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Make in India and 100% FDI in Defence: a double-edged sword?

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The ‘Make In India’ slogan announced by a refreshingly new and agile PM of our country two years ago was lapped up by many Indian enterprises that were starved of economic activity. It was almost like a mouth-watering feast of desserts being brought to a buffet table with a million hungry people waiting for a meal. Then came the pronouncement of encouragement to indigenously manufactured equipment, platforms and arms for the Indian defence forces already starved from lack of capital acquisitions from foreign companies for over a decade. Next came the DPP2016 with the inclusion of a special category ‘IDDM’ to pronounce that Indian Designed, Developed and Manufactured items would get the highest priority in the defense procurement process. This was the cherry topping the dessert!

And now comes the announcement of 100% FDI in A&D, closely followed by the American offer of shifting the F-16 production line to India. So, is this the final serving of the customary ‘Paan beeda’ or is it a hangman’s noose after the last fulfilling meal for the Indian industry?!

I must have attended at least ten defense related conferences and seminars across the country in the last 12 months. In every one of them, one fact that came through very clearly was the mirage of Transfer of Technology from foreign OEMs. Senior representatives of the Armed Services, the DRDO and DPSUs, openly conceded that no ToT of any value was ever achieved over the last five decades. It was almost unanimously agreed that the only way towards military self-reliance was through indigenous R&D, design, manufacturing and lifecycle support. Everyone pointed to the success of ISRO in the face of sanctions and denials and how this could be achieved in other spheres of defense preparedness. It is therefore worthwhile exploring various scenarios that could emerge from the allowance of 100% FDI in A&D.

First of all, it needs to be appreciated that A&D industries operate with low volumes with production often taken up in batches. Hence, the employment potential is certainly limited compared to consumer/industrial product industries. When it comes to production of military platforms themselves (aircraft, helicopters, tanks, armoured vehicles, etc.), only 10 to 15 of these are made in a year. Almost all the systems and sub-systems are outsourced to a global supply chain that comprises specialized competences. Hence, even if a foreign platform manufacturer sets up an Indian operation, he would still import the systems and parts from his global supply chain. It is worth noting here that the systems and equipment constitute more than 70% of the lifecycle costs of the platform. Further, it is the systems that undergo periodic upgrades which are supplied by the OEMs. Hence, there is not much to be gained by the mere fabrication of the outer shell of an aircraft or tank if the expensive systems are also not manufactured in India. For this to happen, we need to create the complete ecosystem of Tier-1, Tier-2 and Tier-3 supply chain of Indian companies and these are far more important than the Integrator company. In the absence of such a holistic approach, we would only help foreign OEMs in increasing their participation in Indian defense procurements. This would go completely against the goal of ‘Self-reliance’.
It is seen that foreign OEMs who establish their Indian subsidiaries very often assemble their products using CKD kits imported from abroad. Since the imported parts and assemblies are produced on a global production scale, they would cost relatively lower than being manufactured here in smaller volumes. However, they are still marked as ‘manufactured in India’ just as Korean and Taiwanese consumer products assembled in India. Further, since this only involves screw-driver technology, there can be no benefit of either exposure or value addition to Indian employees. On the other hand, with no design and development costs to be incurred, these products can be priced lower than what Indian companies can deliver, thus killing Indian R&D and design organisations, including DRDO and DPSUs.
With long lifecycles of 40 years, all military platforms go through at least a couple of systems upgrades. If the foreign OEMs are included in the IDDM category just on the basis of their manufacturing plant located in India fulfilling the stipulated 60% indigenous content clause, then all the upgrades will have to automatically go to them with no participation of either genuine Indian owned companies or individuals. This is again a lost opportunity for Indian defense enterprises. This would ultimately lead to the demise of even the few Indian enterprises that have already shown signs of meeting the challenge of IDDM.
Almost all spare parts of platforms and equipment are now being imported from the OEMs abroad. Without a strong drive towards indigenization of all parts and systems, more and more spares will be continued to be obtained from abroad, channelized through the Indian subsidiaries with a ‘Made in India’ label. This serves neither the hunger for technology nor exposure to manufacturing.
In the unlikely event of a foreign OEM willing to manufacture a major chunk of equipment, systems and assemblies in its Indian factory and using them for meeting Indian defence requirements as well as exporting them back to the parent country, this would most likely involve use of automated machines and processes with little employment potential. While a small number of operators and technicians would find employment opportunities, they could gain some insights into modern manufacturing technologies. However, to interpret the nuances of such processes and technologies, leading to improvement of Indian design and development capabilities, it would need a more holistic exposure with smart and competent engineers involved in the operations. Would the foreign OEM do this?

