State Corporation Rostec

Achievements Portrait in the New Global Economic Environment

At the beginning of August in The Kremlin, Moscow, the The CEO of Rostec Sergey Chemezov presented to Vladimir Putin a detailed report on the latest progress of Rostec and announced the development plans for the next ten years until 2025, according to a new Development Strategy.

In the long run, Rostec should become the core of the industrial and, therefore, the economic development of the country, providing a leading place for Russia in the new technological paradigm.

The sanctions regime imposed against Russia and Rostec by some states did not have a significant impact on the State Corporation development. Rostec emphasized the development of internal resources and competencies, which, based on the results of 2015, allowed demonstrating a steady progress in terms of financial, economic and industrial parameters.

In 2015, the consolidated revenues of Rostec increased by 18%, amounting to 1 trillion and 140 billion rubles. The consolidated net income of the State Corporation was 99 billion rubles, and that of EBITDA — 253 billion rubles. The net profit margin was 8.68%, having increased by 6 basis points. EBITDA margin was increased by 5.58 points (up to 22.19%). The corporation average wage in 2015 increased up to 41,000 rubles (in 2014, Rostec average wage was 37,000 rubles, and Russia average wage was 32,600 rubles as per FSSS data). The corporation tax payments to budgets of all levels exceeded 160 billion rubles.

The new Development Strategy of Rostec adopted at the end of 2015, will allow neutralizing the impact of sanctions and reaching the level of the most high-tech corporations in the world in the next 10 years. The priority is to enter the rapidly growing "smart" markets: electronics, IT, automation, control systems, robotics, new materials, etc. The successful competition with world leaders will enable Rostec to ensure Russia's economic growth. It's not just a matter of competitiveness, it is the goal to maintain Russia as a global technology leader. The main targets include an annual revenue growth by 17%, increase of civil production share up to 50% and growth of operational efficiency to the best quarter's level of the global players.

At the meeting with the President Sergey Chemezov also said: “We have established Yota Devices Company; I showed you the mobile handsets we make. This is a startup. We built this company in three years, and over those three years, the company's value has grown to nearly $130 million. We sold 30% to a Chinese company for 46.2 million.

In 2015, the Kalashnikov concern showed a profit for the first time in many years. We have a public-private partnership there. When three years ago you gave us permission to attract private investors to that company, Kalashnikov was practically on the verge of bankruptcy. Now for the first time since then, the company received a net profit of 2.1 billion roubles. It is now a modern, forward-looking facility, with all sorts of new models added to its product line.

The most significant innovation-related results were the successful completion of state testing of innovative electronic warfare systems, and the certification testing of the Mi-38 mid-range helicopter; the PD-14 engine is being tested now, with the first phase close to an end. I hope that if it is successful, we will be able to complete all the tests in 2016-2017, and begin production in 2018.

Furthermore, we launched the production of two fundamentally new Russian car makes, the Lada Vesta and the Lada Xray. They are very popular, and sell very well. They are in great demand because they meet the modern market requirements.

We have developed a highly mobile automated control, navigation, landing and communication system for airplanes and helicopters to be deployed on temporary sites. This greatly increases the mobility of our armed forces. Another innovation is a universal model of on-board electronic systems for unmanned aerial vehicles.

One of the key features of 2015 and the highlight of the annual report was the corporation's new development strategy until 2025 approved by the Supervisory Board. A major component of the new strategy is an ambitious revenue growth rate of 17% per year. In 2015, we already grew by 18%.

Although this is a very serious challenge, this ambitious growth rate is the only way we can match the development level of our global competitors. I hope that by 2025, we will become one of the world's top ten companies.

Another priority should be to increase the share of civilian products by 2025 to exceed 50 percent of total revenue.
The first step towards the implementation of the renewed strategy in 2015 was the holding companies’ consolidation by industry clusters: the aviation cluster, the electronics cluster, the automotive cluster, the weapons cluster and the bio-cluster. The steps taken in 2015-2016 helped improve the quality of management and raise interaction between the holding companies to a new modern level.

