Private firms find it hard to break into defence market

Private firms find it hard to break into defence market
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First Published: Mon, Feb 18 2008. 12 49 AM IST
Updated: Mon, Feb 18 2008. 12 49 AM IST
New Delhi: At what is billed as Asia’s largest arms fair, Defence Expo 2008, Indian companies jostled for floor space with established international giants, peddling products as small as a bullet and as large as giant earth movers.
But in the midst of the wheeling and dealing, one thing was clear: except for a few clear leaders like the Tata group, most companies from India’s private sector are still trying to figure out how to carve for themselves a small piece of the country’s nearly $100 billion (Rs3.97 trillion) appetite for defence acquisitions.
On Sunday, the Tata group, among the top two private Indian conglomerates by revenues, struck a partnership for its three-month-old start-up, Tata Advanced Systems Ltd with Israel Aerospace Industries Ltd (IAI) to develop and manufacture missiles, unmanned aerial vehicles or UAVs, radars, electronic warfare systems, and homeland security systems.
The announcement from Bombay House, the headquarters of the Indian group, came in the wake of two similar ventures it announced last week. In a joint venture with the US plane maker Boeing Co., the Tata group announced a business potentially in excess of $500 million for fighter aircraft and helicopter parts.
Then, Tata Advanced Systems on Saturday said it would pursue a yet-to-be announced $1 billion contract from the Indian Army to build an advanced communications system, partnering with European Aeronautic Defence and Space Co., a conglomerate that owns Boeing’s arch rival Airbus SAS.
“We believe the coming together of Tata and IAI will… complement the efforts of our defence labs, Ordnance Factory Board and defence public sector undertakings,” said Tata group chairman Ratan Tata in a company-issued statement.
Tata has already signed an agreement with another Israeli defence company called Urban Aeronautics Ltd to market and produce UAVs. In the next one-and-half years, said Yitzchak D. Traeger, vice-president (programmes) at Urban Aeronautics, the joint venture expects to see production of an unmanned plane named Mule from India. “Tata is one of the strongest Indian companies that has a broad technology base,” said Traeger on choosing the partnership. “They understand what we are doing.” Still being tested, Mule will cost about $1.5 million a piece.
The Tatas are unlikely to bring all the defence businesses under one roof. The business house would prefer to take the best from all the units keeping the newly-formed Tata Advanced Systems as the interface, said a senior Tata official who asked not to be identified because he is not allowed to speak with the media. “A large structure (organization) delays decision-making. It’s better to bring together people (from various units) as a team depending on project to project,” he said, explaining the multiple ventures being formed as Indian defence forces accelerate purchase of equipment from private manufacturers. By the middle of this year, the Boeing-Tata facility, to be built from scratch in an as-yet-undisclosed location, will be in place irrespective of the outcome of the 126 aircraft purchase order costing an estimated $10 billion expected by end-2010, said the company’s India programme manager for the deal, Michale E. Rietz.
At Defence Expo, other than the Tata deals, there was an announcement by British Aerospace Plc. that it would partner Mahindra and Mahindra Ltd to design a mine-resistant vehicle called the RG-31. Most other Indian companies at the arms fair were either specializing in niche products such as camouflage and tyres, or as resellers for foreign products.
“We haven’t done any business with the Indian military so far, but we are trying to expand our operations,” said R.S. Perhar, a retired colonel who is now the chief operating officer of Tulip IT Services Ltd, which is showcasing an indigenously designed wireless data system that it hopes to sell to the Indian Army. But the main highlight of their exhibitwas the rugged video conferencing equipment made by Swedish manufacturer Tandberg ASA.
Tulip, which had revenues of about Rs840 crore in 2007, according to its stock exchange filings, said it had set up a 40- person production centre in Jammu by taking advantage of some tax benefits, just in case the Indian Army decided to buy the wireless system. But as of now, its revenues come from civilian operations, largely state-wide projects to set up e-governance projects.
Others appeared to be in the same boat. Most of the exhibits from Indian manufacturers showed walkie-talkies or night vision equipment or body armour from companies based in Israel, Germany or Russia, being sold in India under exclusive resale agreements.
But as the Indian military spends over $100 billion in the next decade and half to upgrade its ageing equipment, at least a third and up to half of that will probably be sourced from Indian manufacturers because of what are called offset rules that mandate local sourcing, setting off a race among Indian companies to set up joint ventures. Currently, less than 30% of the orders—and 9% of the value of those orders —are sourced in India.
The shadow of the in-the-works $10 billion deal for 126 multipurpose fighter aircraft, bids for which are to be submitted by the six shortlisted international firms in two weeks, loomed large over a show that largely focuses on land and naval systems. However, some exhibitors remained resolute in their focus. The Russian delegation, for instance, refused to focus away from the task at hand. “Come to Bangalore (for aerospace),” said Nikolay I. Martsenyuk, deputy chief of directorate in India for Russia’s state-controlled arms major Rosoboronexport, referring to the biennial air show at the southern city that showcases some of the world’s best military aircraft.
tarun.s@livemint.com
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First Published: Mon, Feb 18 2008. 12 49 AM IST