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Can $600m turn toxic Dzerzhinsk into a healthy industrial hub?

6 Feb '09
By Svetlana Zabalueva, Editor

European investors are planning to pump in more than $600m to lay the foundation for a new industrial hub in Dzerzhinsk, 30km from Nizhniy Novgorod. As the financial crisis deepens, will their plans be postponed until things improve or will they continue to place their bets?

A checkered past

No less than seven large diversified European companies are expected to almost simultaneously pump funds into Dzerzhinsk, an industrial suburban city not far from Nizhny Novgorod. The choice may look unorthodox, to put it mildly, as Dzerzhinsk has a checkered past. Named after the first head of Russia’s secret police and cited as one of the world’s most polluted cities, for decades Dzerzhinsk was known as the “city of big chemistry”.

It was also a closed city because it manufactured chemical weapons. Although now open and more diversified, its continued dependence on chemical and petrochemical industries is causing repercussions as these sectors have been severely hit by the ongoing financial crisis.

The risk-takers

Liebherr International AG is the European company that has been credited with pioneering Dzerzhinsk’s industrial renaissance. In addition to re-building existing manufacturing infrastructure, the company is now developing raw land.

Following the Swiss-German giant is another German investor, A.S. Creation Tapeten, and Moscow’s KOF Palitra, owned by Britain’s Lins Wallpaper. This duo announced their joint venture last year.

In late 2008 four more companies unveiled their construction plans, including France’s A. Raymond, Germany’s Lanxcess, Denmark’s Danfoss and Belgium’s Unilin. Nizhniy Novgorod regional authorities signed investment agreements with all of them just last month.

Cranking out diversification

A.Raymond Group is a manufacturer of automotive fasteners. They are
expected to start production with an investment estimated at around $6m. Arendator.ru reported that the plant will crank out six to seven million units per year. The firm’s plastic and metal car fixture components include couplers, buttons, quick joints, etc. all of which are used in assembling Volkswagen, Ford, General Motors, AutoVAZ, GAZ and UAZ vehicles in Russia.

Belgium-based Unilin is currently selecting a site near
A.Raymond Group’s plant for its planned production of lamellar and ceramic coating. This will be a $296.2m investment according to Dzerzhinsk officials. Also coming are Danfoss, a manufacturer of plate heat interchangers and modular heating units, with a $14.5m investment and Lanxess, who will invest $5m in natural rubber production.

City authorities have offered these four “newcomers” a territory of around 100 hectares. The plants are to be put into operation in the second half of 2010, Vedomosti reported.

Why Dzerzhinsk?

The choice of Dzerzhinsk for these manufacturers makes a lot of economic sense—their factories will be located near the Moscow – Nizhniy Novgorod highway and the Igumnovo railway junction; a new. nearby Class A logistics center will be commissioned very soon and the ready labor pool of well-trained workers is far less expensive than their EU counterparts.

The new plants will be placed in the middle of a large and long-standing industrial park that has been losing its manufacturing capacity for more than fifteen years. Although infrastructure will need major upgrades, the supply lines for water and power are well in place so they will not have to be built from scratch. .

Another advantage of building their plants in Dzerzhinsk is its close location to neighboring Nizhniy where massive layoffs caused by the financial crisis have caused a huge oversupply in the labor market. This has added a significant number of highly-qualified workers ready and eager for hire. GAZ Automotive Works alone plans to slash 4,500 jobs in 2009.

Liebherr leads the way

Liebherr International AG has already received a 120-hectare land site to carry out its Dzerzhinsk project. According to the concern's official website, its planned investment will amount to around $300 million. More than 600 new permanent jobs are expected to be created as a result.

Construction work on the site began last fall and roads and engineering infrastructure are completed. In January Turkey-based Renaissance Construction, the general contractor of several large construction projects in Russian regions, began erecting production buildings.

At a press conference to mark the start of construction of its mechanical engineering complex it was announced that by the fall of 2010 the company’s aircraft component facilities would be commissioned and excavation and crane equipment manufacture launched.

Liebherr’s other facilities and an administrative building are to be constructed later. The complex's total area will cover 114,000 square-meters.

Wallpapering its way to success

An alliance between two of the world's largest wallpaper makers, A. S. Creation Tapeten and Lins Wallpaper, will fund construction of a new wallpaper factory in Dzerzhinsk.

A joint venture founded by A. S. Creation Tapeten and Lins Wallpaper's Moscow subsidiary KOF Palitra has bought 60,000 square-meters of land to carry out the project. The partners intend to invest $52.6m in wallpaper production on a parity basis, KOF reported.

Construction is to kick off in 2010 and last 18 months. Under plans, the factory is to churn out 14.6 million rolls of wallpaper a year. Once realized, the project will be one of the largest of its kind in Europe.
As a comparison, A. S. Creation Tapeten's five Europe-based companies produce a total of 31 million rolls of wallpaper combined.

Symbol-Marketing estimates that Palitra is one of only ten or so large wallpaper factories that is still functioning out of the hundreds that existed in the former USSR.

The JV is pinning is hopes on a revival of the housing market.
As Kommersant said, citing Construction Information Agency’s Eugene Botka, by the time the factory is ready, hopefully the financial situation will have changed for the better, which will encourage growth of housing construction and eventually raise demand for finished materials.

“At that time a wallpaper manufacturer using high quality foreign equipment will fare much better than rivals battered by financial instability,” who were not able to re-invest in new equipment to produce better quality paper and designs Mr. Botka said.

The best laid plans….

While all of these plans have been announced by well-known leaders in their respective fields, the financial crisis has caused some concerns.

Liebherr, for example, first announced plans for its Dzerzhinsk-based mechanical engineering production in early 2008, almost a year ago. The Russo-British-German wallpaper intentions were first posted last June. At that time A. S. Creation Tapeten claimed its wallpaper factory would be commissioned by 2010. According to the latest news, construction will now start in 2012.

In December 2008 Lanxess reported that it was temporarily halting its investment projects in its butyl rubber business. Specifically, the company suspended plant construction in Singapore. Its launch was initially scheduled for 2011 but now 2012 is a more likely deadline, Plastinfo.ru reported.

There is no official comment from Lanxess the start of construction in Dzerzhinsk. But with the Singapore precedent, some are worried.

Although all the companies mentioned herein racked up impressive profits in 2007 according to their official websites, none have yet posted their 2008 results. So it is not yet clear how the crisis has affected their businesses.

Lanxess CEO Axel Heitmann told Süddeutschen Zeitung on January 20, 2009 that, we quote, “despite the financial crisis the targeted profit margins for 2008 were achieved.” But on the other hand, Mr. Heitmann acknowledged management's worries over a sharp fall in orders for 2009.

Although Laxness may be thinking of slowing down, other Dzherzhink investors seem to be well on their way to helping the “city of big chemistry” become solidly diversified and well-positioned for success when the current financial crisis is finally over.
Oleg Kouzbit, managing editor: “I’m glad you join us here and take The Bridge walk for Marchmont’s weekly review of the Russian regions’ innovative present and future. Stay close and you’ll find out more of how Russia is bridging the existing gap between its researchers and businesses.”
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