The Indian defence-aerospace industry is taking baby steps in the world of aircraft, missile and radar development. There will be massive opportunities over the next decade for Tier 2, Tier 3 and Tier 4 firms in the West to form lucrative long-term JVs with Indian partners.
India is negotiating the sale indigenously designed Akash surface to air missiles to Vietnam. Almost simultaneously, the Government of India has also cleared a Rs 17,000-crore (($2.6 billion) agreement o jointly develop a medium range surface to air missile for the army in order to beef up its defence preparedness.
Importantly, the first is an example of a 100 per cent Indian weapons platform, while the second envisages co-development by India's Defence Research & Development Organisation (DRDO) and Israeli Aircraft Industry (IAI) - a big change from the previous practice of either buying foreign weapon systems off the shelf or assembling them in India under license.
A new approach
The system of assembling foreign weapon platforms, ranging from the British Jaguar fighter-bombers to the Russian MiG and Sukhoi fighter jets to French Mirage aircraft by the public sector Hindustan Aeronautics Ltd (HAL), does not seem to have led to much technology absorption in the country - evident from the travails faced by the Tejas Light Combat Aircraft.
A direct consequence of this failure is India's rank as the world's leading importer of weapons - for seven of the last 10 years, according to Sipri, an international research institute. This is an “accolade” the country could do without.
We are offering 100 per cent technology transfer, full system and software control, under the Make In India vision. Saab is committed to India and will deliver the best industrial cooperation and technology transfer over the life of the programme.-Jan Widerstrom CMD, Saab India
The Narendra Modi government has, thus, eased rules, cut through much of the bureaucratic red tape and made it attractive for the private sector as well as foreign defence companies to set up operations in India. In addition to making India self-reliant, this will also generate thousands of jobs in the country, lower costs, save foreign exchange and give wing to New Delhi's great power aspirations.
It will be fair to say that there is a veritable arms race raging in India - among large, medium and small companies in India's private sector. The Tata Group, both the Reliance Groups, each run by one Ambani brother, Larsen & Toubro (L&T), Godrej, Bharat Forge and a host of others have tied up with foreign vendors such as Boeing, Airbus, BAE Systems, among others, to bid for government contracts.
India's defence budget is the XXth largest in the world. The country is expected to spend up to $250 billion on procuring arms over the next decade. More than third of this will be spent on modernising the air wings of its military, with the expected acquisition of more than 300 frontline warplanes, over 1,000 helicopters and dozens of missile systems of varying ranges and capacities.
Creating a new eco-system
India was the first Asian country, apart from Japan, to develop and fly its own jet fighter plane. That was soon after Independence. HAL invited Kurt Tank, the designer of the Luftwaffe's fearsome Focke-Wulf single engine fighter jet, to design a jet for the Indian Air Force. The result: the HF-24 Marut, which served the air force with distinction for more than two decades.
But for some reason known only to the governments of that time, this knowledge base was allowed to wither away. India did not expand and build on the knowhow and know why gained. As a result, when it set out to design the LCA, it had to begin from scratch all over again.
Aircraft manufacturing is a complex operation that needs a high technology eco-system with hundreds of small, medium and large vendors to make the components that go into a modern plane.
Barring the 52 DRDO laboratories and the few dozen public sector companies that are part of India's stuttering defence industrial complex, this country does not have many vendors with the expertise to nurture an aerospace industry.
This capability will have to be created almost from scratch. And therein lies a massive opportunity for a host of western European, US, Japanese and South Korean vendors.
Scope for mid-size Western defence vendors
US aerospace majors Boeing, Lockheed and Sweden's SAAB have offered to transfer the assembly lines of their F18 Super Hornet and F-16 fighter planes to India if the Indian government agrees to buy a minimum number of planes for its Air Force and Navy. SAAB has offered to do the same with its Gripen line of fighters.
“Under the Make in India process we may have one or two more jet fighters plants in India by the private sector,” Indian Defence Minister Manohar Parrikar said recently, adding that “several proposals are under consideration and we will select them through a proper process.”
The Indian government is yet to decide which offer it will take up - and the Donald Trump administration's US First credo may well put a spoke in the wheel of the offers of the two US companies.
But regardless of which company finally wins the bid for supplying planes, it is fairly certain at this stage that India will become the location of the only supply line of at least one of these fourth generation fighters.
“Saab is offering an industrial facility that will be centre of gravity for the Make in India Gripen. It is an unrivalled offer that will set new standards in aeronautical engineering excellence for decades to come... We are offering real technology transfer for an Indian-built combat aircraft of the future with new generation technology. We are offering 100 per cent technology transfer, full system and software control, under the Make In India vision. Saab is committed to India and will deliver the best industrial cooperation and technology transfer over the life of the programme,” Jan Widerstrom, CMD, Saab India Technologies, told the media recently.
Boeing and Lockheed Martin have made similar statements about their offers as well.
These fighters use components sourced medium and small companies across the US and Western Europe. If the production base of any of these planes shift to India, it is likely that at least some vendors may be tempted to follow suit - in order to be closer to their end customer as well as to take advantage of the cost arbitrage India offers.
Then, there are reports that a private sector partner could be roped in to speed up the production and further development of the Tejas LCA. Since an estimated 35 per cent of the plane is sourced from abroad, this will open up new avenues of cooperation between large Indian private companies and medium and small scale vendors of high technology components in the West.
