May 08, 2020

The shareholder and CEO of TechnoSpark Denis Kovalevich, “Cockroaches will outlive unicorns.” What awaits startups and the real sector in light of the pandemic / Snob

The shareholder of the TechnoSpark Group of Companies Denis Kovalevich shared a post where he gives a detailed account of how his business has been resisting the quarantine restrictions. The Snob talked to him to find out why the current situation is no joke and what kind of businesses have better chances not only to get through but even lead the way in the nearest future

Photo: Alexei Nikolaev

On social distancing on site

Denis, your post gives the impression that your business has actually benefited from the crisis. Your production is expanding with new job openings. To a large extent, it is all happening thanks to the operation of the response team and its protocol that is obligatory for the entire staff. Let’s dwell on a few points here. For example, in the article you say, “In the first half of March we introduced a large range of restrictions, from handshakes to giving a lift by private cars, from collective smoke breaks to sharing meals.” How is all that working? 

Even though we are based one kilometer straight from the center of Troitsk (New Moscow. — Editor’s note.), you can only access it via the bypass highway, which takes about 20-25 minutes. And as it often happens those who commute by cars would give lifts to their colleagues. It is extremely dangerous in the middle of a pandemic: if one of the passengers has the infection, the rest are sure to get exposed to the virus in the confined space within five minutes. In this respect, car sharing is a direct violation of the basic rule of social distancing. That’s why we banned employees from giving each other rides to work.

Those who don’t own their own cars switched to public transport. As funny as it may sound, large buses with the new staggered seating arrangement in place are safer than passenger cars. Regulations require that drivers have to turn off the AC, keep the windows and sunroof closed to ensure that there is no airflow.

The new requirements didn’t catch on at once. When the first tests were turning out mostly negative, a lot of people believed that everything was fine and the trouble passed by, so they continued to share their rides.

How are you dealing with it – through reason or sanction?

Here’s a graphic example: a group of technicians involved in the production hop in a car and go to the nearest McDonald’s Drive-Thru for lunch. As soon as it is caught by cameras and a special division of epidemiological officers, they are immediately contacted by the person on duty and told not to return to the site. They self-isolate at home, take tests a few days later and can only go back to work after getting a clearance. So a violation of the protocol translates into a loss of the entire week for the person.

Which means they are not getting their salary throughout this time?

They are, but not in full. With smaller wages any further reduction is more than tangible, that’s why people quickly learn to control themselves.

As far as I understand, handshaking is banned too?

Yes, but it went down better. As you know, any touch automatically transmits the virus. Everybody understands that.

Is there a ban on smoking together as well?

Yes, because the main point of smoking together is communication. Now we have drawn squares for smokers to stand in at a distance of 3-4 meters from one another. As soon as we did it, people stopped smoking together at all.

How about shared meals?

Everyone used to crowd into the canteen. Now there are two options to choose from. One can either have lunch at their workplace (it is way safer than one packed canteen). Or they can choose to follow the schedule and go to one of a few rooms that are disinfected as soon as they leave. And there is no dishwashing in bathrooms: everyone is advised to opt for single-use tableware or take the dirty dishes home. Besides, we have changed the water dispensers and figured out a way to supply hot and cold water without the risk of coming in contact with others. In total, our protocols contain a couple of dozens of such regulations, with two or three added every day.

Photo by Media Office of TechnoSpark

How do you enforce social distancing in the workplace?

Things get trickier here, it isn’t enough just to put the machines two or three meters apart. We looked at a case study of a restaurant in Wuhan (China) where they modeled the virus spread dynamics depending on the arrangement of tables in relation to the airflow inside the rooms, and analyzed the situation in our premises from this point of view, using the exact data on the work stations of those employees who got infected. We even ended up having to demarcate an area on the ground floor with a temporary wall which might as well stay there forever. We are going to tweak more nuances as we get to know more about how people get around the warehouse, where they move during their work, where they come in touch with one another and so on. We are going to look for zones which are conducive to rapid spread of the virus around the premises.

But you’d agree that it’s impossible to eliminate all sorts of contact between people within the production process anyway.

It is clearly impossible but we can at least reduce them to a reasonable minimum. Today I have every confidence to claim that the odds of our employees contracting an infection at TechnoSpark are times less than elsewhere, like in shops, pharmacies, transport, etc.

On prevention expenditure and its impact on production costs

You must have invested quite heavily in the measures you’ve been talking about? 

