Interview with Sergey Aslanian, the President of JSC SITRONICS
Sergey Aslanian, the President of SITRONICS, has told Vedomosti about how to make business of SITRONICS “a part of something bigger”, what are the prospects for R&D centers in Russia and abroad, why import replacement should be one of its national causes
Sergey ASLANIAN: “Consolidation of hi-tech assets of JSFC SYSTEMA should lead to growth of joint-stock value.”
Russian Hi-Tech Industry Has Got a Chance of Success
Source: the newspaper Vedomosti
In winter 2011, JSFC SYSTEMA decided to sell 63.9% of SITRONICS to the concern RTI founded recently by the JSFC and Moscow Bank. The idea is to pool all hi-tech business resources, which is logical. However, its implementation might be more difficult as, for instance, shares of SITRONICS are being traded on the London Stock Exchange. Sergey Aslanian, the President of SITRONICS, has told Vedomosti about how to make business of SITRONICS “a part of something bigger”, what are the advantages of Chinese Tianjin over Skolkovo located near Moscow from developers’ point of view and why Russia should not follow Saudi Arabia.
Q: SITRONICS becomes a part of a hi-tech concern that includes the company RTI used by JSFC SYSTEMA as a basis to pool its hi-tech assets. What changes await SITRONICS?
A: Not many changes in terms of the ownership structure: the parent company of SITRONICS will change and SITRONICS will become the subsidiary of RTI instead of Sistema. But there is an industrial logic in the integration: consolidation of hi-tech assets of JSFC on the basis of RTI should lead to growth in stock value. In the first place, the reason is synergism of assets (for example, creation of a united R&D center) and increase in their management efficiency. Besides, such a strong integrated company will be a much more attractive partner being able to perform large-scale and complicated orders (which are already appearing on the Russian hi-tech market) as well as to build strategic interaction with the government for innovative modernization of the economy. It can act as one of the leading suppliers of complex innovative engineering, IT and microelectronic solutions.
Q: Now SITRONICS is a public company, 17.55% of its shares are being traded on the London Stock Exchange. Does integration with RTI mean delisting?
A: It’s too early to talk about RTI and SITRONICS stock integration. At the moment it is planned that RTI will become the parent structure for SITRONICS. The final decision on the reorganization scheme has not been made yet, various options are being considered.
Q: But do you plan to integrate separate segments of the business?
A: Obviously, divisions for main fields will be formed in the consolidated company: security systems, IT, telecommunication solutions, production for the defense industry and so on.
Q: What will be the economic benefit of the reorganization?
A: Any hi-tech product development cycle takes several years, so it would be naive to talk about a momentary economic benefit. Certainly, we did a preliminary calculation. But you should understand that a company employing about 20,000 people is being created — even MTS has fewer personnel. Therefore, our main task in the first year is to limit the level of expenses.
We’ll have to integrate R&D centers, industrial and corporate cultures, and so forth, which is a difficult process. It’s a huge challenge for us. However, integration is a world trend, and the example of world giants shows its economic efficiency.
Q: A year ago you planned to add the company Intellect Telecom to SITRONICS and to create a research and development (R&D) center on its basis. How have these plans transformed now?
A: As you see, not only Intellect Telecom, but also its shareholders — RTI Systems, SITRONICS and MGTS — carry on active business in the research and development field. Our goal is to unite the efforts of all the subdivisions engaged in research and development to achieve synergy. It is still being considered what will be the basis and what scheme will be used for it.
Q: You mentioned plans for creation of another large R&D center on the basis of a joint venture of SITRONICS and ZTE in China…
A: Yes, the joint venture with ZTE has all the prerequisites for successful research and development: the headquarters are located near the city of Tianjin, the journey by train from which to the capital of China, Beijing, takes just half an hour, the sea is nearby, the enterprise is completely exempted from taxes for seven years, it has a cheap workforce, a complete infrastructure … As they say, dreams come true (laughs).
Q: Have you agreed with ZTE on the R&D center operation principles?
A: We have actually agreed on everything, but will tell about it only when we approve it for good and carry out necessary corporate procedures.
Q: Will SITRONICS have to contribute anything?
A: In essence, the assets that should be contributed to the joint venture have been defined. It is planned to finalize and approve the list of these assets in the near future.
