In June 2008 a long-term strategy of the Industrial Group was adopted at a corporate seminar. At the beginning of the seminar President of the Industrial Group UPEC Anatoliy Girshfeld made a speech. Here it is.

Dear friends!

Our Industrial Group has come to a new stage of the development: we are elaborating the company’s strategy for five years. We are seriously thinking about why we work in the machine-building industry, who we are and where we are going to. In the nearest future we’ll have to make decisions, which in many respects will determine the future of UPEC enterprises and its employees.

Let me start fr om the history of the Company.

Our History

The first stage. 1955 is the beginning of operation of the UPEC — Ukrainian Industrial Power Engineering Company. During the very first years together with group "Privat" we realized a unique scheme of Russian customer’s own coal processing at the Pridnieprovskaya hydroelectric power station, having worked through the method of obtaining electric power and its targeted delivery to consumers. This was, probably, the first practice of such deliveries in Ukraine. Dnieprospetsstal’, Ordzhonikidze ore enrichment integrated works, Pridnieprovskaya railway, Avtramat, leaders of the Ukrainian industry, became our customers. Later on we joined the agricultural machine-building complex, supplying electric power to enterprises of Kharkov region.

During the very first years of its operation the UPEC started cooperating with railways of CIS: to supply bearings of Kharkov Bearing-building Plant (HARP) manufacture.

The middle of the 1990-s was the time of deep recession in industry. Adaptation of CIS enterprises to a new practically spontaneous market environment was very difficult. Especially this affected the city of Kharkov: the biggest in the former USSR agricultural machine-building complex, which had been built for the output of the farm tractor to plough soil on the 1/6 part of land, literally collapsed having failed to withstand the test by market. Main products - tractor Т 150 and motor СМД – did not find their place on the market.

The agricultural machine-building complex appeared uncompetitive: its fate was determined neither by technologies nor equipment but the product design itself – engineering solutions built into it.

For several years Kharkov plant of tractor motors (KhZTD), "Sickle and Hammer", Chuguyev plant of heating equipment (ChZTA), Dergachi plant of turbo-compressors (DZTK), Kupiansk foundry plant (KLZ) and many others have disappeared fr om the Region’s map. Tens of thousands people became unemployed. Kharkov began swiftly changing its character. Skilled specialists of plants, production elite of Kharkov, was fighting to survive occupying places behind the counter at trading sites.

Since 2000 UPEC stopped supplying components and motors to Kharkov tractor plant (KhTZ): we were aware of insolvency and bankruptcy inevitability of the industry’s enterprises.

In the second half of the 1990-s Kharkov bearing-building plant was also suffering crisis. Basic funds were obsolete and worn out, the enterprise was on the verge of bankruptcy. Debt in payment of wages was one of the highest in Kharkov region. But the plant advantageously differed fr om other enterprises: it still had potential huge markets for its produce. The enterprise had monopolistic positions on the railway market and in the agricultural machine-building, especially in the production of combine (harvester) equipment.

So in 1999 the UPEC acquired the first big shareholding of HARP, later on becoming the main shareholder. That was the first “baptism of fire”: our opponent was an American company with world known trade name "Sigma Blazer". Nevertheless, we managed to uphold the plant.

The second stage of development of our Company began , i.e. acquisition of industrial and finance assets. Within two years HARP, Kharkov electro-technical plant (KhELZ "Ukrelectromash"), Kosior Kharkov machine-tool building plant, Lozovaya forge-mechanical plant (LKMZ), Tinyakov garment factory, Factorial Bank joined the UPEC. While entrepreneurs were leaving the industry for trade we actively entered the industrial sector. Very few understood us but I was deeply convinced in the correctness of our choice.

Thus, in 2000–2002 the UPEC shaped as an industrial Group.

In defense of machine-building industry interests

The next step, the necessity of which we were aware was to consolidate our position in the society and to get the possibility to influence the state industrial policy of Ukraine. I sincerely believed that it was achievable. I went to elections and after bitter contest I became a deputy of Verkhovna Rada of the fourth convocation. I know that even among workers of UPEC there is no unanimous attitude to this period. I would say that I made this step conscientiously. I realized that we did not have any sufficient experience in managing industrial assets and there was no efficient strategy of the development. I understood that the Company was managed in manual mode and I would not be able to manage it fr om Kiev. But I also understood that the development of big machine-building business is impossible without influence on the industrial policy of the country. Of course, much has not been achieved. But I think as a whole this period was indispensable. I erred only in one: that the country was ready to crucial changes in industrial policy, that it was possible to change the attitude of the authority towards real sector of the economy and to create a system of effective support of national producers. I could not imagine how difficult it would be.

Period of crisis

We remember the period of 2004–2006 as the time of the most severe crisis that affected the leading enterprises of our industrial group.

HARP "was fighting on two fronts". On one hand, dumping on the part of Chinese producers: they sold ball bearings approximately at prices of metal we paid for it to produce them. On the other hand, Russian company ЕPK (European bearing producing corporation), that had state support in Russia, monopolistic supplies to Russian Railways – at that period the biggest market of railway bearings. Besides, EPK actively dumped on the Ukrainian market . This resulted in HARP losses of more than UAH 60 million for three years.

