Knowledge
is realized
in the strategy

Power, –
in the tactics

О компании

Compact secure IFF system

Generates signals to responders and interrogators, that are necessary for IFF purposes, in a cryptographic (spoofing resistant) mode

Вниз

Knowledge
is realized
in the strategy

Power, –
in the tactics

О компании

Compact secure IFF system

Generates signals to responders and interrogators, that are necessary for IFF purposes, in a cryptographic (spoofing resistant) mode

2
Strategic development

2.1
Target markets

Airborne electronic equipment (avionics)

Market size and major segments

In 2015 the size of global avionics market was around USD 26.1 billion. The market is expected to grow at a CAGR of 3% until 2025 (see Fig. 19).

Р19.Global avionics market by segment, billion USD

Military Non-military 40 20 10 30 0 2015 2016 2017 2018 2019 2020 2023 2025 26.1 26.8 27.5 28.2 29.2 30.5 34.2 37.0

Military products account for more than two thirds of the market, a proportion that has remained unchanged for a long time.

The military segment of the global avionics market amounted to around USD 19 billion in 2015, demonstrating a higher growth rate than the avionics market at large (3.6% per year), and may be expected to grow to USD 26 billion by 2025 (see Fig. 19).

Due to geopolitical, historical and other reasons, Russia’s companies only have access to a limited part of global military avionics market. At this point, around 70% of the global avionics market is inaccessible for Russia, though this may change before 2025. Indeed, the share of inaccessible avionics market may be reduced to 50% in view of budget constraints preventing the nations from increasing their defense spending. The currently accessible market is mainly represented by Asian, African and Latin American countries (see Fig. 20).

Р20.Avionics market forecast, billion USD

2013 2013 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Russia Other countries Egypt Taiwan Brazil Saudi Arabia India China Other countries Singapore Austria Thailand Italy Spain Turkey Germany Canada Australia Japan France UK US 30 25 20 15 10 5 0 Accessible market• 30% of the existing market• Over the longer term, more than 50% of the countries in the market may become accessible Inaccessible market (NATO countries and countries to which Russia does not supply arms)• 70% of the existing market• The growth of this segment is limited due to budget constraints on defense spending in the developed countries

Currently, the non-military segment of the global avionics market amounts to around USD 7.1 billion and is expected to grow at a CAGR of 3%. The market of avionic solutions for new aircraft has two channels, the first being air transport and the second general and business aviation (GBA). The channels have comparable volumes and growth potential.

In addition to the market of avionics solutions for new aircraft, there is a dynamic retrofit and aftermarket solutions for military and civilian aircraft, and for GBA. The size of the non-military segment of these solutions can be estimated at a total of USD 3.4 billion per year.

Key market drivers and trends

The key factors that determine the changes in the size of the military avionics segment in Russia are as follows:

  1. aircraft fleet renewal provided for in the State Program of Armaments;
  2. targets for the supplies of military products and aftermarket services;
  3. approved plans to retrofit and harmonize the airborne avionics of most of the Russian Defense Ministry’s Mi-8 helicopters under existing service contracts.

Key drivers for long-term growth in the segment of civil air transport:

  1. increasing global passenger traffic;
  2. aircraft fleet aging;
  3. stricter requirements on aircraft and helicopter performance.

The key growth driver for GBA is the development of corporate air transportation and air taxis

Trends in the avionics market:

  1. standardization and harmonization of systems and equipment, transition to integrated modular avionics (IMA);
  2. increased role of integrated systems development;
  3. increased significance of reputation and competencies for entry to the supply chains;
  4. increased role of large company size and specializations for achieving required performance;
  5. рост значимости наличия собственного сервиса.increased significance of in-house service capabilities.

Concern’s market share and level of competition

The Concern’s market share in terms of avionics for domestic aircraft is around 46%.

The following Russian companies are the Concern’s competing suppliers of avionics for military aircraft:

  1. АО Kotlin-Novator JSC;
  2. АО Zaslon JSC;Заслон;
  3. АО KRONSTADT GROUP JSC;
  4. АО Research and Production Enterprise Polyot JSC;
  5. VNIIRA-Navigator JSC.

The Concern’s competing domestic suppliers of avionics for helicopters are KRONSTADT GROUP JSC (for military and civil helicopters) and Russian Avionics United Designer Bureau JSC (for military helicopters).

The Concern’s foreign competitors in the domestic market of avionics for civil helicopters are Thales Group, Rockwell Collins and Honeywell International.

In the global avionics market, the Concern’s products are mainly represented as part of the exported finished goods (aircraft, etc.). If the Concern enters the market as an independent player, it will be facing competition from the very same leading international manufacturers.