The report also presents around 30 innovative products of the state corporation, those that we have already put into production.

With regard to social responsibility, in 2015, we developed and approved the corporation’s housing programme with funding of over a billion rubles in 2015.

A programme of cooperation with universities is also underway. We have been cooperating with 312 major universities across Russia and have established 294 special departments in these schools to train professionals who would later work for our company. The graduates have received their degree certificates and will soon begin working at Rostec. They have obtained their master’s degrees from our department at the Moscow Institute of Physics and Technology (MIPT).

Against the sanctions pressure, the general decline of the Russian economy and fall of industrial production index by more than 3%, we managed to increase the revenue of the State Corporation to 1 trillion 140 billion rubles, demonstrating a growth by 18% compared to 2014. The volume of military exports grew by 39% in 2015 (up to $4.6 billion). Therefore, the production of civilian goods increased by 6% (up to 336 billion rubles). The steady growth in all financial indicators enables us to develop also the civil industries. According to the new strategy of Rostec, our main task is to ensure Russia's technological advantage in the highly competitive global markets. The planned investment volume for the development up to 2025 is 3,086 billion rubles."

According to Minister of Industry and Trade of Russia Denis Manturov, despite the negative trends in the economy, following the results of 2015 Rostec Corporation demonstrated a progress in the performance and steady financial results. The Corporation has made the best use of the ruble devaluation impact, strengthening its position both in internal, and foreign markets. "The Corporation's enterprises participated in the stable implementation of the state defense procurement, the volume of which has increased by 11 % in comparison with 2014," said Denis Manturov.

The history of creation and development of the Corporation Rostec — now it comprises near 700 organizations in 60 regions of the country that are currently part of 14 holding companies, nine of which operate in the military-industrial complex, and five in civilian sectors; the group also includes 22 direct management organizations — is a very interesting and revealing.

By the end of the 20th century, Russian industry was in a state of deep crisis, where a simple influx of capital was no longer able to deliver any fundamental change to the strength of the manufacturing sector. As of 2009, of the assets that had been transferred to “Russian Technologies,” 148 companies were in a crisis or pre-crisis state, 28 were in bankruptcy, 17 were not engaged in economic activity, and 27 had partially lost or were at significant risk of losing their assets.

The overall liabilities of these companies was 630 billion rubles. Enterprise production chains had been disrupted, physical assets and equipment had deteriorated, and there was a definite requirement for strong and effective management teams with the necessary skills and expertise to manage these businesses. Additionally, the state of these companies was further impacted by adverse market conditions.

The rationale for creating “Russian Technologies” was driven by a dedication to maintaining the country’s industrial capabilities during a complex time and to make the sector globally competitive. The company was faced with some very demanding challenges. Just carrying out an audit and obtaining asset management rights took the company two years. In 2009, the company began to construct a management system, develop a general development strategy, optimize manufacturing processes, and establish relationships with leading Russian and foreign partners.

In 2009, the Company’s revenue was 511 billion rubles, and it paid 62 billion rubles in taxes. Per-worker productivity did not exceed 1 million rubles. Over a two-year period, Rostec’s revenue grew by 60%, to 817 billion rubles, compared to a 15% increase in industrial production in Russia as a whole. In 2012, the company’s revenue topped 963 billion rubles.

One of the company’s priorities is its social programme, and single-industry towns are part of a special area of its responsibility. Currently, Rostec’s portfolio includes 21 companies that are the principal employers in certain towns, with many of these having been on the edge of survival only several years ago. An individual anti-recession programme was tailored for each such company.

And as a result, Verkhnyaya Salda — a town whose principal employer is VSMPO-AVISMA — enjoys one of the lowest unemployment rates in the world: 0.6%. Thanks to Rostec, VSMPO-AVISMA has significantly broadened its relationships with international partners. The corporation provides 40% of what Boeing, 60% of what Airbus, and 100% of what Embraer requires. VSMPO-AVISM net profit has increased from 173 million rubles in 2009 to 7.1 billion rubles in 2012, which is an increase of more than 40 times. Seventy percent of VSMPO-AVISM’s products are produced for export.

