘Motor Sich’ engines, which have no analogues in the world (the unique large turbojet D-18T bypass engine, the powerful D-136 turboshaft engine and the most classic turboshaft engine of the TV3-117 series) will face severe challenges from the side of competitors. And if they do not take advantage of the opportunities opening now, the enterprise will lose its positions in the People’s Republic of China market within the next 2-3 years.

What will happen to ‘Motor Sich’ without Chinese investors and the Chinese market?

Technological obsolescence and lack of demand for the goods, lack of funds for research and development, nearly 20 thousand workers and engineers throw out on the street and leaving their families penniless. Plus, the subcontractors like the State Enterprise ‘Design Bureau “Progress” named after Ivchenko’ and the State Enterprise ‘Antonov’ with labour collectives totalling 10 thousand employees, who also need to feed their families. The Ze-Cabinet of Ministers then will pay jobseeker’s allowance, not the ‘Svinarchuks’. And the rating of the Chinese Communist Party will suffer, but the ‘People’s Servants’ ones will.

What will happen to Ukraine if Chinese investors will be compromised? Broken interstate relations, the breakdown of trade partnerships and, probably, the Stockholm arbitration. Moreover, the Chinese side has fresh memories of problems with the ‘grain’ contract with the Ukrainians (a Ukrainian company received a loan from a Chinese bank to organize grain cultivation for $1.5 billion and performs it with multiple impairments). There are also unfulfilled obligations of Ukraine for $3.6 billion under the contract with ‘Naftogaz’ and the contract for $360 million on the ‘air express’ project.

This is not to mention the fact that our country will finally lose its aviation industry. Neither the US, nor the EU, nor Japan, nor India (aircraft powers) are interested in developing the business of a potential global competitor. It is clear that the Chinese are not altruists either, but they have a real interest, a vast market and big money. And in 3-5 years of head start a lot of good things can be done at ‘Motor Sich’, especially if there is a Ukrainian investor there, who guarantees that manufacturing facilities will remain in Ukraine and will be used in the best interests of Ukraine. Moreover, all licenses and patents remain with ‘Design Bureau named after Ivchenko’, no technologies will be automatically transferred – only with the involvement of the State Commission for Export Control. The Chinese side has already confirmed all this at the stage of negotiations with ‘UkrOboronProm’. As well as the willingness not to supply anything directly or indirectly to countries such as Russia, North Korea, and Iraq.

Now let us get back to where we started – to DCH’s statement on cooperation with Skyrizon on ‘Motor Sich’. It should be roughly clear why ‘Motor Sich’ and Ukraine need Aleksandr Yaroslavskyi as an investor in the enterprise.

But why a successful businessman with an organized life needs this headache becomes an interesting question. Yes, DCH’s investment portfolio is expanding. Yes, it is a prestigious asset, albeit controversial. But still, the question remains. Why?

I would venture to suggest that this is the excellent ‘old school’ manifesting ‘Who else if not me?’. At least there is someone to ring the bell for ‘Motor Sich’. There has already been a precedent, the KhTZ alarm was heard even under the previous government, and the grabbing handles were removed from the plant by both the Antimonopoly Committee of Ukraine and the Security Service of Ukraine. It means that Zelenskyi cannot help but hear. And ‘Motor Sich’ with the Ukrainian mechanical engineering will develop.