But the major concern is how to provide the R&D center with orders. Judging by prospective projects and the orders that we are already receiving, we will be able to load the center with development work — both from us and from the Chinese partner.
Q: What can be developed in this joint center with ZTE?
A: For example, production on the basis of RFID technologies (high-frequency tracers for marking goods in shops, warehouses, etc. — ed. note Vedomosti). Today there is the demand boom in the world for such products and the ZTE R&D center was initially focused on RFID. Another example is the equipment for WiMax networks.
Q: How much cheaper is it to have the R&D center in China compared to Russia?
A: A skilled engineer in China costs about $20,000 a year, which includes his salary, social benefits and so on. In Czech Republic, where we also have a development center, the sum is different and is 50,000 euros. In Russia it is $30,000-50,000 a year.
Q: There is also the Russian project Skolkovo. There are favorable economic conditions and the infrastructure is being created, too. Why have you chosen China?
A: No doubt, Skolkovo will open new possibilities for technologies development in Russia and we consider them in long-term R&D planning. We estimate the prospects of Skolkovo as a startup very positively. But, as the technical component of this project is at a realization stage, we do not yet see such points of contact where we could start developing joint projects today. Speaking about China, negotiations with the Chinese partners began long ago and are at the final stage now. Creation of the R&D center in China is quite a large-scale project which will require considerable resources, therefore we must establish all basic processes now.
I should mention that the development of R&D in China does not mean that SITRONICS refuses to perform research and development in Russia. On the contrary, we are actively expanding our R&D centers network in Russian regions. Now such a center has opened in St. Petersburg, 120 employees work there already, Krasnodar is the next in turn.
Q: But did you discuss anything concerning Skolkovo?
A: Our primary goal now is to carry out integration within out enterprise, to sort out the basket of products to be developed. In general, to do our “homework.”
Q: But there are other examples. Nokia Siemens, Ericsson, Cisco who are opening research and development centers in Russia, even promising to produce some accessories — showing belief in the Russian market…
A: Do you yourself believe in these projects? Well, they will organize assemblage, but whose intellectual property (IP) will it be? Of course, we could choose a simple way — develop in complete dependence on western companies coming to Russia or use their development work as it was done by the Chinese successfully. But, having a huge intellectual potential, we can also select another strategy.
The potential of our scientists and developers is much higher than that in the countries that do screwdriver assembly. They bring us many interesting projects, many projects are created in Rosnano with whom we actively work. Considering this, screwdriver assembly of Cisco switchboards and other things is not the level that could bring us to the necessary rates of innovative development. We ourselves should create and develop technologies, be at the beginning of the development. As for manufacture, it can be entrusted to China, it has fantastic resources for that.
Q: By the way, Rosnano mentioned by you actively promoted the “Smart Shop” project with RFID readers at one time and SITRONICS discussed it with X5 Retail. What’s the result?
A: We reached an understanding with our partners Rosnano and X5. The project for creation of an experimental platform where RFID will replace bar codes in retail trade is attractive for us, no doubt. Some interesting technical problems connected with reading of tags from various surfaces and materials should be solved, i.e. new technologies and know-how will be created with prospects for commercialization in retail, medicine, industry. Radio frequency identification technologies are in the stage of growth and have a huge application potential, so it’s a good market for us.
Q: Recently it became known that SITRONICS had won a Moscow tender for creation of an intellectual traffic control system. Generally speaking, has the change of power in Moscow affected the company’s business?
A: Regardless of who holds the mayor’s post, Moscow is a very complicated infrastructure object that has quite objective vital needs in terms of development. Although Moscow is one of the largest capitals in the world, all of us understand perfectly well that the quality of life quality levels are worse here compared to London, New York and Tokyo. SITRONICS has already accumulated a sufficient volume of knowledge and resources to realize projects of the Intelligent Transportation System (ITS) scale. Fortunately, the present city management understands and feels the critical need for modernization of the city infrastructure very well.
Q: Ill-wishers asserted that the contract for creation of the ITS was won by SITRONICS nominally due to competing against allied companies. Is it true?
A: That’s why they are ill-wishers. System integrators participated in the tender. The only affiliated company, NIS (Navigation and Information Systems, 51% belongs to JSFC SYSTEMA. — ed. note Vedomosti), did not compete with us, but was an associate contractor in the project, i.e. our partner.
