Achieving Ubiquity

Mr. Kladov, what is BRICS for Rostec? And vice-versa – what is Rostec for BRICS?

There are two dimensions – a political and an economic one. In terms of politics, the BRICS offer an alternative to the unipolar world. Countries build their relations based on a different paradigm – these relations are those of equals. They share the same vision with respect to development problems. Even though BRICS is a very loose association that is more economic in nature, the political position is very important.

Rostec is present in all five markets. I do not mean to brag about it, but it is a real brand in the BRICS countries. From time to time, business people come to us and say: “We are trying to operate in foreign markets, but we face problems.” Then they ally themselves with us and get access to the BRICS markets but under the Rostec auspices, and everything works well. To our foreign partners, Rostec offers high technologies, guarantees of success, and, since we are a state-owned corporation, we also offer guarantees of stability and reliability.

Military technologies account for the greatest portion of Rostec’s manufacturing capabilities while the share of civilian technologies remains rather modest. Is this setup likely to remain the same in the future?

Yes, Rostec is the flagship of the Military Industrial Complex. We have a great deal of interplay with all of the BRICS countries in the defence industry. In terms of technologies it is a two-way street: we take something from our partners and offering something else in return.

There is this stereotype that we only deal with the military-industrial complex. However, we have developed an ambitious 2025 strategy, which involves fast tracking growth in the mechanical engineering sector. Today, the ratio between our military and civilian products remains at approximately 75% to 25%. By 2025 we plan to change this ratio to 50-50.

It is a daunting task because our group includes completely different holding companies and enterprises, For instance, the holding High Precision Systems (Vysokotochnye Kompleksy) makes the best air defense complexes in the world, and it would be wrong to make them repurpose their production for civilian needs. In total, six of our 16 holding companies deal with civilian products. In particular, I am referring to Kamaz, AvtoVAZ, and Technopromexport, which built 12 thermal power plants in India, and Tyazhpromexport, which recently signed a contract with Iran to build four power generation units eight megawatts each – the price tag on this project alone is $4 billion.

Many of our enterprises have managed to convert successfully. For instance, today our Shvabe holding, which produces optical and electronic equipment, generates 26% of its revenue from the civilian sector and plans to reach a target of 52%. Their products compete with the best in the world and are exported to Switzerland, India, South Africa, Uganda, Brazil, and other countries. When I visit their production facilities, the mind positively boggles. Shvabe manufactures unique perinatal and surgery equipment. For example, a baby that was born prematurely and weighs a mere 500 grams can be nursed to health until it reaches nine months by a computer that maintains the right temperature and provides the nutrition it requires.

What are your other strengths? Which civilian products offered by Rostec are sought-after abroad?

This would be electronics and IT. Surprisingly, everyone believes that we buy our basic microelectronic and radio electronic products in China. Indeed, we do spend a lot on our hardware components to sustain our needs – about $2.5 million per year. However, our exports to China in this sector account for more than $15 million.

In general, we have five comprehensive agreements with China. For instance, one of them was signed with Poly Technologies and deals with mechanical engineering, while another agreement on aircraft building was signed with AVIC (Aviation Industry Corporation of China). Dozens of projects are being implemented under each of these agreements. Together with our Chinese partners, we are developing an advanced heavy helicopter to be mass-produced in China. Our contribution to the project comes in the form of our technologies, while our Chinese partners will organize and implement the overall program as well as design and build prototypes, conduct tests, ensure certification, training, and organize mass production. They will also promote the helicopter on the market and provide overall coordination of operations.

Our global challenge is to jointly build a wide-body long-range jet airliner. Today, there are only two companies in the world capable of making them – Boeing and Airbus. These giants have divided the global market between them and will hardly be happy to see a third competitor emerge. That is why we are trying to encourage our Chinese partners to stay one step ahead of the game. We are planning to launch this aircraft by 2025.

If this future airliner is based on today’s technologies we will be lagging behind – it will take several years to build, and then another five years to upgrade. By that time, technologies will be entirely different. We need to implement solutions that do not yet exist. Parenthetically, this is exactly what Denis Manturov, RF Minister of Trade and Industry, told the president of AVIC when they met in June.

In your view, what kind of solutions could those be?

For example, why would an aircraft need cabin windows? A one-piece body is stronger and offers greater aerodynamic properties, while LCD displays could be installed for the benefit of the passengers. Why should an aircraft have a body at all? It could be a wing that can accommodate 300 or more passengers. It is this sort of technological development that Rostec is directly involved in. Even though the United Aircraft Corporation (UAC) acts as a systemic integrator, we will provide everything ‘under the bonnet’: ODK will launch the development of a new engine based on the Russian-made PD-14. The aircraft can only become a success if we install our own engine. If we opt to buy an engine built by our competition, they will find reasons not to ship it to us. That is why we are encouraging our Chinese partners to invest in and upgrade PD-14 as a power train for the aircraft of the future.

