Rockford-based Ingersoll Engineers Inc. said Monday that it has formed a consortium to bid for construction of a $200 million plant in the Soviet Union, the latest example of the surge of U.S. interest in doing business with the Soviets.
The contract would be to design, equip and start a plant to produce plastic parts for the latest Soviet export effort, the Vaz 2110, a car showcased at the Soviet trade show in New York last week.
The heightened interest by U.S. businesses in the Soviet Union has been fueled by the improving climate between the superpowers, evidenced most recently by Soviet leader Mikhail Gorbachev`s visit to New York last week.
Recent Soviet legislation that would allow U.S. companies to hold a controlling stake in joint ventures, as well as indications that U.S. companies are coming up with new solutions to problems encountered in the West`s business relations with the Soviets, are encouraging, experts say.
But though both countries agree that the world`s biggest economy should be doing more business with the world`s third largest, they differ markedly on why.
The Soviets need American companies to help them earn hard cash to inject life into their lagging economy, but by selling outside the Soviet Union. And American companies contemplating business ventures behind the Iron Curtain also want to earn hard cash, but by selling in the Soviet Union.
St. Louis-based Monsanto, which tried to form a joint venture to produce weed killer, found this conflict of interest irreconcilable and gave up, said Michael Petrilli, Monsanto`s international development director.
”The interest on Monsanto`s part was primarily selling that product into the Soviet market. The interest on the Soviets` part was to generate Western currency by exporting the product from the Soviet Union,” he said. ”So immediately we had a problem right there.”
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The repatriation of profits remains the biggest obstacle to U.S.-Soviet trade, and as long as the ruble cannot be converted into dollars, there are few easy solutions, said Rochard Hammer, national director of Price Waterhouse`s International Tax Services department.
The American Trade Consortium, six American companies that have pooled resources to negotiate entry to the Soviet Union, apparently has come up with a novel solution to the cash problem, but it still involves a form of the barter arrangement that Western companies typically have to work out, he said. The consortium, which groups six major companies including Chevron Corp., Ford Motor Co. and Archer-Daniels-Midland, was formed in April, 1988, and should be ready to sign a general trade agreement early next year with the Soviets.
That would pave the way for members of the group to work out details of 25 planned joint ventures, a significant improvement on the 10 that have been concluded with American companies since the Soviet law permitting such ventures with foreign companies was passed in 1987.
The six companies together should be better able to cope with the financial problem, pooling whatever hard currency profits they make and trading ”soft” rubles for dollars among themselves, Hammer said.
According to an executive of a U.S.-based multinational firm in talks with the Soviet Union, one way in which this would work would be for Chevron to be paid by the Soviets for whatever crude oil it discovers and produces in the Soviet Union.
This oil would then be sold on the international market and the cash raised would be used to pay the consortium, injecting some hard currency into the venture.
”What you have is six companies in one pot. The only reason these guys are in one pot is one of them is a resource company and it can take out the profits of the group in resources. The others are consumer companies,” he said.
According to the executive, each joint venture must be able to provide the Soviet Union with a net foreign exchange gain.
Because of the contribution Chevron would make if it found oil, the group as a whole can say it is providing a net foreign exchange gain, he said.
But Petrilli is skeptical that such agreements will pave the way for a significant increase in trade.
”That`s fine if your partner is in the oil or gas business. You get into other product areas and it gets much trickier,” he said. ”There`s been relatively few joint ventures signed with American companies, and the manufacturing joint ventures have been even fewer and farther between. The ones that have seemed to succeed have been related to the Soviets` export of either oil or gas or chemical fertilizer, products the Soviets have been exporting even before joint ventures were even allowed.”
The Soviets, too, are caught in a similar trap, because they will need Western help and, therefore, funding, if they are to learn to produce Western consumer-style goods for Western cash.
A senior partner with Ingersoll, which plans to bid on the latest Soviet project, said his firm was ”filling a gap they don`t have. This is state-of- the-art technology,” said Donald B. Ewaldz, the senior partner.
The Rockford-based consulting firm, which will bid on the latest project, has teamed up with Cincinnati Milacron Inc., Cincinnati; Autocorp., Grand Rapids, Mich.; Williams White Inc., Moline, Ill.; and Digital Equipment Corp., Maynard, Mass.; and is being represented in the USSR by the International Equipment Trading Co. (IETC), New York.
The consortium is not a joint venture and will be paid up front in cash by Britain`s Barclays Bank PLC, which will, in turn, collect from the Soviets. Such financing is hard to come by in the United States, however, because American banks are unaccustomed to making such deals.
Nebraska-based Valmont Industries Inc. had to seek help from the Soviet government to find financing for a similar contract to build an irrigation plant, after American banks were unwilling or unable to get involved, said spokesman Brian Stanley
The Soviets put the firm in touch with Britain`s Morgan Grenfell, which agreed to fund the project. Valmont gets paid up front; Morgan Grenfell will collect from the Soviets over 8 1/2 years.
Backed by secure financing, Ingersoll is optimistic that its consortium will beat competitors from West Germany, Japan and Italy for the estimated $200 million contract.
”The Soviets tell us they would like a U.S. company to do it. How that rates in our favor we don`t know,” said Ewaldz.
But if experience is anything to go by, the Soviets again will opt for cash over politics.
Occidental Petroleum Corp. lost to a cheaper bid by a group of Japanese firms last after the Los Angeles-based petroleum company made a much publicized offer to build a chemical plant worth as much as $6 billion.
The award of the contract to a Japanese firm was a snub to Occidental and its chairman, Armand Hammer, who traces his family ties to Vladimir Ilyich Lenin, leader of the Communist revolution, and who this week flew to Armenia to help in the aftermath of the earthquake.