Import Substitution: Next Step

“Defence industry is the significant scientific potential, the crème de la crème of engineering society, and companies that are able to meet today's challenges of any kind. These are the companies with the biggest scientific and engineering potential. Demonstration of our military equipment is a clear proof of this point” Oleg Sienko, CEO of Research and Production Corporation “Uralvagonzavod”, JSC

“Sanctions have spurred Rosoboronexport’s routine operations, making us focus on our objectives, boost our activity and creativity at all stages of production, ranging from marketing to contract execution, if you like”. Sergey Goreslavsky, Deputy Director General of Rosoboronexport, JSC

“Russia’s defence industry is an anti-war system, even a war prevention system since that powerful potential the Russian Federation possesses is a deterrent against abnormal political ambitions of some courtiers and, primarily, the USA. Speaking of co-operation and mutual relations, Russia’s stance is clear – we are interested in multi-polar international system and in creation of the global security system that will allow any nation to assure its sovereignty and act on the basis of mutually beneficial partnership and co-operation” Irina Yarovaya, the head of the State Duma’s Security and Corruption Fighting Committee

20-trillion ruble package has been allocated for the modernization of our military forces plus 3 trillion rubles – for retrofitting and upgrading of defence industry enterprises. Although new production facilities have been launched and output volumes are growing, we are not able to offer our military products to foreign customers whenever they like because our top priority is to re-equip our military forces” Vladimir Gutenev, Russian MP, President of the NPO Association “League to Support Defence Industry”

Initiated two years ago, the import substitution policy is intended not only to assure national security but also to support national defence industry enterprises. Now it’s time to estimate the first results. 90% of military product components traditionally imported from EU countries and NATO member states are to be substituted by 2018. This figure includes about 800 types of arms and special-purpose military equipment, i.e. dozens of thousands of individual products. According to Vice Premier Dmitry Rogozin’s statement, the dead line for substitution of Ukrainian military products is 2018. This relates to 186 types of arms and special-purpose military equipment or about 1,000 various items.

Intrinsic Obstacles

Of course, to implement such a large-scale program, we have to face specific problems. Thus, according to Russian Deputy Minister of Defence Yuri Borisov, “a failure to comply with the state defence order requirements may be caused by: <…> limitation of import component parts, raw products, and materials supply due to implementation of sanctions, cessation of production and loss of a number of technologies, insufficient production capacity.”

Nevertheless, the level of the state defence order completion reached 95% last year. “This result is quite good,” Yuri Borisov said. Over the last few years, this figure was often lower and totaled 82–84% only. Note that in 2014, the state defence order volume was 1.25 times higher than this figure for 2013 but the volume of supply was 1.65 times higher than in 2013.

Although most of military products are still supplied from NATO member states, an adverse effect of economic sanctions imposed by Western countries against Russia has become evident. The development of GLONASS, a Russian satellite navigation system, has been restrained by a temporary ban on selling space electronics components to Russian companies.

Yuri Borisov commented on the actual situation, “We understand these problems and can somehow fill the lack of components, using the MoD’s stock; whenever possible, we are trying to sync the acquisition planning with the company’s capabilities”.

Important Point

Special emphasis should be put on the need for import substitution in those industries, which are not likely to be directly involved in the development of advanced military hardware but have significant indirect influence on production processes.

Thus, most of software and hardware solutions implemented at Russian enterprises are traditionally based on SAP, Oracle, IBM, and Microsoft products as well as on products supplied by other manufacturers from Western countries and Asia. This situation is not acceptable for Russian defence industry enterprises as the information related to industry standards, financing, design and production shall be properly protected from external threats.

Such protection means that applicable equipment and software shall guarantee the absence of undeclared capabilities and prevention of secret data acquisition and fault-free operation irrespective of sanctions and other external circumstances. To solve this problem, development of trusted information infrastructures is urgently needed. This includes either automated systems at large or individual system modules (management, financing, design modules, etc.), applicable operating systems, and software and hardware these systems are based on.

In April 2015, the Ministry of Industry and Trade and the Ministry of Telecom and Mass Communication of the Russian Federation approved electronics and software import substitution plans. While in 2014 the import share of business applications (ERP, СRM, EDMS, project management, etc.) in the overall volume totaled 75%, this figure would have been reduced to 50% minimum by 2020 and to 25% by 2025. The share of foreign industry-oriented software solutions (PLM, CAD, CAM, CAE) shall be reduced from the current approximate level of 90% to 50–60%.

Sophisticated Industry Sectors

Such domestic industry sectors as machine tool industry, electronics, and IT are known as weak points and special fields requiring close attention and intensification. It is not a secret that, for instance, at Votkinsky zavod involved in production of the “Topol-M”, “Yars” and “Bulava” missile systems, half of machine tools are made in Switzerland, Czech, France, and even in the USA. Nearly all Russian Air Force Su-30 and MiG-29SMT fighter aircraft are equipped with foreign avionics systems.

CEO of Uralvagonzavod Oleg Sienko said that time will tell which outcomes the import substitution policy would bring to us. He said, “Import substitution means that old machine tools and equipment made in the XX century must be replaced with the XXI-century new generation. The Ministry of Industry and Trade have made a right decision to tackle this problem now. But there’s no quick solution here because even for development of new machine tools we have to buy import equipment and technologies in order to develop these new production systems, and there’s no way around”.

Unfair Competition

Moreover, we shall take into account the effect that the import substitution policy has on the process of fulfillment of international obligations Russian companies are responsible for. According to the SIPRI Arms Transfer Database (SIPRI – Stockholm International Peace Research Institute), in 2010–2014, an increase in the world’s weapons sales volume totaled 16% in comparison to the sales figures in 2005–2009. American exporters surpassed the mean value by 1.5 times. The share of the US arms export totaled 23%.

