Category Archives: Indigenisation

Challenges in Indigenisation

Part 5 -Contd from part 4:

It is a well known fact that the military applications are the primary focus of most technological research. With every new generation of new technology, the previous generation is released for industrial and consumer applications. In this context, it is most natural that no foreign OEM would provide Indian Armed Services with TOT of current technology. Whatever is sold is at least one or two generations old. In the case of old platforms like the Jaguar aircraft of the IAF, this would be three generations old. Hence, it is not such a daunting task for Indian companies to indigenise products of that generation, provided one is sensitized to the specialized performance requirements of this sector. This includes design, manufacture, qualification testing and certification to very stringent military standards that most non-defense organisations are not exposed to. This is all the more the reason for the Armed Forces to spot, recognize, nurture and grow private organisations that possess such talent and capabilities for meeting their own long term goals of self-reliance. Is this asking for too much?

The real challenge lies not among the MSMEs, but within the Armed Forces themselves. Even among the technically qualified and trained officers, how many of them are acquainted with the fundamental tenets of aircraft systems, leave alone their design, qualification and certification? Of course, they are only expected to use the products and platforms and not design them. But, if they are the nodal officers involved in indigenisation, should they not be empowered for it? And if they do get trained in whatever manner, would it not be a waste if they get transferred every 2 or 3 years to posts that has nothing to do with indigenisation? How many of them have had an intimate involvement in indigenisation of a complete LRU and appreciate the variety of problems faced by a vendor during the whole process? Has even one officer spent one complete day in an MSME engaged in defense indigenis pied-piper ation to get a first hand account of operations of an MSME? The very fact that RFQs quote a delivery period of 3 months for projects that normally take 3 years shows the disconnect with realities. With poor MSMEs that are attracted to the pied piper singing songs of ‘billions of dollars’, should we say any more?!

Military business is all about robustness, ruggedness, high reliability, high efficiency, high technology, miniaturization, sophistication, etc. that are far beyond the perception of most non-defense industries. They therefore need to be sensitized, trained, nurtured and then sustained and this is at least a 6 to 8 year timeline as per current status. So, if the DPM and DPP continue to stick to the L1 philosophy, it is a matter of time before everyone exits irrespective of whether they are successful or otherwise. Technological competence and track record are more important than just lowest cost and therefore the current L1 policy would by itself ensure that the competent get filtered out and the incompetent just fail. Who wins this game?

D&D, Profits and Sustenance

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Part 4 – contd from Part 3:

There is a misplaced belief that Indian companies do not invest in R&D. The terms ‘Research & Development’ or ‘Design & Development’ are often misunderstood and used inappropriately. In the context of indigenisation efforts of the private sector, especially MSMEs, ‘Design & Engineering’ should be the more appropriate term. It is a well accepted fact that Indian MSMEs are highly innovative, enterprising and come up with unique solutions to various problems. Innovative ideas could range from a simple tweaking of a design or reverse engineering of a foreign OEM product. All these activities involve considerable D&E focused on the specific product. The only problem is that private industries do not have the habit of monitoring and accounting such expenditure under a separate head called ‘R&D’. This is due to the fear of the tax-man not allowing these costs as expenditures and treating them as capital investment (which it certainly is) and should result in repetitive long term returns over a period of at least 5 years. In the case of MSMEs indigenising complete LRUs or sub-systems, there is certainly a high indigenous D&D content whose risk is justified only if there is a likelihood of repetitive bulk production orders. The expected Return on Investment (ROI) has to be linked to the risks of D&D. ROI is also linked to the quantum of sales of the product over its lifecycle. Hence, the economic viability of indigenisation has to be based on future bulk production orders from the Armed Services. This is where a serious flaw exists in the indigenisation programmes of all Armed Services and DPSUs. They either do not know what their future requirements are or do not wish to reveal it. In either case, it is almost impossible for a private industry to assess whether there is any worthwhile business potential.

Yet another misconception among the Armed Services is that they have reimbursed the D&D costs to the Vendor at the end of successful completion and hence the vendor is fully compensated. They do not seem to appreciate that D&D cost is very different from the lifecycle value of the product realized. Total value realized from consumer and industrial products over their lifecycle would be more than 100 times their D&D cost. In the case of the specialized A&D sector, lose-lose it should be even higher due to the high value addition of the products. Hence, choking a vendor by not providing him serial bulk orders at least for a few years would amount to killing him without sustainability. This leads to a ‘lose-lose’ situation with both the successful vendor gradually dropping out of business and the Services losing a successful vendor, who could have multiplied his initial success into many more successful projects and graduating to higher levels of technology.