19
billion USD in the global EW market forecast until 2025

Electronic Warfare (EW) market

Market size

The global EW market is currently estimated at around USD 14 billion per year. In the years coming, it is expected to grow at a CAGR of 4% and reach USD 19 billion by 2015 (see Fig. 22).

P21.Key segments of EW

Ship-based Land-based Airborne Technology for ensuring comprehensive technical control and neutralizing foreign intelligence technologies EW technology to counterinfocoms systems EW technology to counter radar systems and to protect against precision weapons EW

P22.Global EW market forecast until 2025, billion USD

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 20 19 18 17 16 15 14 13 12 11 10 11.6 12.1 13.7 13.5 13.2 13.7 14.5 15.5 16.1 16.8 17.4 18.1 19.0

The main factors contributing to the growth of the global EW market are as follows:

  1. a quantum leap in the development of electronic warfare systems by the leading foreign countries that is attributable to the implementation of the network-centric operations concept and that has made it possible to move from military struggle to information confrontation;
  2. considerable expansion of the weapons list and increased amounts of weapons, military and special equipment that use electronic devices; increased role of precision weapons.
  3. Major areas for the development of EW market:
  4. development of high mobility land-based multipurpose EW complexes for area- and point-defense of facilities, weapons and military equipment against electronic intelligence systems and destruction with guided weapons;
  5. creation of wideband EW systems and complexes for group and individual protection of airborne, ship-based and land-based weapons, military and special equipment;
  6. development of electronic deception technologies that use complex broadband signals, including those with rapidly tunable (pulse to pulse) parameters;
  7. development of technologies intended for electronic jamming of multiple-stations systems of radar intelligence, target designation and weapons control systems;
  8. increased accuracy of executive electronic surveillance in terms of defining the location of radiating targets.

Key development trends of the EW market:

  1. ultrabandwidth as the result of the need to cover the operating frequencies of all types of electronic warfare systems;
  2. the need to functional density of the equipment to reduce its specific weight and size per unit of frequency coverage and the energy potential of radiated interference;
  3. the possibility of broadband (with a bandwidth of several GHz) high sensitivity digital processing (analysis and generation) of signals received by different antenna systems, taking into account the trend of increased bandwidth of sounding signals generated by the more advanced electronic systems.
95%
Concern’s share of shipbased IFF systems market

Concern’s competitive advantages:

  1. Encription units for all types of IFF devices are manufactured only by the Concern’s companies;
  2. The IFF devices for drones and the checkout equipment for the IFF devices manufactured by the Concern have no alternatives on the domestic market;
  3. V. I. Shimko Radioelectronics Scientific and Production Association JSC, one of the Concern’s companies, is a competency center on the development of new IFF systems.

Concern’s market share and level of competition

The Concern takes virtually a monopolistic position in the Russian market for EW equipment with electronic intelligence and weapons control systems. The Concern’s EW systems and complexes are installed on Su-25, Su-25SM, Su-30, Su-34, Su-35, Il-76, Il-78, Il-96, Tu-214 aircraft, Mi-8, Mi-26, Mi-28, Mi-35 и Ka-52 helicopters, as well as on Project 1144, Project 1164, Project 1155, Project 956, Project 11540, Project 22350, Project 20380 and Project 21631 surface ships.

The Concern’s Russian competitors in the domestic market are Concern Sozvezdie JSC Academician Berg Central Research Institute of Radiotechnics Federal State Unitary Enterprise (CNIRTI imeni Berga FSUE) and Special Technology Center LLC.

The concern’s competitors in the global market are Lockheed Martin Corporation, Northrop Grumman Corporation, The Boeing Company, Raytheon Company, ITT Corporation, BAE Systems (United States), Thales Group, Elettronica, Indra (Europe), Elta Systems and Rafael (Israel).

Currently, the airborne EW market is the most advantageous market for the Concern. Apart from the overall increase of demand for EW systems in the world, this can be attributed to the following factors:

  1. expected increase of supplies of Russian aircraft;
  2. expected increase of the share of aircraft equipped with EW systems for individual and group protection;
  3. foreign countries purchasing EW systems as part of their programs of fleet renewal with aircraft manufactured in the USSR/Russia.

IFF systems market

There is hardly any competition in the global IFF market. Currently, there are only two IFF systems, the Russian and the US-made. The choice of either of the systems is mainly determined by geopolitical factors rather than by supply terms, price or performance. Transitioning from one system to the other is extremely costly (all the aircraft, ships, missile defenses, etc. will have to be rapidly re-equipped) and therefore virtually impossible. The Russian IFF systems are mostly supplied as part of the vehicles.

