The Russian IT market for a MIC

2014 - 2015

MIC role in economy

The Defense Industry Complex (DIC) in the Russian economy holds a specific place. From the USSR Russia inherited the huge military infrastructure expected global armed conflict. Spent for defense of the USSR by different estimates from 10 to 20% of GDP. Modern Russia spends much less (3-4% of GDP) — at the level of expenditure of the USA, but it is twice more, than the European countries and China.

In percentage expenses of the Russian budget on defense are similar to the American: Russia has 16.7% of all budgeted expenses in 2014 and about 20% in 2015; at the USA in 2015 on defense about 18% of the budget will leave.

Russia in 2015 took the third place in the world on expenditure for defense in direct monetary calculation:

• The USA - $609 billion;
• China - $144.2 billion;
• Russia - $81 billion.

However it is necessary to remember a difference in the amount of budgets (data for 2014):

• The USA - $3.5 trillion;
• China - $2.4 trillion;
• Russia - $408 billion.

So, China spends only twice more Russia for defense, but at the same time honor all Chinese budget in 6 times more. For comparison: Mexico will spend in 2015 for defense only $7.55 billion or 0.51% of GDP (the population of 125 million people, the budget of $348 billion, the main source of income — oil sale).

In the Russian economy of a MIC has the serious weight which in the next five years will not decrease because of the current political situation. At the same time the big share of defense expenditures in the budget means that the MIC should be the main driver of the innovative technologies in Russia.

Expense structure of the consolidated budget of the Russian Federation for the first 2 months 2015

MIC — the leader in growth rates of labor productivity while in other sectors of the Russian economy this growth slows down since 2008. So, in 2014 in agriculture labor productivity grew by 2%, and in the aviation industry — for 14.2%. In many respects the positive picture is explained by large-scale state investments and application of modern IT solutions.

The considerable share of the defense budget leaves on production of industrial output. In 2014 its volume grew by 15.5%, generally due to military production. The increase in labor productivity and increasing production creates space for implementation of new IT solutions.

Assessment of size of the market of IT for a MIC

By estimates of TAdviser, the volume of the IT budget of all industry of defense industry complex of Russia in 2015 was 21 billion rubles. About 50% of these means are a budget of informatization of the enterprises entering into Rostec.

Growth of IT costs in 2015 was about 10%. In 2016, according to the forecast of TAdviser, growth will slow down. In particular, the enterprises entering into Rostec in 2016 are limited in increase in IT budgets no more than 8%.

Structure of the IT market for a MIC

The IT market for a MIC in Russia can conditionally be separated into two directions:

• Systems of performance improvement of work (CAD, electronic office-work, operating systems, decision making support systems, information and analytical systems, management systems for the enterprises, systems of identification, analysis algorithms of data of DZZ, etc.);

• Specialized solutions (enciphering, data protection, special GIS, ACS, simulators, communication solutions, etc.).

In the first direction in a domestic MIC generally import solutions are used. Be necessary to note that foreign software makers annually receive about 285 billion rubles of runtime royalty fees (45% of the total amount of the Russian software) from the Russian consumers. 30% of these assignments are the share of a public sector.

According to the Ministry of Telecom and Mass Communications, the share of import client and mobile operating systems in general in Russia makes 95%, server - 75%. 70%^[1] electronic components in a domestic MIC - import production.

Creation of domestic analogs of solutions for the first direction — the perspective sphere of development of the Russian IT market, especially in the light of intention of the government to support import substitution in the field.

The second direction has higher requirements to privacy and assumes use of completely transparent developments, preferably domestic production. The high complexity, privacy and specifics of such systems requires work of highly qualified specialists and close interaction between department and developers.

The structure of the Russian MIC differs in extremely high share of the integrated structures which integrate development, tests and production. About 60% of products of a MIC are created by 50 integrated structures, and process of enlargement continues. Within holdings of IT solution are used generally at the level of the enterprises where the number of projects of management of lifecycle, the insufficient depth of workflow automation and decision making processes is still small. At the same time the share of import IT solutions is high: 88% of software in the industry are foreign developments. In the spring of 2015 the head of Rostec Sergey Chemezov noted that defense industry enterprises depend on foreign IT solutions more than for 90%.