Finally, coming to the offer of Lockheed Martin to shift their manufacturing plant of the F-16 fighter aircraft to India, it is a well-known fact that the F-16 was first manufactured for the USAF forty years ago in 1976 with subsequent versions being supplied to various NATO countries. The manufacturing plant is already planned for closure and so it is evident that the company is offering to relocate a scrapped and obsolete plant to India. This once again confirms what we get from foreign OEMs!

In the final analysis, does 100% FDI sound like a double edged sword or a dagger used for ‘hara kiri’?

Defence Procurement Procedure’s new avatar inspiring; some players seek more tweaking

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The much-awaited changes to India’s Defence Procurement Procedure (DPP) were announced last month. This was in line with the promise made by Defence Minister Manohar Parrikar, after he took over the reins of Ministry of Defence in November 2014. The new look DPP, set to take shape in the next two months, gives major impetus to the Narendra Modi government’s flagship Make in India mission. It has some inspiring elements to boost Indian private companies to undertake research and development in the aerospace and defence (A&D) sector.

One India elicited the views of some of the private A&D players to capture the mood of the industry, which has always felt that enough is not being done to win their hearts. Here are the excerpts from a series of interviews we did recently. Offset mechanism not working in interest of country G Raj Narayan, Managing Director of Radel Advanced Technology (P) Ltd, has been a visible voice in the last couple of years in various A&D forums. He says it was clear from the beginning that the offsets mechanism wasn’t working to the interests of India. “The insistence of the foreign OEMs to dilute the same on the pretext of ‘not finding capable Indian partners’ was only an indirect method of preventing any exposure to Indian companies on related technologies. The only way to improve our state of self-sufficiency is to develop R&D in-house and design from whatever technologies we are presently exposed to (LCA, Jaguar & Mirage), and then move upwards to higher levels indigenously,” says Raj. According to him, the raising of the offset applicability to acquisitions of Rs 2000 crore and above is irrelevant. “The higher preference to ‘indigenously designed, developed and manufactured’ items certainly makes more meaning than the vague ‘Make’ and ‘Make & Buy’ categories. This is a confirmation of the preference for Indian products which needs to be applauded. Further, the focus on enabling and empowering R&D as well as supporting MSMEs through funding is a huge step forward. Though this could still throw up problems in distinguishing between ‘mature and capable’ MSMEs and ‘raw’ MSMEs, proper processes could certainly be set up to ensure that the right company get the right amount of funding appropriate with its track record and status,” Raj added. Radel’s ongoing projects for various military programmes include, auto-selector bomb release system, speed switch, anti-collision lights, cockpit control unit and ground test rigs of various aircraft and helicopters. Introduction of IDDM a good move Puneet Kaura, MD and CEO, Samtel Avionics, says that the introduction of a new category — Indigenous Design Development Manufacturing (IDDM) – is a welcome move. “We welcome the move to introduce the IDDM category in the DPP as it will back companies like us who have proven competencies in indigenous design, development and manufacturing. Furthermore, the announcement of funding by the government for R&D purposes will help build a technology base in the country,” says Puneet, among the early players in the A&D sector. He said the growth of the Indian defence industry has been marred by delays. “The new DPP addresses this through a definitive step to cut down the delays in procurement by reducing the time lag between AoN (acceptance of necessity) and the tender or request for proposal (RFP),” says Puneet. Samtel through its joint venture with HAL, has been developing MFDs for Su-30 MKI within its facility in Greater Noida. The Samtel-HAL JV has already delivered 125 sets of MFDs for Su-30 MKIs. Will boost investments and better quality of products According to Rajeev Kaul, MD & Group CFO, Aequs, told One India that that take on LI policy in the new-look DPP is a positive step. “L1 policy is a bold move and it credits the capability of the bidder. This would encourage quality consciousness and boost investments in better quality products,” says Rajeev. Aequs has been supplying main landing gear shackle for the B787 programme. Aequs manufacturing facilities are located in Belagavi, Bengaluru, and Houston. Offset limit should be brought back to Rs 300 crore Col H.S. Shankar (Retd), CMD, Alpha Design Technologies Pvt Ltd, feels that increasing the offset applicability limit is a retrograde step and will deny Indian industry, particularly MSMEs, large chunk of their work content. “It is our view that offsets (with Rs 300 00 crore and above limit) was working satisfactorily (except for few glitches at MoD) and benefiting Indian Industries enormously. This will be a big blow to Indian industries. The limit should be reviewed and brought back to Rs 300 crore. He said the MSMEs/FICCI had listed many suggestions to the DPP Review Committee, but they were not accepted. “We wanted the ‘Make’ category to be split into two categories: ‘Make’ large industries with higher limits and ‘Make’ MSMEs with a limit of funding up to Rs 500 crore per project,” says Col Shankar. Commenting on the ‘strategic partners,’ the veteran A&D expert felt that it was a retrograde move of brining in ‘public sector mentality’ into private sector by reserving few big players in private sector. “This is a back door entry for big private sectors – something which Kelkar Committee had recommended as ‘Udyog Ratnas’ in 2016 and rejected and not implemented by successive governments,” says Col Shankar. MSME categorisation limits for A&D products must go up Naresh Palta, CEO (Aerospace), Maini Group, said the government funding of 90 per cent for indigenous R&D will spur domestic products and technologies. He also felt that ‘accepting offers in single tender cases’ would remove major hurdles for industries developing niche products. However, Palta felt that the DPP’s new avatar is silent on measures for SME segment. “We want the new policy to increase MSME categorisation limits up to Rs 150 crore for A&D projects specifically. Further taxation relief to Indian products vis-à-vis imports, for level playing. We are still unable to compete our products in the domestic requirements with imported ones due to higher duties and taxation incident,” says Palta.