Q: Besides, SITRONICS has a long-term contract with the Moscow subway for delivery of transportation cards — $100 million a year. Hasn’t Dmitry Gayev’s resignation from the subway’s chief post disrupted the relations with the subway?
A: We are a faithful subway supplier. As far as I know, we have established a reputation as a reliable partner and comply with subway’s requirements.
Q: A year ago you told about plans to transform SITRONICS into an innovative products factory. What innovative products have you developed since then?
A: Development of an innovative product takes years of work and requires large investments. We are carrying out a number of projects including RFID technologies in microelectronics. But it would be naive to expect emergence of an innovative product as if with a wave of a magic wand in such a capital-intensive and resource-demanding industry as hi-tech.
Besides, we were worried about how the branch would recover after the crisis not long ago. The year 2010, especially the first six or eight months, was very hard for the whole industry. We managed to increase investments in R&D only in the fourth quarter of 2010. But, thank God, we have a strong development team and we know exactly where to go, what to develop and even whom to offer it to. For the whole process to be executed, we only need some time.
Q: In other words, investments into development were cut down because of the crisis, weren’t they?
A: This was caused both by the crisis and the hardest situation we were in during 2009-2010. Representing the results of the second quarter of 2010, I said that we see a restoration of demand, but it is slow.
Today the situation is improving gradually. In 2011, we will increase expenditure on R&D by 1/3. Our capital investment will not increase very much, by 8-10%, but R&D will grow. This is what we pay the most scrupulous attention to.
Q: Have you got a chance to release a part of the money?
A: Yes, we have. Last year our debt was reduced a little, which is important to us (the general debt decreased from $745.9 million to $699.1 million, the net debt from $584 million to $483 million. —ed. note Vedomosti). And notice that the situation changed exclusively thanks to integral decisions and methods. That is, we made profit and repaid debts. When you come to the office every day, organize meetings, motivate people, any changes seem to be substantial, believe me.
Q: Telecommunication solutions, the largest SITRONICS business, were on the decrease for almost the whole of last year. Will you manage to break this trend?
A: 65% of the telecom business is in Greece, and the general economic situation made Greece fall by 20% or even more. That was the general reason for the telecom segment decrease.
The margin also grew mainly because of the Greek subdivision which reduced personnel and salaries. Can you imagine what it means to reduce salary for 2,000 people by 15% in Europe? But they managed to do it.
As a whole, the telecommunication equipment market is falling everywhere, except for China. I think that Europeans have already lost this market to the Chinese once and for all.
We are working at making a certain cash-cow out of this business. We want to maintain the volume (and I think that we will maintain it considering the available client base), the margin. But in perspective, this business, of course, should be a part of something bigger. For this reason we aspire to develop international strategic partnership with China and India. For example, in the beginning of May we entered into a partner agreement with Indian Shyam Networks, we plan to start working in this format with other companies in India, too. Only such actions can ensure competitiveness under present market conditions outside the country. If you do not enter into alliances, you will keep an existing level at the best or maybe will grow by little percentages.
Q: What interesting can be in the alliance with SITRONICS for foreigners?
A: We have a branched network of R&D centers working effectively. We give special attention to this by opening R&D laboratories in Russian regions — here we can not only be engaged in development for our own needs, but also fill external orders. Therefore, foreign companies are interested in us as an R&D partner that can localize products, improve them according to the specificity of the local market and regulations and perform certification. Besides, our wide client base makes it possible to offer products [of potential partners] to our customers and to make SITRONICS the system integrator. In addition, international partners recognize us as the bearer of technologies and knowledge for billing, designing and manufacturing of microcircuits, development of communication paths and antennas. By the way, other world leaders in the field of billing software production also have continuous interest in our billing.
Q: In December 2010, the Zelenograd factory Micron and NIIME belonging to SITRONICS showed Prime Minister Vladimir Putin a pre-production model of a microchip with the topological size of 90 nm. When will the batch production begin?
A: It was not just a test model — it had been certified by an independent expert for conformity of key parameters of our 90 nm technology to the international standards. We want to start commercial operation of the factory in autumn 2011. Besides, we are going to produce a chip for a universal electronic card (UEC) in June and to receive certification from MasterCard and Visa in November.
