Element President Ilya Ivantsov: Measures to support microelectronics sufficient in Russia, but filling them with funding should be top priority
Ilya Ivantsov
Photo: Press-office
The geopolitical situation and steps taken by the regulators are prompting Russian customers to step up the pace of two simultaneous processes, namely, digital transformation and import substitution in the IT industry. Unlike the processes that are occurring on the electronic component base market, which is the foundation not only for IT, but also for the majority of other industries as they stand now. President of PJSC Element, the parent company of the Russian microelectronics group formed by Sistema PJSFC and state company Rostec, Ilya Ivantsov said in an interview with Interfax about the situation on the Russian microelectronics market.
Q.: What is the current situation on the Russian microelectronics market?
A.: At the end of 2023, the Russian microelectronics market was estimated at 289 billion rubles. Russian companies, which are manufacturers of first- and second-level microelectronics, account for 20% of this value. Imported component base accounts for the remainder.
First-level microcircuits are those that were developed and produced in our country. Our Mikron plant, which produces, for instance, chips for biometric passports, bankcards, and transport tickets, is among companies of this group. The second level provides for the design of microchips in Russia, while foreign plants are involved in their production.
The market itself is relatively consolidated, as we, Element Group, which currently incorporates around 30 companies, have a slightly more than 50% share in the segment of Russian microelectronics manufacturers. The rest of the market is shared by other manufacturers such as Angstrem, Bryansk-based Silicon El and others. There are also quite a large number of design centers, and companies with the revenue of 500 million to 2 billion rubles on the market. They frequently represent the very second-level microelectronics.
These companies are forming the market in terms of supply. At the same time, there is no significant head-on competition between Russian microelectronics producers now, as demand far exceeds supply. Russian manufacturers can meet only 20% of the market's needs so far, and each player has its own niche.
At the same time, all Russian producers are facing China as their global competitor. Chinese producers are mainly providing the demand that Russian producers are still unable to meet due to objective reasons. And in order not to give the entire market away to them, we need to develop rapidly. That is what we are doing. Both in terms of increasing the range of products and developing technologies, and in terms of expanding existing production facilities and establishing new ones.
Q.: What segments have Russian manufacturers developed, and which remain "empty"?
A.: In fact, there are opportunities for business development in all niches, as there is a potential for it everywhere. Another point is that there are whole segments of the market that we can fill with products whose production is completely under our control. We as a group of companies are focused on these segments. This is primarily an industrial electronics segment, within which we can distinguish three core product groups for us. The first group is power electronics, the second one is control microcircuits (or microcontrollers), and the third one is microcircuits providing telecommunications and navigation.
Our main objective now is to ensure the maximum use of our component base in every electronic device that is developed and manufactured in Russia. And this has been largely achieved by now, in particular, thanks to government support measures. They are designed in such a way that developers and manufacturers of radioelectronic equipment are interested in using Russian electronic component base.
Q.: Currently, there are various state support measures aimed at developing the radioelectronic industry as a whole and microelectronics in particular. In your opinion, which of these measures are the most useful and in demand on the market, and which support measures are lacking in the Russian microelectronics industry?
A.: Government support measures can be divided into four large groups. The first group is aimed at supporting the development of products, that is, the component base itself, microchips, technology development, computer-aided design systems (CAD), and electronic devices themselves. There is an entire set of subsidies, the provision of which is governed by the corresponding governmental decrees. With these subsidies, the government compensates up to 90% of the development costs.
Most importantly, the developer retains the intellectual property and the rights to a specific development. At the same time, such subsidies are not granted for nothing, but on commercialization terms. They have their own criteria. Before applying for any measure of support, it is essential to calculate the guaranteed sales of future products. This means finding customers who are guaranteed to purchase the new products provided the technical and production parameters declared for them are reached. Therefore, we would ideally sign letters of intent with our potential customers before requesting any support measures.
The second group of measures involves support for establishing production facilities. These include preferential loans from the Industry and Trade Ministry's Industrial Development Fund. The rates on these loans vary from 1% to 3%, and their terms range from three to seven years. The same group includes a cluster investment platform, which is also operated by the Industrial Development Fund. In this case, the base interest rate is equal to a third of the key rate, increased by two and a half percentage points.
