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OSH in the Kazakhstan Engineering Group of Companies

Interview with the Chairman of the Board of NC Kazakhstan Engineering JSC Abdrakhmanov Temirzhan Kairatovich on the topic of the development of civilian production at military factories.

JSC “NC “Kazakhstan Engineering” is a diversified machine-building holding, which includes 14 production enterprises in different regions of the country. The main directions are the production and repair of weapons and military equipment, the assembly and repair of helicopters, the repair of aircraft, the production of sea and river vessels. The holding has mastered the production of modern unmanned systems, as well as various types of equipment for the oil and gas and railway industries. According to consolidated statements, the company’s net income for 2022 amounted to 5.1 billion tenge with a sales volume of 58.7 billion tenge. The holding structure employs 4,000 people.

Is it possible to produce civilian products in military factories?

I would put it this way: in modern and well-equipped factories it is possible to produce a wide range of products - from civilian to military. The lines between military and civilian factories are already blurred.

In Soviet times, military factories, according to some, even produced household goods such as cups, spoons and utensils. But do not forget that military factories at that time hid their activities due to the Cold War, conducting a kind of conspiracy.

Of course, it is possible to produce dishes at a tank factory, but this requires additional equipment, workshops and specialists. Personally, I believe that it is time to forget about the division between military and civilian factories and move forward with a new paradigm. Any plant can produce a variety of products, it’s just that some have a license for military production and can carry out certain orders under state control.

Our holding “Kazakhstan Engineering” has undergone a transformation from a purely defense holding to a multi-disciplinary machine-building holding. However, historically we have always been involved in civilian products. Some civil assets were sold as part of the privatization of state assets, for example the pumping plant of Munaymash JSC. Now we produce from spare parts for cars to robotics: pendulum suspension, various types of wedges, pipe products, gas shut-off valves, robots for extinguishing fires and much more. If there is a large order, we can also produce frying pans. About 20% of orders are purely civilian products.

On modern CNC machines, with the correct settings, the availability of appropriate equipment and, most importantly, documentation, you can produce anything. We need technologists and programmers, this is the most important thing.

In Soviet times, it was easier to develop civilian products due to the planned economy and the large domestic market. And military products too. Some industry veterans look back nostalgically to the days of high volumes and orders. But even during the period when the holding was part of Samruk-Kazyna, we entered into direct contracts with customers within the framework of so-called intra-holding purchases, which significantly helped to provide factories with orders.

Now we are faced with the challenges of market competition and participate in tenders on equal terms, on a general basis. Thanks to regulated procurement with local content requirements, for example, from Samruk-Kazyna, we received contracts for oil and gas equipment, which contributed to the revival of lost production and the creation of additional jobs. There is an example with Kazmunaigas and its subsidiaries, with the creation of real jobs. This is very encouraging.

However, there are bad examples associated with our participation in ordinary government procurement, for example, in the supply of computer equipment. Competition with cheap imported goods and fly-by-night companies, as well as with students of “tender workshops”, turns out to be impossible. We were faced with a situation where, due to unfounded accusations from one company, our plant was idle for several months. Although we were ultimately proven right, the budget had already been sequestered, resulting in the customer not receiving the goods and us being out of work. I remember well the name of this company “BSB Trade and Advertising”, with which there are currently ongoing proceedings and criminal cases regarding fraud, but in other cases.

How do such factories work in the world?

As for international experience, it is worth paying attention to the Defense News Top 100 rating. Examples of companies such as Boeing, No. 5 in last year's ranking - 46% of revenue from military sales, that is, almost half. These are C-17 aircraft, Apache and Chinook helicopters. And for example, Airbus, No. 12 in the ranking, has only 20% of its revenue from military sales. Air Astana shareholder, British BAE Systems, earned 96% from military sales. The seemingly purely civilian company Honeywell receives 13% of its $4.5 billion in military revenue. Even the Japanese FUJITSU sells military products worth 450 million US dollars.