Classes of IT systems by quantity of the implemented implementation projects in the industry of MIC/military industrial complex (the complete version)

Revenue of the companies in the IT market for a MIC

By preparation of the overview data on revenue on the MIC direction provided only 3 Russian IT companies. Among them RT-Inform which showed rapid revenue growth at the end of 2014 and not less serious forecast for revenue for 2015 is especially selected.

Revenue of the companies in the Russian IT market for a MIC, 2013-2014

TAdviser, December, 2015

Drivers and barriers of the IT market to a MIC

Insufficient informatization and outdated control circuits

The Russian MIC is focused on industrial production. From 1339 MIC organizations in the field of activity of Minpromtorg there are 70%. The value of hi-tech products grows in a MIC. In 2014 the volume of products of the radio-electronic industry grew by 24% in comparison with 2013. In the aviation industry — for 17.1%; the ship-building industry — 14.4%; the industries of ammunition and special chemistry — 13%; the space-rocket industry — 8.6%; the industries of conventional arms — 5.4%.

All these industries, according to experts of the IT companies, are insufficiently computerized today. In particular the CEO of BARS GROUP company Timur Akhmerov, the chief of the department of information technologies "The United Instrument Manufacturing Corporation (UIMC) of Rostec Group Vitaly Sazonov, the Deputy General Manager for Research and to development, IVK company Valery Andreyev so believe. It complicates transition of the industry to contracts of lifecycle which simplify development, production and operation of products. The lack of electronic document management leads to loss up to 10% of documentation and to tightening of terms of decision making. Also insufficient informatization and outdated control circuits complicate implementation of investment projects. In particular the outsourcing share in the Russian MIC is still insignificant, though increases. Defense holdings are traditionally concentrated on building of internal opportunities and give preference to insourcing. Besides the most part of the Russian defense expenditure is secret that complicates an input of private companies on the market.

At the same time abroad the reverse situation, for example, an outsourcing share in Airbus concern reaches 50%, in Boeing — 70%. The Russian experts note that for cost reduction of the customer the outsourcing share in structure of business of service provider should be not less than 40%^[2].

Staff deficit problem

The Russian authorities repeatedly declared a staff shortage in the IT sector. In 2014 the Minister of Telecom and Mass Communications Nikolai Nikiforov reported that in Russia only 350 thousand. IT qualified professionals, while accomplishment of tasks of import substitution requires not less than one million within 5-7 years.

By estimates of Microsoft and analytical company Evans Data Corporation (EDC), in Russia about 900 thousand programmers (this number includes school students, students and other nonprofessionals who are engaged in programming at the different levels). Thus, there is a potential base for building of the personnel in domestic IT.

The average salary at the enterprises of the Russian MIC in 2014 was 35 thousand rubles that is a little higher, than on average in the country: 29.6 thousand (31.2 thousand rubles for January, 2015). At the same time the average salary of qualified specialists of IT (all specialties) in Russia in the first half of the year 2015 exceeded 60 thousand rubles. It complicates involvement of highly skilled IT specialists on defense industry enterprises.

In particular, Maxim Bogdanov, the CEO of ASCON told about the shortage of specialists.

"The representative of one large corporation in personal meeting was recognized that in all corporation which plants are located from Moscow to the Far Eastern Federal District there will be no more than ten specialists capable to direct implementation projects and operation of PLM systems", - Bogdanov noted, speaking about problems of penetration of the PLM solutions in the Russian market.

At the same time the number of young specialists in IT grew up, and demand for them decreased twice. So, the number of applicants on HeadHunter in a year grew with 170462 (on October 27, 2014) to 219692 (on October 25, 2015). The average salary of the young specialist in IT is 32 thousand rubles. Thus, the MIC can fight in labor market only for the IT personnel with brief experience of work, and defense holdings are forced to train specialists independently and to transfer a considerable part of difficult orders to third-party developers. By 2020 the government is going to increase the salary in a MIC twice, but even during the pre-crisis period (since 2011) it grew only by 3% taking into account inflation.

