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Peaceful production: is the MIC ready for the «demobilization»

23 January 2018
Peaceful production:  is the MIC ready for the «demobilization»

A year has passed since Russian President Vladimir Putin has directed defense companies to set out on a “civilian” path. By 2030 the volume of non-defense products should reach 50% of all contracts. However, nowadays not every company is ready to convert. Some of them are successfully joining state diversification programs, other factories are constrained due to legislature and market barriers.

Which companies managed to adapt, and which are not ready for the diversification and why? How is the state willing to support them? Read about it in the INNOPROM VIEW.

From Army to Medecine

In the upcoming two years the programs of the large-scale rearmament in the army and the navy are expected to be accomplished. Since 2020 the demand on the products of defense companies is predicted to fall on the part of the state as a customer. Therefore, the defense sector is developing contracts in the civilian sector, so that it could secure itself after delivering defense contracts.   

Circumstances differ among companies: while some companies are actively investing into the conversion, others were left dependable from the defense sector and cannot switch promptly to the civilian production.

Holding «Shvabe» which delivers fibre-optic products to the army represents an example of an effective diversification. In 2016 the company's volume of contracts in the civilian sphere in Russia was 12,1 bln rubles, in 2017 it is expected to reach 17,6 bln rubles. In 2020 the holding intends to raise the share of civilian products in the revenue of the company up to 50%, and up to 81% in 2025.

«Shvabe» is increasing its profit due to medical projects: the company is taking part in the federal program of constructing perinatal centers. In 2017 the holding delivered medtech in the amount of 2 bln rubles to 30 Russian regions. For example, for hospitals they produced anesthetic machines used for nursing premature babies. Moreover, “Shvabe” delivers incubators for newborns with an extremely low body mass, as it was reported in the press relations service of the state corporation “Rostec”.

The Federal Cabinet of Ministers supports aircraft industry using state programs. The Ministry of Industry and Trade of the Russian Federation has formulated a development strategy for the industry up until 2030. The percentage of the civilian production in the aircraft industry is predicted to grow from 21,3% in 2016 to 38,5% in 2030.

In 2017 events on import substitution were made actual in the project «Sukhoi Superjet 100» (SSJ-100), which implied using Russian components in the interior, purchasing Russian passenger seats. Part of the budget is spent on the state program «Aircraft Industry Development for 2013-2015».

 

“If we take into consideration that the 'Armament’ program's peak has passed, we will gradually substitute defense products with civilian ones. There is a growth of around 15% in produced helicopters in comparison with 2016. In 2018 as a part of the program of the ambulance aviation development it is expected to deliver 31 helicopters (12 “Ansat”s and 19 Mi-8). The issue of including in the ambulance aviation program the aircraft L-410, which is locally produced in Ekaterinburg in the Ural civilian aviation factory (potential resident of the second stage “Titanium Valley”) is currently discussed with the regions. Moreover, the production of a new aircraft MC-21-300 is taking place. For now, the motor PW-1400G (USA) is installed in this type of aircrafts, but hereafter this aircraft will be equipped with Russian motor PD-14,”

― Denis Manturov, Minister of Trade and Industry of the Russian Federation.

 

On the whole, such producers manage to raise contracts with the help of the Cabinet of Ministers. Companies' projects satisfy the requirements of markets and state programs.

Prohibitions and Taxes

Successful projects of some companies do not cancel system problems in the industry. The defense industry cannot accomplish mass conversion due to objective reasons.

For example, the concern “Kalashnikov” faced the difficulties in the civilian sales due to the barriers in the legislature of the Russian Federation. The main company’s profile is the production of military firearms, high-precision ammunition, and the revenue from the civilian sales in 2016 was only 5,6% of the sales volume, or 885,6 mln rubles.

The Russian legislature is strict, civilians are limited in their possibility to carry and keep arms. Therefore, the concern cannot increase its share in the civilian sector: “The redundant constraint of the Russian legislature on the civilian arms limits the market development”, as company’s reports mention.