The next group of support measures comprises direct orders from the government for performing specific R&D to develop certain solutions.
The final group of measures is tax incentives, which are currently in effect. These are privileges for the corporate income tax and for insurance contributions. They are largely identical to those benefits that are in place for the IT industry. We are expecting these measures to remain in effect for the next few years without any changes. In our opinion, the elaborated system of support measures is essentially exhaustive. The main thing is that they have to be funded and brought to the notice of industry players in a timely manner.
Q.: The guaranteed demand in Russia is frequently secured through government contracts. And while in the event of state procurement, granting preferences to suppliers of Russian products does not cause any difficulties, when working with state-owned companies it is essential to take Russia's international commitments into account. In particular, these are the World Trade Organization's requirements for granting most-favored-nation treatment. Does this duality cause more difficulties in ensuring guaranteed demand?
A.: If one wants to, one can find a great deal of obstacles to the introduction of domestic solutions. But we see that the developers of end devices such as manufacturers of aircraft, trains, computer equipment, as well as their assemblers are genuinely interested that more and more components are produced in Russia. And this did not start today or in 2022, but back in the pandemic. Back then, not just supply chains were disrupted but companies even failed to reach foreign suppliers to clarify the status of their orders.
It is easier with Russian suppliers as they are nearby. People who faced, for instance, a halt to the assembly line at that time, have a phantom pain, which, against the backdrop of current developments, is spuriously pushing them to implementing more and more solutions from Russian manufacturers, which are nearby.
This should also be taken into account that major industry programs are currently being developed and launched. For instance, these include civil aircraft building, unmanned aerial systems and high-speed rail traffic. The use of predominantly domestic solutions is envisioned in the core of these programs. These programs and the desire of electronics developers to shift to the Russian component base are creating a pull long-term demand.
However, we have to acknowledge that we are only at the beginning of the way. We cannot yet say that we have everything contracted for three to five years to come, but at the same time, the first long-term contracts worth billions of rubles are beginning to emerge. I think that this is just the beginning, and there will be many more such contracts in the next two to three years. Therefore, the industry will switch to the logic of long-term contracting, where everything will be bound by the so-called end-to-end contracts. This will help us understand what the customers need in terms of volumes and deadlines. In turn, customers implementing major complex programs will be aware that they have component base suppliers who are able to meet their obligations.
Q.: It is no secret that Russian products are often more expensive than their foreign counterparts. Are manufacturers ready to overpay for Russian-made products, and are they ready to sacrifice part of their margins?
A.: We have to realize that there are no miracles. The price is a derivative of the volume. And no matter how you may look at it, you cannot get away from the economy of scale. And with the scale of electronic component base production that Russian manufacturers can provide now, their produce is indeed more expensive than their imported counterparts.
Currently, we are just starting to ramp up our production volumes. Therefore, there is still some price gap between the products of Chinese and Russian manufacturers. We see that many customers are willing to pay this premium of tens of percent. At the same time, we do not put any extra margin into this higher price.
Russian radioelectronics developers are interested in having sustained component base manufacturers in our country. Therefore, the premium is in place and will remain in place for some time to come, until we gain enough volume for the effect of scale to take effect.
Q.: The company has adopted an investment program totaling 92 billion rubles. In what areas are these funds to be used?
A.: There are several of them. The first one is aimed at expanding existing production facilities and creating new ones. Such projects of various scales are being implemented at all our enterprises.
Another group includes the development of new products. We realize that the range of products needs to be expanded. This is proved by the very large unmet demand, which is currently being covered by Chinese electronic component base vendors.
The technology development projects could be singled out as a separate trend. For now, the basic technological level has been reached at our crystal production facilities. We are currently working on enhancing the technological options so that we will be able to produce the broadest possible range of products at the existing facilities. These include more high-tech products, that is, not just basic microcontrollers, but, for example, microchips that are closer to the processor level in terms of their capabilities.