Profit was considered a dirty word in our country till recently. While it has turned decent, it still retains a gray shade among the Armed Services and DPSUs. How much or profit is ‘decent’ and how much is to be considered ‘profiteering’? Any B-school would teach that profit is all about maximization at every opportunity. Even in the background of a patriotic national sense connected with indigenisation of weapons and systems, profits allow the industries to grow and diversify multi-dimensionally. Ultimately, this becomes a national asset since the industry in involved in achieving self-reliance of defense equipment. In the absence of profits realized through repetitive sales, the industry would turn unsustainable. This appears to be the present state of MSMEs engaged in defense indigenisation. Only those who have an alternative revenue stream in a different domain are able to sustain their business even though the A&D sector is a drain on the other stream.

Processes and Paralysis

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Part 3 – contd from part 2:

The Defence sector is considered the ultimate in robustness of processes followed in day-to-day operations. Rigid enforcement of discipline, turnout, maintenance and operations ensures that every part of the organisation including men and machines are fighting fit at any time of day or night. But, if every one of these actions are questioned for authority and expense by bureaucrats who have no knowledge of the operational needs of the defense forces, then there is little doubt that the Armed Force would be a demotivated and ineffective force. On the other hand, if the Armed Forces are given discretionary powers that are misused or abused, this would also be unacceptable from a bureaucratic angle. This is where a good mix of trust and powers of discretion are required in a robust system that does not leave the swords of the CVC, CAG and CBI hanging above the heads of the officers of the Forces. This appears to be the actual situation at present with no one really wanting to take any decision however small they may be at any level of authority.

Other issues that aggravate the situation are the following:

Shortages at the maintenance workshop of the Armed Forces catches somebody’s attention only when the foreign OEM stops either supply of spares or repair services due to complete obsolescence. This causes an immediate need that cannot be met by indigenisation which is a very time consuming long term solution which can take as long as 5 to 8 years in some cases. By the time the long term solution is implemented, the need itself disappears since the ageing platform (aircraft) itself is either discarded or goes through an upgrade by the foreign OEM, thus turning the indigenized item redundant.

Why does indigenisation have to take such a long time? A wide range of issues determine whether indigenisation of a durable item such as an LRU is economically viable or not. To begin with, a majority of the aircraft of the IAF are at least 30 years old in terms of design and technology. Many are as old as 50 years. Very few countries operate such obsolete aircraft not only due to lack of maintenance and spares support, but also due to their poorer performance compared to recent versions. In such a scenario, the IAF would certainly like to phase out such aircraft if only new ones were made available. But, have our Governments ever been bold enough to take these major decisions in time? In the absence of clear and timely decision making, the Armed Services can never take long term decisions on indigenisation of LRUs or sub-systems.

Within the Armed Services, indigenisation is a maze. No one knows for sure whether an LRU is to be indigenised by a DPSU or DRDO or a private sector industry. A year or more is lost in figuring this out. Then follows the issue of an informal RFI (Request for Information) or a feasibility study to be performed by prospective ‘Vendors’ registered with each Depot. A vendor cannot just assess feasibility since he has neither complete technical information nor even seen the item. He has to spend his own money to travel to the bases, dig out whatever info is made available to him (in most cases nothing), guesstimate the technology involved, time, effort and his own confidence level and then send a feasibility report with budgetary cost. This itself can take anywhere from 3 to 6 months. The Base would then study it and request the ‘Vendor’ to provide a detailed break-up of the budgetary cost estimate. Making a budgetary cost estimate for an item about which very little or nothing is known is bad enough. But, to be asked to provide a break-up is asking for the impossible. For the sake of moving the process forward, some figures are worked out in 2 or 3 months time. It is then time to release an RFQ, which is a very crucial document that has to include unambiguous technical specifications, quantities required over the next few years, method of evaluation of the lowest bidder, timelines for development of prototypes as well as production batches, etc. Since many of these details are not clearly known even to the purchasing authorities, preparation and release of RFQs themselves take 12 to 18 months, sometimes even as long as 3 years! It can be seen that it would have already taken 2 to 3 years to reach this stage from the time the need was identified.

angif-red-tape-def The RFQ states that bids should be valid for a minimum of 180 days. During this time, a technical evaluation of the bid followed by commercial evaluation of those who qualified the former, is carried out. Then follows a price negotiation with the lowest bidder to beat him down further even if it was already unrealistically low. Finally a purchase order is released just a few days before the lapse of the validity of 180 days.

Now, if the RFQ was based on assessment of need for the item for the next 5 or 6 years, it can be seen that more than half that time is already consumed upto the release of the RFQ. Allowing for another 3 to 4 years for the development and certification of the item, it is little wonder that the need for the item no longer exists! So, what does the vendor get out of his efforts over 6 years? Literally nothing that can be called business gains either in the short or long term.

