Azmol's Road to Recovery

BERDYANSK, Ukraine - In 1990, JSC Azmol held a distinguished place in the lubricants industry. At that time it operated as Berdyansk Pilot Oil and Lubricant Plant and was part of the Soviet Union's Ministry of Petrochemical Industry. It also supplied more than half of the grease consumed in the country and was the largest grease producer in the world. But the plant was knocked from that position by the collapse of the communist empire. In the tumult that ensued, the plant, which also produced lubricating oils, suddenly lost the bulk of its customers while also having its supply lines cut. Almost overnight the once mighty business shrank to a fraction of its former size.
The road to recovery has taken much longer and required big, sometimes painful changes. After two decades, the company is growing again. Operations remain far smaller than what they once were, but officials say Azmol is more adept today and again on solid ground. In fact, management feels safe enough that it is ready to leave the confines of government ownership that helped it survive the lean years.

SOVIET ROOTS

Azmol's beginnings trace to 1937, when the Berdyansk Cracking Plant was constructed in this port town on the Azov Sea. Originally it was a refinery, the primary purpose of which was to make petrol for Soviet military aircraft. A decade later it was retrofitted to produce lubricants, a niche that allowed it to grow steadily for several decades.
The plant took on a large role in the centralized economy of the Soviet Union. Enormous as it was, the empire had just three major grease producers. Berdyansk became the largest, at its peak supplying 55 percent of the general purpose grease consumed by the country. Total output approached the plant's capacity of 330,000 metric tons per year, thanks largely to big customers such as Volga Au-toworks, better known as Av-toVaz, builder of the Lada. The Berdyansk plant supplied lubricants to AvtoVaz's facility in Togliatti, Russia, the largest car factory in the world.
Berdyansk Pilot Oil and Lubricant Plant nearly fell apart without the government and system that had nurtured it. After the breakup of the Soviet Union, its former republics suffered economic decline. Relationships between many businesses were broken, creating widespread disarray. The Berdyansk plant's sources for raw materials were now in a separate country - Russia - which had frosty relations with Ukraine. In 1993, supplies of those raw materials, particularly base oils, were cut off. At the same time, large customers in Russia stopped accepting its products.
The plant still had Ukrainian customers, but many of them found the first years after independence similarly painful. A large number of Ukrainian businesses closed during that period. Beginning in 1992, the country's gross domestic product shrank for eight consecutive years.
It is possible that Azmol itself was never in real danger of closing.
"Was there a chance of them going out of business ? Probably not," said Jarosla-wa Johnson, managing partner of the Kiev office of law firm Chadbourne and Park. She specializes in business law. "Certainly, there were a lot of businesses that went under at that time. But there were a number of companies, including the whole oil and gas sector, that were considered strategically key, and the government would have kept them open no matter what."
Even so, Azmol Board Chairman Olexandr Stakhurs'ky recalls it was a very worrying time.
"We were purely a lubricant business, so we could not manufacture anything else," he said during an interview in April. His comments were translated by an interpreter. "But we just kept telling ourselves, 'As long as we are alive, we will survive.'"
Stakhurs'ky said Berdyansk Pilot Oil and Lubricant Plant had several months of difficulty looking for sources of raw materials. The base oil problem was finally solved when the plant found a willing partner in another former republic, Uzbekistan. That country's Department of State Oil Refineries needed grease, so a trade for base oil was arranged.

REBUILDING A BUSINESS

More and bigger changes would be needed to revive sales. In 1994, the plant was restructured into a joint stock company, still government-owned, and renamed JSC Azmol, in acknowledgement of its location on the Azov coast. The next year Stakhurs'ky was appointed board chairman. Until then he had served as chief engineer, responsible for everything from manufacturing and energy supply to sales.
Also in 1995, the company set up a network of dealers to distribute its products in Ukraine. Officials say this was an important step because it allowed the company to expand sales while focusing on production. To this day domestic sales have been a large and stabilizing cog in the company's operations.
That same year Azmol began again to land contracts to supply significant volumes to Russia, which by 1997 became its largest sales destination. The revival was temporary, however. Russia devalued its rouble and entered an economic downturn, Stakhurs'ky said, and Azmol's accounts there withered once more. The company's recovery continued to drag on, and it appeared it would have to look elsewhere to increase sales.
One of Azmol's biggest challenges was to adopt a market strategy after so many years of being a production-driven company. Sergiy Ba-gnyuk, deputy chairman of the board for marketing, explained that it was necessary that the company "not only develop and manufacture the most modern products in conformity with international standards but also thoroughly study the needs of our clients and give them recommendations..."
The change in mindset did not come easy. According to Stakhurs'ky, management concluded that many existing employees did not have the skills that the company needed. As a result, management reluctantly decided to fire approximately 200 pensioners.
"It was a very difficult decision," Stakhurs'ky said. "But we needed to begin doing things that were complicated, and many of our employees at that time could not do those jobs. We had to fire those people and replace them with young people who had the skills we needed."
The company did have one thing going for it as it sought to hire people with sales and marketing experience and skills: With Ukraine's economy in such poor shape, the pool of available workers was, from an employer's perspective, luxuriously large.
"Many companies and enterprises [in Ukraine] closed during that time," Stakhurs'ky said. "So there was a great opportunity for us to hire top experts and bring them to the company. We still have several people who came to us around that time from western Ukraine."