To date, the investment program has been 90% funded. Our own funds account for around 20% of the budget. This is the money raised through the IPO, as well as part of the profit earned by the Group. Approximately half of the investment program is financed by funds received as part of state support. This is a direct state financing for R&D and subsidies for product development. The remainder is funded by preferential loans and credits with an around 2% average interest rate.
Q.: Has the company already started implementing the projects included in the investment program?
A.: To date, two projects have already been implemented to set up new production lines involving funds from the Industrial Development Fund. This spring, Mikron launched two new production lines for assembling microchips to be placed in plastic cases and for producing chip modules for bankcards, electronic documents and SIM cards. Total investment in this project reached 1.35 billion rubles, of which 1.1 billion rubles was funded by a concessional loan provided by the Industrial Development Fund.
The second project involved the launch of a microchip-packaging production line at the Voronezh-based Research Institute of Electronic Technology (NIIET). The budget of this project totaled 790 million rubles, of which 616 million rubles was also provided by the Industrial Development Fund in the form of a soft loan.
We are launching serial assembly of microcontrollers of our own design on these lines: Amur [microcontroller with RISC-V architecture core, which is designed for industrial automation and Internet of things devices, wireless peripherals, etc.] at Mikron and an ultra-low-consumption microcontroller of NIIET's own design at the facilities of our Voronezh enterprise.
There is a multimillion demand for both of them, and the scope of their application is the broadest from metering devices to robotics and industrial electronics. Our objective in this area is to ensure serial deliveries of these microcontrollers. Their volume will reach several hundred thousand pieces this year, and we can speak about millions of items from next year.
Q.: The IT market as a whole, like many others, has a problem with qualified personnel. What kind of experts does the Russian microelectronics industry lack? What do you see as a possible solution to the problem of staff shortage?
A.: Microelectronics and radioelectronics are no exception to this, as the personnel problem is acute there. Moreover, in some areas, for instance, in electronic engineering [development and production of equipment for microelectronics production], professionals have not been trained at all for some time.
Therefore, the goal of addressing the personnel problem has been set before the industry, and we are gradually resolving it. The number of employees at the group's enterprises has risen around 30% since the end of 2021 from 7,000 to more than 9,000. The main sources for team expansion are universities and specialized secondary educational institutions. Currently, we are collaborating with 48 universities in our country. Moreover, we are working in all possible formats and programs envisioned by the Higher Education and Science Ministry. Regional specialized secondary educational institutions are also training quite serious young specialists. The qualification levels of graduates are sufficient for them to start working at an enterprise confidently, get a foothold there and start developing their professional skills.
The microelectronics industry requires tens of thousands of specialists to address the challenges faced by the industry. In our assessment, it will be difficult to achieve such a high result without a mass nationwide movement aimed at popularizing engineering occupations. For instance, we have already launched similar programs at our enterprises. Mikron has a Path of Engineer program in effect. This will certainly take some time, but the solution of the personnel problem is quite realistic at the horizon of three to five years.
Q.: Does Element work for the future in terms of creating new technologies or is it focused only on addressing current goals?
A.: Of course, we are dealing with promising technologies. Moreover, this is reflected in our strategy, which states the necessity of moving to a new technological level and developing advanced technologies. And not only under Russian standards, but under world standards, as well.
There are several such areas: non-volatile memory, photonics and graphic processors. For instance, if we talk about photonics, much in this area is now only at the level of research and development, as the market niche is not completely clear, and the technological stacks based on which photonic integrated circuits could be produced have not been determined. There are still more questions than answers in these areas.
Q.: The company has previously mentioned the production of components for 4G and 5G base stations among other areas of development. What stage of implementation does this project reach?
A.: There is a trend in our country to localize the production of cellular base stations. We are interested in those development companies that are designing these stations. Our goal in this area is to embed the maximum number of our microcircuits into these base stations. These can be power amplifiers based on gallium nitride, which is a very promising material, and power electronics, and PLICs [programmable logic integrated circuits]. The latter are often used in base stations. We are currently in dialogue with station developers on the demand for these components and, accordingly, on the launch of their production.