Key drivers and market trends

Key trends:

  1. increased destructive capacity, precision and range of weapons;
  2. increased cost of weapons, military and special equipment that may potentially be destroyed by friendly fire;
  3. adoption of the network-centric system doctrine together with a necessity to provide the control systems with positive information related to IFF
  4. appearance of new weapons, military and special equipment that need to be equipped with IFF devices (Army vehicles and units, drones, military robots and low-maintenance military vehicles);
  5. increased interest in creating national IFF systems displayed by a number of countries;
  6. increased efficiency of protection against the adversary’s IFF deception efforts;
  7. reduced weight and size, integration of the IFF equipment into the weapon systems.

Key factors that have a negative or positive effect on the demand for the Russian IFF systems in the global market:

  1. changes in the acquisition objectives for new military equipment as part of military technical cooperation;
  2. IFF systems upgrade by the CIS states;
  3. NATO expansion and increase of its influence that limits the potential for the supplies of the Russian IFF-related products;
  4. procurement of new weapons, military and special equipment and upgrade of the existing ones that use IFF systems as the driver of internal demand for the domestic IFF equipment.

Concern’s market share and level of competition

The Concern is the leader in the supplies of Russian IFF systems and has competencies in every segment of IFF market. The Concern’s key market is the market of airborne IFF systems in which it is a monopolist. The Concern has a 95% share of ship-based IFF systems market, and around 40% of the land-based IFF systems market.

The Concern’s competitors in the Russian market are Concern VKO Almaz-Antey JSC (in the development of land-based radar interrogators), Concern Sozvezdie JSC (in the development of battlefield IFF systems), and LINCOS Space Technology Park CJSC (TPK LINCOS CJSC).

The Concern’s operations are governed by the following policy documents:
  1. KRET JSC Development Strategy up to 2025;
  2. KRET JSC Action Program for 2014 and for the planning period of 2015-2016;
  3. KRET JSC Innovative Development Program for 2012-2020.

2.2 Development strategy

The Concern’s operational Development Strategy to 2020 (hereinafter “the Strategy”) was approved by the Executive Board and the Supervisory Board Strategic Planning Committee of Rostec State Corporation.

In 2015 the Strategy was updated, and the planning horizon was extended to 2025. The main focal points of the updated Strategy are diversification of production, strengthening the position in terms of non-military products, integration of research and technology potential and attracting highly-qualified personnel. The updated Strategy for the development as part of the aviation cluster of Rostec State Corporation is expected to be considered and approved by the end of 2016.

Concern’s strategic objectives:

  1. achieve competitive position in avionics systems and complexes against global competitors,
  2. transition from supplying separate systems to supplying integrated electronic systems and complexes for military and civilian application to the Russian and global market.

Strategy implementation tools:

  1. implementing the business model of an integrated supplier in the avionics market (for more details, see Business model). The Concern’s key priority is to step up its presence in the advanced airborne vehicles segment, as well as to increase representation among the relevant aircraft with large volume of supplies;
  2. preserving the monopolistic position in the relevant EW market segments and intensifying international marketing;
  3. entering new EW segments, including the segments of integrated technical control equipment and equipment designed to counter the intelligence technologies of foreign states;
  4. participating – as an umbrella organization – in the development of a new IFF system and IFF airborne, land- and ship-based equipment, as well as of battlefield IFF systems;
  5. participating in the IFF system updates in the CIS states.
The contribution of the reporting period into the achievement of the said strategic objectives

With a view to meet the targets identified in the Strategy, the following efforts were undertaken in 2015:

  1. The state defense order was 100% fulfilled by Concern’s companies;
  2. The R&D for the integrated modular avionics IKBO IMA was completed. Implementing the R&D results will enable the Concern to significantly increase its share in the Russian avionics market;
  3. A program for the technical re-equipment of the companies is currently underway (see Upgrade and reconstruction).

The Concern’s strategy is inseparable from the Development Strategy of Rostec State Corporation. The Concern’s performance advances the achievement of the Corporation’s strategic objectives. The Concern’s contribution in the achievement of these objectives in 2015 is shown in Fig 23.

P23.Concern’s contribution in the achievement of strategic goals of Rostec State Corporation

Operating efficiency Growth Markets: from hardware to intelligence Elements of theCorporation’s strategy Up to 50% increase of non-military products share by 2025 Achieving operating efficiency levels that are comparable to the global best practice Average annual revenue growth of 17% Strategic objectives of the Corporation The Concern’s revenue accounts for more than 11% of the Corporation’s revenue The Concern’s revenues increased by RUB 13.6 billion to RUB 119 billion The share of non-military products in the revenue was 13.5% The share of exports in the revenue was 25.3% Labor productivity in the Concern’s companies increased by 25% over the year to RUB 2.35 million per employee per year Concern’scontribution in 2015
> 50
thousand people are employed by the Concern
> 22
research institutes and design bureaus are a part of the Concern

2.3 Business model

Currently, the Concern has nearly shaped the business model of an integrated supplier of avionics, EW and IFF systems and complexes (see Fig. 24). The robustness of the business model is attributable to the fact that the Concern can offer full life-cycle services related to sophisticated electronic complexes – from design to delivery to the customer and aftermarket. Integrating supplies will enable the Concern to act as a universal partner maintaining multilateral and long-term relations with its customers.