The situation at LKMZ was also very difficult.

Up to 90% of production volume was intended for KhTZ – but production of tractors was swiftly falling there. The situation at the tractor plant was aggravated by the struggle of non-core investors for property ownership - "Interpipe" and "Ukrsib": neither the former nor the latter could provide efficient management of KhTZ and restore its position on the market. At LKMZ itself by the beginning of 2003 overdue credit debt made more than UAH 70 million, debts in wage payment – over UAH 5 million.

We faced the most complicated problem: to clear the enterprises from debts, to occupy a place on the market. We had to fight. At the opposite side there was Interpipe who had concentrated practically controlling block of shares via Ukragromashinvest.

We made a brave decision – to conduct a re-organization procedure with complete acquisition of assets, paying off debts to employees and main creditors of JSC LKMZ and create a new enterprise – LKMZ Ltd. As to its scale it was an unprecedented project. As a result we have got 100% control over LKMZ , cleared it from debts and saved a unique town-forming plant – the only survived enterprise of the agricultural machine-building complex of such scale in Kharkov region and main supplier of KhTZ.

Also our company may be proud of the fact that we have saved from crisis big machine-building enterprises of our city: Kharkov machine-tool building plant and Kharkov electro-technical plant. Having bought shares from non-core investors we managed to defend interests of the plants and preserve thousands of working places.

Stabilization stage

At the beginning of 2006 we had to start practically from the very beginning. I called this period anti-crisis. At every enterprise crisis management measures have been taken. As a whole by the end of 2007 we managed to stabilize the situation in the Company and since 2006 to 2008 we have practically increased output of products by 2,5 times.

During these years HARP has recovered its position on the CIS market of ball bearings. Experts of UPEC and the Plant have started work on elaborating a new project on updating of production of railway bearings, having resumed since 2007 supplies to the Russian Railway and Transmashholding. HARP considerably increased its presence at all leading conveyor plants of CIS.

Step by step LKMZ occupied leading positions on the CIS market in the production of hot-stamped items. Supplies of bridges for road-building equipment increased more than two times and production of mounted agricultural implements – more than by10 times.

In 2004 on the basis of the foundry shop of the Kharkov machine-tool building plant a new plant was created for production of castings for machine-building industry – Ukrainian foundry company (ULK). Otherwise it would have been impossible to stabilize the output of bridges at LKMZ.

KharVerst, one of the most perspective and hi-tech enterprises of the Industrial Group, has come to beneficial operation.

The procedure of crisis management and production stabilization is coming to an end at KhELZ. I have no doubt as to possibilities of the young team which is managing this enterprise. I believe that they will say their word.

Recently information policy of the UPEC has crucially changed: the Company became more open and occupied absolutely different place in the society due to its active PR-activity. We have managed to shape a new image of the Company - a public, dynamically developing industrial group.

In 2007 we made a decision to sell non-core finance assets of the Company – Factorial Bank. The gained 120 million dollars we invest in the development of machine-building assets of the UPEC.

The Industrial Group has survived once more. Nowadays we have, on one hand, a favorable market situation, growth of volumes and profitability, available finance for investment, good image of the Company, interest to cooperation on the part of world leaders, on the other hand, high losses in the production process, lack of skilled personnel, obsolete production funds, far from perfection system of management.

I do not put equality mark here – I do not equalize these facts as to their significance. First, because I have always considered any threat a possibility. On the other hand, we have will and great desire to make our business perfect. This is a noble aim, which, I am sure of it, together we’ll be able to achieve. My life experience says that this is more important than any obstacles on our way.

Factors of the market

Today we are elaborating a long-term strategy of development of our Industrial Group. What factors influence our business?

Conclusion. If we do not take urgent measures and do not elaborate an effective strategy, crisis that had hit the Company enterprises in 2004–2006 may happen again with harder consequences. We have maximum 2–3 years in order to re-construct the Company.

Economy of Intellect

I would like to dwell on a very important fact. During the last decade the world has entered a new post-industrial stage of development. It is better to explain by way of example.

In1900 63% of Americans were producing material values, 37% worked in service. After 90 years: 22% were engaged in the material sphere, 78% - in the sphere of service. Same happened in Europe and Japan. By 2025 3–5% of the working people will be employed in the sphere of production.

All this is the result of progress, permanent growth of labor efficiency due to improving and creating new technologies, engineering solutions, new information and knowledge. This epoch should be called industry of knowledge or economy of intellect.

One more example. In 1991 in the USA $112 billions was spent for investigations, i.e. for knowledge, and $107 billions for equipment. In 1995 investigations cost to American companies $212 billion, while their expenditures for equipment practically have not changed. Nowadays the economy of the developed countries comprises 60% and more of non-material assets, i.e. knowledge. If the whole American export for 50 years could be weighed (in literal sense) we would find that its weight has not changed but its real cost increased by 20 times. This is the cost of knowledge, of human intellect.

At present 80% of the world economy is concentrated in the developed countries with only 20% of the Earth’s population (countries of “the golden billion”). And the difference in the standard of life between them and the rest of the planet population increased almost by 25 times.