The original article appeared on One India

Time to lift MSMEs from ‘garage-type’ operations in defence

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Medium, small and micro enterprises (MSMEs) in the defence and aerospace sector can be ‘game changers’ by contributing their bit to the Prime Minister’s ‘Make in India’ call, but fear they may end up in ‘garage-type operations’ if the required support is not extended.With modern technology in their hands and an instant connect with global trends, what MSMEs need most is credit support and hand-holding by bigger players in the sector.

“There are immense capabilities in MSMEs in aerospace and defence, but they are restricted to being vendors for low value-added services”.

One way to tap into the huge talent pool could be to have special classification of “defence MSMEs’, with special funding and support mechanisms, such as exclusive clusters tied to bigger players in the sector, such as PSUs and the Tata’s.

What has raised hopes among MSMEs in the sector is the ₹100-crore technology fund announced by Prime Minister Narendra Modi. The feeling we get is that a part of this fund will be apportioned to critical projects that involve technology, indigenisation. Also, about a 75 per cent grant for design development… if that happens, it will be great news.

“If India is serious about being self-reliant in defence production, it needs to nurture and offer an enabling ecosystem to MSMEs,” unless this is done, India may have to face “crippling effects’ of over-reliance on imports, which often leads to buying outdated foreign technology.

“In the so-called technology transfers that happen, they only give drawings, no design. And most often, the technology that is given is outdated, at least two generations down, and they make a couple of billion dollars,”

India needs to develop technology on its own. It has the expertise and knowledge, all it needs is mapping of MSMEs in the defence sector and offer credit support.

Armouring India: Indigenisation of India’s Defence needs

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A look at the feasibility of complete indigenisation of India’s defence needs

India is the largest importer of defence equipment in the world. It is therefore evident that the domestic industry is not being optimally utilized to meet the country’s defence requirement. Currently, the domestic defence production is met by 41 factories of the Ordnance Factory Board (OFB) and nine Defence Public Sector undertakings (DPSUs) under Department of Defence Production with various units across the country. In addition to this 194 industrial licenses have been issued to 121 private sector companies.

The buzzword today is indigenisation but this is more a fashionable word than work-in-progress. While we jump on to the bandwagon of indigenisation let us truly understand the concept. Indigenisation starts with identifying critical equipment and systems that are being imported”, and then to either reverse engineer these products or design them from scratch using our own knowledge and expertise.

Over the last five decades, the Indian Government has been pursuing the acquisition of new technologies as part of manufacturing licenses from foreign companies. While this has resulted in valuable exposure to the manufacture of state-of-the-art products, as in the case of the Mig-21 and Su-30, Transfer of Technologies (ToTs) have rarely included design technologies of the manufactured product. What is transferred is only the manufacturing technology. It is therefore up to the Indian partner to either reverse engineer or decipher the technology behind the design in order to lead to future indigenous designs.

Technology to manufacture is distinctly different from the technology involved in design. Manufacturing of various parts and systems involves mechanical fabrication and machining, assembly of electronic modules and equipment, testing and qualifying to rigid and stringent quality standards. Very few industries in the private sector have exposures to such specialised standards and processes as are applicable in defence equipment. Hence, the need of the hour is to attract more private sector enterprises, more particularly the MSMEs, to this field.
With the competitive growth of the Indian MSME environment, many of whom have highly sophisticated machineries and equipment, and possess specialised expertise in their own small areas of operation, there are many examples of truly outstanding firms who are now manufacturing industrial parts and equipment not only for Indian consumption, but also exporting them to prestigious companies globally.