In December 2012, the company’s supervisory board made the decision to optimise Rostec’s structure and reduce the number of holding companies to 13. Specifically, the shares of Aviapriborostroenie were transferred to Radioelectronic Technologies; those of the Machine Engineering Design Bureau were transferred to Vysokotochnye Kompleksy, while Roselektronika received the assets of both Sirius and Orion. This objective is expected to be achieved during 2013.

Over the six years since its inception, the company has achieved significant results, which are a testament to strength of the strategy for development that the management team have implemented and of the company’s ability to achieve its goals and objectives. Today, the Rostec brand is inextricably connected with science-driven industry and technological innovation in Russia.

According to the 2025 Corporation Development Strategy the main goal of ‘Rostec’ is to increase the standard of living in various regions of Russia, which is being achieved through productive cooperation with regional state bodies and municipal units.

‘Rostec’ and Government Authorities work together to solve problems through various cooperation agreements including the projects aimed to develop high technology industry production for civil, military and joint purposes of design, production and delivery.

The Corporation has concluded agreements with 31 regions including the Republics of Bashkortostan, Mordovia, Tatarstan and Udmurtia; the Perm and Khabarovsk Territories; Arkhangelsk, Bryansk, Vladimir, Volgograd, Voronezh, Irkutsk, Kaluga, Kirov, Moscow, Nizhniy Novgorod, Novosibirsk, Omsk, Pskov, Rostov, Ryazan, Samara, Saratov, Sakhalin. Sverdlovsk, Smolensk, Tver, Ulyanovsk and Yaroslavl regions; Moscow and Saint-Petersburg. The Supervisory Board has founded 26 representative organizations in different regions of Russia.
The International Military-Industrial Cooperation development is one of the Corporation’s priorities. The volume of ‘Rosoboronexport’ military-purpose goods exports amounted more than 11 billion dollars. Constant delivery volume increase allows Russia to fit the second leading position in the world market, with the USA in first place.

Corporation Rostec is a Russian industrial company consisting of 700 organizations, which also includes 22 direct management companies and 14 holding companies, five of which specialise in the manufacture of civilian products, and nine, in the manufacture of products for the military and industrial sectors. Rostec organizations are located in 60 regions of the Russian Federation. Company products are delivered to markets in more than 70 countries.

Having brought together and developed many unique production operations and technologies within its structure, along with a significant share of the nation’s research potential, Rostec has become a reliable government partner for innovative industrial development.

The corporation operates in the following areas:

• automotive manufacturing;
• aircraft manufacturing;
• engine manufacturing;
• metallurgy;
• construction;
• optics;
• composite and other modern structural materials;
• medical equipment;
• pharmaceuticals;
• industrial biotechnologies;
• radio electronics;
• instrumentation technology;
• information technologies, and telecommunications;
• machine tool technology and the manufacture of equipment to revitalize industry;
• manufacturing of arms and military equipment.

Corporation Rostec objectives:

• to further the development, manufacture, and export of high-tech industrial products;
• to support Russian developers and manufacturers of high-tech industrial products in both domestic and foreign markets;
• to retool production;
• to develop the country’s research and human resources potential;
• to develop relationships with large international and Russian industrial companies.

Principal functions of the Сorporation Rostec:

• To support Russian developers and manufacturers of high-tech industrial products in both domestic and foreign markets;
• To participate in the implementation of state policy in the area of military and technical cooperation between the Russian Federation and foreign governments and the state arms programme.
• To attract investment to create competitive examples of high-tech industrial products.
• To engage in promotional exhibits and marketing activities and to participate in demonstrating examples of civilian, military, and dual-use products within and outside of Russia.
• To promote applied research in promising areas of scientific and technical development.
• To bring advanced technologies to fruition, so as to improve the level of home-grown technologies and to reduce the time and cost required to create products.
• To facilitate foreign trade activity with respect to core strategic industries.