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`It's Like Climbing The Himalayas'


The Corporation

`IT'S LIKE CLIMBING THE HIMALAYAS'

Standing in front of a meeting of 150 skeptical factory workers, Joseph Abramovich Bakaleynik is not having an easy time. The deeply suspicious Russians can't understand why he wants to be their boss. Why should a 42-year-old Harvard University MBA be keen to trade his comfortable, well-paying position at the International Finance Corp. in Washington for a $3,600-a-year job rescuing an all but bankrupt tractor factory? One middle-aged worker shouts at him: "If you have any doubts, let's settle them now!"

Bakaleynik feigns laughter but launches into specifics. Only tough measures will save Vladimir Tractor Factory, he says. He plans to trim the plant's bloated 16,000-person workforce by 34%, cut back its extensive social services, and adopt tighter accounting controls. It's harsh medicine, but Bakaleynik argues his strategy of deep cost-cutting is the only way Vladimir can remain competitive, both in Russia and abroad. "The better the price, the more we shore up our position in the market," he tells workers. His logic wins. The next day, Mar. 24, at a shareholders' meeting, Bakaleynik gets 98.6% of the votes to become the plant's general director. He takes over May 1.

ACID TEST. If Bakaleynik pulls off a rescue, he could become a millionaire, thanks to company stock options. More important, saving the plant could be one of the more dramatic turnarounds in Russia's shaky new world of capitalism. Privatized less than 18 months ago, the 51-year-old plant is choking on $3.5 million of debt. And new orders just aren't coming. Vladimir, which made 21,358 tractors last year, has operated only four of the past seven months. And when its workers are paid--as many haven't been for two months--they often get just 40% of their $47 monthly pay.

In many ways, Vladimir is a microcosm of the woes plaguing Russian industry. Although retailers, bankers, and other entrepreneurs are thriving, the acid test of whether Russia can make the transition from communism to a more market-oriented economy lies in the struggles unfolding at thousands of factories such as Vladimir. Although some plants, including Vladimir, have been privatized, Russians are finding privatization no panacea. Debt remains the biggest problem. Vladimir and other plants long depended on government orders that have dried up. To keep workforces intact, the factories have shipped products but gone without proper payment, in effect accepting IOUs. As a result, Russia's enterprises now owe each other a staggering $10 billion.

The boyish, soft-spoken Bakaleynik is no newcomer to the plant. His family moved from Siberia to Vladimir, an insular, grimy industrial town 130 miles east of Moscow, when he was 11 years old. After graduating from an elite Moscow university, he went on to serve as deputy director of Vladimir Tractor. Then, in 1990, Bakaleynik enrolled in Harvard as part of a program to train promising Russian executives in Western business practices. Afterward, he went to work as an investment officer with the IFC in Washington.

While at the IFC, Bakaleynik made an initial stab at becoming Vladimir's boss at the first-ever shareholder meeting last June. He had backing from Renova USA, a New York investment group made up of Americans and Russian emigres, which holds 16.6% of the plant's shares. But most shareholders, many of them plant workers, voted to keep on Anatoli Grishin, a Soviet-style manager who had been director for 18 years. Grishin pledged there would be no layoffs and vowed to maintain the plant's large social-service sector, which includes 25 kindergartens, dozens of apartment buildings, and three farms.

Before long, Grishin's expensive strategy backfired. By last September, he couldn't make the payroll. In January, he resigned. Grishin declined to talk to BUSINESS WEEK. Soon after, the plant's board of directors contacted Bakaleynik and asked if he wanted the job. For Bakaleynik, the offer was too intriguing a challenge to pass up.

PALATABLE PRICE. Bakaleynik believes exports are crucial to Vladimir's survival. Last year, the plant sold 21% of its tractor output to farmers in the U.S., Canada, and Mexico--its only source of hard currency. And despite Vladimir's decidedly low-tech product line, the export market has potential. Belarus Manufacturing Inc. in Milwaukee, which handles the sale of Vladimir's small 31- and 36-horsepower tractors, sells about 1,000 Vladimir tractors a year in the competitive U.S. market. The price makes a big difference. Vladimir tractors retail from $6,000 to $9,000 in the U.S. "I think there's a reasonable market for it, but for just the price-driven buyer," says Robert J. Ratliff, CEO of Norcross (Ga.)-based AGCO Corp., which makes several lines of tractors. AGCO's low-end Massey Ferguson tractor, which is manufactured in Poland, sells for $11,500.

