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Foreign companies find it tough to comply with local sourcing rules

Foreign companies find it tough to comply with local sourcing rules
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First Published: Wed, Feb 11 2009. 01 15 AM IST

Aerial view: An AS 550 built by Eurocopter, one of the bidders for the supply of 197 light helicopters to the Indian Army.
Aerial view: An AS 550 built by Eurocopter, one of the bidders for the supply of 197 light helicopters to the Indian Army.
Updated: Tue, Mar 17 2009. 10 50 AM IST
Bangalore: In November, Bell Helicopter Textron Inc. backed out from a bid to supply 197 light helicopters to the Indian Army. The company said it was unsure if it could source aerospace components and services worth nearly half the deal value (nearly $1 billion, or around Rs4,870 crore now) from local firms, as the Union government required it to.
Aerial view: An AS 550 built by Eurocopter, one of the bidders for the supply of 197 light helicopters to the Indian Army.
Bell had earlier forced the government to float a fresh bid for the 197 helicopters after being edged out by Eurocopter, a unit of European Aeronautic, Defence and Space Co., or EADS, in a previous tender.
Bell said the purchase rules that require the bidders to comply with the so-called offset requirements to source local aerospace goods worth up to 50% of the order value seemed tougher than competition from the four additional competitors in the new bid.
Bell found that except for military plane manufacturer Hindustan Aeronautics Ltd, or HAL, the local industry was too young and would struggle to supply goods and services worth nearly $500 million in seven years—the timeline for the 197 choppers to be delivered to the army once the contract is awarded.
Besides the supply of these choppers to replace the ageing Cheetah and Chetak fleet of the army, the vendor would have to set up a repair hub in India, stock spares and maintain the choppers for their lifetime of at least 25 years.
“The volume is very big; to identify vendors, get components and systems manufactured in India and complete it by 2016. They felt it was too tight,” said a person familiar with the decision at Bell, who didn’t want to be named citing company policy. A Bell spokesman in the US, Greg Hubbard, did not respond to emails or phone calls.
According to a study by the Associated Chambers of Commerce and Industry of India, or Assocham, a lobby of trade associations, India—the world’s third largest arms importer in terms of spending—will buy military hardware and software worth $30 billion by 2012, a majority of it foreign-made, as its Armed Forces buy multi-role fighter jets, artillery guns, a variety of helicopters and long-range maritime spy aircraft.
With the aim of building a local aerospace and defence industry and reducing future imports, India in 2005 framed the offset policy that mandates foreign contractors source components and systems from local vendors for at least 30% of the value of orders of at least Rs300 crore that they get from the Indian military.
In the helicopter contract and another one for 126 fighter planes, for which the tenders are being processed, the value of offsets could go up to 50%.
Assocham estimates that by 2012, Indian companies would get offsets worth at least $10 billion.
So far, just Rs253 crore worth of offsets have been awarded to Larsen and Toubro Ltd (L&T) and Astra Microwave Products Ltd by Israel-based ELTA Systems Ltd against supply of microwave wireless sub-systems for India’s defence radar programme.
This estimate excludes the nearly $2.4 billion in offsets that come to Indian firms from Boeing Co. and Airbus SAS for the passenger planes they sold to state-run National Aviation Co. of India Ltd, or Nacil, which runs Air India.
Boeing has committed to sourcing $1 billion worth of goods in 10 years from HAL, besides planning a repair facility for Air India in Nagpur.
Airbus has awarded HAL a Rs340 crore deal to buy around 1,000 doors for its A340 planes, besides committing to source more doors from the Indian plane manufacturer.
“In engineering services, India needs to have a solid story in the next five years. The window of opportunity needs to be seized now, it has good preconditions,” said Roger Moser, a visiting professor at the EADS-Supply Management Institute endowed chair for sourcing and supply management at the Indian Institute of Management, Bangalore.
“(For) manufacturing, it will take at least 10 years to develop maturity,” Moser said.
Cades Digitech Pvt. Ltd, an engineering services firm that serves customers such as Airbus and Boeing, realized this shortcoming after it failed to find a local partner to produce cargo doors it had designed for the A350, Airbus’ next-generation passenger plane.
Finally, the contract to make around 800 doors went to Korean Airlines Co. Ltd. “We could not get the manufacturing partner here. We are a long way (away from building) competency and infrastructure for manufacturing large products over a longer period,” said Dataram Mishra, chief executive of Cades.
The nearly seven-decade-old HAL, which employs around 35,000 people in 19 factories and nine design centres, makes most of the components and systems to produce aircraft in-house.
The firm, which has been the licenced manufacturer of Russian-made MiG and Sukhoi-30 MkI as well as the UK-made Jaguar jets, has designed and built a few home-grown helicopters and planes. It has an order book of Rs60,000 crore and needs to build at least 350 planes and helicopters by 2012.
So far, its attempt to get the private sector to participate in a big way has had little success.
“The private sector has to do a lot more in equipment, infrastructure and training,” said Ashok Baweja, chairman, HAL.
Still, some say that with a strong local auto and auto components industry, India has the potential to be a hub for aerospace components and systems. But unlike the large volumes that automobile companies produce, the aircraft industry is process- and precision-driven, a low-volume industry that takes years to mature.
It takes, for instance, between two and three years of investment and certification of equipment and personnel before orders trickle in. “You need to invest long term; once you begin, the relationship is very long lasting. The business cycle of an aircraft is 25-30 years; it is a very reliable business,” said Moser of IIM-B.
For that, a host of large Indian firms, such as the Tata group, L&T, Mahindra and Mahindra Ltd, Bharat Forge Ltd, Godrej and Boyce Manufacturing Co. Ltd and mid-size companies such as Dynamatic Technologies Ltd and Quality Engineering and Software Technologies Pvt. Ltd are investing in new plants and machinery and training their people.
In November, EADS announced plans to source at least €4 billion (Rs25,000 crore) worth of aerospace components and systems as well as software from India in 10 years.
Boeing won a $7.2 billion order in January 2006 to deliver 50 passenger planes to Air India, followed by Airbus winning a $2.2 billion contract to supply 43 jets to Indian Airlines (since then, Air India and Indian Airlines have been merged into Nacil and the combined airline operates under the Air India brand).
“Real offsets have yet to emerge in the aerospace area,” said M.V. Kotwal, vice-president for aerospace and defence business at L&T, India’s largest engineering firm by revenue, whose customers include HAL and the Defence Research and Development Organisation.
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First Published: Wed, Feb 11 2009. 01 15 AM IST