Rostec Fills in the Gaps Where the Market Offers Insufficient Incentives
Civilian and military helicopters, Kalashnikov assault rifles, Kamaz trucks that triumphed at the Dakar rally, titanium alloy products, and even the world’s only dual-screen smartphone – these products, and many more, are all manufactured by Russia’s Rostec Corporation or its subsidiaries. Sergey Chemezov, CEO of Rostec, spoke with BRICS Business Magazine about the high-tech industrial solutions that his company and his country could offer its BRICS partners.
You are on the board of Russia’s largest industrial corporation, which is well known in the BRICS professional community. Could you explain Rostec for the benefit of a larger audience?
Sure. Rostec is the largest industrial corporation in Russia and it is made up of over 700 different organizations. Most of them are grouped into 14 holding companies – nine in the defense sector and five in the civilian sectors. Our companies manufacture aviation equipment, electronics, radio and electronic equipment, optical and electronic devices, helicopters, engines, composite materials, medical equipment, machine tools, cars and trucks, automotive components, semiconductor devices and materials, as well as various military grade products. Our companies produce the Kalashnikov assault rifle, Kamaz trucks, and Lada cars. Rostec also deals with biotechnologies and industrial construction, among other areas. As for overall financial stats, Rostec’s revenues in 2013 reached 1.04 trillion Russian rubles [$33.5 billion, if using an average 2013 exchange rate of 31 Russian rubles to 1 US dollar] and our net profit was 40 billion Russian rubles [$1.3 billion, if using an average 2013 exchange rate of 31 Russian rubles to 1 US dollar].
The corporation’s investments in various projects in the period from January 2013 to the beginning of 2015 totaled $7 billion.
Today Russia’s re-industrialization and modernization is much talked about. What was the point of departure for these processes? What triggered them?
Today the value of the so-called ‘real sector’ in Russia is generally overestimated and there is much talk about the need to revive the high-tech production sector in particular. Both the United States and Europe also talk about re-industrialization; they are trying to repatriate a part of the manufacturing capacities that were moved abroad. Service undoubtedly represents a vital sector, as it constitutes the core part of the developed countries’ GDP. However, it hardly means that the industry of each particular country need not be developed. Otherwise, the economy would depend too much on the nations where the real production is located. There is a perception out there that a well-developed national industry would guarantee the country’s sovereignty. But one should give as much weight to the fact that each new job in the industrial sector creates additional jobs in other sectors of the economy.
Thanks to today’s emerging technologies, many sectors are starting to look entirely different. It means there is a chance to get ahead of the pack during the industrial development stage and leave traditional leaders behind. As for the government’s industrial policy, their priority is to build machine and mechanical engineering tools for heavy industries, as well as the oil and energy sectors. Rostec’s role in these areas is significant, especially when it comes to building machine tools
The sanctions introduced against Russia only prove that policy aimed at developing the domestic high-tech industry is the right approach. It turned out that the cooperation with Western suppliers could be stopped at any time, and for purely political reasons. We cannot afford to rely exclusively on overseas partners to ship critical equipment to our country.
At a State Council meeting in September 2014, Russian President Vladimir Putin emphasized the need to make a leap in the next 18 months to two years to improve the country’s competitive edge in the real sectors. As the largest industrial corporation in Russia, Rostec will also contribute to achieving this goal.
What does ‘re-industrialization’ mean for you? Was the idea to set Rostec up in line with this strategy?
The term ‘re-industrialization’ has many meanings. At times they may be interpreted differently. For us, it primarily means developing new, high-tech production facilities at a faster pace. It should be noted that it does not just mean that the scope of industrial production should be increased in high-tech areas; it requires a transition to a new economic growth model. In addition, when it comes to the military industrial complex, our mandate is to achieve 100% import substitution.
From the very outset in 2007, Rostec was specifically created to drive industry modernization in Russia with a special focus on high-tech sectors. The collapse of the Soviet Union caused a sharp decrease in the number of industrial projects commissioned by the government, in many ways due to military budget cuts. In the 1990s, the expectations that market development mechanisms alone would do the job turned out to be an exercise in futility – against the backdrop of a severe economic crisis, the business world operated with a planning horizon that was too narrow for high-tech production investment. As a result, equipment was never upgraded, scientific research was suspended, salaries at production facilities were delayed for months, and the combination of these factors led to a loss of qualified personnel.