Attitudes and Habits

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Part 2 (Contd from Part 1): Old habits die hard. When a child gets used to spoon feeding, it will resist eating by itself. This applies equally to the Armed Services. Having got used to being fed by foreign OEMs with machines, equipment and their spare parts for over six decades, the easiest and simplest method to re-arming is to go back to them. These are buying habits that even we as individuals acquire, don’t we? So, it needs a monumental effort to change those habits. Moreover, how many of us are aware of ‘Life Cycle Costs’ and how many of us take that into consideration when buying durables? ‘Baadme dekha jayega’ (‘We’ll see later’) would be the common refrain. So is the case with the Armed Services. To be fair to them, they are always so desperate for new procurements to replace old and ageing ones that they just have to go ahead and buy whatever is offered to them. In such a scenario, indigenisation is the last thing on their mind. Add to this our obsession with anything ‘phoren’ over a ‘desi’ stuff, you get almost the entire picture.

Management theory states that resistance to any change is a natural human trait. So, if one has been buying weapons and arms from abroad for the last 50 years, he or she is part of a system that allows it to continue since it has the least resistance. People in charge of planning, budgeting, procuring, inspecting and using the items are all used to it and wont ask ‘why?’. On the other hand, if somebody says he wants to get it from an Indian vendor, all hell breaks loose. Questions like – “Why change?”, “How do you know the Indian stuff works?”, “Who will guarantee its performance?”, “How do you know it would last at least a year?”, “Who will take responsibility for this decision?”, “Who will certify the technical specifications when we dont know what the foreign OEM is supplying?”, etc. Just a few of these are enough to kill any enthusiasm about indigenisation within the Armed Service.

On the other side of the fence are the thousands of private industries who have been attracted to the ‘billion dollar’ annual procurements highlighted by the pied pipers of the bureaucracy and Armed Services. Nobody tells them about, leave alone train them on the highly stringent quality and certification standards that need to be met. This is somewhat like a kid that has been persuaded to get into the shallow end of the swimming pool by the coach who then invites the student to swim towards him while he himself surreptitiously keeps moving towards the deep end! Once the student has gone out of the shallow end, he has no option other than to thrash around and hope to somehow reach the nearest handrail. The only difference between the two scenarios here is that in the Defense arena, the ‘coach’ just disappears after leading you in. Certainly not an enjoyable situation. But, why does this happen? One, nobody cares. Two, nobody takes ownership for either indigenisation or nurturing of ‘vendors’ with the larger objective of achieving self-reliance. Three, officers in charge of indigenisation get transferred to other posts across the country leading to loss of continuity. Four, a DRDO or DPSU, which does not have to participate in tenders and attain L1, offers to take up the job and so the Armed Services are obliged to give them the order even if they are 20 times costlier. Five, the need for the item just disappears due to bureaucratic delays. The list can go on and on.

Does the poor vendor survive or drown?

Watch this space to know more.

Defense Indigenisation – some hard facts

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The CII in partnership with the Indian Air Force had organised yet another seminar on indigenisation on 23^rd May 2017. As is usual at such events, presentations from senior representatives from IAF and DPSUs laid out the ‘huge’ opportunities for Indian industries, particularly MSMEs. On the contrary, a CII-KPMG report titled ‘India as an aerospace hub – Opportunities, challenges and way forward”, circulated among participants, had this to say on the opening page –

“Unpredictable demand, lumpy orders and extreme pressure on pricing makes the risk of aerospace business significantly high. Aerospace manufacturing for the defense sector is even tougher given that there’s only one client”. It goes further to state “…. negotiations, approvals and payments can really test one’s patience”. What I presented that day was even more blunt and down to earth.

This blog provides an insight into the hurdles in the system that have inhibited progress in defense indigenisation. The blog is in several parts, addressing multiple issues connected with all stake-holders.

Part 1: Ground Realities

The A&D business in India is literally unsustainable all by itself, more particularly from the point of view of an MSME. This is obvious for any insider, whether in a DPSU or DRDO or the Armed Services. But, nobody dares say this in public since they are expected to toe the line of the higher ups and provide lip service to attract unsuspecting MSMEs to burn their fingers and go bankrupt. Here are some interesting insights into this expensive game as it is played in India. While the focus of this article is on the IAF, the sum and substance of this article applies equally well for the Navy and Army.