By the way, the example of base stations illustrates well the end-to-end contracting chain. The station manufacturers have forward contracts with telecom operators, which stipulate the number of base stations they require. There are decisions made by the Digital Development Ministry and the Industry and Trade Ministry to increase the level of Russian-made components of these stations. Therefore, there is a meaningful dialogue with developers to ensure that a significant number of Russian microchips appear in their devices within a short time.
Q.: During the IPO period, the company announced plans to expand to foreign markets. In particular, the markets of the Asia-Pacific region and the Middle East. Is there any progress in this area?
A.: We view entering foreign markets as a strategic goal, but we cannot discuss the details for a number of reasons. Moreover, we are convinced that many matters associated with the pricing and the pace of production could be resolved precisely when entering the global market. When starting the development of any product, we also ask ourselves whether this product will have prospects on the international market, and we start developing it only if the answer to this question is positive.
We intend to advance in this area carefully and gradually, using minimally capital-intensive methods. At the first stage, we can talk about establishing entities to sell our products. At the same time, one should take into account that the localization issue is as acute in many countries as it is in our country. We will enter such markets through establishing development centers, either independently or with the involvement of local partners. We will be able to develop local solutions for each target market on the premises of these centers using existing products. We are currently testing exactly such models of entering international markets.
Q.: International expansion is quite a costly endeavor. At what expense is the company planning to finance its entry into foreign markets?
A.: Attracting additional external funding for implementing these plans is out of the question. The investment program has been endorsed and funded, and no significant spending on international expansion is planned in it.
In the future, as the outlines of such projects emerge, they could be funded from three sources. These are our own funds, the money that we will start earning on these markets, as well as the funds of our partners. The point is that in those countries we are talking about, there are local players who are interested in entering the microelectronics market. Especially against the backdrop of the serious interest that has emerged around the industry on the global market. Accordingly, we are now seeing many potential co-investors.
Q.: On foreign markets, we will have to compete with the same Chinese microelectronics manufacturers without government support. What are the advantages that will make it possible to withstand such competition?
A.: There are quite a few areas in microelectronics, in which we can successfully compete at the global level. For instance, in the segment of power electronics. However, only with products based on silicon carbide or gallium nitride, rather than on ordinary silicon.
We also see that consumers on the international market are interested not only in individual components, but also in more integrated, complex devices such as modules and units. Our goal is to produce those modules and units using our own electronic component base, which could be competitive on the global market, both in terms of technical characteristics and cost.
Electronic engineering is another interesting and promising area. Only a few countries in the world have the corresponding competencies in this area. And there are those countries that, for various reasons, want to enter the microelectronics production market and get an alternative to the American or Chinese technological stack. This requires their own technological equipment, their own materials, and their own specialized software. There is such a need on the market, and this opens up very good prospects for us. Of course, we ourselves still have a long way to go here.
Q.: Experts estimate that the Russian microelectronics market will grow by an average of 15% per year until 2030 and will reach 780 billion rubles. Does the company plan to increase its share on this market?
A.: Indeed, analysts forecast the entire market to expand by 15%, while the market provided by Russian manufacturers is expected to grow by 30% per year. Our goal is to keep our share on this growing market. We do not have any global ambitions to seize the entire market. On the contrary, we believe that there should be a certain balance on the market, and we view the current situation as quite balanced.
At the same time, we realize that development only in one electronic component base segment is not enough to make our plans for business scale growth come true. That is why we are entering the segment of modules and units, which is relatively new for us, and starting to develop and sell devices with higher added value. These are units and power converters. There is also a segment of electronic engineering. We believe that the development of these three segments will allow us to grow at a faster pace.
Q.: Will this require any changes in the group's structure, separation of non-core assets?
A.: No global restructuring is planned for now. The electronic machine building, modules and units are under development on the grounds of separate companies, which, if required, in the event of acquiring core assets, will act as consolidation centers. I do not rule out that eventually, if sufficient scale is reached in these areas, investors could also be attracted to them.