Opportunity Strikes

Opportunity Strikes

The country’s conglomerates are throwing themselves into arms-making. smaller companies too are joining the fray.

by Jayashree Kini Mendes

It has been reported that if one pays a visit to Larsen & Toubro’s Talegaon plant, one might confuse it for the props department of a film studio. About half-a-dozen hangars spread over 50 acres are filled with enough weaponry to thrill a Bond villain: camouflaged track-mounted howitzers, anti-submarine rocket launchers and, particularly appealing, a contraption to turn a humble carriage into a ballistic-missile-launcher. Some of them may be dummies, but the rest of it tells of India’s ambitions to nurture world-class makers of defence equipment.

For some years now, India has had the world’s fourth-biggest military budget, but simultaneously it has also been the single biggest arms importer. It is only recently that this seems to have irked the officials and for the last 3-4 years the government is convinced that indigenous manufacturing of weapons can provide jobs, budget savings and technological know-how. The reason why it has put defence at the heart of its drive to boost domestic manufacturing.

The Make in India crusade is a step in that direction. That delighted Indian conglomerates no end. Finally opportunities were coming their way. In this hope, most of them armed themselves with expansive equipment that their size alone would help them bag large orders. Some of the large companies that announced defence manufacturing plans were Tata, Mahindra, Godrej, Reliance, Adani, as well as L&T, who set up or expanded existing plants and invested heavily. Most of them even tied up with prominent MNC defence companies waiting for the orders to flow in.

ARMS AND THE MAN
For long, the defence contracts in the country have always been the domain of PSUs. The government would not have it any other way. Private companies were awarded significant contracts, but they were confined to small parts. This put brakes on their plans. But going by Prime Minister Modi’s plans and announcements, this is soon expected to change going forward.
The Prime Minister has vowed to reverse India’s dependence on imports by building a local manufacturing industry. The government is forecast to spend $250 billion on modernisation of its armed forces over the next decade. If this happens, then it will give the private companies the much-needed impetus to push forward serious long-term commitments for defence manufacturing. The Budget proposal for 2017-18 offered a small hike of about 6.2% in defence spending and allocated Rs 2,74,114 crore as against last year’s Rs 2,58,589 crore.

Anandi Ramalingam, director (marketing), Bharat Electronics Limited (BEL), says, “The objective of Make in India is to transform India into a global design and manufacturing hub and to revive India’s industrial growth. The government has identified 25 sectors with more focus on defence manufacturing. India has the third largest armed forces in the world. About 60% of defence related requirements are met by imports at present, which offer a huge opportunity for import substitution.”
BEL has been seeing enormous advantage in this policy. Many of BEL’s indigenous development programmes, that is, in-house or with DRDO programmes, will find a chance to be categorised as IDDM [Indian (Designed, Developed and Manufactured), or Buy (IDDM]. BEL also has plans to exploit the IDDM route.

The government has also finetuned the procurement policy to give preference to the indigenously manufactured equipment. A new category ‘Buy (Indian-IDDM)’ has been introduced in DPP 2016. The Defence Acquisition Council (DAC) accorded approval of 136 capital procurement cases at an estimated cost of about Rs 4 lakh crore during the last three financial years, of which 96 cases involving about Rs 2.5 lakh crore are under the ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’ and ‘Make’ categories.

Phil Shaw, chief executive, Lockheed Martin India, says, “We have already invested in Indian defence manufacturing. Our joint venture with Tata Advanced Systems in Hyderabad manufactures large aerostructures for the global supply chain of C-130J and S-92 helicpter cabins. This JV has trained the majority of its own staff through apprenticeships and on-the-job training and the number employed in the facility has reached almost 600 personnel. In addition, the JV has trained an additional 400 personnel that are employed in local aerospace industries.”

Dr Glenn Kelly, VP, customer business India, defence, Rolls Royce, says, “The government’s Make in India initiative is one way the industry can focus on indigenisation. However, it’s still early days in the Make in India agenda. We are already seeing major OEMs tying up with Indian private sector companies not only for the Indian market but also for their global customers as well.”

He goes on to add that major OEMs are setting up technology centres, to generate real IP and capability in India. “Going forward, a holistic approach to developing the indigenous capability that combines the strengths of aerospace organisations like NAL, DRDO, GTRE, etc. with the private players that possess proven domain expertise is the need of the hour,” says Dr Kelly.

While several of the industry folks are gung-ho, Brig. SM Sharma (Retd), CEO, Continental Defence Solutions, says, “Though there has been much excitement about the Make In India initiative particularly after the new Defence Procurement Procedure (DPP) was published in 2016, little visible change has occurred on the ground. But there is hope. Many Request for Propsals (RFPs) have still not been issued, even two years after plans for procurement of the related equipment were announced. Inordinate delays during the tendering process are still prevalent, which increases the fixed cost burden for companies. The government agencies are yet to fully accept the processes that propel Make in India manufacturing, which are yet to be tested.”

NO FAREWELL TO ARMS
Last quarter, there was news that the government is mulling to liberalise the foreign direct investment (FDI) rules for the defence sector. This could force Indian companies to re-look their plans as it reduces the dependence of original equipment manufacturers (OEMs) on domestic manufacturers.

The government has opened up the defence sector allowing foreign companies to own as much as 100% equity in the local defence sector through the government approval route in cases where it is likely to result in access to modern technology. The current FDI regime permits foreign companies to own 49% in Indian units through the automatic approval route. Dr Kelly says, “This will allow foreign OEMs to bring their valuable technology and IP into India with confidence. FDI inflows are likely to increase – by DIPP’s own statistics, currently defence languishes near the bottom of FDI investment by over 60 industrial sectors since April 2001. The 100% FDI is certainly a motivator given that FOEMs continue to have control over IP and processes, but what is required is speedy decision-making and granting orders. We need to have buoyancy in the defence sector which can be achieved only via closing deals and subsequently delivering on them.”