The technical competence of Indian MSMEs is therefore no longer under question. What is required is a nurturing environment of trust and support going much beyond the token recognition by way of annual awards by the government or trade and commerce bodies.

Tweet this: “MSMEs need only to be empowered with the right kind of exposure and training to raise their capabilities to the demanding and specialised needs of the defence industry”.

Such MSMEs will then graduate over time to developing their own products and processes that would contribute to the creation of a large matrix forming the supply chain for indigenous integrators such as the Jaguar aircraft. PSUs or even the large private sector organisations in the years to come.

The question of value arising from foreign collaborations and ‘manufacturing under license’ can be answered in comparison to the automobile sector in India. The entry of Suzuki and Honda into the country for license manufacture of their vehicles in a collaborative venture with Indian private companies, introduced not only the Indian consumer to high quality, state-of-the-art, re-liable and trouble-free vehicles, but also to modem manufacturing methods, machineries, human skills and management systems. The Indian private sector companies have proven their mettle in absorbing not only the manufacturing technology but also in developing their own design skills.Thus, resulting in their ability to leap-frog and compete by themselves in the global market. Indirectly, this has also spurred the establishment of a supply chain of ancillaries and parts manufacturers of global standards. Thanks to this, a healthy ecosystem of the indigenous automobile industry is firmly in place. This is what needs to be replicated in the defence sector too.India is, and will continue to be, an attractive market for defence related sales for foreign manufacturers.

However, it is certain that no other country would be willing to transfer critical, cutting edge technology to India, with the risk of losing their de-fence superiority as well as financial returns. The solution clearly lies in factoring in all these aspects, and pooling of all resources and the best minds in the military, the public sector, the private sector, the academia and R&D organisations across the country in a strategically planned and executed partnership. The political leadership only needs to set the rules of the game and a level playing field in a transparent system.

Tweet this: “Innovation and indigenisation are literally two sides of the same coin. Innovation is triggered automatically when one is forced into a corner”.

This was amply proved by both DRDO and ISRO in the manner they overcame sanctions and denials of technology and critical parts for their projects. This should give us the confidence that the same can be replicated in other de-fence and aerospace projects.
The MoD, Government of India, should act as a facilitator and enabler in such a way that it stimulates innovation in both design and manufacture of defence related products. In fact, the establishment of a separate category of “Defence MSME” through a qualification and evaluation process would by itself lead to their entitlement to financial grants, tax rebates and lower lending rates for private players successfully developing indigenous defence projects.

This calls for innovative methods of identifying prospective enterprises, evaluation of their skills as well as growth capabilities, special and exclusive funding schemes, training programmes and other support for rapid growth of such enterprises. In short, such companies need to be nurtured in the interest of the country quickly achieving self-reliance.

Tweet this: “Indigenisation and self-reliance in defence technology is no cakewalk and requires dedicated scientists, technocrats and entrepreneurs”.

The user agencies and armed forces need to appreciate this and lend a very supportive hand even when either the performance is slightly below target or delays are encountered.After all, no organisation takes any pride in failures and would certainly like to take up the challenge to improve further and cross the ‘finishing line’. As India has demonstrated in the automobile sector and space technology, Indian defence industry can not only increase the scale of its operation to cater to the domestic requirement but also export to the global market. The export of the ALH Dhruv helicopters, though limited in number, proves this capability.

The new Government headed by a down-to-earth and highly progressive Prime Minister, Narendra Modi, has shown signs of a few bold initiatives, that have set a clear direction towards massive indigenisation of defence procurements in the years to come. Public-private partnerships should be the best way for-ward to reach a win-win situation for everyone concerned. This will pave the way for the best talent to be attracted towards this industry consequently leading to industry meeting most of the needs of our defence forces.

Indigenisation – the only way forward

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The success of the indigenously developed Mars Orbiter Mission of ISRO has taken everyone by surprise, more so because it was achieved at a tenth of the cost of similar projects abroad. The fact that India is the only country to have achieved success in its maiden attempt at Mars, makes this even more creditable. Do these facts not provide enough proof of the technical competence of our engineers and scientists? If one concedes this fact, it is evident that we also have the capability to design and produce our own state of the art military equipment and aircraft.

