How Strategic Partnerships will change the Indian Defence Industry Ecosystem
Systemic changes to the environment around us has affected our thought processes to have an enhanced look at ourselves. This is what the Modi government has done to us, has made us feel better of ourselves and also empowered us with the ability to achieve what we always wanted to. Among the 23 identified sectors for Make in India, the PM has chosen the Defence sector to be the key one. Much talk of reversing the import ratio of 70:30 for more than a decade without any work done on ground. Manohar Parrikar led Defence ministry embarked upon a series of reforms amongst which the Strategic Partnership figured towards the end. This was essentially to ensure that the ground work is done to enable the industry and the nation to respond to the Strategic Partnerships in the private sector, in the manner envisioned by the Dhirendra Singh Committee(of which the author was a key member).
Vision, was to arm the Forces with the state of art weapons and systems for them to engage with the ever-provoking enemy both from within and without. Key strategic procurements cannot be relegated to a vagaries of a procurement procedure(DPP), that handles routine procurements. Delays in decision making, have crippled the Forces as never before.
For example, the procurement of 126 fighter aircrafts in the much talked about MMRCA, began in 2004 or so and RFP was issued in 2006 and no decision was taken till 2016, despite down selecting the lowest bidder in 2013. This is essentially because we drafted a QR for an aircraft that was never made and the global majors such as Boeing, LM, Eurofighter, SAAB/Gripen, Mig, Dassault/Rafale, were competing for the deal. It would have been wiser for the IAF to have placed a finger on the aircraft they needed and rest left to the MoD to make sure the deal is done in a timeframe that the IAF wants. Ideally, such deals must be negotiated between governments to iron out any misgivings and assure support at the government level.
In the same manner as the MoD is able to place orders/indents onto the OFB and DPSUs on a single tender basis; an enabling condition was necessary to extend this to the private sector; thus came about SPs. There is space for everyone, the OFB, DPSUs and the private sector, demand side being strong a balanced approach is expected.
Indian Defence Industry has grown beyond the realms of the OFB and DPSUs to include the private sector as a force-multiplier. While it may be argued that the infrastructure investment in the private sector is way too low, well the game has just begun. In the past five years there have been many private sector companies that have bagged large orders from the MoD. L&T with the K9 Guns in collaboration with Hanwa Techwin, Tata Power SED for the mountain warfare EW systems, Alpha Design for various programs in communications and EW and as recently with ISRO, just to name a few. There are also many examples of private sector actively supporting the Public sector such as the Global Engineers building the explosive plants for OFB, VEM technologies developing their own ATGM with home grown technologies, and so many more. India’s geo-political and economic ambitions have grown significantly. Establishment of a robust indigenous manufacturing capability supported by a energetic and vibrant ecosystem in the Aerospace and Defence industry is the call of the hour.
The un-enviable security environment in the Indian subcontinent region, places huge demands on defence requirements. In the foreseeable future, this will only increase thus making indigenous development of modern defence hardware and technology a top priority for the government.
DPP 2016 was indeed a game changer, a transformational one ringing about such lasting changes with a focus on indigenous design, development and increased manufacturing. With the government’s agenda to reduce import dependence in defence by 35-40 percent it is actively promoting indigenous defence manufacturing with initiatives like Make in India and policy reforms including allowing 100 percent Foreign Direct Investment (FDI). Several states are also offering incentives and concessions in the form of aerospace clusters or Special Economic Zones (SEZs) for developing an ecosystem where all core and ancillary activities related to defence manufacturing can co-exist, the most recent one being Haryana, with a A&D industry policy.
How does the SP policy contribute
It is estimated that procurement to the tune of about US$10 billion worth of defence products per year is planned in the next 5 to 10 years. It is in the interest of the OEMs and the domestic industry to move on from a buyer-seller relationship to that of a partner in terms of co-development and co-manufacturing, with transfer of technology. Indian companies will largely front end all business with the government and the opportunity for the OEMs is indeed huge in establishing a sound relationship not only for Indian market but also to service the global market.
