Rostec’s Fourth Industrial Revolution

To preserve sovereignty in a world that is entering the era of the Fourth Industrial Revolution, Russia needs its own independent technology policy, says Rostec’s Director for Special Commissions Vasily Brovko. He spoke to BRICS Business Magazine on how the state corporation is getting ready for the move into ‘Industry 4.0’, global technological leadership, and how to achieve it.

So, what is this famous Fourth Industrial Revolution, or ‘Industry 4.0’, that everyone all over the world has been talking about for so long? Is it a hypothetical construct in the minds of intellectuals and futurists like Jeremy Rifkin, or is it the reality in which we are already living?

Even if this notion was conceived of as a hypothetical construct at one time, today, it is so ingrained in the minds of industrialists and businessmen that it has become an objective reality. The endless competition that exists in today’s world forces everyone to change and work with the basic costs: production costs, transaction costs, improvement of energy efficiency, and reducing labor costs. Using the principles of Industry 4.0 at work ultimately affects the value of the goods, the time frame of their development, and the introduction of modern production technologies. All of this simply makes the companies more competitive in the global market.

What role will corporations play in Industry 4.0? Will they give way to the ‘disruptive’ startups, which are now appearing all over the place thanks in large part to the greater availability of new technologies, especially ICT?

Despite the general information noise, the process of industrial consolidation has been continually happening over the past decades. Big corporations are getting ever larger, and small companies are being rapidly absorbed by the global players in their integration into the global chain of added value distribution.

Is this an objective trend?

This trend is obvious, and there are clear reasons for it. The first is the ability to consolidate the resources within themselves to work in the manner of technological singularity, or a desire for singularity – in other words, continuous R&D, constant innovation, continuous product improvement, constant work on technologies. Naturally, small companies cannot afford it. They are capable of making a breakthrough in any one single industry, or make some sort of product. If the platform is promising, it becomes a target for a takeover, and most likely, the large companies will develop it themselves.

Secondly, and most importantly, it means access to global markets. Today, one of the key areas of competition is not the sales themselves (and they are very important, of course), but the after-sale services, the services which add the main value and where the majority of the competition is. Obviously, a small company cannot provide services of the same quality all over the world.

Thirdly, globalization of the market that continues in spite of everything. There is a unification of technology and an expansion of markets. Today, trying one’s luck in foreign markets has become much easier, but only the big players can afford a global expansion.

So, large corporations will be the backbone of industrialization and the transition to Industry 4.0. But the trigger – the catalyst – is the small companies, which do from home what used to require a huge workshop and industrial production. Today, we see how they can make a technological revolution in a given niche. And, of course, it encourages corporations to make major changes.

NOT A PROBLEM OF EDUCATION

How prepared is Russia for the world of Industry 4.0 in terms of its technological and scientific foundation and whether the government understands the challenges of Industry 4.0?

Today, both the country’s leadership and executives in various industries who deal with these issues, as well as the government as a whole, have a clear understanding of it. Everyone is well aware that riding on the old coattails of Soviet legacy will not work in the long run. On the other hand, there is also an understanding of the fact that the inertia of our business environment, the inertia of our industrial capacity, is such that extremely fast changes can hardly be expected to occur. But I stress once again: They think about it in Russia, and there is an understanding that Industry 4.0 or the ‘Internet of Things’ or the ‘Internet of Everything’ will overtake us.

We have already achieved substantial progress in some sectors. For instance, our country is definitely one of the main trendsetters, a leader in implementing e-services and e-government services in the world. Similar examples exist in industrial production, too. I will give you an example from one of our defense industry enterprises, where, after a thorough modernization of fixed assets, we introduced a robotic assembly line for missiles. This is a major technological breakthrough, as the production line complies with the most advanced global technological standards. Of course, such examples are still sporadic and have not turned into a mainstream trend.

But, industrial production will continue to change: Robotics will increasingly be used, smart factories will be built, new formats that will facilitate competition in the global market will be adopted. There is the simple reasom for all changes: if it does not, it will simply disappear in the next 20 to 25 years.

Does Russia have some obvious competitive advantages when compared to the rest of the world?

Yes, it does. First of all, the labor costs are low relative to its high quality. Secondly, there is the low cost (relative to many developed countries) of electric power and resource availability. Besides, due to its own technological development, Russia can compete with global players in many niches. However, these advantages are gradually levelled. So, we need a qualitative technological transformation, a kind of qualitative leap.

You have not said anything about another competitive advantage of Russia that is often mentioned in this regard – the high quality of Russian education. Or have we lost this advantage?

In spite of the fact that society as a whole has a rather pessimistic view of the education system, I believe that its plight is often overly dramatized. To this day, we have strong schools and universities, as well as individual faculties and departments that produce world-class specialists.

But it’s another issue that a business, or any other employer today, very rarely asks for specific requirements from our educational system. Often, they are on different planes of existence. The government has no explicit requirements, perhaps, due to lack of clearly defined economic policy. Industries are also not that great with goal setting, although they are generally able to formulate some requirements.

Another problem is that we rarely consider a new threat that is gaining strength: Competition for talent all over the world. This is a struggle, a confrontation, that is being waged out in the open. Today, we are losing this fight. It is not even about how to attract personnel from other countries to Russia – we do not even speak seriously about it and we do not have expectations. We have a problem with the fact that we are losing our own human resources. It is no secret that more or less every talented programmer working today for any of the largest Russian Internet companies, for example, gets offers from Silicon Valley. And sooner or later, after weighing all the pros and cons, they simply get on a plane and fly off. The same applies to many other areas – the aircraft-building industry, for example. After having studied here, people leave the country to work in Seattle or Toulouse. This trend may have slowed down somewhat, but it certainly has not stopped.

