"Three Plus Three": The Urals Defence Industry’s Success Arithmetic

02.06.2009 — Analysis

The Russian Army is not yet prepared to use the advanced developments that were created by domestic defence industry plants with the participation of foreign partners. Nevertheless, as the idea of common security establishes itself in the world, the future has a lot in store for joint production facilities. This is the certainty that Veniamin Elinson, PO Optical and Mechanical Plant's Deputy Director General, expressed in his interview for RusBusinessNews.

- Mr Elinson, a couple of years ago UOMZ declared a simultaneous launch of several joint production projects with the participation of foreign partners. Where are these projects now?

- Our interest for joint production of both civilian and military equipment has always been, and still remains, considerable. Why do we need this? The assembly of various types of equipment requires the supplies from abroad - a range of components which we cannot produce independently in-house so far.

You see, in Russia you can make anything - the problems arise when mass production is to be established. Look at Lefty - he managed to put horseshoes on a flea, but how would he manage putting the same horseshoes on a million of fleas? E.g. 3rd generation thermal imagers require thermal imaging matrix - a product that we cannot produce in batches so far and have to purchase abroad. However, the ultimate aim of any joint production facility must be its complete nationalization, i.e. the production of all components in Russia.

Our plant and SLE (UK) have been jointly producing infant ventilators for five years now. We sell them in Russia and CIS; in the last two years, even SLE has been purchasing these ventilators from us. During the five years of collaboration, we sold 600+ ventilators at 15-20 thousand U.S. dollars each.

THALES Navigation (France) was engaged in the second joint production facility that we established - the manufacturing of GPS navigators. We purchase receivers in France and make holders, enclosures, etc. locally. We started with GPS; however, taking into account the development of Russia's GLONASS, we are prepared to start producing navigators that support both systems as early as this year.

Not only does UOMZ engage foreign partners in the joint production; it also establishes manufacturing facilities abroad. UOMZ-Meizhou was officially granted a corporate status in the Chinese economic area in April 2009. This is our 100% subsidiary. They produce surveying instruments - levels and transits.

- Why start a production facility abroad?

- They offer lower cost of labour and renting production space. The goal is to sell surveying instruments in China and its neighbour states. We have currently supplied our inspection equipment and kits of parts for UOMZ-Meizhou to assemble the first 200-300 surveying instruments. In the second half of the year these parts will be substituted by those produced in China according to our drawings. The plant is supposed to produce up to 3,000 levels and transits a year.

- What about joint production of military equipment?

- In 2007, we had a plan to establish a joint venture with Sagem (France) for the manufacturing of 3rd generation thermal imagers. A relevant memorandum was signed. Until now, Russia hasn't had joint ventures with foreign participation that would produce military equipment. I wouldn't say that the first pancake has been a lump; unfortunately, time waits for no one. In the course of this time we, jointly with the State Applied Optics Institute (Kazan), made our own 3rd generation thermal imager.

Obtaining a permit for the establishment of this venture proved to be very difficult in both countries. Moreover, there was much more bureaucratic red tape in Russia. Unfortunately, our country still has no clear procedure for the establishment of such ventures. We know that an instruction from the President and a decree from the Government is required; how to get to this top, though? We have developed a serious substantiation and a business plan. Alas, the Russian Army is not yet prepared to apply imported element base, even though this base is produced by a joint venture.

- So it turns out that there is no future for the economic cooperation in the sphere of military equipment at all?

- There is a future. The concept of common security is being discussed these days. This has been stated by both Deputy Premier Sergei Ivanov and Deputy Defence Minister Vladimir Popovkin who is responsible for military procurements. E.g. the Russian Defence Ministry has signed a deal with an Israeli company to buy several unmanned aerial vehicles (UAV).

Our project with Sagem may be implemented in some other form. I do keep the hope, although my optimism has substantially decreased in the course of these two years.

- Do you consider other joint projects with foreign partners?

- May I pursue the subject of the UAV's. Prior to buying these aerial vehicles in Israel, our military authorities should probably have invited representatives of Russian plants that are capable of producing them.

I have an idea to produce a UAV in the Urals with the use of our optoelectronic system; it would be a small, manually-launched one, with a weight of less than 10 kilograms and a range of up to 5 km including return. This is a subject for discussion with one of our foreign partners.

However, an extremely small - with a diameter of mere 10 mm - optoelectronic system is required for these aerial vehicles. We negotiate a joint production of the system at the UOMZ premises with two Israeli companies - Controp and OnhoTech. We will work with whichever of them offers better prices for the components. However, both companies must obtain a permit from the Israeli Government first; we have been awaiting the permit for two months now. The situation makes us work fast; however, it doesn't work out every time.

- How close is your cooperation with Russian authorities?

- The UOMZ representatives work in full contact with the Federal Military and Technical Cooperation Service. The key challenge that we keep calling attention to is the pirate working methods employed by Russia's neighbour states. UOMZ is the only developer and manufacturer of optoelectronic systems for Sukhoi and MiG aircraft. At the same time, when we go abroad we often see representatives of Byelorussian and Ukrainian repair works who never hesitate to offer repair, rebuild, and maintenance support for our products. In doing so, the cards and modules that they install on the UOMZ systems are cheap but old - they remained in their warehouses since the days of the Soviet Union. This is a problem that requires a solution at the high political level.

- Has the global economic crisis impacted the foreign trade activity of your plant?

- We need to make it clear at this point: since 2003, UOMZ is an independent entity in terms of military and technical cooperation (a total of 22 entities of this kind in Russia). Our powers were extended for the third time now. This enables us to supply parts abroad and perform all kinds of repair on our optoelectronic systems independently, without the involvement of Rosoboronexport. UOMZ products are installed on all versions of all of the MiG-23, MiG-27, MiG-29, Su-17, Su-22, Su-25, Su-27, and Su-30 aircraft.

We work with 15 foreign countries. Since 2003, UOMZ has increased its global market share more than 20-fold. Following last year's results, our military and technical cooperation generated a revenue of nearly 30 million dollars. The crisis hasn't impacted these indicators yet since we mostly try to execute long-term contracts. We have contracts for the whole of this year; contracts for 2010 and even 2011 are being signed.

As soon as we were granted the right for independent military and technical cooperation, we set ourselves a goal of providing extremely prompt assistance to our customers abroad. This was when our corporate slogan - "Three Plus Three" - was put into operation. We guarantee any delivery of any spare parts within a maximum of three months following the contract signing date, and any repair within a maximum of three months following the arrival of the equipment to the plant. Things like that have never happened before - normally, repair takes years.

Production, repair, and maintenance of military equipment account for 75% of the UOMZ turnover; the rest is civilian equipment. Moreover, the government's defence order only accounts for less than 1% of the military equipment production turnover - only 12 million roubles in 2009. The rest is export that consists of three components: supplies to leading plants that produce aircraft for export; deliveries via Rosoboronexport (a small part); and, independent military and technical cooperation (the main part).

We can say that we have learned how to work in foreign markets by now. Thus, UOMZ opened its first representative office in Europe last year - TriAlpTek GmbH in Zurich (Switzerland). Its goal is to promote our civilian equipment to the markets of Europe, the Middle East, and North Africa. It deals with sales and maintenance of medical, lighting, and surveying equipment. The representative office is also instrumental for us in solving the issues related to purchasing imported equipment and especially sophisticated devices. This is our plant's outpost in Europe.

The interview has been prepared by Pavel Kober