The IAF puts out RFQs for indigenisation of various items that range from little rubber parts, machined parts, to complete LRUs (Line Replaceable Units are complete equipment) for some of the most aged aircraft in the world. However, it is clear that they do not really need these after they are successfully developed by an Indian firm. Imagine the plight of an MSME that spends anywhere between 30 to 100 lakhs on developing a sophisticated LRU with the fond hope of realising a stable business over the next 5 to 10 years, when no serial production orders are released subsequently. And this plight is even further exacerbated if the firm had in the interim managed to win further orders for development of other items. Pleadings with higher-ups of the IAF sometimes produces a response that says “you are doing a wonderful job for the IAF. Orders will certainly be released as and when a need arises”. Then there is dead silence for years after that.

What makes this whole business even more of a mockery is the fact that there is intense pressure on the Indian firm during the entire process of development and testing with the item classified as ‘critically required’. How this criticality turns into redundancy very soon after successful development is certainly a mystery for Indian companies. And when this repeats again and again, this mystery gives way to misery. This is certainly not a test of patience as suggested in the CII report, but one of anger management.

For anyone with a deep insight into the operations of a DPSU and the Indian Armed Services, it is all crystal clear. The reason why things don’t work will be elaborated in Part 2 of this blog.

Defence Procurement: Truth vs Hype

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This article was presented at a Seminar by CII on ‘Make in India for Indian Air Force through Innovation & Indigenisation – Season 2’ on 23rd May 2017 at Delhi. Specific instances are cited, where the clauses in the Defence Procurement Manual have been breached in letter and spirit in actual practice.

DPM 2009 – THEORY vs. PRACTICE

Introduction: The term ‘Self-reliance’ has been a fashionable term of Prime Ministers and defense ministers over the last six decades. Yet, we continue to be reliant as ever on foreign OEMs for supply of critical weapons and systems. Apart from the financial burden, the intangible risk of blockage of spares and support due to international political posturing is even greater. Without true indigenization, self-reliance is impossible.

Today, the DPM 2009 is breached in both letter and spirit. DPM 2009 highlights the need for support and encouragement to indigenous manufacturers with D&D capability. In actual practice, this is rarely experienced. It also suggests that DPSUs & DRDO align their procedures accordingly. This does not appear so.

One of the glaring obstacles to successful indigenization is the lack of a collective approach. Aerospace and Defense (A&D) is a highly specialized technology sector with a veil of confidentiality that prevents familiarisation to private industries. Hence, induction of the private industry can only happen if there is adequate knowledge sharing with opportunities for exposure in either DPSUs or the BRDs of the IAF. While this is reflected in some of the paragraphs of DPM 2009, it appears to focus predominantly on procurement from foreign OEMs with only Chapter 15 being devoted to Indigenous D&D. Issues with reference to the specific paragraphs of DPM 2009 are listed below.

Para 2.4.4 – “Indigenous firms should be given all support to produce and supply quality goods”. This does not start and end with periodic seminars and workshops on Indigenisation, but should result in more practical support such as provision and access to airworthy grade raw materials, standard parts, processes, etc. either directly from the BRDs or through a DPSU. There should also be technical knowledge sharing on a ‘need to know’ basis.

2.5.2c – “Exemption from EMD and waiver of Security deposit for MSMEs” – PBGs and Warranty BGs are still insisted by many of the maintenance bases/depots. BGs are issued by banks only against deposits. Hence, this money gets locked up for over 18 months since the BGs roll over from a Security deposit to a Performance/Warranty BG. MSMEs getting into multiple projects cannot afford to lock up precious finances. Refer suggestion under Para 15.2.4.

3.2.5 – “Inter-Services and inter-departmental Acceptability of Registration” – This is meant to be applicable across all Services. However, it is seen that each BRD within the IAF, leave alone other Services, has its own Registration process.

7.10.3 – “Guidelines for levying of LD” – LD needs to be seen in the context of the specific procurement. Firstly, LD needs to be applied only when there is a definite hardship and cost suffered by the buyer, especially in case of routine and repetitive procurement of standard and proven parts. However, application of LD for the indigenous D&D of any item taken up by an Indian industry appears to be contradictory to para 2.4.4. While there is provision for waiving of LD, this is very rarely exercised due to fear of adverse audit comments.

11.2.2 – Repair Contracts – This is primarily aimed at foreign OEMs. However, the same terms are also applied to Indian firms, especially MSMEs, who take on very challenging tasks at very high financial risks at their own cost. Repair of obsolete parts and equipment of foreign origin are tendered for Indian enterprises only when the foreign OEM stops support. In such a scenario, the IAF has no other alternative than to attempt local repairs. Hence, it is neither fair nor encouraging for an Indian MSME to be penalized with LD, PBG & WG for successful execution of the job. Even in the case of unsuccessful attempt, the Indian vendor has already incurred a sizeable loss through expenditure in the process. Further, it is worth recognizing the value of undertaking repairs of foreign OEMs. Repair is one of the best and economical methods of demystifying and deciphering specialized technologies. Access to the inner parts of equipment reveals details of state of art manufacturing technologies, types of components and raw materials used, multi-disciplinary design techniques, methods of ruggedisation, maintainability features, etc. that can be effectively used for indigenous D&D.