And yet both Airbus and Boeing buy aeronautical titanium from one of Rostec’s enterprises – VSMPO-AVISMA?

As a matter of fact, VSMPO-AVISMA accounts for 30% of the entire global production of aeronautical titanium. Airbus buys 60% of all titanium it uses from us while Boeing buys 40%. AVIC of China signed a 10-year contract with VSMPO-AVISMA to import titanium. Brazil’s Embraer buys 100% of its titanium from us. First of all, these facts speak to Rostec’s industrial potential and, secondly, to the high degree of confidence we enjoy.

Brazil is the only third-world country that mastered aircraft building. What kind of potential does it have when it comes to advanced technologies?

Indeed, the Brazilians managed to build their production capabilities virtually from the ground up and came up with a pretty good aircraft. As a mid-range airliner, Embraer proved to be very good and competitive. In addition, they also built a remarkable line of business jets. Each time we deliver something, they insist on a transfer of technologies. They want to obtain industrial competencies and learn to do things on their own.

South Africa has made some significant advances as well – they boast a number of joint ventures with leading European corporations, such as Airbus and Safran.

As far as Russia is concerned, following the collapse of the Soviet Union, we stopped building new civilian aircraft. Only recently did we manage to get the situation off the ground – we revived the Sukhoi Superjet program, even though a large number of its components come from the West. However, when MS-21 goes online in 2018, it is going to be the first real civilian aircraft built in Russia, and the majority of its parts are already produced domestically. This aircraft will really be able to compete with its Western counterparts.

What exactly are you shipping to South Africa? How specific is this market?

This is a huge market for small arms and ammunition; hunting is a national sport in this country. South Africa shows a great interest in these products – every farmer carries a weapon in this country.

In addition, we have offered to South Africa to build sea and river ports infrastructure, while Azimut Group has been hired to build comprehensive automated air traffic control systems. Azimut has already won a tender in a fair competition to upgrade Zvartnots, the airport of Yerevan, and built an air traffic management (ATM) system in Armenia. Later, they won a tender to implement a national air traffic control system in Cuba as well as to equip five airfields and a traffic control center in Egypt, and build a monitoring center in the Republic of Indonesia. They also signed a contract to ship equipment to South Korea.

Kamaz and AvtoVAZ are also present in South Africa – when it comes to the automotive industry, we are working closely together with all of the BRICS countries.

Rostec took part in the First International Business Fair for the BRICS countries, which took place in Delhi from 12 to 14 October. What products did you showcase there?

We focused on several areas: optical and electronic medical products from Shvabe, Roselektronika, and most importantly, water, sewage, and waste treatment solutions offered by our National Ecological Operator. This is what India needs, as waste is truly a national problem there. In Russia, the issue is equally acute and now our specialists from Rostec have come up with several world-class waste recycling technologies, including the compost method. By the way, it was thanks to this method that Europe managed to overcome the critical pollution it was suffering from 60-70 years ago to become what it is today, where there are rabbits roaming through its parks. We also showcased our projects dealing with high-quality drinking water.

What energy-saving and energy efficiency projects do you have in the pipeline?

This is where we have one of our strategic partnerships with China. Environmental pollution is a major problem there, as well as in India, but China started to tackle it earlier. Three years ago, there was a blackout in Beijing; I was there at the time. It was so dark that I got lost in the city center, where I had lived for five years. Because of the smog, visibility was only three meters. All electronic boards displayed messages: “Return to your home immediately”; “Shut all your windows”; “Staying out in the open poses a threat to your life.” So, then the Chinese government realized something: If we continue to develop at the same pace in the future, it will stop making any sense because there will be no population left. They cited some figures: Cancer incidence in China went up 80-fold. This is why the country spends enormous amounts of money to shut down and repurpose production facilities, implement new technologies, and protect the environment. They created the office of Minister of the Environment, who is authorized to shut down any facility that produces too much smoke and emissions.

Speaking of which, the Chinese came to see us at Rostec last month – we held negotiations. Our companies were invited to develop energy-saving and green technologies as well as power generation, air purification, water treatment, and industrial and household waste management solutions. These technologies are available in Russia, and the Chinese are ready to invest money to convert ideas into industrial solutions.

Coming back to India – did many things change in the country after Prime Minister Modi took over?