Is this a problem of education?

This is a problem of the social institutions that worked with those who were given an education using the public budget, and whom we have lost. So, we need to think not only about how to teach and what to teach, but also about where these people will then go to work so that it will be interesting for them.

One of the main reasons why programmers, for example, leave Russia is because there is the lack of large projects here. There are few ventures that could present a fascinating challenge for these people – an intellectual, professional, or career challenge, you name it. And precisely because these great people don’t really have many places to work in Russia they leave. This trend in very perfectly clear in many areas.

I repeat: The problem of human resources is a problem of engaging people so that when they go to work, let’s say, in an engineering design office, they can feel like this sort of thing is cool; so that their job can be interesting; so that there are proper working conditions. Because teaching people is not even half the battle – the trick is keeping them afterwards.

A STRATEGY FOR 20 YEARS

Is Rostec able to offer large-scale projects that would attract talented young Russians?

Of course, we make every effort to launch such projects and there should be quite a few of them so that we can attract hundreds and even thousands of young employees and engineers. Many areas of our work are particularly interesting to young talented people – building aircraft and helicopters, for instance. Over the past decade, the average age at the Mil Moscow Helicopter Plant fell by seven to eight years (in 2015, it was 45 years old). A lot of young people want to work there. The salary is good, the social security it offers is good, and the job itself is stimulating.

There are big projects in the field of ICT, as well as engine and propulsion engineering. For example, at Saturn plant in Rybinsk, we have also managed to assemble a good team, including a lot of young people. There are very interesting breakthrough, forward-looking ideas that appeal to young people.

We have a company that works on exoskeletons and biological prosthetics at the Bruk Institute of Electronic Controlling Machines. There are many young people there too – it’s a whole scientific team, which has done a lot of good projects.

And there are many such examples. But for this to become truly mainstream, there is still a huge amount of work to be done. That is why we keep working – in order to influence this process and, if possible, to accelerate it. Large national projects that attract young people under the Rostec brand will be there, and, I assure you, there will be more and more of them.

At the end of 2015, Rostec adopted a development strategy through 2025 that implies a significant restructuring of the company to improve its efficiency and revenue growth. What has been achieved since that time?

Indeed, in 2015, after the phase of consolidation of industrial assets within Rostec had been completed, we updated our strategy. Now, one of the principal tasks involves improving the efficiency of the state-owned corporation, significant revenue growth in order to rise to the scale and scope of a global leading technology companies, as well as accessing new markets. When building that strategy, we relied on the most important trends in the global industrial sector, which I mentioned earlier – in particular, the trend toward business consolidation. If we wish to remain a global player, to be able to compete on the global market, we feel that we need an annual growth by 11% in dollars and 17% in rubles over the next 10 years. This is a very ambitious goal. But, in our opinion, it is possible to make these ambitions into reality. What is more, only the actualization of this ambition will allow us to remain a global player.

So, what have we done? We have analyzed more than 250 major markets around the world that are divided by size, dynamics of growth, and our share in them. Employing this analysis, we have discovered that many of the segments in which Rostec dominates or plays an important role are either growing slowly or not growing at all. This forced us to pay closer attention to emerging markets, where we rarely participate, shifting our market, technology focus, and starting to invest and reformat the corporation to service these new segments and markets, which often are only now coming into their own.

We grouped all of the Rostec assets across multiple clusters on a sectoral basis, and then began to optimize them by industry principle; there is a huge potential for increasing efficiency. Then we began to make technological and product maps to look for duplication, for those technologies that we already had and for that could be used as a platform for creating new products – the products of the ‘industry of the future’. And finally, we looked at what merger transactions we needed to to enter the markets where we want to be a player.

All this can be considered us the result of the first two years of the Rostec restructuring program. Perhaps these are not very exciting or highly visible action points, but they can be characterized as a fundamental change that, in the future, will affect the whole of the Russian industry.

The corporation’s ambition is to gain global leadership positions in at least two to three segments of the global technology market. What are we talking about here?

We do believe that there is an opportunity to become a world leader in several segments. Apart from the military applications, where Rostec already has many niches and where we are and will remain one of the world’s leaders, there are other critical sectors – telecommunications, for example. We are working on new types of communication, such as SDN networks, which are a whole new generation of networks. This is potentially a new, $54-billion market. We already have some solutions here, and some individual projects have already been implemented.

Furthermore, there are projects that have to do with artificial intelligence, with unmanned vehicles, with helicopter engineering, as well as new materials and alloys. All of these are niches where we can do very well in the next 15 to 20 years. We can even expect to become a global technological leader in these areas.

What is the practical purpose of having global technological leadership?

Global leadership is being a part of the very singularity which I mentioned earlier. In other words, it is participation in permanent changes, in global growth, and in corresponding patents in terms of R&D, technology, and education. All this is necessary to ensure that in 10 to15 years, there will be no doubt about whether Russia will have its place in the global technological chain. Today, I hear this question often, and we must put it to rest once and for all. We understand that without an independent industry, there will be no independent foreign policy. It is an axiom. For Russia to remain Russia, we need a proper technological platform.

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