While the government will short-select both the platform and OEM on the one side and the pool of Indian industry considered eligible to become SPs on the domestic side, the differentiator would be the partnership-relevance between the SP and the OEM. This relevance comes about through indication of range and depth of transfer of technologies, development of ecosystem and establishment of a production base in India.
One of the essential parameters of the SP policy is that of outsourcing. Although, deliberately, the Government of India has not indicated any specific number in terms of percentage of outsourcing that an SP should do; they have outlined the concept. Such as, it has been elaborated that the SP is expected to be a system of systems integrator; this means a lot, clearly indicating that if something can be outsourced, please do not do it. Concentrate on the Integration part, concentrate on the core technology part and leave the rest to the eco-system.
How did Bangalore, Hyderabad, Chennai in a major manner and other towns like Pune, Belgaum, Nasik and others in a smaller scale develop into pockets of excellence in Defence Sector? This was because of the DPSUs/OFB and DRDO labs that were in the vicinity that was an Industry-enabler cum Developer. So, there was an eco-system that developed to support the large government owned factories, despite these PSUs having huge infrastructure and their erstwhile known resistance to outsourcing.
Now the situation is much in favour of the small-scale industry. Here, the government will enable the formation of SPs with guaranteed business, four segments have already been identified, the aircrafts, submarines, helicopters and Armour Fighting Vehicles; all of which together count on more than 100 thousand crores. Although the potential SPs in the submarine segment have some infra to talk about, in each of the other segments they have little to offer, and will have to build from scratch. Herein lies the opportunity for the eco-system to develop. If for example we carryout a systems analysis of an aircraft , we could well end up with some 5000 sub-systems that go into its making, some of the major ones being Flight control systems, Engine control systems, Fuel systems, Hydraulic systems, Electrical Systems, Pneumatic systems, environmental control systems, Emergency systems, Rotary systems, Advanced systems, Avionics systems and more than about 200 technologies that determine its efficacy. The idea of listing some of these above, is that the nominated SP will not be able to master all of these and perforce will have to outsource, retaining the core technologies and system integration.
SPs are expected to have a global outreach addressing the global market and service them in addition to the domestic demand. Demand side dynamics are very strong in each of these segments and hence the opportunity for the industry to show up with centres of excellence in each of these areas. In addition, India offers tremendous opportunities in engineering services, supply chain sourcing and associated maintenance, repair and overhaul-related activities. This is the call of the hour and the nominated SPs are mandated to service all revenue requirements, MRO, spares, performance based logistics(PBL) over the life cycle of the product.
One challenge for the industry will be in Skill. From where do you get the work-force? Companies like P3 Consulting Engineering have been the pioneers in establishing a centre of excellence in skill development for training fresh engineering graduates to provide them with a finishing course in design skills. This initiative needs more hand-holding from the government and must extend to manufacturing and services like MRO, testing etc. As per government estimates, a reduction in 20-25 percent in defence related imports could directly create an additional 100,000 to 120,000 highly skilled jobs in India. The industry therefore, needs to build and train talent to address the growing needs of the market. With SPs in business these figures could well exceed estimates.
Tiered system of Industry – this is in the making with the SPs. While presently in India, we either have the MSMEs or then the big industries, the medium ones are neither here nor there; while they continue to do what the MSMEs do, they have greater aspirations. Aspirations will now be matched with discipline oriented investments at system and sub-system levels. Partnerships both with foreign OEMs and with the public sector are in the offing, for increased efficiencies. It is the turn of the DRDO labs to interface with industry in forging technology oriented relationships. Every design house must have a front-end manufacturing house, this relationship will boost Indigenous design and development. Partnerships amongst the private sector will also be the order of the day. Discipline oriented partnerships to converge on technologies and products will determine success in business.
