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Interview

with Leonid Sorkin, General Director, Honeywell

29.08.2011 / Energyboardroom

Honeywell pioneered US enterprise in the Soviet Union and last year you invested $5 million in a new multifunction centre. How would you sum up Honeywell’s longstanding interest in the Russian market?

Honeywell has been in Russia since the Second World War. One of our most important divisions, particularly for the oil and gas industry, called UOP, a world leader in licensing for refineries and petro chemistry was providing refining technologies to Russia according to a lend-lease agreement in the Second World War. The first Soviet refineries were constructed based on UOP technologies received by the Soviet Union through the lend- lease programme. The reason that Honeywell has been present for such a long time firstly is due to the size of the market. Russia is a large market for the company because of the aerospace and oil and gas industries. Indeed the volume of Honeywell’s global aerospace business conducted in Russia is one of the largest for the company and we sell everything from avionics to breaks and wheels. Oil and Gas is the second pillar of Honeywell’s business in Russia and is also extremely important. Honeywell is the main player in the market for refinery and petro chemical technologies, indeed the majority of global refining technologies came from UOP. It is worth mentioning that one of the founders of UOP was a Great Russian chemist, Vladimir Ipatiev. Above all, this is a licensing business which is very much connected with the ownership of patents and Honeywell is one of the largest owners of patents worldwide.

The other area connected with oil and gas is automation which we call ‘process solutions’ and this is an important market for us. The second dimension to Russia’s importance for Honeywell as a global company is the extremely high level of education in science and technologies in Russia. Honeywell can employ hundreds of technical specialists with a unique knowledge of IT, electronics as well as a deep fundamental knowledge of the principal sciences from chemistry, through physics, mathematics, mechanics etc. Young talent of this quality in Russia is critical to Honeywell’s success in the region and we plan to grow the number of young specialists we hire. Therefore the market and the availability of talent explain Honeywell’s historic and growing presence in Russia.

Russia is known for its talented citizens but the transition towards commercialisation is not very strong in Russia. What is the role of companies like Honeywell in bridging this gap?

As each human being has his or her strengths and weaknesses, so too do nations have their strengths and weaknesses. Russia’s strength as a nation lies in Research and Development (R&D). I would sum this up by saying that Russians are very good in high-tech engineering, reasonable in project management and terrible in sales. It is extremely difficult to find sales staff in this part of the world. Moreover the combination of high-tech engineers with sales people is seldom present in the Russian market, but as Honeywell we are here to commercialise technologies. We bring all of our corporate skills to help develop this combination in the Russian market.

In 1991, you founded Petrocom, formerly a leading player in the processing industry, which was subsequently acquired by Honeywell. What were the capabilities that this acquisition added to Honeywell’s overall Russian portfolio?

This acquisition brought several upgrades to Honeywell Russia. Petrocom was a leading supplier of solutions to processing industries. It was not dealing with basic automation (which more concerns commodities), but with ‘advanced solutions’ including operator training simulators, advanced process control, manufacturing execution systems, advanced planning and scheduling tools. These are complicated solutions with differential equations and sophisticated optimisation techniques – the equivalent of rocket science. Petrocom brought these abilities into the Honeywell Russia. This was combined with the basic automation that was already present in Honeywell Russia and with this acquisition Honeywell transformed in Russia from simply a vendor to the customer into a trusted adviser and consultant to the customer. It became an organization which is helping customers to improve the profitability of their refining and petro chemical business. Essentially, the acquisition moved Honeywell into another league in Russia.

Another change which this acquisition brought was university agreements. Honeywell became partnered with the best Russian universities including Moscow State Institute of Physics and Technology which is the Russian equivalent of MIT or l’Ecole Polytechnique in France and, of course, Gubkin Oil and Gas University. Honeywell is present across many universities across Russia and our employees are lecturing in these institutions. This was a step change in Honeywell’s standing in Russia.

In 1999 Honeywell was nominated by Forbes as the company which globally had the widest range of products. Given the government’s 2030 energy efficiency paper, how much are you focused on energy saving technology?

Honeywell is a highly diversified company and we believe that strength derives from this diversity. Honeywell is in aerospace, oil and gas and buildings with smart housing solutions. Honeywell is also the leading producer of turbochargers in the world. However, the theme which traverses Honeywell’s entire offering is energy saving. Every technology from state-of-the-art refining and petro chemical technologies to turbo chargers for engines and automation for buildings and industry is focused on energy saving. This even applies to energy saving during an airplane’s taxi to the runway. UOP’s refinery solutions are even energy saving compared to any other technologies. When the Russian government announced that energy saving was a strategic core for the country we saw this as a positive step forward and a good opportunity for Honeywell to provide for this change.

