Driven by the lure of a huge growing market, Indian companies, big and small, are making a beeline to become suppliers for the enormous armament needs of the country. For the year 2015-2016, India’s defence budget was $40.4 billion, an increase of nearly 8% over the previous year, and it is likely to continue growing at a similar rate of growth over the next five years.
Given India’s geo-strategic realities, its burgeoning defence needs are only likely to grow. India is the world’s second-largest arms importer and the Indian government’s focus for the defence sector has been indigenization of the industry and acquiring advanced technologies from abroad which will in turn help to reduce dependence on imports from other countries. Currently, virtually nothing material in terms of our defence requirements is made in India.
In an effort to make it easy for the private sector to participate in the Make in India programme, the government has given licences to many private companies to manufacture products for the country’s defence needs. The new defence offset policy, whereby foreign suppliers of equipment need to manufacture a certain percentage of their products in India, has given Indian firms a chance to play partners to global companies. As Mint reported in April this year, since October 2015, when the Department of Industrial Policy and Promotion (DIPP) granted permission to 19 private companies to manufacture defence products such as simulators, there seems to be a rush to announce plans for manufacturing defence equipment. Companies ranging from Himachal Futuristic Communications Ltd (HFCL) and Ananth Technologies Ltd, to more familiar names like Titagarh Wagons Ltd, Taneja Aerospace and Aviation Ltd, Punj Lloyd Aviation Ltd, Bharati Shipyard Ltd, Ashok Leyland Defence Systems Ltd and big, established ones like Bharat Forge Ltd (BFL), Reliance Industries Ltd (RIL), Tata Group, Larsen and Toubro Ltd (L&T) and the Mahindra Group, have all thrown their hat into the ring. The Anil Ambani Group and the Adani Group are the latest to enter the race.
For these Indian companies, queuing up for a lucrative new business, there is the promise of the vast domestic market as well as a global market in which defence equipment is a recession-proof play. The world defence market climbed to $65 billion in 2015, up $6.6 billion from 2014, consulting company IHS Inc. said in its Global Defence Trade Report. That’s the largest yearly increase in the past decade. In Asia, countries bordering the South China Sea have raised their defence spending by 71% since 2009 on purchases such as that of aircraft and anti-ship missiles, in an effort to counter China’s aggressive intent in the region.
What’s more, over time, expertise in defence leads to the building of capabilities in frontier areas of technology like AI and robotics which in turn fuel advances in medicine. For any company that builds domain expertise in a business like defence, the spin-off benefits are also enormous. Over the years, as Israel developed capabilities in defence electronics, it has also built a reputation in areas such as medical equipment, digital communication and advanced agricultural technologies.
And yet there will be worries at the rash of entrants signing up for a piece of this action. A quick entry with the intention of an equally quick cash-out and exit can, in the long run, actually hurt India’s security. There’s a strong chance most of the Indian companies that have rushed to get into the fray will not be around 10 years from now. Either the demands for capital that a business like this makes or the inability to manage its vicissitudes will ensure that.
Only companies that have the patience and the resilience to build capabilities and stay the course will be successful, besides answering India’s needs for indigenously manufactured equipment. That calls for the kind of rapid absorption of technology and upscaling of expertise that Bharti Airtel, which started the business in collaboration with Singapore Telecom, has shown. Coupled with that is the need to own the entire value chain much like Reliance Industries did with its ownership of the upstream and downstream petroleum business. Building a lasting business from scratch isn’t about being opportunistic but about being visionary and having the commitment to stay invested for the long haul.
It isn’t going to be easy for Indian firms. Data from think tank Stockholm International Peace Research Institute (SIPRI) shows that the defence industry continues to be dominated by companies based in the US and Western Europe, with firms from these areas taking up the top 10 positions on the list of the biggest arms makers. The largest weapons manufacturer in the world, Lockheed Martin, which makes fighter aircraft such as the C-130 Hercules and the fifth generation F-35 Lightening II, receives nearly 10% of the Pentagon’s funds as the largest US government contractor.
Creating such a powerhouse in India is crucial to its long-term security needs. But it isn’t going to be easy and is made doubly difficult if too many fly-by-night operators get into the business.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.