The Russian arms export increased by more than 37%. However, in 2010–2014 China took the lead by increasing the major arms sales growth by 143%! This allowed Beijing to become world No. 3 arms exporter and surpass Germany and France, which reduced their arms export by 43% and 27% respectively. The share of each of these three countries in the global arms export totaled 5%.

The world’s Top 5 arms exporters have three-quarters of the global arms sales volume (74%). The US arms export share totals 31% while Russia has 27%. The 10 biggest arms exporters also include the Great Britain (4%), Spain (3%), Italy (3%), Ukraine (3%), and Israel (2%).

How will the sanctions affect Russia as one of the major players in the global arms market? Sergey Goreslavsky, the Deputy Director General of Rosoboronexport, believes that we should not expect any dramatic defeat. “Unfortunately, some countries have recently employed such tools as the sanction policy. Rosoboronexport regards this policy as an unfair competition factor. As a result, the sanctions have failed and had no effect. The best evidence here is the annual sales of Rosoboronexport and other Russian arms exporters in 2014. No doubt, that we will fulfill our sales plan. In 2015, we are keeping up with the delivery schedule. Our arms and military equipment are in high demand in the global arms market. The portfolio of Rosoboronexport’s orders is dynamically growing, providing contracts for Russian defence industry enterprises for the next few years. We cannot agree with some comments predicting stagnation for Russia’s arms export instead of positive dynamics. We see that our arms are in high demand, basically due to the performance comparable with similar products offered by our competitors in the arms market. In some aspects, our arms even surpass them.”

Oleg Sienko, CEO of Research and Production Corporation Uralvagonzavod, JSC, agrees with this statement. “Military equipment and arms do not feature devaluation elements, we shall understand it and develop these trends. As the Russian tank-building industry possesses 60% of the world market, we shall support it and not slow down momentum. Our arms have a quality and a price accepted in the world. We must strive for co-operation – with India, Brazil, China.”

In his speech at the X International Exhibition of Arms, Military Equipment and ammunition (Russia Arms EXPO 2015), Sergey Goreslavsky listed the main types of arms demanded in the world arms market, “The highest demand for aviation equipment for air forces – 41%. Military equipment for ground forces – 27%, followed by equipment for air defence forces and naval forces. Some contracts have already been signed and are being executed to deliver the following types of arms: Т-90МS tanks, tank support fighting vehicle (BMPT), BT-82 armored personnel carrier, “Tigr” and “Federal” armored vehicles, TOS1-A multiple rocket launcher, command and control automated equipment. Aviation – Su-35 and Yak-130 aircraft, various modifications of Mi-35M, Ka-52 and Mi-28 helicopters. Naval force equipment – “Amur-1650” submarine, frigates and high-speed assault landing ships. The military equipment for air defence forces listed below is in high demand: S-400, “Antey-2500”, “Buk” anti-aircraft missile systems, and other systems. There is a growing demand for the “Pantsir S-1” anti-aircraft missile system. Innovative and conceptual technologies used for development of this system allow this weapon to have an advantage over all available similar products manufactured in other countries. No equivalents have yet been produced.”

The countries of the Middle East remain large arms buyers with the situation in this region growing more unstable. Over half of the arms import volume in the region (54%) goes to the Persian Gulf countries.

According to Sergey Goreslavsky, the trends military equipment makers must focus on are “further improvement of helicopter equipment in order to develop high-speed rotorcraft, development of heavy helicopters and equipping them with smart next-gen systems. Development of drone aircraft. Over 40 countries are developing the UAV technology. The world market offers over 250 types of UAVs. UAV acquisition and suppression systems are in high demand. Here we have a large field of activity to introduce such products in the external open market.”

With Regard to Circumstances

However, while ramping up production and expanding Russian arms supplies, we shall take into account the risks associated with illegal use of advance military solutions.

Irina Yarovaya, the head of the State Duma’s Security and Corruption Fighting Committee, said, “When speaking of today’s challenges and threats, we have not discussed the problem related to the use of advanced types of arms that may fall into wrong hands, i.e. may be used by organized crime. Advanced military products and know-how developed by the defence industry are important for security assurance on the whole. Arms market analysts conclude that arms types related to UAVs that are available in external markets are used, in particular, for drugs trafficking. This brings up the question related to protection of our intellectual property in this field and to our ability to think ahead and offer such solutions that would be able to localize this threat. We shall discuss not only new problems but also new priorities that must be on the agenda of the defence industry so that its solutions may be used for hardware systems under the Safe City concept as well as for crime fighting and security assurance by law enforcement agencies”.

Therefore, the point is that solutions developed by the Russian defence industry are to be applied not only on battlefields but also on city streets in Russia.

Co-operation and Marketing

In his report at Russia Arms EXPO 2015, Christopher Foss, an armored forces and ground forces weapons international expert and Jane’s Defence Weekly and Jane’s International Defence Review reporter, marked the importance of co-operation among manufactures involved in production of different weapons components. Proper and effective co-operation often becomes an insolvable problem for system integrators and end-product manufactures especially when concerned parties are fully private companies acting in many areas of business, including non-military industry sectors. Not only Russian military equipment makers but also their European counterparts have to face such a problem.

It is also worth mentioning the growing understanding of the importance of state-of-art public information technology and the establishment of stable relations with interested groups. The experience acquired in recent years conclusively proves that Russian arms makers have achieved certain success in improving their self-display techniques comparable with their progress in hi-tech production. In fact, this tendency relates only to certain Russian companies grasping the importance of self-publicizing in the world and domestic arms markets. The Kalashnikov Concern’s successful rebranding campaign is the best evidence of progress in using advanced marketing technologies.

 

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