We’ve been in the business of microelectronics for a long time, since 2002, and have now achieved the stage when we can offer a domestic product with our encryption core to the market that will be certified all over the world. You have probably heard that we want to join the JSC UEC equity to participate in formation of technical requirements for universal electronic cards — 120-140 million of them will be manufactured in the next five years. This is the additional work of the manufacturing industry, protection of national interests and additional workplaces.
Q: Do Sberbank and other founders of UEC agree to let you join?
A: There is a preliminary consent. We plan to enter there with a minority stake. But we want to develop this chip sitting at one table with respected customer banks. It is important for us to understand the requirements and dynamics of the demand.
Q: Will these be chips with a standard size of 180 nm?
A: At first 180 nm and 90 nm in a year and a half.
Q: Where else do you expect orders for 90 nm chips from?
A: RFID tags, biopassports, GLONASS and industrial microcontrollers. The main added cost of the chip is the design. And we are going to build a national design center. Now there are separate design centers in the country. They should be united into a single ecosystem and we could act as a consolidator and as a foundry to transform development work of the design centers into mass production, into serious sales. This is the national cause that completely conforms to the logic of the sector development.
Q: You searched for a partner to create the design center before. Have you found one?
A: I hope that the Russian Academy of Sciences will participate in this. And we are interested in Rosnano participation very much.
Q: Do you mean money?
A: Rosnano could be a co-investor. We would like to use the Academy of Sciences as an organizing center. We are a business firm just like all the others who will join this center. We need some process mediator who will coordinate our efforts.
Q: Has the time-frame for the design center creation been determined?
A: We plan to do it before the end of this year. For the new factory to work, products are necessary. To create products, design centers are required. We are allocating a special site in Zelenograd for the center and are ready to invest money because it is critical for us.
Q: What amount of investment will be required?
A: $20-30 million. But the point is not the money, but consistency of the concept and a desire to cooperate. There are too many participants in the process — and each of them has his own ambitions. To commercialize development, well- coordinated work of the whole chain is required, from design to ready-made electronic systems.
Q: How do you convince these separate market participants to join the project?
A: We are ready to offer them partnership, which includes using the capital. We do not insist on control.
Q: Last year Putin held a big meeting to support national microelectronics. You and Rosnano suggested securing some market niches to Russian manufacturers, officials got assignments to come up with ideas… Is there a practical result?
A: The practical result is the following: the President Dmitry Medvedev’s modernization committee made a decision that the UEC will be created using the Russian chip. Our chip has been submitted for certification for use in the EMV system payment card. As a rule, certification lasts for 6-12 months, but we plan to finish this process as soon as possible.
No doubt, life always sets tasks that are too difficult to fulfill. But there is no doubt that we’ll solve this problem, we will offer our own product to the national market conforming to the highest international quality standards.
Q: What about other areas that were spoken about at Putin’s meeting — chips for digital set-top boxes, RFID, intelligent electricity meters? Do you think your offers were considered?
A: We feel understanding on the part of the government and we should simply show what Russian manufacturers are really capable of. If we make the UEC, we will move on, but if not, it will be psychologically much more difficult to expect new orders. But I am sure we’ll cope with the task.
Q: An important component of the SITRONICS strategy is participation in a state- private partnership. What part of the company income is formed by state contracts?
A: Last year it was 25%. In 2009 it was a bit less, approximately 21%. It should be taken into account that total proceeds increased last year, too, but the turnover share from state companies grew even faster.
Q: That is, the trend is good, isn’t it?
A: Certainly. Of course, we would like this growth to be even faster. But once again I say that the hi-tech industry has been given a chance, and we will use it.
Q: One of the state projects, GLONASS, was actually entrusted to JSFC SYSTEMA. Has SITRONICS got any additional opportunities as a result?
A: We will develop the chip for GLONASS. We’re already doing this.
Q: For user devices?
A: Yes. We want to show this chip in the middle of 2012 — it will be based on 90 nm technology.
Q: Is it a large market potentially?
A: For example, for the road accident emergency response system (GLONASS ERA) not just to start working, but to be effective, each vehicle should be equipped with a device making it possible to locate the vehicle in case of an accident and to transfer key parameters to the emergency response service. Each driver should have it, just like they have a civil third party liability insurance certificate. That is, the market is huge.