One key element of the policy lies in “Buy in India”. One of the ingredients that determines FE outgo, is raw material. It is widely believed that aerospace and defence grade raw-material is not available domestically. This, therefore becomes a thrust area for achieving our objectives of “Make in India”. If a raw material is available within the country, it must be procured, imports of such raw material must be forbidden, even if the Indian supplier is higher in price. Similar mandate is required for any sub-system and products/technologies that are home-grown.
Cost to Country
It is often argued by few finance experts that Indian products and systems are costly and drains the national exchequer. MoD Finance is very happy with the award of contract going to the lowest bidder, also called as L-1. This could be true in a pure domestic competition, but has a slightly different connotation when the competition is geography agnostic.
Consider this as an example. From available public information, the cost of a Sukhoi 30 MKI if procured directly from Russia is INR 350 Crs. However, when HAL makes the SU 30 MKI, the cost is 450 Crs, implying a cost escalation of 30%. Is it then wiser to procure the SU 30 MKI from Russia and not get it manufactured in HAL?
The answer lies in an understanding of the concept of, “Cost to Country”. When the SU is made in HAL the first advantage the country gains is the direct savings of precious FE of equivalent of USD $60 million per aircraft. There would however, be an element of FE outgo in terms of certain raw materials and proprietary products that may still have to be sourced from Russia. This FE savings can be better utilised for purposes that could have a social affect. The funding of SU 30 MKI from HAL would be done by the MoD in rupee terms, and this rupee is circulated back into the system in a variety of ways. Tax-payers money is getting back to enrich the tax-payer.
The other advantages are far more over-reaching. More than 42 new high-end technologies were mastered by HAL Nashik. HAL Nasik division, has grown into a manufacturing division and one for overhaul. complete Repair and overhaul (ROH) is done from within the country. Besides manufacturing the SU 30 MKI, it also supplies spares, consumables and aerospace fasteners. It has also taken up work-packages for civil aircrafts and exports spares to various countries as well, such as Egypt, Syria, Vietnam, Malaysia, Algeria, Poland and Russia. The complete Mig 21 and Mig 27 fleet( about 500 aircrafts still in service in many Air forces across the world) is supported globally from Nasik. The division has (from information on their website) manufactured 850 aircrafts and undertaken overhaul of more than 1800 aircrafts. The division presently holds on rolls, 1770 trained technical experts and 650 engineers; while more than 8000 trained over the two decades; this much for skill. They have a huge outsourcing bill, including disciplines like sheet metal components, machined components, non-metallic components, springs, metallic tanks, and a variety of tooling items, besides outsourcing labour. The eco-system developed just for the SU 30 MKI line could be more than 350 small companies that are tirelessly working on high end aerospace components. The outsourcing has a target of 30% and is leaning towards that with a 20% outsourcing that is presently taking place. Nasik has three huge industrial estates, viz, Satpur, Ambad and Sinnar with more than 2600 industries in it. The who’s who in the industry have their manufacturing plant there, just to name a few, Siemens, Kirloskars, Crompton Greeves, Mahindra, VIP industries, Mico and many more. Also, to facilitate exports, Nashik division of HAL created a socio-economic JV between HAL and CCI corporation of India to provide a single window export clearance and facilitation for the agri-produce(grapes, Pomegranate, Bananas and others) the region is famous for.
A cost analysis of all of the above and the over-bearing advantages, would indicate that the cost to the country is far less, when we source from within the country.
When our SPs get on to their job, the contribution they could make to the environment would be far greater with a sound eco-system and a formidable production base established in the country with impinging technologies and manufacturing processes of global standards. SP model initiated by the government is a great transformational initiative and all stake-holders must come forward to whole-heartedly support this.
The SP policy is expected to cause a sea-change in the industry both in terms of outlook and real effects. Proliferation of technologies, development of skilled force, best practices in manufacturing, tired system of industry and development of MSMEs will be the order of industry. Niche companies with intense technological outlook will mushroom across the geography of the country and centres of excellence such as Nasik, Bangalore, Hyderabad and Chennai will spring to support the national effort.
We need to develop on the concept of cost to country a bit more