Leonid Dzurich, Director General of the trade/manufacturing company Alliance, Ltd., was sitting next to his consultant from the Graduate School of Management (GSOM) under Saint Petersburg State University in a new American long-range wide-body twin- engine plane Boeing-777 that belonged to the Air China, Chinas only national flag carrier and a Star Alliance member. They were coming back from Beijing to St.Petersburg via Moscow and seemed to be satisfied with the results of the negotiations and the terms of the international distributor agreement they had just signed. According to the agreement, Alliance Ltd. became exclusive distributor of the large Chinese state company Advanced Technologies & Materials (AT&M) in the Northwestern region of Russia. It took four months of scrupulous work to prepare the agreement. They spent all week in Beijing meeting relevant authorities and line managers of AT&M. In the first place they discussed the delivery of welding wire for gun-type welders (including those carried on the back or shoulder). Looking through pages of the book by A. Sherman¹, Leonid compared his company with David, the Bible protagonist, who had to stand against Goliath. ² About 1,000 people worked in the central AT&M office only (among them two members of Chinese Academy of Sciences and 130 PhD holders). Total assets estimated in June 30, 2007 were $425 bln, and the net income was $6,68 bln. ³ Whereas in Leonids company there were only seven permanent employees and the turnover during the first six months of 2007 was only $0.35 bln. There was a thousand times difference between their weight categories.

How Leonid was searching for his own business

I graduated from a good medical institute in Arkhangelsk, said Leonid. I should say I got a rather good education. However, the perestroika changed the lives of those employed in the social sphere a lot. They had to look for their place in the sun again. In 1992 I got started my private business using my contacts at shipbuilding and metallurgic plants in the North of Russia rather than my experience. I began to render assistance to these plants supplying them with metal ware. It was the time when habitual relations between companies broke off while present-day market infrastructure that helps partners find each other was not built yet. Mybusiness throve. Later I moved to St. Petersburg, one of the shipbuilding centers in Russia. No less than 45% of money flow of the vast North-West region goes through this city (Appendix 1). In St. Petersburg I founded a new enterprise, the commercial manufacturing company Alliance Ltd. It was not a big company; it was a sort of family business, with only four people employed. I decided to deal in articles of mass consumption choosing the industry that I had many contacts in, namely, shipbuilding. In accordance with present-day technologies, the shipbuilding industry consumes a lot of welding materials. The analyses showed that a representative (an agent, a distributor, or a consignor) of a foreign producer of welding materials could find a vast market for himself, even if the assortment included powder welding wire only.I got started collecting and systematizing information about the leading producers of welding materials and equipment. Leonid continued. I analyzed the prospects for development of those industries that used welding wire rather widely, namely, shipbuilding, oil and gas industry, building industry. And I hardened to the view that I had made the right strategic decision. I could observe the positive effect of the existing ambitious Federal

Target Programs for priority areas.(Appendix 2) Further prospects for the demand for welding wire as operating supply that is used in technological processes in the industries mentioned above seemed rather promising.The results of one study of the Russian market of welding equipment and consumables carried out by the global consulting company Frost&Sullivan, London (2007), proved the validity of Leonids hopes. It is stated in the study⁵ that the active economic growth of such industries as iron and steel industry, oil and gas production, shipbuilding, mechanical engineering, aerospace industry and building industry push up the demand for modern welding equipment and materials. According to the forecasts, the Russian market of welding equipment and materials stimulated by these tendencies would increase from 544.8 million dollars in 2006 to 874.4 million dollars in 2011. The biggest segment of the welding equipment market in Russia was welding consumables. They made up 66% of gross profit. At the same time a strong growth in consumption of powder and solid welding wire (for MIG/MAG welding) was experienced (Appendix 3).

Russian shipbuilding: trends of revitalization

At the beginning of the new millennium the Russian economy demonstrated steady positive dynamics of GDP (Table 2). GDP growth in 2000 was one of the most considerable in the world. In the following years, Russian industrial production, consumer spending as well as retail trade kept growing. The unemployment rate was decreasing, inflation was under control. The manufacturing industry including shipbuilding was also developing.Shipbuilding was the biggest sector of mechanical engineering with a rather high scientific and technical potential. The Soviet Union (as well as the USA) concentrated its efforts on producing warships, carriers and bulk-oil tanker fleet. Namely military orders (for example, from China and India) helped to many Russian shipbuilding companies to survive at the earlier post-Soviet time. That time shipbuilding in Russia consolidated companies and enterprises of different kinds of ownership, which were certainly taken into consideration while carrying out restructuring. Capital-intensive products were a specific feature of shipbuilding. A standard production cycle of a scheme comprised of 1.55 years. The final result could be achieved due to a wide cooperation of different branches of industry. The establishing of the United Shipbuilding Corporation (USC) was an important event for the restructuring Russian shipbuilding industry. The USC was a management company with the assets of leading engineering firms. This fact was sure proof of the growth of demand for shipbuilding items, and consequently, for welding wire, that was the principal trade category of Alliance during the concerned period.

Oil exports were crucial for the Russian state budget which predetermined a great demand for shipbuilding products due to the increase of allotment for the customers that participate in Russian shelf schemes.⁶ It was necessary to come up to a new technological level in order to provide shelf development with the help of Russian marine machinery. Certain obsoleteness of Russian shipbuilding technologies and management, structural disparities, imperfection of the Russian legislation and financing arrangements were systemic problems and they caused an increase in production costs in shipbuilding by 20-25 % in comparison with their foreign analogues. This situation called for the development of the State Shipbuilding Strategy for as long as the year 2020. The Ministry of Industry and Energy of the Russian Federation confirmed the Strategy by the order issued on September 6, 2007 (# 354).Therefore, the main factor of shipbuilding development was Russian domestic market. It encouraged demands for ships of different classes. The total amount of financing for the mentioned period was 136.4 bln rubles ($5.28 bln), including 90.6 bln rubles ($3.62 bln) from the federal budget. The production volume was to increase by 2.2 times by 2015. Such tendencies in the development of the industry were to provide a steady and rising demand for welding materials and the specialized equipment for processing seams after welding operations due to the fact that the welding constituted a considerable contribution to works in shipbuilding industry.

Question 1.

characterize AT&M as a potential partner for Alliance Ltd. What makes it attractive for the prospective development of the intermediary companys business?