Moreover, the purchasing power in Russia is going down. As a result, in 2014-2016 the domestic market of civilian arms has decreased more than one-and-a-half times. In their reports, the representatives of “Kalashnikov” predict that the customers’ behavior is unlikely to change in the upcoming 3-5 years.

The representative of the Saratov Elektropribor plant named after Sergo Ordzhonikidze remark that it is more difficult for the defense companies to convert due to the foreign competition and the tax burden.

 

 

«Our companies are in unequeal terms with foreign companies, the deadlines of the new project are extended for 2-5 years. Moreover, the tax burden does not allow long-term investments »,

— Dmitriy Hanenko, CEO of the Saratov Elektropribor Plant.

 

 

The plant produces aircraft instruments and automatic control systems. In three quarters of 2017 the state secured 78% of the total revenue of the plant. Dmitriy Hanenko remarked that it is difficult to develop new productions under the conditions of the nationwide economic stagnation.

How defense companies look for contracts

In order to get rid of the defense dependence, companies find prospect buyers on their own through marketing researches. Companies research what is in demand on the market and how they can convert their production. 

Siberian military companies announce about their readiness to take part in civilian projects. Affiliated company of “Techmash” – AO «Research Institute of Electronic Instruments» is going to attract civilian contracts: there is a possibility to produce LED products for the systems of dynamic navigation of Russian Railways, automatic systems of supervisory monitoring and control for housing and public utilities etc.

 

«There are all the necessary conditions in the Research Institute to carry out these projects. The assembly of new products is esteemed to be opened on industrial sites where there used to be section 4. We plan to carry out researches together with our partners on improving, modernizing, creating new kinds of civilian products»,

— Valeriy Edvabnik, deputy CEO of the Research Institute.

 

Aircraft companies build their strategies, set their goals which direction the industry will develop in the long run. For instance, United Aircraft Corporation is developing a new strategy up until 2035. The company is going to invest into creating new capacities in order to increase civilian production.

Among key courses there is the development of close inter-plants cooperation, increasing collaboration. By 2035 UAC plans to give away around 40% of their production to the outsourcing.

“Together with the holding “Industry Technologies” we discuss about the creation of the production of onboard cable networks and pipe lines in Ulyanovsk and Kazan. The experience, including the international one, shows that in some cases outsourcing allows to reduce significantly time and cost of products at the cost of deliveries including ones for “exterior” and “non-aviation” customers”,

— UAC Vice-President Sergey Yurasov.

 

 

How the State Can Help

>One more problem is the deficit of investments, as it is remarked by companies that are eager to expand to the civilian sector. In this context during 2017 the Federal Government developed a package of support tools for diversification projects. One of the basic mechanisms will be loan-based funding on the part of ерe Industrial Development Fund. More specifically, new programs “Conversion” and “Complementary Parts”.  

«The main parameters of these programs are mainly identical. The fund provides soft loans on a competitive basis for the period until 5 years with 1% interest in the first three years and 5% interest for the rest of the period. Moreover, only those companies that are included in the Defense Companies Register can take part in the “Conversion” project »,

— Vasiliy Osmakov, Deputy Minister of Trade and Industry of the Russian Federation..

 

 

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As it was announced by the press-release service of the IDF, as a part of the “Conversion” program the amount of loans will be 200-750 mln rubles on the period up until 5 years, for the “Complementary parts” it will be 50-500 mln rubles. The financing will be provided for the projects with a total budget starting from 400 mln rubles (“Conversion” program) and from 71,5 mln rubles (“Complementary parts project”). 

Moreover, the Ministry of Industry and Trade of the Russian Federation developed a joint program with Vnesheconombank in 2017: defense companies will receive loans with 5-7% interest for priority projects. Furthermore, the package will include subsidies for the delivery of pilot batches of new production, subsidizing partly costs on the research and development, support of the Russian Export Center.

Diversification and digitalization of Russian defense companies is one of the key topics for discussion during INNOPROM events. In 2017 leaders of the government of the Russian Federation, foreign business, Russian partners were invited to the dialogue. What are the successes of military campaigns? What is the effectiveness of the support for these companies? What new niches can become the drivers for the growth of the defence industry? We invite you to discuss problems of the industry at INNOPROM-2018.

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