Not yet. It most surely amounts to quite a bit of money by our standards, but in general it has so far been affordable for many producers. It is highly unlikely that we can prevent the infection completely. But we are aiming at what the regional administration is working on as well: reducing the spread of infection per unit time in order to flatten out the curve of contagion as best as we can and not allow it to spike. The longer we manage to keep it flat, the more manageable this process is going to be. The quarantine (even when the illness goes asymptomatic as in most case now) will last three weeks or so, and it’s bearable. Such leaves and staff turnovers are leveled out by increasing workforce productivity and recruiting more people. We need to make sure that 60–80% of employees are at work, otherwise, the whole operation will cease. We are actually experiencing some growth in the workload since TechnoSpark started producing portable coronavirus screening devices. Frankly, we are among those few who are in operation right now, that’s why we have a huge inflow of new clients. Not only do we need to keep up but we have to speed up the rate.

How economically feasible do you think your production is? Given all the prevention costs, rearrangement of premises and workflow, forced substitutions for those who fell sick or are quarantined? Doesn’t it mark up the production cost

Here, we need to draw the line between two things. The first one is the law of all expanding production processes. If production in terms of the output and fulfilled tasks isn’t in stagnation but on the rise, however strange it may sound, such situations as pandemics and massive depletion of the workforce actually trigger an increase in productivity rather than otherwise. By our estimates, in the last couple of months, the productivity has doubled.  Current production lines are incomparably more loaded than back in January or February. And we are coping with this bigger load engaging fewer people. It’s clear enough that it wouldn’t be happening without us maintaining the output. And in this respect, some part of the costs that will never be paid off, for instance, those for gloves, masks, sanitizers, additional cleaning that is conducted every two hours, or something like that, will just make part of the permanent expenditures — and these aren’t super huge expenditures.

There is another part of expenditures, provisionally non-recurrent. For example, procurement of specialized devices that disinfect premises and clothes with hot vapor and so on. It’s a matter of investment. Production processes differ in this sense. Unlike privatized former Soviet industries, ours wasn’t inherited but built from scratch back in 2014. And it’s entirely a product of investment. As long as we have our powerful investment partner represented by the Rusnano infrastructure fund, we can afford an additional investment in production when it comes to momentarily changes. Investments on the part of those enterprises that came from the Soviet times were inherently different, based on the “once up and running then can buy one new machine” principle. And they often struggled to find a few thousand or million rubles of investment in their new level of epidemiological safety. Such investments for us are quite realistic and relevant, as the production itself in the high-tech equipment amounts to over half a billion.

Photo: Alexei Nikolaev

On duration of the pandemic and universality of measures taken

There was one point in your post that raised a question: you didn’t refer to the current situation as a temporary but permanent factor of production. What do you mean? Is it to stay forever? What if they invent a vaccine, and everyone gets it, and some get over it asymptomatically? Then we’ll be left with “collective immunity of the nation”, and soon forget about coronavirus, as we did about the bird, swine or other types of flu.

I think this epidemic is the first in a long-lasting cycle. Humanity is facing a situation when new viruses are to appear with persistent regularity. Moreover, nobody knows which ones people can develop stable immunity against. Even the current coronavirus differs from country to country, it keeps mutating, and its impact on people in China is not the same as that in Russia, USA, or Italy. It has even been officially confirmed that we should expect a second wave in the fall, and we don’t know yet if those who have recovered will be immune. That’s why we chose to treat the situation as a new norm.

Do you think the measures you are taking can be considered universal for the real sector across the country? Or they are only applicable to small-scale production sites and useless for bigger ones?

As for approaches, there are a few things that simply have no alternatives. For example, regular testing regardless of the size of an enterprise. We carry it out three times a week, and I hope that as soon as we have acquired the equipment for express screening that we were ordered for production by a Kazan company, we will be able to do it more often, and, more importantly, more quickly. There is no alternative for social distancing: no handshaking, no rides, strict hygienic standards. There is no escape from establishing new positions in production such as our epidemiological officers who make sure the above-mentioned norms are duly followed. Or, say, employees in charge of taking the infected back home from their work, without spreading the infection to those who are around. It can become indispensable to managing any company if you will. Most surely, this “epidemiological management” among other things will be responsible for the rearrangement of the workspace, taking into account the airflows inside premises and other factors like that. That said, it has been forever: any managerial function appeared as a response to an emergency and later became regular.

And as for the specifics, how production has to be arranged and where such measures work better than elsewhere, there is no universally applied solution, each business will have to look for their own set of optimal measures. Because all businesses are built differently.

I agree that it was easier for you to impose those measures because you are a high-tech producer. 