“While a problem in a space program only causes a disappointing delay, the same in the defence sector could become a critical factor in the security of the country”.

A commonly attributed reason to the low cost of the Mars mission is that Indian manpower is far less expensive than in many other countries. However, a lesser known fact contributing to the success is that many sub-assemblies and parts were outsourced to private companies, including MSMEs. This resulted in a synergy that saved time, money and effort.

However, the difference between space projects and defence equipment is that the latter are strategic and crucial. Any problem in the smallest part – either lack of supply or problem in performance, becomes critical. While a problem in a space program only causes a disappointing delay, the same in the defence sector could become a critical factor in the security of the country. This is why indigenisation forms the core of establishing a strong and reliable military capability to counter any threat.

What is indigenisation? The capability to design, develop and manufacture equipment within the country, using our own skills and resources, constitutes indigenisation. The capability to maintain and repair these, as well as equipment sourced from abroad, makes us self-reliant. Not depending on foreign suppliers for anything, makes us self-sufficient.

Since we attained independence, we have depended on foreign suppliers for our defence requirements. Irrespective of West or East, we have suffered due to supplier pressures – denial of spares for political reasons, high cost of spares, delays and lack of transparency in technology transfer, etc. By not taking proactive steps toward indigenisation in the early years, by constantly ignoring the warning signs of equipment repeatedly failing over many years, we have reached an alarming situation today where the armed forces are left with obsolete and failure-prone equipment.

“By not taking proactive steps toward indigenisation in the early years, by constantly ignoring the warning signs of equipment repeatedly failing over many years, we have reached an alarming situation today where the armed forces are left with obsolete and failure-prone equipment”.

A combination of factors is responsible for this situation – the manufacturer (the PSUs in this case) developed aircraft, battle tanks, etc. with the limited technology at their disposal. However, the armed forces had a mistaken perception that ‘only the best with the latest technology’ would be good enough to effectively thwart the enemy (in spite of the lowly Gnat fighter aircraft comprehensively defeating the so-called ‘superior’ Sabre jets and Star fighter in the 1965 and 1971 wars). They were unwilling to accept the indigenously developed products. This in turn led to a stand-off and ultimately a de-motivation of the industry.

On the other hand, the industry too, did not put in sufficient efforts to assimilate technology from licensed projects and leap-frog to the contemporary state of the art. For example, the MiG-21 aircraft, that was manufactured under license from the USSR since the mid-60 did not lead to either sufficient transfer or assimilation of technology of its systems and sub-systems. HAL continued to import and use a large number of sub-systems and parts over decades without any efforts at indigenisation or reverse-engineering. In another case, significant disruptions were caused in the maintenance of the AN-32 aircraft due to the break-up of the Soviet Union. This could have been avoided if indigenisation of the majority of parts, sub-systems and equipment of these aircraft were initiated simultaneously with the induction of the aircraft into the air force. Such indigenisation efforts would also ensure a sizeable quantum of business to the local industry over the entire life-cycle of the aircraft and ensure timely support especially at the end of life.

The PSUs and armed services are still sending many equipment and their sub-systems to the OEMs abroad for repairs, incurring huge cost in foreign exchange. A viable alternative would be to encourage qualified MSMEs to undertake such repairs. This would provide an opportunity to the Indian industry to familiarize itself with the technology as well as find innovative, cost-effective and indigenous solutions. Radel Advanced Technology, Bangalore, has already demonstrated the feasibility of this model by repairing some of the electronic modules used on the Jaguar aircraft. The process of undertaking repairs also provides a very effective stepping stone for indigenous design and development of products.

“…lack of clarity in the rules and implementation of offset guidelines have been impediments in the successful establishment of offset partnerships”.

The Kelkar Committee on review of Defence Procurement Procedure has recommended an integrated approach involving Users, Ministry of Defence and the Industry. The Committee recommended that DRDO should concentrate on projects requiring sophisticated technology of strategic, complex and security-sensitive nature. However, R&D for high technology that is not security-sensitive, should be outsourced to private sector with shared cost. Further, a minimum order quantity is also recommended, to sustain the financial viability of the development effort.

The defense offsets policy of the GoI, where a foreign vendor has to mandatorily procure 30% of his order value from Indian sources, is expected to provide an opportunity for indigenization of parts and assemblies. However, lack of clarity in the rules and implementation of offset guidelines have been impediments in the successful establishment of offset partnerships. The Government needs to act quickly to address this issue.

Combinations of all these measures are required for the successful implementation of indigenization programmes across the defense sector, which are well within the reach of Indian industry.

The original article appeared on IndianDefenceReview