A few words about China. The economy of this country grows annually by 12–15%, and the economy of the USA by 2%. Nevertheless standard of life in the USA grows faster, the gap between the economics of these countries increases every year by $900 per capita. That is why even with such significant growth China will be able to provide income for their people, for example, equal to 20% of the Japanese one no sooner than in 50 years, with the number of unemployed in China remaining greater than the whole population of CIS.

It should be noted that it is China who depends on Western countries and not vice versa: its whole growth is supported by Western investments, because for highly developed countries it is more profitable to have inexhaustible source of labor. And they may not worry about their own welfare: in the structure of cost price of their products the share of non-material assets is immeasurably higher. And for us at the moment «head-on collision» with Chinese producers is lethal. But this is to-day. Our to-morrow must be different.

One more example: all export of China to the USA makes only 0.15% of the USA GDP. To the above facts one more can be added. According to plans of the International Organization of Economic Cooperation of the Developed Countries the need of countries of “the golden billion” in raw materials ought to be 10 times less by 2025.

Thus, we live in the post-industrial world, polarization in which increases from year to year. The wellbeing in it depends on achievements in the industry of knowledge, or economy of intellect.

Profitability of engineering solutions

I paid so much attention to global economic processes in order to show clearly the paradox of the situation we got in.

Ukraine was one of the most developed republics of the Soviet Union. Its GDP in 1990 made 2% of the world one but in 2007 with the same weight of export ( mass in tons) only 0,2% of the world GDP. Here “the law of preservation” works: the share of intellect in creation of GDP has become 10 times less in Ukraine, and in the West it increased as much. And we wonder why we are so poor!

In Kharkov it is demonstrated especially obviously. From the leading scientific and industrial centre our city is becoming very swiftly a huge trading site wh a greater part of the intellect earns not by intellectual occupation but by selling Chinese and Vietnamese mass-produced items.

Meanwhile our higher educational institutions keep on training specialists at a speed of the Soviet time. No doubt quality of education has decreased. But crisis in education has manifested not so crucial as in industry. In the past gifted young people joined research institutes or remained at the Chairs of higher educational institutions, others went to works and factories, the more so that the state authorities took care of young specialists. Now gifted people go to the West and fill the ranks of “the golden billion”. Others become managers in trading companies. Young specialists do not go to factories: either they are not paid or there is no need in engineers there.

Despite all this fundamental and applied science has been preserved but it stopped working for industry. Not because it does not want, but because it does not pay. Enterprises of the machine-building complex turned into big factories, producing shavings and metal scrap. Their development has practically stopped. One of examples, in my opinion, brightly describing achievements of a high-tech company that long ago pursued a course of engineering solutions, is a Sweden corporation SKF, one of the world leaders in machine-building. For research and development (R & D), speaking in our language, engineering solutions and knowledge, the company spends 250 million US dollars annually and wants to improve the world with knowledge.

Similar picture is observed in other leading companies of the world. As a result they achieve output of $200 thousand per capita a year which ensures high level of income of employees. And profitability of engineering solutions reaches hundreds per cent.

Foundation of the Industrial Group

At the seminar we are seriously talking about business we work for and why we are doing this. Why have we remained in the machine-building industry? Many of you have been working here for many years, some have come recently. I am sure that what keeps a man attached to a company is not only money, but also participation in its accomplishments, giving confidence in the future. Also, in my opinion, it is very important that we are united by the system of common values. This is a peculiar compass by which we synchronize our actions.

For us it is important to determine predestination of our company, I like this word more, than a fashionable word “mission”, it is clearer. This is what we exist for, what we feel on our mental level. This is what we can offer to the society and our partners. This is very important, this is foundation of our business, our industrial group. This is what cannot change, our core.

At the seminar we shall discuss in detail main platforms on which a long-term strategy will be constructed – engineering solutions, base technologies, investment into the personnel. Based on our values we must understand on the account of what solutions, resources and possibilities we’ll be able to create competitive advantages in each type of product, in each area of our business on each of the three platforms.

It is indispensable to clearly realize in what we are better, what our competition advantages are in each product, in each technology. Creation of such advantages is our tool in the competition, is what the world is ready to pay money for. This is our added value, i.e., wellbeing of every worker of our Industrial Group. In order to realize this and elaborate strategy it is necessary to answer the following questions:

• What customers we are oriented at;

• How our products differ from our competitors’;

• What production processes (technologies) and engineering solutions give us competitive advantages;

• What specialists we need to achieve maximum success;

• What organizational and technological tools of realizing strategy of permanent reduction of losses are, remember, for example, “economical production”, we have already talked about a lot.

The above means that the company must change, become different – competitive and strong. To this end serious transformation shall be done. Principal areas of such transformations are:

We are moving to the achievement, no doubt, of a very complicated but noble and unusually significant for our country, for the company, for everyone of us, aim: to join the number of European leaders in the production of components and units for machine-building in the railway, automobile and agricultural sector, to become by 2012 an engineering client-oriented company with GDP of $1 billion, 50% of shares of non-material assets and European indexes of labour efficiency.

This is our way to join 20% of the world’s successful population.