One could say that when Modi came to power, a new era was ushered in – he gave it an impulse and implemented ideas. The prime minister is a great champion of the private sector, and dozens of private companies flocked to us with proposals to foster cooperation.

There was an expo in Bangalore one year ago, and, naturally, Rostec was present there. Prime Minister Modi came from New Delhi and delivered an inspired speech, the main thrust of which was as follows: “Enough is enough. For 20 years we have been importing and could not do anything on our own. We are the world’s largest buyer of weapons – an area where our spending reached $56 billion – this is an honor we can do without, it is embarrassing.” And then he used a phrase that went on to become the buzzword of his entire policy: “Make in India.” Naturally, it was met with ovation and applause, and Modi went on to visit the expo. When he approached our stand, I welcomed him and started talking about our corporation. I said: “Mr. Prime Minister, I am very impressed with your moving speech, but I would like to point out that we have been following the ‘Make in India’ policy for the last 15 to 20 years in Russia.” “How so?” he asked me. “Look at our T90-S tank – it is produced based on our documentation and under a Russian license in India, SU30-MKI fighter – one of the best in the world with advanced functionality is assembled at HAL, based on Russian technological documentation in cooperation with the Irkutsk Aviation Plant. Or take our jointly developed BrahMos missile – it is a unique product, and there is no other like it in the world. This supersonic missile is used for coastal defense and it can be air-launched too. There is no other like it in the world. We understood a long time ago what the current climate requires of us, and you have just proclaimed it. We enjoy a high degree of mutual trust with India, otherwise, we would have not made these advanced technologies available to you. We have a project that has been stuck for over two years – moving the manufacturing of Ka-226 helicopters to India.” Then Modi said: “Don’t talk to me about the two years before I came to office. Give me a month and I will solve the problem!” And he did! Today, we have a contract in place to deliver and jointly produce 200 Ka-226 units in India.

What is the ratio between Russian technologies and those from competing nations in the Indian market?

One could say that the Indians are ‘shopping around’ – they pick their partners based on the price to quality ratio. These two aspects are very difficult to reconcile – products tend to be more expensive and better quality or less expensive and inferior quality. The Indians hold international tenders for many projects. Today, the French maintain a robust presence in the country, and in recent years, Americans have been present there as well. However, the scale of our cooperation is much greater, at least when it comes to those high-tech areas where Rostec is present.

I must say that we have been operating in the Indian market for as many years as we have existed. Nearly all of our holdings are active there. We are obviously talking about military hardware, aviation. In addition, today, we want to move from selling Kamaz lorries to setting up a production facility in India. The negotiations are already under way. We are also looking into localizing the production of small arms under the Kalashnikov brand.

There are many projects; recently, when I was at the Innoprom in Yekaterinburg, I was approached by two governors from two Indian states: Andhra Pradesh and Maharashtra. They both proposed strategic partnerships. They have ambitious plans to build ‘smart’ cities, new public transport, and e-government. Naturally, we cannot tackle all of it, but we are capable of many things.

Rostec is generous in sharing its technologies with the BRICS countries. But what do you get from your partners?

Natsimbio is running a very interesting project. I am referring to our national immuno-biological company, which signed a contract with Cipla – a global leader in generics production – during the St. Petersburg International Economic Forum (SPIEF). They are to launch joint production of pharmaceuticals and ready-made HIV drugs. Today, HIV treatment involves five to six pills that cost $1,200 per day. Clearly, not everyone can afford to pay this price. In India, they developed technologies and drugs at half the price while the quality remains equally high. If production were to be launched, the therapy coverage would be doubled given the same level of financing. According to our calculations, reducing the price would increase the coverage and accommodate 80-90% of all those who need this treatment.

Rostec is taking a keen interest in the bio industry right now, including pharmaceutical products, and India is one of the leading drug manufacturers in the world.

South Africa has made some serious advances in radio electronics and aircraft equipment. We use some of their radio electronic technologies in the aircraft that we export to third-world countries. We buy a lot of things in China. For instance, our automotive giants – Kamaz and Avtovaz buy a significant percentage of their parts from the Chinese. If you look at what LADA has under the bonnet, you will find a lot of things labelled “Made in China.”

The Rostec group also includes Neftegazavtomatika, a company that manufactures equipment for our oil and gas industry. The Chinese have come up with a new electronic well diagnostics system: This technology enables them to ‘penetrate’ a well and identify the amount of resources left. It increases output by 30%. We have signed a contract, and now our oil companies can benefit from this equipment. It is a good alternative to our Western suppliers who are trying to slow down the development of our oil industry. There are many examples of this kind – we see them every day. It is just that we do not always talk about them.