SIBERIA IS huge, empty and inhospitable - a five-hour plane ride from Moscow in a battered 1970s Tupolev gets you no further than the wild central republic of Khakasia: population 600,000 average yearly temperature, zero Celcius. It seems an unlikely hotbed of new developments in a pounds 30bn world industry.
Yet nothing better illustrates the changing of the world's industrial guard than the new Khakas aluminium smelter at Sayanogorsk, south of capital Abakan. Khakas, the first smelter built in Russia since 1985 and claimed to be the most technologically advanced in the world, is being built by Russians, using Russian technology, with Russian money. The pounds 375m investment is just a starter: even before this month's merger announcement with smaller rival Sual, parent Rusal (for Russian Aluminium) had began a pounds 8bn expansion and modernisation programme aiming to almost double production to 5 million tonnes by 2013.
At a stroke, the merger, which includes the raw materials assets of Swiss metals trader Glencore and will be known as United Company Rusal (UCR), achieves Rusal's aim of becoming the world's Number 1 producer, overtaking long-time North American leaders Alcoa and Alcan. Given the company's history, this is remarkable in itself. Only six years old, Rusal emerged as a joint venture put together by oligarchs Roman Abramovich and Oleg Deripaska out of the wreckage of the 'aluminium wars', a violent struggle for control of the industry in the mid-1990s. Its chief assets were four giant Soviet-era smelters whose size was offset by being run down, over-manned and an environmental nightmare. The captive workforce wasn't just disaffected - it was dangerously mutinous.
But it would be a mistake to dismiss the company's rise from nowhere as a triumph of dodgy finance and quantity over quality. 'Becoming number one is good, but it's all about quality,' says director of strategy and corporate development Pavel Ulianov. As bold as the company's growth goals, is its ambition to become Russia's best-managed company and an employer of choice. This means playing a canny game on at least two levels.
The first is strategic and geopolitical. The largest cost element (at 30 per cent) in aluminium production is energy - which is why, as competition for energy sources hots up, the industry's centre of gravity is shifting to the Middle East, Iceland and Siberia, which is blessed with clean and renewable hydropower. Energy will account for a third of UCR's investment spend. Also vital is a secure supply of raw materials - alumina for smelting and the bauxite from which that alumina is refined.
Increasingly, aluminium production requires global scale. As Deripaska noted, the estimated pounds 15bn Rusal-Sual-Glencore deal creates 'a truly global company', with assets stretching from Guyana to Guinea by way of Australia and Europe, and substantially in energy as well as aluminium. In turn, that requires the company to raise its game in managing operations, and, particularly, people. 'I used to believe we needed to breed "Rusal people",' says HR director Victoria Petrova, part of a young top team that relishes the idea of creating a world-class Russian enterprise. 'Now I think diversity is more important.'
Alongside R&D and design capabilities, the group has set up a corporate university, professional 'academies' for functions such as HR and finance, and a medical institute. With 110,000 employees in 17 countries across five continents in the combined group, diversity now has a strong international element.
Just how far Rusal has come in international awareness is in evidence at the Sayaganorsk complex. On the walls of the spick-and-span plants are charts tracking production, quality and absence levels, while at the Khakas smelter, robots delicately stack aluminium ingots on pallets. Apparently at Deripaska's behest , Rusal invited sensei (teachers) from Toyota to advise on production techniques. It now boasts a 'Rusal Business System' along the lines of the famous Toyota Production System which, according to Petrova, is removing swathes of bureaucracy as well as identifying novel ways of boosting smelter productivity. Although this has doubled since 2000 it still lags behind the best international standards.
In other areas, however, the company remains unabashedly Russian. It is proud that, having sacked the original international contractors, it is building Khakas using its own engineering and construction resources. The advanced processing technology used at the site is also self-developed. It had to be - foreign rivals refused to license theirs.
Less welcome - and its most obvious Achilles heel - is another Russian speciality of the 1990s less-than-transparent corporate governance and the potential for political influence. A flotation in London in the next two years - a condition of the merger - and Russian presidential elections in 2008 are tests that will be watched by investors and competitors alike. But assuming those hurdles are passed, have no doubts: it won't be how the cold-war warriors were expecting it, but the Russians are coming.
The Observer, 22 October 2006