Thanks to small but steady exports, Vladimir has $7 million in export receivables. And Bakaleynik hopes to build on that by preserving Vladimir's price advantage through cost-cutting. Meanwhile, to spur domestic purchases, he plans to upgrade and expand a network of parts-and-service distributors throughout the former Soviet Union. Bakaleynik also wants to create a new leasing network to offer customers easy credit terms, perhaps with help from the Russian Finance Ministry or the European Bank for Reconstruction & Development.

But Bakaleynik's plans to boost sales at home and abroad may be doomed unless he can improve Vladimir's manufacturing capabilities. He reckons he needs $14.6 million for new equipment. About 30% of the plant's gear still dates back to the U.S. Lend-Lease program of World War II. Vladimir's boss would welcome a Western partner such as Deere & Co., which declined comment. Bakaleynik, however, admits he would also like government money--and lots of it. At a minimum, he hopes state agencies will pay their bills. That's why he supports the controversial policies of new Deputy Prime Minister Alexander Zaveryukha, who wants a $2.8 billion state bailout of agriculture.

Zaveryukha's quick rise in Yeltsin's government recently gave pause to many Western observers who see his policies as antireform and inflationary. But from his vantage point, Bakaleynik thinks Zaveryukha's approach is more realistic. For now, he doesn't support the tight monetarist approach sought by radical reformers Yegor T. Gaidar and Boris G. Federov, which could abort Vladimir's turnaround bid. Tight money can come later. "I hope Zaveryukha can get some money into the agricultural system," he says.

Vladimir's unions could also stymie Bakaleynik's strategy. It's not certain how the workers will react once he starts paring the payroll and trimming perquisites. Vladimir Tractor has never had a history of strong labor unions. But their mood is definitely not upbeat. "The majority of the people don't know what to expect. The whole country isn't working," says a middle-aged worker, who voted for Grishin in June and for the Communists in December's elections.

PENSIONERS. And morale isn't the only labor issue that Bakaleynik is likely to confront. He'll also have to deal with an aging workforce. Some workers are so elderly they literally hobble through the plant's front gates on canes. But they are kept on the payroll because inflation is so fierce many Russian retirees can barely live on their pensions. These older workers outnumber younger ones, who often are more attracted to outside work. A young person hustling Snickers bars and Chinese clothing at a sidewalk kiosk or trading booth, for example, can easily pull down $176 a month. "There are only a few young workers here--mainly pensioners," says 28-year-old Igor Belyakov, who has worked at Vladimir for six years.

All of Bakaleynik's efforts could be sunk if Russia's depression persists and products don't start moving again. He gives himself five years at the outside. So far, shareholders appear to be optimistic. "I think the situation at Vladimir has bottomed out," says Len Blavatnik, managing director at Renova. Blavatnik believes the plant may even generate a small profit of $4 million to $5 million this year. "Not huge, but reasonable for Russia in today's environment," he says.

Victory would be sweet: Factory shares now sell for $1.50, but Bakaleynik, who holds those stock options, says they could be worth 50 times that if there's a rescue. Besides that incentive, Bakaleynik uses a mountain-climbing metaphor to explain what drives him. "It's like climbing the Himalayas," he told the 700 shareholders who voted him into office. "You go up, and if you're lucky, you come down." If he can manage that feat, he'll prove there's still hope for Russia's basket-case manufacturing economy.

WHAT MUST BE DONE AT VLADIMIR

1 Reduce a bloated workforce from 16,000 to

10,500

2 Find $14.6 million in capital to modernize machinery, some of which dates to World War II

3 Attract a for-eign investor or partner such

as Deere & Co. or J.I. Case

4 Cut back the socialist-era services for workers, including schools, farms, and apartments

5 Introduce tighter credit controls on product sales to state enterprises

DATA: BUSINESS WEEKPeter Galuszka in Vladimir, with bureau reports


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