Sanctions and import substitution

The IT market for a MIC depends on preserving of a sanctions regime and increase in financing from the state. Most likely, in 2016 the sanctions regime will remain, and it will maintain the interest of the state in an import substitution subject. However large-scale projects in this area are limited to financial crisis. The predicted reduction of price of oil lower than $40 for barrel in 2016 complicates implementation of large-scale state programs for development of new solutions and building of personnel resources in IT for a MIC.

Now in Russia large-scale projects are unavailable without the state support. At the same time import-substituting products are aimed at the domestic market and its intellectual and financial resources.

As Mikhail Golovin, the advisor to director general for automation explained TAdviser NPP Radiosvyaz (group of companies"Rostec"), not for all import developments it is possible to find analogs. In most cases defense industry enterprises already use domestic developments where it is possible. One of the main problems: dependence on import operating systems and "iron".

"For our enterprise transition to Russian "iron" is at the level of the hypothetical assumptions so far. It is possible to note that domestic developers of big ADP equipment offer nothing worthy now. All "iron" at our enterprise is produced by IBM company, and what is above iron – all this the western products — Mikhail Golovin notes. — Simpler Russian servers exist, but they too expensive because of small-lot production. At the same time in terms of security I do not consider "iron" of Asian production more preferable, than western".

The CEO of BARS Group company Timur Akhmerov considers that sanctions did not cause essential damage to the IT industry: "Special attention of the state to a MIC in a difficult international situation opposite — the catalyst of IT projects. Many questions which were saved before for years are solved within months today. For anybody not a secret that lag stronger is felt in the field of hardware and infrastructure solutions. Here the Russian developers still should solve a problem of the missed time for development of basic and special products".

Most of experts agree in opinion that sanctions and an initiative of import substitution can help the domestic industry of IT, but still there are serious problems with development of analogs of many foreign technologies. In a MIC import substitution is especially noticeable trend as use of import solutions is connected with certain risks.

Andrey Marushkevich, the senior vice president of Galaktika corporation, telling in an interview of TAdviser about the solutions demanded by the MIC industry, reminded that the Galaktika ERP system is developed on XAFARI, and 99% of a program code entirely are based on the platform of domestic development.

"It allows to guarantee to clients the absolute level of information protection in use of a system that is especially important for the enterprises of the industry of a MIC and civil services. In this light we one of the few companies having a full-scale product of the class ERP which is completely ready to solve import substitution problems already now", - Marushkevich noted.

The Deputy General Manager for Research and to development, IVK company Valery Andreyev emphasized that the main problems in the field of import substitution appeared not today, and several decades were saved. And if problems with software manage to be solved, then work at the hardware level just begins, and in the conditions of a huge handicap. The introduced economic restrictions only aggravate this problem that significantly complicates its solution in the short term.

"The specified danger exists always. Not understand it and furthermore to wave away from a problem of not declared opportunities of program and hardware tabs is the naivety adjoining on criminal neglect. About such threats there is not enough information that it is quite explainable. But it is not "horror stories" at all. Another thing is that now and heads of the organizations, and even IT shniki and bezopasnik believe that now we do not care before. But when it happens, already nothing can be changed. And the principle of missing of a shell in the same funnel does not work here. Just on the contrary — time once worked well, so it will be possible again. All our actions should be directed to prevention of such cases".

The chief executive of ARPP "Domestic Software" Evgenia Vasilenko considers that the sanctions applied to the Russian enterprises showed real risks of use of the foreign software:

"It is a signal for all organizations using foreign software. In my opinion, these events forced all to approach support of the Russian IT industry, development of the products more attentively. The most urgent task of import substitution, in my opinion — to stop buying foreign solutions where use Russian is possible. Quite often tenders when customers "for the future" buy foreign solutions even in the presence of domestic alternatives meet. Such situation developed for years. There is a habit to buy foreign, there is a stereotype that foreign it is obviously best of all. And it not only in the field of software. And foreign producers spend many resources for support of such stereotype. The Russian companies, as a rule, on marketing and promotion have no such resources. Often customers do not even know about opportunities of the Russian software products, do not study them. At the same time in the majority of segments of software we already have practices which suit at least certain categories of customers. Them it is possible and it is necessary to use already now".