Explaining why it is too early to speculate on details regarding India’s FDI policies, Shaw says that Lockheed Martin’s Make in India proposal is an exclusive opportunity to quickly progress from final assembly to manufacture and assembly of structural elements of an advance fighter aircraft, the F-16. “India would then be able to move into manufacturing of sub-assemblies and subsystems for future F-16 aircraft. This would position Indian industry to play a critical role in supporting the worldwide fleet of F-16s currently in operational service,” Shaw adds.

Brig. Sharma says, “The advantages of 100% FDI is that investment in the defence industry will increase substantially. The pace of indigenisation will follow. I feel that the disadvantages would be that there will be little or no transfer of technology to Indian companies. The international companies that invest here would be careful to ensure that technology is safe-guarded. We will miss out on the learning curve.”

Recently, Niti Aayog proposed that battle tanks, military transport vehicles and armoured vehicles be fully sourced from foreign companies. Ask Brig. Sharma that and he says that though the proposal by Niti Aayog has its merits, the Indian R&D does not have the desired depth. “The Indian defence industry is not mature enough to manufacture complex systems and equipment such as battle tanks, armoured vehicles or aircraft in a short span of time. The indigenisation process is yet to stabilise. At this stage, particularly for equipment that is required urgently by India’s defence forces it would be prudent to import. However, any procurement from a foreign OEM from abroad should definitely have an offset clause of minimum 50%,” he adds.

Ramalingam adds that foreign investment beyond 49% and up to 100% is permitted through government approval, wherever it is likely to result in access to modern technology or for other reasons. “Enhancing FDI to 100% will benefit if critical/core technologies flow into India from the foreign OEMs. Products could be sourced from 100% FDI companies and the same will be considered as indigenous content,” she adds.

CATCHING UP
To further promote manufacturing of strategic platforms, viz. fighter aircraft, helicopters, submarines and armoured vehicles, the government has announced the Strategic Partnership (SP) policy, where shortlisted Indian companies can form JVs with shortlisted foreign OEMs to manufacture such platforms in India with Transfer of Technology. BEL finds enormous opportunity as it manufactures electronic products and systems for tanks, guns, aircraft, submarines, etc.

The Make in India has special incentives to boost small players and MSMEs for supplying the sub-systems to large manufacturers. BEL has achieved a procurement level of more than 20% from MSMEs during 2016-17 as against 8% in 2014-15. It has also established an SOP for use of BEL’s test facilities by the private entities, which is being used by many MSMEs, besides identifying partners for collaborative R&D. As of today, about 120 projects have been identified for collaborative R&D and 193 partners, including 85 MSMEs, are empanelled.

About 90% of India’s total defence manufacturing output comes from DPSUs and 41 ordnance factories. DPSUs/OFs are equipped to manufacture platforms/ systems for Indian defence forces. However, as the requirement of the armed forces is huge, large private sector players are also being involved.

Ramalingam adds, “All policies in the last 5-10 years has been aimed at building a strong indigenous defence industrial base in the country with DPSUs, OFB and private players. Most critical military technologies are closely guarded by the OEMs due to its sensitive nature. Hence, policies are oriented to encourage development of such technologies within the country.”
The government has come out with several policy interventions such as Mandatory Offsets policy, encouraging JV companies and enhancement of FDI. Buy (Indian-IDDM) was introduced in DPP-2016 as the most preferred category in the hierarchical order of procurement categories to provide emphasis on indigenous design and development of defence equipment.

Brig. Sharma feels that neither large nor small defence manufacturers are well-equipped in terms of technology and equipment. “Most have basic equipment. However, when it comes to the next level of complexity where high-tech, specialised equipment are required to integrate complex assemblies, much of the industry is left wanting. Major infusion of capital would be required but due to lack of sustained orders would not make a viable business plan.”

Shaw says that Lockheed Martin has had a very positive experience working with Indian companies. “With Tata, we would like to create an ecosystem of industries to support the venture. We have engaged with Indian industries for F-16 supply chain opportunities, and met with around 60 companies. Our objective was to better understand their unique capabilities and gauge their interest in a potential F-16 Block 70 opportunity, he adds.

WHAT NEEDS TO BE DONE

The spirit of defence manufacturing seems to have caught on. But Shaw of Lockheed Martin says the government would do well to give more thought to the following points: Robust protection of IP (we still hear concerning anecdotes of “indigenisation through reverse engineering”, especially from government bodies) & FOEM liability; acquisition based on through life costing (reflecting the true value for money rather than just cheapest upfront L1 costing); The use of NCNC trials which are expensive for foreign OEMs to participate in at their own cost, but then the procurements can still be cancelled for the slightest reason; repeated requests for price validity extensions at constant cash prices, especially when these are then followed by demands during negotiations for further discounts. This also adds cost to any initial bid as companies hedge against this happening; greater consultation with foreign OEMs as a body. Foreign companies are here to partner with the Indian government and private sector and have many global experiences that they can bring to bear in helping the Indian defence market to flourish.

Indian companies have seen a change in their role progressing from a supplier of raw material, components and sub-systems to become partners in manufacturing and integrating complete equipment and systems. Companies are investing in capital infusion by developing and upgrading the infrastructure to target large contracts. The big companies are developing the ecosystem by encouraging Tier-1, Tier-2 suppliers in India to be part of their supply chain.
Countries that spend heavily on armed forces typically have successful arms-making companies. India’s ambition is to stop being an exception to this rule.