To make a technological leap forward, companies will first have to increase revenues, raise their market value, and create a management team able to work in the new high-tech paradigm.

Dan Medovnikov and Elena Rytsareva

Management as unconditioned reflex

Last year, Alexander Goncharuk gave up managing around a dozen of AFK Sistema’s communications assets, including Eastern Europe’s biggest cellular provider Mobile TeleSystems (MTS) and the Moscow City Telephone Network (MGTS). Now he is General Director of the Nauchny Tsentr (Research Center) Concern (KNTs), the union of all of Sistema’s assets in the preeminent Russian scientific center of Zelenograd. Goncharuk met with us in his office, where microchips hang in expensive frames on the walls.
Goncharuk’s new charge is multifaceted and includes three main types of business. The first is electronics assembly, where inexpensive electronics and home appliances are produced under the Sitronics brand, as well as computers. The second is microelectronics, primarily the Zelenograd Research Institute for Molecular Electronics (NIIME), the Mikron Factory, and the Voronezh Semiconductor Plant (VZPP). The third direction is telecommunications equipment, represented by the Czech company Strom Telecom which was purchased by Sistema. The concern’s microelectronic section earned $44 million for 2003, $5 million in electronics were assembled and sold, and Strom Telecom sold $45-50 million of its products. These results are far from stunning. Goncharuk has transformed the “natural growth” strategy previously pursued to a greater or lesser extent by the concern’s companies into one of “artificial boom.” The plans for 2004 are extremely ambitious. “Strom will expand its revenues to $100-150 million,” Alexander Lutsenko explains. “We will get $70 from microelectronics and $50-70 million from assembly.” The concern is also getting involved in new areas of business: systems integration, management software development, and mass production of PCs. Sistema is purchasing one of the leading companies in the NIS in this sphere. The concern’s revenues should quadruple in this year alone to exceed $500 million.

A billion in a year

Goncharuk’s passionate statements stood out in stark contrast to the landscape of Zelenograd. We found it particularly strange when Goncharuk referred to Mikron as a “money factory.” Like the rest of the media, we seem to have fallen victim to Intel’s PR campaign that has the whole world talking about its latest processors based on 0.13-micron technology. Mikron can only produce exponentially larger 1-0.8-micron products.
Naturally the first thing we asked the concern’s head engineer, Gennady Krasnikov, Research Director and Corresponding Member of the Russian Academy of Science was whether any of Mikron’s products were capable of competing on the world market. “Everyone is so caught up with size—0.5, 0.13, 0.07 microns, but this is a fairly mundane conception,” Krasnikov explained. “Currently the world market for 0.8 micron products is $60 million and growing. There are many sub-industries that don’t need 0.13 micron technology, such as heavy electronics, telematics, appliances, communications equipment, medicine, and so on. They need minimal cost, not super high speeds. As things have turned out, American companies make 90% of microprocessors, 90% of memory cards are produced in Asia, and Europe is strong in the fields of heavy electronics and telecommunications. This is also our area. The technology here is more complicated, as the signal does not move along the surface, but deep inside the silicon. All operations have to be very precise. The Asians don’t do with this; it’s too difficult.”
Even 1-micron technology is high-tech. We became convinced of this when we toured Mikron’s facilities. Only after putting on special uniforms were we allowed in the clean room, the holy sanctum of all microelectronics manufacturing. A clean room is a closed space with a certain number of dust particles per cubic unit of measure. As the director of the Future Technology Center, Anton Prosy, informed us, it is more appropriate to talk about the size, and not the number, of dust particles. A fatal flaw measures one third of the total minimum size of the chip produced in that particular room. Thus, in the Class 1 clean room at Mikron, which measures more than 50 square meters, only one half-micron dust particle is allowed per cubic foot.
Currently, Mikron’s main product is silicon plates containing several dozen microchips. The chips not intended for the Russian military are mostly sold in Southeast Asia where they are cut up, enclosed in a special casing, and resold. The cost of packaged chips is around 2.5 times that of chips on plates, though chips are a thousand times more difficult to produce than to package. By merely selling plates all these years, Mikron has lost serious profits. Now the concern plans to concentrate on selling packaged chips.
In addition to its traditional clients, Mikron plans to work with new customers. “The Russian natural resource monopolies are a very promising segment, meaning organizations like the Atomic Ministry, the railways, and RAO EES. They need our chips everywhere, from logistics to energy management to telematics,” says Oleg Kuts. “The total market for integral chips in Russia alone is estimated at $800 million to $1 billion,” believes Alexander Lutsenko. “Now 93% of the Russian market is made up of imports and only 7% are domesticly manufactured.”
Mikron is also interested in the foreign market, which means it will need to work with the leading world companies in the semiconductor industry. “In cooperation with the West and the East, we will be able to develop chip designs and fill orders for disc production,” recounts Kuts.
“In a little more than a year, the concern’s stock will be listed on one of the Western exchanges,” Goncharuk told us, “I am confident that the company’s capitalization will be $1.5 billion with annual sales of $800-900 million. Then, we sell a small stake to a serious Western investor. We are also looking into various large global venture funds, I won’t deny it. We are going out of our way to appeal to them. But our numbers don’t appeal to them at all, because we are still too small and too plain, but we’re growing fast. They really like that. They see a huge market in Russia, and working with us is one of the efficient ways of entering this market.” Thus, one of the main tasks for Goncharuk and his team is to make revenues grow and get the entire business conglomerate on the trading floor.