11.3.2 – “Unforeseen repairs – Missing parts, PCBs, etc.” – Except in the case of a repeat order, all repairs of OEM equipment would certainly have many unknowns and hence unforeseen issues. In most cases, OEMs do not supply detailed technical documents other than basic guidelines on disassembly and re-assembly. Hence, the 60 days period as a limit for identifying and intimation of unforeseen repairs appears unrealistic, at least for repairs of LRUs. This needs to be made more industry friendly so that it is a win-win situation for the IAF and the industry.

11.8 – Warranty for repairs – It is highly unfair to seek a Warranty on repairs of aged and obsolete equipment since many of the parts other than the repaired part may sequentially fail due to its excessive age. Failure of such aged parts may also consequentially lead to failure of the replaced part. Hence, this is a grey area of the DPM that needs improvement.

13.8.5 – “Data sharing between Services” – This never seems to happen even within each Service, leave alone between them. There is an urgent need to implement this since successful indigenization or repairs in a particular domain (communication/ hydraulics/ controls/ pneumatics/ guidance/etc) can be put to quick and effective use for the benefit of both the industry and the Armed Services, due to similarities in platform systems.

CHAPTER 15 – INDIGENOUS Design & Development

15.1.2 – “Economic viability of indigenization to be established based on likely requirement for 3 to 5 years”. Further refers to “economies of scale so as to make it commercially viable …”. Strangely, many RFQs issued by the BRDs do not even indicate future requirements. A D&D RFQ for qty. 1 or 2 is absolutely meaningless and displays a complete lack of understanding of ROI for private industries. Further, this also makes a mockery of a tender process since bidders can exaggerate the unit price and lower the D&D cost so as to still achieve L1. However, they stand to make higher profits on future production, whenever that happens. This actually works against the interests of the buyer and the Govt. Hence, the evaluation criteria for L1 should include at least the first batch of future supplies which should also be specified in the RFP.

15.2.1c – “Development contracts may be placed with two or more contractors in parallel. EOQ may be placed on L1 contractor”. When future quantities cannot be clearly predicted, only L1 would get the order. However, to keep the option of allowing additional contractors in case of higher quantities, the design of L1 could be used by any other vendor against payment of a royalty. The Royalty amount should be specified as part of original tender bid.

15.2.3 – NCNC contracts – This is one of the most dangerous options for an industry for two reasons.

The buyer is never under any compulsion to procure the developed product on some pretext or the other since there is no commitment.
As price is not pre-negotiated, IFA can insist on an RFQ for bulk supplies and the NCNC vendor could lose the bulk production bid negating the whole purpose of undertaking development at his own cost.

15.2.4 – DPM 2009 states that “Deposits and EMDs need not be insisted from reputed companies”. This option is rarely exercised even with MSMEs with proven track records in A&D sector. A scientific and transparent system of rating MSME vendors based on successful completion of prior projects can be easily implemented. Such rating can be used to either reduce or completely exempt the MSME from EMD or Performance/Warranty deposits. The rating can also consider failures and delays to derate the MSME thus making the system very dynamic. Ideally, this rating system should be common and universally applied across all defense services.

15.3.2 – Design – IPR for indigenous design should be held by the firm developing it. Customer should provide a “Non-Disclosure undertaking” and should not provide the same to any other indigenous supplier.

15.10.2 – Acquiring Manufacturing Drawings – This para makes no mention of IPR for the design realized by the vendor. True value of IPR lies in the recurring profits resulting from long term bulk production and not in the actual design cost. Hence, the IPR ownership should not be transferred to the Services, but should remain with the D&D organization. Alternatively, a royalty amount can be negotiated as part of the tender bid. This topic was discussed at one of the seminars held in Delhi a year ago and Govt. representatives had largely agreed with this argument. As stated in above Para 13.3 and 15.1.2, future quantities are not always stated. Further, insistence of submission of design is neither universally applied nor stated in the RFQ. The matter raises its ugly head only at the successful delivery of the product and at that stage no MSME would have the ability to take a legal stand on this issue since payments would be withheld. This matter therefore needs better clarity in statement.

Miscellaneous Issues:

The concept of IDDM should be brought into DPM and given primacy over all other forms of procurement.

Local Taxes and duties – Exemption certificates, etc. – Services should pay all duties and taxes based on documentary evidence of actual payment. Vendors should not be subjected to harassment by Local governance bodies.