Russian rhetoric about change does not always produce actual results. How much will these initiatives genuinely translate into action?

I believe that everything that is said by the Russian government is becoming a reality. We need only to be patient. Taking the example of depth of crude oil processing which was traditionally lacking in Soviet industry, the Russian government has stated the need for this process for several decades. In the 1990s the process towards this end was very slow and the focus shifted more towards crude oil production and export. In the 2000s the focus started to change towards large scale modernizations for refining facilities. Almost all of the producers started to modernise their facilities. This started with LUKOIL with their refineries in Perm, Volgograd and Nizhny Novgorod. TNK-BP modernised their Ryazan refinery and now Rosneft have all begun. These changes have all had the central aim of more deep processing of crude oil i.e. more light products and less fuel oil so we are starting to see the effect. As Honeywell we are part of this modernization due to our industrial automation and UOP technologies. Although things are moving in the right direction, the speed of this transformation has never been satisfactory.

Vladimir Putin has again made a push towards depth of crude oil processing recently in Kirishi and the 60/66 reforms are designed to create an economic environment favouring the construction of Fluid Catalytic Cracking units, hydro cracking, isomerisation, etc. to increase the depth of refining. This will increase the market value of products deriving from a tonne of oil and prevent the export of fuel oils to the West which contained high quantities of light refinery products which were being extracted in Europe. Honeywell has certain customers who were early adopters and took the road of modernization and deep conversion earlier than the rest. LUKOIL for example started modernization many years ago and before the government’s push. Other customers have since moved in this direction and with the government’s drive this programme has become an important business opportunity. All this shows that in Russia patience is a virtue.

Honeywell is focusing on innovation rather than manufacture in Russia through initiatives like the Petersburg technology centre. Why have you taken this approach?

Honeywell is a company which produces brains not bodies. Large and respected partners such as Boeing are producing bodies. In this instance, Honeywell is producing brains in the form of avionics or other crucial elements such as auxiliary power units. The same applies to oil and gas where Honeywell produces distributed control systems, advanced process control systems, operator training simulators and so on. In my view, production is never the most interesting part of our work and does not need to be vaunted above other business practices. Honeywell simply produces in places where it makes economic sense. Russia does not offer very low labour costs and especially in the large cities these cost can be quite high. There is therefore not a large economic driver to produce in Russia although there are certain forms of Honeywell’s production for example manufacturing fire alarms which do occur in Russia. The real interest for Honeywell is high-tech engineering and R&D. This is the area where Honeywell wants to have hundreds of experienced specialists. Russia’s focus on innovation through the Skolkovo Foundation for example is important in this development. For producers of bodies, the local production is important to secure the local market. As a producer of brains, Honeywell secures the market due to the unique features of our products and the skills of our consultants.

What are some of the projects that Honeywell is focusing on in the upcoming years?

Specifically speaking about oil and gas, the most important project for the future, if it does happen, is Shtokman. The most attractive business opportunities for Honeywell are those unique projects where there are very few international players who possess the capabilities to play the game. When there are 5-6 companies who could provide alternative solutions then the project is less interesting to Honeywell. A project is exciting when there are only one or two players who could compete for the project. Shtokman is interesting because of the monumental technical challenges which it brings in the field of automation solutions for offshore platforms, for LNG carriers and LNG plants. Like reforms in refineries this project has been delayed several times and production has been moved to 2018. Although it is a great opportunity for the future. The upcoming construction of LNG carriers for Shtokman and elsewhere is another challenge and Honeywell is a leading provider of solutions for LNG carriers. Honeywell will naturally be part of new refining developments because automation solutions and UOP technologies will be used in these modernizations for sure. Honeywell will also be involved in critical infrastructure protection projects for oil and gas pipelines and energy saving is part of our advanced solutions portfolio.

You have always worked in US-Russian cooperation. What is the value of this relationship?

Cooperation between these two countries is critically important for the whole world. Unfortunately there are still large swathes of the population in both countries who are antagonistic towards the other culture. Many media centers in both countries are playing a negative role in moving this opinion from bad to worse. However, business and Honeywell included is working on improving this relationship. The real key to improving the relationship lies in improving business ties. Leaders of both countries have highlighted the need for economic interdependency. German-Russian relations are secured by the significant trade ties between these countries. Russia-US trade is 4% of Russia’s total trade and even less as a percentage of America’s trade. Government and business must work to create greater economic interdependency. Finally, purely from a business perspective, cooperation with American companies can be more interesting for Russians as well as with Russian companies for Americans than with any other nations because of a shared tradition of innovation in both America and Russia.

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