Initially in 2009, 437 state-owned companies were placed under the Rostec umbrella. Later that number increased. A significant part of these companies were in a state of crisis and some were even undergoing bankruptcy. Once upon a time, these companies were the pride of the Soviet industry, but by the mid-2000s, they were already facing a severe crisis. Their equipment was obsolete, orders were few and far between, their target markets were exceedingly limited, and management often lacked the requisite qualifications. Rostec and law enforcement authorities set up a special group to identify dozens of cases of embezzlement. Our corporation decided to integrate these companies into holdings that would help support the life cycle of the product – from its development to after-sale services. This approach makes it possible to create large, profitable companies that are able to compete in the global marketplace. We had to restore ties between certain companies, often replacing management and infusing them with fresh blood. The newly created holding companies enabled us to channel our managerial and financial resources to key areas and put an end to a duplication of efforts in developing various industrial designs.
The sanctions introduced against Russia only prove that policy aimed at developing the domestic high-tech industry is the right approach. It turned out that the cooperation with Western suppliers could be stopped at any time, and for purely political reasons. We cannot afford to rely exclusively on overseas partners to ship critical equipment to our country. At a State Council meeting in September 2014, Russian President Vladimir Putin emphasized the need to make a leap in the next 18 months to two years to improve the country’s competitive edge in the real sectors
Rostec operates in areas where the market offers insufficient incentives. In the global market, high-tech sectors are often populated by just a handful of players, some of which enjoy the support of their governments. Rostec’s strategic objective is to create large, holding-based corporations capable of competing in the global marketplace. A number of these holding companies will have IPO launches. In other words, the government is only helping to restore high-tech sectors in the Russian economy; it is in no way trying to replace the market. The process of bringing private investors on board is already underway. Investors have acquired 49% of the Kalashnikov Concern, which manufacturers the famous assault rifles. As for the VSMPO-AVISMA Corporation, the world’s largest titanium producer, Rostec retains only blocking stake.
Out of the industry sectors prioritized by the government, where does Rostec operate?
Thanks to today’s emerging technologies, many sectors are starting to look entirely different. It means there is a chance to get ahead of the pack during the industrial development stage and leave traditional leaders behind. As for the government’s industrial policy, their priority is to build machine and mechanical engineering tools for heavy industries, as well as the oil and energy sectors. Rostec’s role in these areas is significant, especially when it comes to building machine tools.
Stankoprom, another Rostec holding company, assumed the role of systems integrator in this industry, pulling Russian machine tools building assets under one umbrella. Going forward, this will enable us to exercise a holistic approach and re-arm companies operating in strategic industries, conduct an integrated technological policy, consolidate competencies, and organize the requisite production facilities in Russia. It is especially noteworthy that Stankoprom is taking responsibility for the program aimed at re-arming companies that are a part of the military-industrial complex and increasing the share of technological equipment produced by Russian defense enterprises – from the current 10% to at least 60% by 2020. We expect the share of numerical control machine tools produced on the domestic market in Russia to grow from 10% to 33% by 2020. Building up Russia’s industrial capacity will be impossible if we fail to develop our ‘in-house’ machine tool-building industrial capacities.
Rostec also owns companies that manufacture equipment used in the mining industry and geological exploration. As for the machine tools built for the energy sector, Rostec’s United Engine Corporation (UEC) joined forces with GE and Inter RAO in October to open a plant that manufactures, sells, and services gas turbines. This will make it possible to meet the demand for high efficiency power units in projects that involve co-generation of heating and power.
It is widely known that the export of energy resources is very important to Russia. Certain technologies and materials developed by Rostec could also be used in this area. For instance, VSMPO-AVISMA is ready to offer off-the-shelf titanium products, which are widely used in oil and gas field exploration.
Rostec organizations also operate in other vital areas, such as industrial biotechnologies, composite materials, robotic equipment, pharmaceuticals, radio electronics, and aviation equipment. They also run a large-scale project to extract rare metals, which are indispensable to electronics manufacturing.
Have the measures taken to date to develop the industry made a difference in the Russian economy?
No doubt. The growth rate demonstrated by the Russian industry is greater than overall economic growth. Industrial growth in October alone was 2.9% in annual terms. In the first nine months of 2014, growth in transportation and equipment manufacturing went up by 11.8% (compared to the same period a year earlier). In October, the production of steel pipes went up by 30% (compared to October 2013) and gas turbines production recorded a 91% increase. In many ways, it has to do with the import substitution policy as well as contracts to build pipelines with China, who remain a reliable BRICS partner. This exemplifies how cooperation between the BRICS countries helps to implement our industrial development strategy.