Registration and Categorisation: The matter of registration and categorization of products and services has been misinterpreted by some of the Buyer agencies. It was contented that registration was valid only for the specific type of product/services that the MSME has already delivered. This is incorrect. Eg; An organization with competence and proven track record in electronics should be permitted to bid for any electronic equipment as long as some competence in reverse engineering or design exists.

Conclusion : DPM 2009 needs to be improved further through active and collective participation of all stake holders that includes the Armed Services, DPSUs, large and MSME private sector companies.

Challenges & Solutions for Make In India in the A&D sector

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CHALLENG Defexpo 2016-title ES FOR MAKE IN INDIA IN THE A&D SECTOR

The ‘Make in India’ campaign seems to focus on ‘Build to print’ as per drawings supplied by a foreign OEM. While this may provide some short-term benefits, it will not lead to self-reliance in the long term. Experts in the A&D arena have openly acknowledged that the so-called ‘Transfer of Technology’ has never resulted in any provision of core technology other than basic manufacturing and maintenance documents. To be truly self-sufficient in this critical sector, we need to Create, Innovate, Design, and Manufacture in India through indigenous R&D.

Any entrepreneur desiring to design and manufacture for the A&D sector faces many challenges. These are:

Internal:

Lack of specialised domain knowledge and awareness of the stringent quality standards and military This is a result of the historical confinement of the domain within DPSUs for the last six decades with no access to the private sector.
Capability to design equipment to overcome harsh conditions imposed by extremes of temperature, humidity, altitude, vibrations, corrosive atmosphere, etc.
Competence to engage in technical discussions with certification authorities.
Multi-disciplinary domain knowledge that is essential for holistic design and manufacture.

External

Delays in all processes up to several years for even a small project. Tender bids are required to be valid for at least six months and often for 12 months.
Small volumes leading to problems in sourcing specialised components at competitive prices.
Uncertainty about future production orders for an indigenisation product.
Availability of trained workforce

While the responsibility to develop competency in the domain rests with the entrepreneur, the external challenges above are detailed as follows:

RFQ and tender stage:

One of the greatest challenges relates to lack of ownership and decision making in the DPSUs and the Armed Services. It often takes two years for a requirement to mature to an RFQ, even for ‘critically required’ LRUs, sub-assemblies and spare parts. The subsequent process of tender evaluation, price negotiation and order release takes at least 6 months. In many cases, orders are not released even after the L1 vendor has attended price negotiation meetings. These are highly demotivating to an entrepreneur. In most cases, technical specifications of the OEM equipment are not even available with the tendering agency and the RFQ states ‘Generation of technical specifications is a part of the indigenisation process’. If this is so, how does a bidder specify what he would deliver and how does the tendering agency evaluate the bid?

Small volumes

In most cases, annual quantities of specialised parts and equipment are in single digits. This makes purchase of specialised, military grade raw materials and components very difficult. These include even screws, nuts, washers, consumables, etc., that are used on airborne equipment. This imposes either very high costs on a small quantity, or a large inventory of unused materials.

Qualification Testing

Before the indigenised unit can be integrated into a military platform, it needs to be qualified by subjecting it to stringent life-cycle tests. This includes expensive EMI/EMC and Environmental testing that is only carried out in a few specially equipped laboratories. These tests can by themselves cost anywhere from Rs.6 to 10 lakhs.
Qualification tests are to be conducted in Govt. approved test agencies. While large corporates are able to afford investments in expensive test facilities within their organisation, MSMEs find it unaffordable. MSMEs therefore have to rely on external service providers such as DRDO or DPSUs. Time slots at such external agencies are very difficult to obtain for a private company. This hurts the progress of the projects leading to cost escalation. Reputed test houses in the private sector are far more expensive than govt. controlled agencies.

Serial Production

There have been many instances where no production orders have been placed after indigenous development of even a ‘critically required’ item that has been designed, tested and qualified by a vendor. This is a complete let down and one of the demotivators for design entrepreneurs to enter this sector.

Funding and cash flow

Funding for long gestation A&D development projects is just not available. Indian banks and funding agencies do not appreciate the value of research, design and development. While the present Indian Govt. has proposed to set up a Defence R&D Fund for MSMEs, the modalities of making this available to genuine entrepreneurs is yet to be formalised.

Availability of trained workforce

Trained workforce, especially design engineers, are simply not available due to disconnect between industry and the academia. This is even more severe in the specialised A&D sector.