The strategic scope of the Concern’s activities is defined by the key policy documents of the Russian Federation (the state armaments program, federal target programs), and by its sole shareholder, Rostec State Corporation.

To secure the interests of the state and the Corporation, the Concern has contributed to the implementation of the state armaments program and the federal target programs; it has been engaged in military technical cooperation with foreign customers and has taken efforts to increase the share of high-technology non-military products. Observing social responsibility has also been a significant factor.

The main functions of KRET JSC as the Parent Company is managing the Concern’s efficiency, ensuring support of the products’ full life-cycle, expanding cooperation between the companies that form the management network, and acting as an integrated supplier for partners and contracting agencies.

The Concern manufactures high-technology military and non-military products. The main contracting authorities and key users of the Concern’s products are as follows:

  1. Ministry of Defense of the Russian Federation,
  2. Ministry of Industry and Trade of the Russian Federation,
  3. United Aircraft Building Corporation PJSC,
  4. Russian Helicopters JSC,
  5. foreign customers
  6. end-users of non-military products.

In its activities, the Concern uses financial, operating, human and intellectual resources. The activities are financed by own resources, subsidies from the state budget, incomes under the federal target programs, loans obtained to cover the expenses related to fulfillment of the state defense order, state grants. Human and intellectual resources are also essential for the manufacturing of high-technology products. The Concern has more than 50,000 employees. The Concern includes 22 research institutes and design bureaus and 36 production facilities that have the competencies required for manufacturing the products for the Concern’s four Divisions.

One of the main functions of KRET JSC is to supervise – throughout the lifecycle – the cooperation between the companies that form the management network. The value chain is as follows: research – prototypes of the design bureaus – production. The Concern’s companies offer comprehensive aftermarket services for the products supplied to the customer, including the provision of service records, training of the customer’s personnel, spare parts supplies, repair and maintenance. The Concern also pays key attention to upgrading its products and developing their innovative equivalents with superior characteristics.

The effectiveness of the business model is confirmed by the growth of financial indicators (revenue, net profit), labor productivity, average salaries and other significant indicators of the Concern’s performance. For more detailed information, see Financial capital, Manufactured capital, Intellectual capital and Human capital sections of this Report.

Ensuring state interests

Implementing the State Armament Program

Implementing the Federal specialpurpose programs

Fulfilling social obligations

Strategic objectives of Rostec State Corporation

Annual revenue growth of 17%/p>

Share of non-military products increased to 50% by 2025

Achieving operating efficiency levels comparable to foreign competitors

Achieving operating efficiency levels comparable to foreign competitors

Annual revenue growth of 20%

Achieving operational efficiency

2015 results

Financial capital

Revenue growth, %

12.9

Profit on sales, billion RUB

15.7

Revenue from R&D, billion RUB

12.8

Tax payments, billion RUB

17.7

Manufactured capital

Capital assets commissioned

8

Intellectual capital

Share of innovative products in the revenue, %

33.5

R&D spending, % of revenue

12.7

Labor productivity increase, %

25.5

Average salary increase, %

14.2

Business model
Airborne
Airborne optronic defense complexes Vitebsk
Airborne
Helicopter radar Arbalet
Airborne
IGD-03 tonometer for IOP measurement
Airborne
EW complex Khibiny
Airborne
ATLD-12 laser ranger
Airborne
Radar Garmon
Airborne
BINS-SP-2 strapdown inertial navigation system
What do you think are the major development challenges that the Concern is currently facing or may face in the medium term (up to 2020)?

Today our main challenge is efficient and timely execution of the state defense order. The program related to the production of EW and avionics technology is rather strenuous, just as it is the case for many other items supplied under the state armaments program. Therefore, to meet this challenge, we need to keep ahead in implementing projects aimed at upgrading the production base of the companies that are involved in the execution of the state defense order. As 2020 draws nearer, I suppose we’ll focus our efforts on increasing our market presence. Our strategic goal is to become an integrated supplier of electronic complexes in the global markets of avionics and EW technology. This is exactly why the Corporation has carried out a wide range of projects aimed at the development of a new generation of unique electronic systems, products and complexes. We will focus on production diversification as well as on the development of non-military products.

The Concern has a huge number of know-hows that may be applied to civilian production in such areas as avionics, control systems for power industry and production, solutions for robotics and unmanned aviation, medical devices, software, information security solutions, etc.

Building up the civilian production will enable the Concern to make its financial results less dependent on the requirements of the state defense order, as well as to enter new markets.

Igor Nasenkov

First Deputy General Director, KRET JSC