Q: You spoke about plans to move on before — to microchips with a standard size of 65-45 nm.
A: Now that the crisis has receded, we are returning to this idea. We want at least to begin designing chips using 65-45 nm technology this year. But it is clear that large-scale investments are required and, to be honest, we see ourselves as an operator in this project, rather than the main investor. Private business cannot do everything — there are spheres where the state plays the main part. We are sure that we will cope with the technical aspect of the task, but the state should play the first fiddle in the financial part.
Q: What investments are required to execute the project?
A: About 60 billion rubles.
Q: But after all, being a part of the integrated hi-tech concern RTI, you will improve your financial position, won’t you?
A: Certainly. It is planned that the ratio of the debt/OIBDA in RTI will be 2-3, which is a rather sound indicator.
Q: Your Greek partner Intracom Holdings still has an option to sell the remaining 49% of Intracom Telecom to SITRONICS. Are they not going to use this option?
A: As far as I know, our partners are not going to realize this option at present, although the crisis going on in Greece forces Intracom Telecom to alter their business. They have a hard time now.
Q: How would you characterize the support provided to the Russian hi-tech industry by the state? Is it being provided at all, do you feel it?
A: There are two important points here. The first point is the innovative potential that has been accumulated by private business in the last years. Seeing a potential demand for innovations, we started complex projects long ago. The projects require a big input of investments that should have created the necessary prerequisites for a technological leap in the country. Currently we do have the expertise and capability to carry out national-level projects the results of which can be appreciated by each inhabitant of the country.
On the other hand, if the state wants to develop innovations, to enter global markets and to free the economy from dependence on raw materials, it is necessary to use the available potential and competence as much as possible. To that end, it is necessary to help to create markets where the competence will be required. That is, to create demand for innovations.
We never adopted a passive position that could let us be idle and expect help from the state. It’s easy to criticize, but you must go and take action. We participate in all modernization committees, working groups, meetings — both in the Ministry of Telecom and Communications and the Ministry of Industry… I do not want to sound too pompous, but any short step of the state towards us will mean hundreds of new workplaces, increase in demand and competitive recovery of the country.
We export 20% of our products already which means that the products are in demand. Do you know why 20%, not more?
Q: No. Why?
A: Because the price depends on the costs of manufacture! The larger the internal order, the lower the cost of manufacture and the more the export. This is one of the secrets of the Chinese economy, by the way. For example, Chinese manufacturers of telecom equipment received internal orders for construction of telecom networks in their huge market at first and then could go far beyond their domestic market with tested quality and lowered cost price.
Q: Isn’t the resource-based economy the root of the problem in Russia? They speak much about innovations, but the economy structure does not change.
A: There was a joke: for innovations to develop, a barrel of oil should cost 75 dollars (laughs).
Q: But dependence of the economy, even if it is resource-based, on high technologies grows anyway. Even oil companies need more computers, supercomputers and better Internet access.
A: Have you been to Saudi Arabia?
Q: No.
A: They do not worry about it at all. As far as I know, 75% of the country income comes from oil export and they do not need an innovative economy.
Q: Then it turns out your company and hi-tech business in general are doomed to failure in Russia. You are doing what is not in demand here.
A: No, not like that. We do not dispute that each citizen needs a universal electronic card. Do you know why Russian passports are usually so soiled and greasy? Because there is no other document that could be used instead of the passport. Americans’ passports are clean and nice — they have all data on a social ID. And we have just a passport — that’s all, God forbid that we lose it. My passport was stolen recently, so it was a nightmare: I went to municipal housing offices, collected some certificates…
But sooner or later there will be a new document based on a chip where all the necessary information will be stored and where many different applications could be installed such as credit, biometric ones and so on. And the next question is how to make it. The easiest way is to go and buy it — for example, from NXP or Gemalto. But it is possible to make a Russian product especially for Russia. I’ve been in charge of SITRONICS for more than three years now and every year I understand the importance of import replacement better as it is one of the national causes, though I know perfectly well what barriers there are in the way. Therefore, when we manage to move on in such a sensitive segment like microelectronics, I really feel pride.
Igor Tsukanov
Previous page