Conclusions & Suggestions:

DRDO and DPSUs should facilitate domain specific knowledge sharing with A&D MSMEs to empower them to appreciate the intricacies and challenges of indigenous development.
Funding mechanisms for long gestation D&D projects need to be created on priority since this involves self-reliance in defence and aerospace. One method could be the award of rating points (similar to credit rating by CIBIL), proportional to the value of A&D related orders successfully executed by an MSME. The accumulation of points would indicate the maturity and capability of the vendor. These could be accumulated and monetised for obtaining special financing from Public Sector Banks, as well as for proportional reduction of monetary Performance Guarantees to the customers.
Establishment of virtual clusters of MSMEs linked to larger private companies or DPSUs/DRDO will result in an organised growth of MSMEs with specialised aerospace domain knowledge that can ultimately lead to complete indigenous equipment and systems development capability over time.
The same ecosystem can then be leveraged by the educational institutions for teaching as well as training the graduates in the field of A&D, within industries on live projects. Engineering colleges today teach the aeronautical subjects without even a physical contact with a live aircraft or engine.
Materials Bank to be established for easy availability of commonly used military grade raw materials and standard parts for MSMEs.
Establishing testing labs by the Government, exclusively for use by private MSMEs or by directing a priority allotment of time slots at govt. labs.
Excise duties, Service Tax and VAT (GST) should be exempted for all related inputs as well as the final product/services. It does not make any sense for duties and taxes to be paid from one Govt. account to another through the intermediary private vendor who has to also deal with the cash flow issue.

There is no dearth of technology and competencies among Indian private sector industries in undertaking challenging indigenisation projects. All they need is a friendly and supportive induction into the sector.

The original article appeared in the Defexpo 2016 Show Daily of Geopolitics Magazine on March 30, 2016.

New Defence Procurement Policy results in dynamic changes

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In an attempt to streamline defence acquisition and give a boost to the “Make in India” initiative, the government on Monday approved changes to the Defence Procurement Procedure (DPP). This will give Indian private companies a chance to locally produce equipment and invest in research and development (R&D).

At a meeting chaired by Defence Minister Manohar Parrikar on Monday evening, the Defence Acquisition Council (DAC), which is the supreme decision-making body for the Ministry of Defence, allowed changes to the DPP after a one-year review, The Tribune said.

“Recommendations of the expert committee headed by former Home Secretary Dhirendra Singh were considered and most of them were approved,” Parrikar was quoted as saying by The Hindu.

As per the changes, the procurement policy of 2016 will have a new category — an Indigenously Designed, Developed and Manufactured (IDDM) platform. Under this category, if the design is indigenous, it will be mandatory to have 40% local content, but if the design is not local, 60% content will be mandatory.

Another major change to the DPP is “small and medium-scale industries will get opportunities,” Parrikar said. However, two issues have to be addressed: “The method of blacklisting for firms” and the “requirements for guidelines to select the correct strategic partner for producing equipment in India”. The DPP offsets limit has been increased from Rs 300 crore to Rs 2,000 crore, The Tribune report said.

“Issue of Offsets is actually irrelevant since this was not working in any case. As I have been saying all along, Offsets even for projects in excess if 2000 crores will be of no use from a defense technology point of view,” said G Raj Narayan, Founder & Md of Radel Group.

India is currently the largest buyer of military equipment and weaponary, which accounts for 15% of all international imports, Stockholm International Peace Research Institute, a Sweden-based think tank said.

The original article appeared on IBTimes.

Another Chairman of HAL talks

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HAL seems to have finally realized that it needs to be a final integrator after all! Or has it?

(http://m.thehindu.com/news/national/hal-seeks-to-lighten-light-combat-aircraft-burden/article7617119.ece) It now wants to offload major parts of the airframe to the large private players. We can now see the ‘biggies’ trooping to HAL to have a bite of the various platforms that HAL has been struggling to deliver to its reluctant customers.

How sincere is HAL when it makes such statements? I say this because this same intent has been repeated over the years ad nauseum without any action on the ground:

2002: www.thehindu.com/thehindu/2002/06/13/…/2002061301830400.htm

2003: www.thehindubusinessline.com/2003/02/12/…/2003021201020200.htm

2005 August: www.thehindubusinessline.com/todays-paper/tp-logistics/outsourcing-bonanza-in-aviation-hal-alone-sets-rs-600crore-business-for-private-sector/article2185343.ece

2005 October: www.thehindubusinessline.com/…/hal…outsourcing/article2193883.ece

If anybody thinks that this would make an impact on the Indian military aerospace sector, they are going to be sadly disappointed once again. All that this would achieve is to allow the large private players to put in place a certified system of producing airworthy structures, besides churning out riveted airframes and that too out of jigs and fixtures to be transferred to them by HAL. What nobody seems to notice is that a large part of a flying platform comprises its accessories and systems, including the most important power plant (engine), that really determines the flying as well as fighting capability of that aircraft. Onboard systems constitute about 25% of the acquisition cost of a military aircraft and along with the power plant, they account for 50% of the total cost. These also need maintenance and upgrades over the long operating lifecycle of at least 35 years. Considering that such systems can be tailored and modified to suit multiple aircraft, this constitutes the core of the aerospace industry. So, isn’t it silly that we are still talking only of manufacturing the shell and nothing about indigenous development and manufacture of all airborne systems such as avionics, electrical, hydraulics, pneumatics, air-conditioning and pressurization, cockpit instruments, weapons control, etc?

