Mumbai: The defence division of the Mahindra Group, Mahindra Defence Systems Ltd, and Europe’s Airbus Helicopters have signed an in-principle agreement to set up a joint venture to manufacture helicopters in India, seeking to tap a military hardware market estimated to be worth an annual $41 billion (around Rs.2.6 trillion) in seven years.
The details of the investment will be finalized soon, according to a statement issued by the companies, which said the joint venture will act as the prime contractor for India’s military helicopter tenders, including the reconnaissance and surveillance helicopter, the naval utility helicopter and the naval multi-role helicopter procurement programmes.
“The strengths of both companies will ensure a strong partnership to present the best rotorcraft solutions for India’s needs and strengthen indigenous industrial capabilities. The teaming represents a significant step forward in the country’s ‘Make in India’ ambition,” the statement said.
Prime Minister Narendra Modi’s emphasis on defence equipment forming part of his ‘Make in India’ campaign to encourage manufacturing and attract foreign investment has seen a scramble among companies for licences to manufacture defence equipment.
India will see a total defence budget allocation of $620 billion between fiscal years 2014 and 2022, of which 50% will be capital expenditure, according to a report released in February by lobby group Federation of Indian Chambers of Commerce and Industry and financial services company Centrum Capital Ltd.
The annual opportunity for Indian companies—both state-owned and private—is expected to touch $41 billion by fiscal year 2022 and $168 billion cumulatively, it said.
According to a person close to the development, the investment by Airbus Helicopters will be in accordance with current foreign direct investment (FDI) guidelines. According to the rules, FDI to the extent of 49% is permitted through the standard approval route, provided the original equipment manufacturer is seeking to invest in a facility which is capable of design, production and maintenance of the product. It is also subject to the ownership and control of the venture vesting in Indian hands.
Indian companies—big and small, known and unknown—looking for a piece of the defence equipment business, have applied for industrial licences from the ministry of commerce to locally manufacture everything from airplanes and warships to tanks and howitzers.
Among the bigger and better known entities eyeing a piece of the action are companies such as Bharat Forge Ltd, Reliance Industries Ltd, the Tata group, Larsen and Toubro Ltd, the Godrej Group and the Mahindra Group. While they are fairly well entrenched in the defence equipment business, they are looking for more opportunities.
Recently, Anil Ambani’s Reliance Group and Gautam Adani’s Adani Group have also applied for licences to make helicopters in India. Both conglomerates will start scouting for international partners once they secure the government’s permission.
Besides these conglomerates, Moscow-based Russian Helicopters JSC is in talks to build a helicopter manufacturing facility in India in partnership with state-run Hindustan Aeronautics Ltd (HAL) and Delhi-based investment firm Sun Group. The venture aims to build the Ka-226T, a light, twin-engine, multi-role helicopter.
In an interview in February, Viktor N. Kladov, head of the international cooperation department at RosTec State Corp., of which Russian Helicopters is an arm, said the company will hold up to 49% in the venture, while HAL and the Sun Group will hold the remainder.
US helicopter maker Sikorsky Aircraft Corp. also announced its intention to make helicopters in India. It will manufacture the aircraft with its existing partner, the Tata group, or through new tie-ups, Sikorsky executives said. Sikorsky, a unit of United Technologies Corp., now manufactures helicopters at its Connecticut facility. It has a tie-up with Tata Advanced Systems Ltd, a Tata group company, to make S-92 helicopter cabins at a facility in Hyderabad for the global market.
Toulouse, France-based Airbus was willing to set up assembly lines, and establish supply chain and related infrastructure for military transport planes and helicopters in India, Mint reported on 11 April. It was in discussions with Indian companies to finalize teaming arrangements for various helicopter programmes, the report had said.
On the alliance with Mahindra Defence, Guillaume Faury, Airbus Helicopters’ president and chief executive officer, said: “The tie-up is in line with our intent to develop an indigenous industrial ecosystem dedicated to helicopters. The joint venture will be dedicated to supplying the Indian Armed Forces with Made-in-India, state-of-the-art helicopters of high reliability, quality and safety standards based on combat-proven platforms.”
The proposed joint venture will create hundreds of high-tech jobs locally and lead to a flow of cutting-edge technologies to India, should it be selected for governmental helicopter contracts, a separate statement by the $16.9 billion Mahindra Group said.
“This arrangement between two established and trusted industrial players will create a formidable partnership,” said S. P. Shukla, group president (aerospace and defence sector) and chairman of Mahindra Defence Systems.
“We have extensive expertise in engineering, automotive and fixed-wing sectors and have made substantial investments in aero components manufacturing, while Airbus Helicopters offers best-in-class rotorcraft platforms. Together, we will produce India’s next-generation helicopters that will not only answer our country’s defence needs but will also have the potential for exports in the future.”
So what are the opportunities in the sector?
Deba R. Mohanty, chairman and chief executive of defence and technology consultancy Indicia Research and Advisory, points out that if the Avro replacement project can go to the Indian private sector instead of HAL, future helicopter projects can also go to the private sector.
In May, the Defence Acquisition Council cleared the sole bid of Rs.11,930 crore by the Tata-Airbus consortium for manufacture of Avro transport aircraft for the Indian Air Force.
“Due to a variety of reasons like delayed and cancelled procurement projects, the demand for military aerospace products are growing fast. This becomes an opportunity for the private sector to grab and Mahindra’s latest attempt to get into helicopter market through a joint venture with Airbus serves as a good sign,” said Mohanty.
He said there is a massive helicopter requirement for the Armed Forces and every type of aerospace item is in short supply. “You only have one large state-owned aerospace producer HAL. It makes reasonable sense to encourage Indian companies to enter this lucrative market,” Mohanty said.
He, however, added a note of caution—the private companies who aim to enter the market have no prior expertise in systems integration, although many small and medium firms have been tier II or III suppliers.
“So, it makes sense for joint ventures like Tata-Lockheed, Mahindra-Airbus to participate in large tenders as vendors. Large investments, long design and development time, infrastructure and technology challenges as well as uncertain order flows will always be there, but many such challenges can be mitigated by joint efforts,” Mohanty said.
Mahindra Aerospace has led the Mahindra Group’s entry into utility aircraft and aerostructure manufacturing since 2008. Its utility aircraft business, based in Australia, produces the Airvan 8, billed as the most capable, rugged and versatile utility aircraft in its class.
Certified in 38 countries, over 200 are in service. Mahindra Aerospace is also developing a 10-seat turboprop, the Airvan 10, which is scheduled for certification this year. Mahindra Defence makes armoured vehicles, underwater warfare equipment, radars and surveillance equipment, among others.