In this regard, it is important to note that import substitution in various industries does not rule out the possibility of international cooperation, which is something that Russia is planning to build upon and expand.
What is the overall scale of Rostec’s international cooperation?
The corporation exports its products to 70 countries, including the United States, France, Great Britain, Germany, and Japan. The company’s permanent representative offices are operating in more than 50 countries, including China, India, and Brazil. In 2013, Rostec exported $16.32 billion worth of products. The corporation created more than 20 joint ventures with leading international companies. Our foreign partners value us as a source of technological innovations and an organizer of large-scale industry partnerships around the world in pursuit of long-term objectives. AVTOVAZ, the largest car manufacturer in Eastern Europe, partnered up with the Renault-Nissan Alliance to boost future development, while KAMAZ, one of the world’s leading truck manufacturers, is teaming up with the Daimler Company. Another Rostec company, Russian Helicopters, accounts for 14% of global helicopter sales. It also occupies an 85% niche in the Russian market. As of 2014, nearly 9,000 Russian-made helicopters have been used in more than 100 countries.
VSMPO-AVISMA provides up to 100% of titanium required by Embraer, a Brazilian aircraft maker; their agreement will run until 2020. Atlas Táxi Aéreo of Brazil was one of the first companies to order the Ka-62 helicopter that was designed in the framework of a broader international collaboration
What sort of work does Rostec perform in the context of BRICS?
Russian President Vladimir Putin appointed me to be one of Russia’s representatives at the BRICS Business Council from 2013 to 2015. Naturally, our corporation is interested in the broadest possible range of cooperation. After all, the BRICS countries represent the largest market in the world today, and their aggregate gross product has reached 21% of the global GDP and continues to grow. The BRICS Summits have become an effective tool, enabling participating countries to coordinate their positions on global development issues. The new Development Bank has recently been established, and it commands a reserve currency pool. Its stated capital is $100 billion, which makes it one of the largest multilateral financial development institutions in the world. Envisaged transactions for the reserve currency pool may also reach $100 billion in value. All of these things create an environment that encourages the implementation of joint programs – not to mention that Russian industry has long been cooperating with the BRICS countries.
I would like to reiterate that Rostec is trying to foster cooperation with the BRICS countries in many different ways, including joint ventures and production localization in partner countries. In other words, it is pursuing a long-term strategic interaction. After all, the BRICS countries make very attractive investment platforms and are not merely target markets. We stand ready to implement an ‘investor – financial institution – Rostec corporation as supplier’ formula.
I would also like to note that Rostec seeks to facilitate access to the Russian market for its foreign partners. The Corporation is interested in raising investments and implementing new projects in our country. We can guarantee that working conditions will remain stable.
Which specific projects is Rostec running with the BRICS countries?
As you certainly know, there are a multitude of different projects. I will name just a few, starting with the technologies that have already gained traction around the world. We ship our helicopters to many countries, including China, India, and Brazil. In terms of recent contracts, Russian Helicopters shipped two Indian-certified Mi-172s to the state-owned Pawan Hans Helicopters Limited in August 2012. Currently, Russian Helicopters are working on different options to launch the production of various components of these helicopters in India. Kamaz also has a joint venture in this country. VSMPO-AVISMA Corporation ships semi-finished titanium alloy products to different divisions of the Indian corporation Hindustan Aeronautics Limited (HAL), including their HAL Aircraft Division, which contracts with Airbus to manufacture Airbus A320 parts. In other words, the BRICS countries are participating in projects that are truly global.
Jointly developed electronic and optical electronic devices are exported to China (this collaboration involves two holding companies, Roselektronika and Schwabe). We joined forces to upgrade the technology behind China’s industrial chemical facilities, and Kamaz trucks are exported to China as well. Gas infrastructure development projects in China may require a shipment of up to 80 gas turbine units with a capacity of 25 MW. This fall, Rostec organizations and their Chinese counterparts entered into a number of vital agreements. In particular, agreements were signed with the China Aerospace Science and Technology Corporation (CASC), the Aviation Industry Corporation of China (AVIC), and the China Aerospace Science and Industry Corporation (CASIC). Earlier contracts were also signed with other large Chinese companies, including the China Poly Group Corporation.