The Lucknow division of HAL was established out of the need for self-reliance in the development of accessories and systems. It has miserably failed to meet its mandate and hence this is where a multi-billion dollar opportunity exists for a large number of MSMEs alone. They can do wonders if pool their knowledge base, collaborate and synergize with each other and HAL can benefit by this too. This could lead to the creation of multiple consortia across the country each of which could be a potential exporter over time.

It is interesting that the CMD, HAL has talked of hand-holding. Let us look at their past track record. Five years ago, two divisions of HAL (Nasik and Lucknow) cancelled their outsourced manufacturing orders to a small private company stating that the labour unions had objected to outsourcing of work to the private sector. This was after going through a whole process of tendering, L1, price negotiation, and release of formal Purchase Orders. Is the CMD of HAL now sure that this will not happen again? Or, would the divisions now go to the unions to plead with them?

Talking of the 2600 SMEs that are supposed to be supplying parts to HAL, has anybody wondered what quantum of business each of these SMEs derive from HAL? If they are only manufacturing bolts and nuts, they could certainly graduate to aggregators by putting them together into a bracket or sub-assembly. That’s not what the SMEs would like to aim at. This precisely has been the problem with HAL. They never seem to be able to recognize the huge potential that lies untapped among the many competent and highly capable MSMEs of this country. Had HAL encouraged and facilitated the formation of clusters of MSMEs two decades ago, these would by now have graduated to system integrators, with each cluster delivering a communication or navigation or hydraulic system.

Why has HAL done nothing to support and encourage the existing MSMEs, many of whom are CEMILAC certified, who have already demonstrated their capabilities by manufacturing complete airborne equipment? Why does HAL not realise that creating such an ecosystem would be a force multiplier?

An Inclusive Approach to Defence Indigenisaton

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The problem of either DRDO or a DPSU not delivering results as desired by the Armed Services is analogous to the lack of industry-academia interactions. Just as the engineering educational institutions are detached from practical engineering concepts as relevant to an industry, the DRDO/DPSU is also detached from the User agency. Both sides possess complementary parts of the total domain expertise, which means that they need to work as partners and not ‘buyer-seller’. Each side has to learn from the other through a continuous process of interactions and exchange of ideas. While this must surely have been the purpose behind posting serving officers to DPSUs, personality egos on both sides have prevented a healthy working partnership. As examples, I have known of scientists/engineers working on aircraft projects in CSIR/DRDO without even having seen an aircraft at close quarters. I am quite sure this is true even with many Naval projects. This hypothesis is also proven by the comments of some naval experts who have pointed to the successes of the Navy when Naval officers with the ‘best brains ‘ were sent on deputation to DRDO. I would say that the ‘best brains’ understood the system level performance requirements better than the scientists and ensured that these were met through a continuous interaction with the scientists who were able to apply their ‘best brains’ at the sub-system level.

The private sector is being promoted as a likely saviour for all the current problems. While it is certainly true that this sector is more accountable and keen to prove its mettle, the lack of domain expertise even to the level of the DRDO/HAL is by itself likely to be a severe limitation. The private sector will therefore have to be supported and nurtured through an active assistance from the Navy/Air Force in upgrading their knowledge in specialised domains of defence equipment, be it armaments or navigation or communication or radars, none of which is encountered in commercial and industrial applications. This will once again have to be a hierarchical approach with a large private player creating a cluster of MSMEs as a supply chain with design and manufacturing skills.

The Armed Services need to appreciate that many of the technical officers among them are not conversant with the technologies adopted within the systems and sub-systems of the platform, beyond the scanty maintenance documentation provided by the foreign OEMs. This is where the availability of strong technical and analytical skills available with the ‘best brains’ in the DPSU/HAL/Private sector can be taken advantage of. The existence of highly innovative and competent MSMEs in their own spheres of specialisation is acknowledged widely, but these rarely get to be tapped due to a disconnect between industry and the Armed Services. This is where the Armed Services need to draw on the strengths of industry. It might be interesting to set up defence laboratories by, for example, the Navy, where a private sector player could work for a limited period (like a sabbatical) to familiarise themselves with the on-board systems and even acquire technology through study or reverse-engineering of existing systems.

To conclude, a spirit of partnership needs to be nurtured among all the stakeholders in this whole game so that we achieve synergy leading to a win-win situation rather than a blame game.