Freedom is not for everyone, yet she strives to gain in it in spirit after so many years of independence.Disturbance all around her ,ever since she became independent. Hers neighours have their own interests and policies to defend be it any one of them , starting from once close allies like Nepal and Bangladesh(she played her part in gettting him his freedom) or the neutral ally like Sri Lanka and her supposedly not so close neighours like Pakisthan and China.
Very few countries have fought 3 ( if we dont call terrorism and marxism as war) wars like her after achieving independence at the cost of biggest human migration in the human history.
All these wounds have led to believe in not just her mental strength(soft skills like IT) but to always believe her physical strength as well. This has been done by huge investments of her resources in defence sector.
A new avenue has opened up after Govt. of India has opened up this sector for public private partnership in early half of this decade.
In 2008-09, India will spend about half of its defence budget of Rs. 1, 00,000 crore in purchasing the defence equipments i.e. nearly $20billion.However only about one-fourth of this amount will come the way of companies in India, directly or indirectly.
The Movement in Time:
Prior to independence in 1947 India's defence industrial capacity amounted to 16 ordnance factories that were inherited by the new government. The country now has 39 ordnance factories and a 40th about to be built. In addition to this, India has eight defence-focused public-sector undertakings (PSUs).The Indian government also has at its disposal the Defence Research and Development Organisation (DRDO) that was established in 1948. The organisation is tasked with developing new weapons systems.
From the 1960s onwards, India changed its tack, and rather than purchasing weapons systems off the shelf, began to insist that it be allowed to build many of the weapons systems that it purchased under licence. By way of examples, India currently produces the Anglo-French Jaguar and Russian MiG-27s under licence. During this period India also started to request technology transfers from foreign suppliers.
From the early 1980s onwards India government attempted to develop its own purpose-built manufacturing and research and development capability. The goal had been to reduce its reliance on foreign suppliers. Thus far, however, its efforts have been largely unsuccessful. India, still a country that is pre-dominantly dependent on foreign imports of aircraft carriers, MIG’s,Sukoi’s,T90 tanks, Bofors guns, airborne surveillance aircrafts. Commercial aircraft builders like Boeing and Airbus and defence aeronautic companies such as Dassault and Lockheed have significant market control of the Indian A&D space.
Defence Procurement Policy 2002: The OFFSET Clause
Government recognised the benefit of having a strong private sector and would like it to be the natural complement of the existing state- owned companies, with the aim of procuring around 70 per cent of its defence requirements from indigenous sources by 2010.This objective explains why the Indian government has progressively opened up the A&D market to local private companies and foreign investors (for example in 1991 for the manufacture of components, assemblies and sub-assemblies).
In January 2002, with a view to promoting defence-industry partnerships, the MOD decided, in a major move, to open production of defence equipment to private businesses. These partnerships could be held 100 per cent by local private investors with a 26 per cent maximum FDI. Under this policy, all the companies that get a contract of above Rs. 300 crore from the Indian government will have to bring back 30% of the contract value into the country specifically in defence sector.
The ramifications of this policy are significant. In the short and long term foreign defence manufacturers and their vendors will start or step their purchases from Indian vendors to meet the clauses. If Indian companies are able to deliver good quality at low cost, then they will become a part of global defence manufacturing eco-system. Domestically if government is ready to spend in this sector, it will remain immune to slowdowns and recessions in the economy making it attractive for the India Inc.
The Drivers:
There are four key levers driving growth in India’s Aerospace & Defence (A&D) industry. A rapidly growing commercial aviation sector; a significantly large aerospace defence budget; foreign players increasingly outsourcing parts manufacturing, IT and engineering services; and finally a domestic set of private players that are attempting to reshape aircrafts manufacturing and design.
The Tie-ups:
With the third largest military force in the world, military expenditure in India amounted to $23.9 billion in 2006 (source SIPRI) and has grown steadily over the past years. Considering the obsolescence of a significant part of the military equipment (70 per cent of which is of Russian origin) and with the strategic objective of remaining a significant military force in its region the Indian government has recently put out to tender a contract for 126 fighter aircraft, estimated to be worth more than $10 billion. EADS (Eurofighter), Saab (Gripen) and Dassault Aviation (Rafale) are reported to be considering a bid. The Indian Air Force also plans to upgrade its fleet of Mirage 2000 and MiG-29 aircraft and is considering the purchase of 15 C-130J Super Hercules aircraft. The Indian Navy has already struck a deal with France for the purchase of six Franco-SpanishScorpene submarines. This deal consists mainly of a technology transfer, with the submarines being assembled in Mumbai. The Viraat aircraft carrier is also expected to be replaced in 2011-12 by the new Vikrant-class carrier, which will be developed and manufactured under a cooperation contract agreement with the Italian shipyard Fincantieri. The Indian government has just launched a $100 billion investment plan over the 2007-12 period in order to renew the Armed Forces’ equipments. At 30% offset, Rs.1,50,000 crore plough back to Indian defence sector. As a result several JV’s and other tie ups are beginning to roll out.