VSMPO-AVISMA provides up to 100% of titanium required by Embraer, a Brazilian aircraft maker; their agreement will run until 2020. Atlas Táxi Aéreo of Brazil was one of the first companies to order the Ka-62 helicopter that was designed in the framework of a broader international collaboration. A joint venture between Kamaz and Marcopolo of Brazil is operating in Russia.
In terms of our cooperation with South Africa, Russian Helicopters and a South African company called Denel Aviation jointly set up a repairs and maintenance center in Johannesburg to service Russian-made civilian helicopters. The center opened its doors in 2013 on the eve of the BRICS summit in South Africa. TechMASH, a scientific and industrial company, signed contracts for OSA multipurpose nonlethal weapons and training ammunition. At the 2013 MAKS International Aviation and Space Show, Rostec and Denel signed a collaboration agreement.
What kind of advanced technologies can Rostec offer?
Rostec can offer its partners joint production and installation of mobile multipurpose rapid deployment ports, equipped with communications, monitoring, and standalone power supply systems. These ports can be deployed virtually on any unmodified shore. Floating docks can be used to unload and store various cargos, including raw hydrocarbons.
Discussions are underway with China to develop a heavy-duty civilian helicopter. Aviation Equipment Holding plans to take part in a joint Russian-Chinese project to create a wide-body aircraft. Both sides are looking at various options to launch a joint project to build new equipment and use each other’s designs in avionics. Russian Helicopters has proposed to set up a joint helicopter development center together with Hindustan Aeronautics Limited (HAL).
Rostec can also offer its partners the adaptation and implementation of freight and transport tracking systems using GPS/GLONASS. Ruselectronics, for instance, offers complex automated security management and information systems including the ‘Safe City’ system. ASIMUT also developed a suite of tools called Galactica, which is designed to automate air traffic control. It represents a new generation of automated systems specifically targeting air traffic management centers with low, medium, and high flight intensity.
What about joint efforts in the area of military technologies?
As you know, China and India are Russia’s key partners when it comes to military technologies and cooperation in this area. We work with them on many different fronts, but I will name just a few. In particular, subsidiaries of the United Engine Corporation are shipping AL-31FN engines for the Chinese J-10 fighter jet. Currently, Rosoboronexport is negotiating a contract with China to ship Su-35 jets. The United Industrial Corporation OBORONPROM and Russian Helicopters are both looking into setting up a joint venture to service MI-17 helicopters for India’s Air Force – a license to manufacture 120 RD-33 engines was made available to the Indian side. In March 2014, Nimi (a TechMASH company) signed contracts to ship and organize the production of armor-piercing sub-caliber shells in India.
Russia’s Ministry of Industry and Trade appointed the Moscow-based design bureau Kompas as one of the contractors responsible for providing the Indian side with access to high accuracy signals, which come from the Russian global satellite navigation system GLONASS. They were also tasked with delivering consumer navigation hardware and integrating Russian components into this navigation hardware.
We ship our helicopters to many countries, including China, India, and Brazil. In terms of recent contracts, Russian Helicopters shipped two Indian-certified Mi-172s to the state-owned Pawan Hans Helicopters Limited in August 2012. Currently, Russian Helicopters are working on different options to launch the production of various components of these helicopters in India. Kamaz also has a joint venture in this country
What would enable Rostec to maintain and increase the competitive edge of its products in today’s global economy?
Russia is one of those countries that has the requisite scientific and production capacity to create unique technologies and high-tech products. It is this capacity that provides Russian companies, Rostec included, with a competitive edge. In the last five years, the government’s investments into fundamental and applied research have doubled.
Strong fundamental science offers great competitive advantages, which Russia possesses to the fullest. As for Rostec, we have another competitive advantage – our company is very balanced. We have military contracts and we produce civilian products; if the number of orders falls in one area, we will be sustained by our work in the other. Furthermore, the corporation places a great deal of emphasis on creating its own brands, which increase our subsidiaries’ market capitalization.
I would also like to point out that Rostec has been quite successful even in the highly competitive market of consumer electronics. Yota Devices, in which we have a 25% stake, developed the world’s only dual-screen smartphone: the YotaPhone. It is an entirely new and innovative product and utilizes over a dozen patented technologies. Yota Devices has representative offices all over the world and is constantly expanding its geographic presence. At an event that took place during the 2014 Asia-Pacific Economic Cooperation Summit in Beijing, Vladimir Putin gave the latest generation YotaPhone to the Chairman of China’s Communist Party Xi Jinping. YotaPhone is yet another example of the successful cooperation and collaboration between the BRICS countries.