A NEW FACE

Azmol's business has changed noticeably since the breakup of the Soviet Union sent it into a tailspin. Except for the man at the helm, the leadership has undergone a large turnover and become younger. Stakhurs'ky's deputies are all approximately 40 years old.
The largest chunk of the company's sales - 42 percent on a volume basis — is in Ukraine. The company has a strong hold on the home market, claiming to supply approximately two thirds of domestic lubricant demand.
It reports a healthy distribution of sales across the market's various segments, including greases and automotive and industrial lubes. Important end-user groups in the latter segment include manufacturing and mining.
The company has some sales in Russia, but not much considering it stands at the doorstep of one of the world's biggest lubricant markets. In fact, all Commonwealth of Independent States countries account for just 12 percent of Azmol's sales.
Instead, the company increasingly looks in other directions to increase exports. Management identifies Turkey and Africa as two areas of particular focus, and adds that it sees prospects in Southeast Asia. Officials travel regularly in Western Europe and North America, attending conferences hosted by organizations such as the European Lubricating Grease Institute and the National Lubricating Grease Institute. Stakhurs'ky said the company is looking not just for foreign customers but also for opportunities to collaborate with other lube suppliers.
Officials say Azmol has become much more of a market-ing company. To illustrate, they point to the fact that it produces approximately 350 products today, up from 100 in 1990. Some products are added as a result of the company identifying new lines of business to enter, others in response to customers looking for customized solutions.
While the core blending facilities have not undergone much change, there have been tweaks to packaging operations. Azmol makes its own metal cans and plastic bottles now, and has installed more packaging lines, primarily for smaller container sizes.
For all the steps toward recovery, Azmol still has not approached the level of production it reached before independence. Its grease plant remains the largest in the world, and the company's production capacity for all lubricants is 330,000 tons per year. Actual output, however, amounts to 89,000 tons per year, just 27 percent of capacity.
Officials believe Azmol still has potential for significant growth. Stakhurs'ky estimates sales volumes could increase 100 percent. As he notes, this would make it among the largest lubricant producers in Europe.
"Our business operations and the quality of our products have gone to another level, and those are the biggest measurements of what we have accomplished," he said. "We hope that we can continue to increase our volume." But when asked if he expects volumes to ever return to pre-in-dependence levels, he simply shakes his head to indicate no.

GROWING RESTLESS

Ironically, government ownership, which likely was the reason Azmol survived the period following independence, is now viewed as one of its biggest problems. Listening to Stakhurs'ky and his deputies, it is clear that they are restless of the Oil Ministry's control.
They have many complaints. The government requires Azmol buy at least some raw materials from Ukrainian companies, and to bid on lubricant contracts of other state companies. When Azmol earns a profit, they say, the money goes to the government budget rather than being reinvested in the company. If Azmol finds cheaper sources for its raw materials, the government has been known to raise import duties, thereby cutting into the savings.
"It is unfortunate that the government cannot trust the managers of the company to make decisions about what is best," Stakhurs'ky said.
"Without that, and without the ability to obtain credit for things such as the purchase of equipment and raw materials, it is difficult to make things better."
There has been limited discussion - some initiated by Azmol management - about possibly privatizing the company or selling it. In 2004, the government decided to privatize the company by putting it up for auction. That plan eventually fell through, and Stakhurs'ky said there is no indication now that ownership would change any time soon.
For the time being, then, the company is left to continue doing what it has been for the past quarter-century - building up the business to regain its prominent position.

By Tim Sullivan, Lubes'n'Greases, July/August 2008 – Number 8

Reproduced with permission. © 2007,
LNG Publishing Company Inc.