The president/chairman of the board of directors, CDC Group (the Center of Corporate Developments, Sidisi) Hussein of Az dawn is sure that the western sanctions of IT for a MIC only on advantage:

"The main result of sanctions — it became obvious to all that the software in itself and the more so in a complex with the various equipment can be very powerful weapon with different types of application. It is obvious that any sane Russian specialist should invest in development of domestic software every day. It is necessary to create urgently the transparent competition in production of above-mentioned types of program systems. Without fair competition it is impossible to create a qualitative product. In Russia very good programmers, but very strange purchasers are the main stopper for development of the Russian competitive production of software today. And it is a national security issue, I ask to pay attention! And process of import substitution goes to a MIC more slowly, than it is necessary".

Vitaly Sazonov, the chief of the department of information technologies "The United Instrument Manufacturing Corporation ("UIMC") of Rostec Group, notes that the share of foreign solutions in the field of military equipment, the telecommunication equipment and software applied today in Russia is critically high and reaches in the majority of segments 90 and more percent. At the same time not a secret that often the foreign equipment and software conceal in themselves not declared opportunities regarding a secret information access and data transmission.

"Such situation is unacceptable for the enterprises of defense industry complex. Regulatory, financial, project, production information should be reliably protected from external threats. The used equipments and software should guarantee lack of not declared opportunities, secret removal of data and also steady work irrespective of sanctions and other external circumstances. With respect thereto the state is sharply faced by a question of creation of the entrusted operating systems, the software and the equipment on which these systems work. In particular, "MIC" - head holding of State Corporation Rostec in the development areas and productions of ADP equipment, telecommunication equipment and the accompanying software is engaged in the solution of these tasks now", - Sazonov tells.

As for sanctions, according to the head of IT management of "MIC", their influence cannot be estimated unambiguously.

"On the one hand, sanctions caused significant damage to the Russian industry. Some solutions got under restrictions, the cost of software products and their support increased. Also the cost of the credit resources attracted to the solution of investment tasks grew. But not everything is as critical as it seems at first sight. For example, the restrictions introduced concerning products of Autodesk company - the world's largest software provider, including the AutoCAD system — many were apprehended with pessimism. But restrictions practically did not affect activity of "MIC" for the reason in any way that we simply did not use these products at design of products. On the other hand, sanctions became a push for development of own IT solutions. As you know, the state took a number of measures for support of the domestic IT companies: financing of projects of technical re-equipment and upgrade of productions within the FTP is conducted, import substitution programs where the markets and reference points for the Russian software makers, are recorded by W are approved. If last year the import share in the total amount of the market of business applications (ERP CRM EDMS project management, etc.) made 75%, then by 2020 this indicator should decrease at least to 50%, and by 2025 — to 25%" — Vitaly Sazonov tells.

Science

In Russia expenses on Research and Development make about 1% of GDP, from them 0.6% are the share of a MIC. Thus, the MIC is the most knowledge-intensive sector of the Russian economy.

Specific weight of the organizations which performed technology innovations in 2014 by sectors of economy was:

• research and development - 31.6%, 464.18 billion rubles (29.6%, 344.6 billion rubles in 2013);
• ADP equipment and information technologies – 8%, 32.3 billion rubles (8.4%, 39, 5 billion rubles in 2013);
• communication - 10.7% (11.8% in 2013);
• production of electric equipment, the electronic and optical equipment – 27% (25.9% in 2013);

The rest is the share of industrial production (metallurgy, chemistry, electricity, etc.).

In spite of the fact that the science takes the leading positions in use of the innovative solutions, the specific weight of the innovation goods, works and services in scales of all of the Russian economy is still small and made 8.2% in 2014 (8.9% in 2013). In 2014 the Russian MIC develops more than 270 industrial production technologies of hi-tech products. There is a need for IT solutions which can increase efficiency of scientific activity and accelerate implementation of the innovative technologies.

Notes