Successful business is not limited to military orders. There are no explicit restrictions between military and civilian production. In a market economy, the approach is simple - “call me whatever you want, the main thing is to pay me money.”

Now there is even a trend towards military production and sales. Still, unfortunately, there is quite a large demand in the world...

Let's look at examples from our neighbors. The Kurgan Machine-Building Plant produces military vehicles, but has also successfully diversified its products to include utility vehicles, car trailers and timber tractors. The same applies to Plant No. 9 in Yekaterinburg, which has artillery as its main focus, but has also diversified its products by producing railway axles for the Lastochka high-speed trains. The Kalashnikov Concern, although it specializes in military weapons, also produces biathlon rifles, boats, boats and drones. In general, we have carried out very good diversification of production.

Thus, despite the main focus of military production, product diversification towards civilian goods is a completely possible and successful strategy. This allows us not only to strengthen our positions in the civilian market, but also to ensure more sustainable development of any company.

Then it is obvious that all our factories must produce products for the market and be successful?

All major customers in our country are guided by laws and regulations when conducting their purchases. Some of them directly support the development of Kazakh production (Samruk-Kazyna and state defense procurement), while others are aimed at creating a competitive environment without any priorities (government procurement, procurement of subsoil users, large private companies, etc.).

I will honestly say that it is very difficult, almost impossible, for our holding company, our state-owned factories, with enormous social burden and expenses, to work in market conditions. At the same time, we are proud that, despite difficulties with orders, we fulfill all obligations to employees in a timely manner.

Of course, including thanks to state defense orders, which are regulated by a special law, which, by the way, is being amended in order to further develop domestic enterprises. Taking into account the instructions of the President, we made additional proposals for the inclusion of imperative norms for the priority of domestic producers in specific product categories. Then there would be no dispute with the choice of imported equipment, and the factories would develop steadily and steadily. Based on the law, it would also be possible to develop in-country value through the targeted localization of raw materials and supplies, for example, to develop the production of fabric for military uniforms. However, unfortunately, customers do not always realize this.

Support from the state, as in the case of Samruk-Kazyna, helps a lot - the procurement system algorithm is built in such a way that if there is a domestic manufacturer for the selected product range, it is impossible to purchase another. It is very difficult to win in regular government procurement, where you have to compete with cheap imports and fly-by-night companies.

Large subsoil users and large private companies, unfortunately, are still closed to real producers. Intentions about cooperation are expressed, but concrete contracts are not reached. Negative responses are often motivated by the fact that our price is higher than the market price. With this attitude, our factories lose the desire to argue and prove that our raw materials are imported, our social obligations are large, we pay taxes “in white,” and so on.

This war between customers and suppliers will probably never stop if the procurement legislation does not contain clear and specific, I repeat, imperative, unambiguous rules on concluding contracts specifically with Kazakh manufacturers. A forum on Kazakh content was recently chaired by the Prime Minister, at which large customers promised to still contract with Kazakh manufacturers. At the same time, many procurements are hidden in works and services, where the private contractor independently determines who to buy from. And in such cases, nothing can be done with simple human greed - save as much as possible on the purchase in order to earn more from the tender.

There is another problem - a limited, small sales market. Our technology partners, for example, the Turkish giant Aselsan, provided us with licenses and documentation for the production of communication equipment. While covering our entire market, the plant is only 20% loaded. For myself, I personally set one of the priority tasks - the development of new sales markets, the development of a modern distribution and dealer network, at least in neighboring countries. But we will also be realistic and consider economic feasibility.

Ultimately, when faced with the challenges of the modern economy, we come to the conclusion that it is necessary to strive for diversity in production and flexibility in responding to changes in market conditions. Working in engineering plants has its challenges, but also provides opportunities for development and successful product diversification. The main thing is not to force yourself into the framework of only military or only civilian production.

To summarize our conversation, I would like to dispel one myth - it is impossible to produce pasta or cigarettes at a cartridge factory! Some factories are better off not being distracted by third-party orders.