India will also buy about a thousand helicopters and develop new missile systems for its military. While some this will be designed and manufactured locally, a fairly large proportion will come from foreign vendors who will be obliged to Make in India.
Easier rules for 100 per cent foreign ownership
Many foreign defence vendors have refrained from investing in India because they don't want to share high technology unless they are allowed 100 per cent ownership. Till November, this was difficult as Indian laws allowed foreign companies to hold more than 49 per cent stake in Indian companies only if it brought in modern and state of the art technology.
This led to apprehensions that the word “state of the art” could be open to different interpretations by different people and this could lead to approvals being revoked in future. To remove such misgivings, the government has removed the term “state of the art”.
Press Note No 5 of 2016 published by the Department of Industrial Policy and Promotion (DIPP) amends the circular dated June 7, 2016 says foreign investment beyond 49 per cent (and up to 100 per cent) may be permitted on a case-by-case basis if it brings modern technology into the country.
This will make it easier for many small and medium companies to set up 100 per cent-owned subsidiaries in India that can supply high technology and patent/copyright-protected components to end-user assembly lines of fighter jets and helicopters made in India either by foreign companies or by joint ventures between large foreign defence companies and their Indian partners.
In particular, lots of opportunities exist for British firms. Says Fraser Hamilton, Vice President, Global Alliances, for Boxaar, which has developed a systems management software to quicken defence processes: “India is an exciting market. The UK may be leaving the EU, but we are stepping up our engagement elsewhere. India and the UK are an unbeatable combination in defence and aerospace.”
Joint ventures are in place
The Indian government's announcements that it will buy complete weapons platforms from the Indian private sector to reduce imports of defence equipment from 70 per cent at present to 30 per cent within a decade has prompted a host of foreign defence aerospace manufacturers like Boeing, Lockheed, BAE Systems, Airbus, Israeli Aircraft Industry, among others to forge joint ventures with large Indian conglomerates such as the Tata Group, Reliance (both Mukesh Ambani and Anil Ambani), L&T, Godrej and M&, among others.
But the Indian government has not yet floated any large contract that any of these JVs can bid for. That, perhaps, is holding back Tier 2 and Tier 3 suppliers of components to these Western defence majors from forging links with smaller Indian companies.
“We like the policy; we await the execution,” a senior executive in a foreign defence firm said at the recently concluded Bangalore Aero Show, which had 549 exhibitors, almost half of them foreign.
Make in India versus Assemble in India
As noted earlier in this report, India's mainly public sector defence industry has been assembling a host of Russian, British and French aircraft under license, without much technology absorption.
Some experts question how replicating this model with private sector partners will improve the situation. But here, some experts point to the example of the two-wheeler industry. In the early 1980s, when the sector was opened up, almost every Japanese major - Honda, Yamaha, Kawasaki and Suzuki - entered India in partnership with Indian companies.
The buzz then was that these Japanese brands would take over the Indian market in a short while. In truth, the reverse was the case. Today, an Indian company, the erstwhile partner of Honda, is the world's largest motorcycle company, and Indian brands, not the better known Japanese ones, rule the Indian roads.
A PwC study from 2014 says liberalising the defence sector could result in a similar diffusion of technology to Indian companies and help develop the domestic defence industrial base.
Priority to indigenous weapons platforms
The government has announced that it will priority to weapon system designed, developed and made in India. It has also eased norms for exports of these made in India weapons. Exports, according to experts, is the only way to make arms making a profitable proposition for domestic companies.
This is expected to incentivise companies to absorb and indigenise technologies and develop their own platforms, a la, the two-wheeler industry.
Encouraging defence start-ups
The Defence Minister announced the setting up of a new technology innovation fund for defence aerospace to encourage start-ups in this area.
“We are initiating a defence innovation fund with an initial contribution from HAL and BEL. The fund will support innovation and technology development and will be open to both Indian and foreign firms. The focus will be on start-ups to enable a culture of innovation,” Parrikar said at the recently concluded Bangalore Aero Show. He did not disclose the size of the fund.
The defence aerospace industry in India is slowly coming of age. The private sector, which has been supplying components to HAL and other defence contractors is now ready to step up and start making complete platforms with technological support from foreign defence contractors.
“In the coming years, the role of IT and network centric warfare is going to be a game changer. As the Indian defence industry catches up with the international industry in terms of producing hardware, it could take a quantum leap in matters of information warfare. The recent push by the government to incentivise electronics manufacturing in the country will complement the existing expertise in services and software,” Dhiraj Mathur, Leader, Aerospace and Defence, PwC, said in a recent report brought out by the Big 4 consultancy firm.
India is now taking baby steps towards self-reliance in the defence sector. But before it gets there, it will have to create a network of vendors, suppliers, independent consultants and designers, especially in the micro, small and medium enterprises sector, who will, necessarily, have to form the backbone of the country's defence-industrial sector.
It may be a decade and a half before results begin to show. Over this period, there will be a huge opportunity not only for the big boys but also for Tier 2, Tier 3 and Tier 4 companies both in India and the West to enter into long-term joint ventures to service what is arguably among the most lucrative arms markets in the world.