For European Aerospace &Defence companies facing increasing constraints in their domestic market, a move to India could be a solution to some of their strategic issues. EADS has an intention of moving some of its production capacity to the ‘dollar zone’ in order to hedge their currency exposure. Although the exchange rate difference between the Indian national rupee (INR) and the euro is still favourable to European companies, the INR has steadily risen against the dollar, reducing the exchange rate advantage a European A&D business could find in moving some of its production capacity to India. At the same time as moving some of their production capacity to the ‘dollar zone’, European A&D companies are also trying to decrease their production costs by moving some of their capacity to low-costs countries. India, with an average monthly salary for engineers ranging from €400 for a beginner to €1,000 for an engineer with ten-year experience, looks very attractive in that respect.
Infra Major Punj Lloyd has joined hands with Singapore Technologies Kinetics(STK) to manufacture land defence systems-essentially weapons including howitzers, mortars and small arms and has announced a Greenfield project near Gwalior, with an initial investment of Rs.200 crore. Howitzers are artillery guns which are due for an upgrade since bofors from the past 25 years. Punj Lloyd is also looking to build naval ships with Mundra port.
Hero Aviation, a subsidiary of Hero cycles, is in talks with US and Israeli companies to get a share in the GPS and missile contracts. It has partnered with RAYTHEON to make small training planes in order to leverage RAYTHEONS’ involvement in the laser sensors for India’s missile programme. Samtel Display Systems is working with DRDO and HAL to supply LCD displays units for helmets of fighter pilots.
Boeing , besides forging alliances with HAL and the TATA group is also considering partnering with large, medium and small enterprises in India over the next 5 years. It is considering India to be part of its global supply chain.
New Structure of Defence Equipments Industry:
In 2007, there were about 5000 companies supplying 25% of the market requirements but mainly through sub-contracting work. Companies like TATA, Godrej, L&T, Mahindra’s and Walchandnagar Industries have been integrating and involved in production of systems and equipments based on the specifications given to them by public sector driven organisations like DRDO,HAL and Ordnance factories and other Defence PSU’s.
This new structure has brought the margins in the range of 5-20% . At the same time, the offset clause may bring the work low in costs, technology and margins but high in volumes. It is expected that the defence industry might grow like IT industry starting with low value work and eventually move up the value chain. Initially the big foreign equipment manufacturers will integrate in their home base. They will instead, meet the offset norm through sourcing. They will facilitate meetings between SME suppliers in Europe or US and Indian companies. At the same time some foreign companies will be looking for tie-ups to hedge their risks.
FDI in defence businesses is limited by law to 26 per cent and this has historically constrained investment by foreign defence players in India. However, the definition of defence equipment in the Indian regulations remains fairly vague, thereby opening the way to some degree of interpretation. This has resulted in foreign companies
Setting up operations related to, but not necessarily purely related to, defence equipment.
For example, BAe Systems owns 40 per cent of BAeHAL Software Limited, its joint venture company with HAL, which is dedicated, amongst other solutions, to avionics embedded software and simulation software. This company has activities that are on the fringe of the defence sector, but takes advantage of the fact that up to 100 per cent FDI is allowed when providing software services. Similarly, Safran Aerospace India Pvt Ltd, Snecma’s R&D centre in India which develops engine components and embedded software, is a 100 per cent subsidiary of Safran (100 per cent FDI being allowed for R&D companies as the Indian government highly encourages setting up such businesses). Having started to set up operations in India, and taking into account the significant business opportunity represented by the Indian A&D market, prime contractors are encouraging their suppliers/ subcontractors to accompany their development in this region.
A move to India by European A&D Tier 1 and Tier 2 would compensate for the present lack of maturity of the Indian A&D private sector, and in the medium term would help the development of local players.
Two European A& SMEs that seem to have anticipated the demand from prime contractors for moving some of their production to India are Recaero and Machaero, although not many other European A&D SMEs have followed suit yet.In November 2006, Recaero, a €21 million turnover French aeronautical spare parts manufacturer, created Recaero India, a company based in Bidadi (30 km from Bangalore) and held 75 per cent by the French parent company and 25 per cent by local individuals.
The Existing Constraints:
India’s defence budget estimated to be around $30billion is expected to grow by 7% annually over the next five years. The government wants 70% of the defence procurement to originate from India by 2010(at present 25%). It will not possible to reach these levels under the current situations.
Lack of transparency in dialogue between Ministry of Defence and Industry on long term plans is holding back companies.
Also in developed countries governments fund the development of defence equipment by private players. The requirements are given and companies are given a time frame for R&D. They do the prototypes which are sent for evaluations and trials. So the companies know what is required and also have the comfort of the development risk being shared by the government. In India, however the DRDO or the ordnance factories ask the companies to do specific work without sharing the details with them.
26% FDI is also a block in high-tech work being done in India. The reason is that no company will share its technology with a local player without having significant say in the management control.
However the biggest challenge for the Indian Firms is to overcome the inconsistent order flow and long gestation period to reap the benefits of better margins in this sector.
REFERENCES:
· http://www.indiandefencereview.com dated Jan 2009.
· http://business.outlookindia.com/print.aspx?articleid=2256&editionid=60&catgid=1&subcatgid=1044 dated Nov-15 edition.
· http://www.pwc.com/extweb/pwcpublications.nsf/docid/19BE4A9A94BDB22D852574440065666D/$File/Rochard.pdfdated April 2008.