Science after the stock market

Human resources, revenues, stock markets…but where is the much-touted science here? “We are now financing projects that will pay for themselves in two to three years,” says Lustenko. But there is no way to get a serious product to market that fast.
Nonetheless, research is now underway at the concern, though it is still mainly financed by the state, and Mikron and some of the concern’s other companies are currently conducting research into new products for various military agencies, the Moscow Committee for Science and Technology, and the Ministry of Education and Science. The patents will remain property of the companies. Chip design is a science-intensive business traditional for Mikron. Yet the micromechanics the company is currently working on is something completely new. A tiny mirror, gyroscope, or micro-engine measuring a few microns is implanted into a silicon crystal. This integral system not only processes electrical signals but also carries out mechanical movements. Mini-mirrors can redirect light sources traveling, for instance, along a fiber optic cable. “The Chinese are not involved in this area at all for the time being, and it demands its own technical software, math, and unique production methods,” says Krasnikov. For now, the military is placing orders for these microstructures with Mikron. The concern is perfecting the math to make micromechanics function precisely.
Another interesting area that the concern is working on is self-illuminating displays, or to put it more scientifically organic luminescent substance imaging systems. They would replace liquid crystal monitors. In liquid crystal displays the layers between plates of glass is filled with liquid crystals through which light is projected in order to make an image. Around ten years ago, organic substances were developed that emit light of different wavelengths. No other light source is necessary. This substance can be put on paper or film. These displays require little electricity and can function at any temperature. There is just one “but:” these substances are difficult to work with and decompose quickly, which means these displays have a limited lifespan. The displays currently under development in Zelenograd function for around 2000 hours, and scientists are working to extend their life.
Yet another promising project that is being researched in Zelenograd and around the world is lighting sources based on halogen nitride, or in other words white laser diodes and light diodes. A regular light bulb functions for 500-1000 hours, while compact energy efficient bulbs give just as much light but use five times less electricity and work for 5,000-10,000 hours. Light diodes using halogen nitride use another seven to eight times less energy and work for 150,000 hours. The main issue at present is how to increase efficiency and reduce the cost of producing these diodes. “This will mean huge savings,” Krasnikov assured us, “and a huge market, a real revolution in lighting.” At present, no one in the world has begun commercial production of these lighting sources. They would be used in places where price would be less important that operational expenses, for instance in a swimming pool where water must be drained to replace burnt out bulbs.
The concern sees two business strategy options. It can continue to operate in customary niches on customary, albeit completely high-tech, markets, but will never become a world leader or make super profits. Or the company can invest the proceeds from an IPO or from a sale of a stake to investors in breakthrough innovations and function like a captive venture fund, as state funding will not be enough to support a “lighting revolution” or the conversion of all displays to organic. The risks are great, but the prize could be even greater. Russian big business has yet to come up with an innovation strategy of its own, but if it does so within three years, things do not look so bad. If we give business five years, then with tough management and proper financing, Mikron could make some of its pie-in-the-sky plans a reality. As Goncharuk told us as he bid us farewell, a technological leap forward is possible, but the company still needs to increase revenues, raise its market value, and create a management team able to work in the new high-tech paradigm.

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