First and foremost, we are a contract-based producer. It is a model that differs from its juxtaposed counterpart of a vertically integrated business when you are both the inventor and producer of a product. Figuratively speaking, if you take an automotive conveyor as an example, it can only produce cars that it’s designed to make. Ford can’t produce Tesla or Mercedes, and Mercedes can’t make BMWs. Though, by my estimates, about some thirty years ago many industries, including car manufacturing, and particularly, instrument engineering, saw the advent of the contract-based production model. It’s when a company doesn’t have a product of its own but it makes those exclusively for their clients.

Their customers bring them design documentation, regardless of what it is, a 3D-printer or laser for surgery, and the company produces a specific product or its part for them.

As a result, our company doesn’t depend on any of the specific products, and when a certain product experiences issues in the market (like a drop in demand for the same 3D-printers), it only accounts for a reduction in a share of our production. A contract-based production, in this respect and in the conditions of rapidly changing markets and perturbations faced by particular products and startups that developed them and promote them to the market, enjoys fewer risks than single-product makers. For instance, one contract-based company of TechnoSpark had about 300 customers in six years of its existence. Some have been ordering for years, some less, some only come up with occasional orders, and it’s normal too, our production is flexible, it was initially designed in the way that it can offer a reasonable price for a limited volume of goods. So for us, losing 10-20% of customers at once in a situation of crisis rather opens new opportunities to take up other customers instead of driving us to the brink of survival.

Photo: Alexei Nikolaev

Does it mean that you see the future of your industry in the bigger number of producers similar to you?

One hundred per cent! I’m convinced that this crisis will prompt more producers to adopt the contract-based production model. And there is one important point. Contract-based production is focused mainly on the development of the means of production, which is all about “how to produce”, which ways to use, how to most quickly find the optimal production track, and which program to choose for processing particular items in sophisticated machines. Companies that, say, make robots or devices for detection of Covid-19, are focused on the product and have to keep making the upgrades, at least every six months. Their risks are within the product itself, whereas the risk of a contract-based business is in the ways and means of its production. That is why, for instance, contract-based makers are always main investors in robotization of production, because it increases their productivity and profits.

The final question is this – what has this crisis teach you personally, what lessons and outcomes are obvious to you now

First of all, it is the approach – we have to keep on working instead of giving way to panic, stopping and trying to wait it out – that will divide the companies of most industries into two unequal parts. Those who took the risk and attempted to live in new world order, and those who got frightened, failed to keep up and froze. We know quite a few examples, even among us, when the production didn’t close but at the same time didn’t adopt any preventive measures, which eventually led the company to face an instantaneous spike in contagion sending 90% of its employees home. And that’s it, there’s no production anymore. Those who don’t stop now are not only going to get an incredible experience in handling this new situation, but also additional customers. There aren’t too many companies that stay afloat these days but those that are experience overloads.

We looked at the possibility of suspending production in the following way: if we do, we have to do it for 9 to 12 months. It doesn’t make any sense to close in early March and reopen In May – in this case, we will have to apply the entire scope of measures that we have in place today. If you don’t, you will see an immediate outbreak. Why would we need to suspend our production then? If we see a slight decrease later on in the summer, and then the second wave in September, you will still face the trouble in September after your re-opening in August. Whether the virus is going to mutate into less dangerous forms or there will be a vaccine is all a matter of no less than 9-12 months. What would a suspension for a period that long entail? It’s a death sentence to a business, its write-off and beginning of a new one. One will have to start anew: look for clients, learn to produce, boost their productivity again – all we have been doing step by step in the last several years. That’s why those who haven’t stopped but managed to continue their work and are learning to handle this epidemiological process are getting a head start with their competitors.

Secondly, in my opinion, there will be a huge readjustment in the market of startups. Lots of startups in Russia can’t really be deemed as companies. Rather, they are teams of specialists who managed to find investment or grants. So shortly after the crisis started, they experienced cuts in the financing, and with no easy money, these teams fell apart and left the market. There will be a radical cleanup, objective, not arranged by anyone on purpose, just dictated by the crisis. Once my Dutch colleagues that are, just as us, in serial production of startups, said that they have a stake not in one-of-a-kind “unicorns” – that are bright, enticing, almost always overly invested companies that require a lot of funds to survive – but in the “roaches” among the startups, small and no-frills, that don’t spend too much on their employees, public presence and image. Roaches are creatures that can survive for a long time without food or water, they move in groups and support each other. Such startups have a much bigger chance of survival than many “quasi-unicorns.”

TechnoSpark is a serial producer of high-tech companies from an idea to the sale of the business, including contract-based production, engineering and industrial design services.

Sourse: Snob.

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