Inside Indian industry’s big defence play13 min read . Updated: 26 Sep 2017, 05:56 PM IST
India's emerging aerospace and defence industry is gearing up to tide over daunting quality control issues in bid to tap potential opportunities over the coming years
New Delhi: Every fortnight, when Tata Advanced Systems Ltd (TASL) completes assembling the airframe for Pilatus Aircraft Ltd’s PC-12 aircraft at its Hyderabad factory, it undertakes an even tougher task—transporting the airframe safely through bumpy and crowded roads to the nearest port from where it can be shipped to its Swiss manufacturer.
A tiny bump on the road can damage the airframe, which leaves the facility to be turned into a $3 million aircraft, delay the plane’s assembly and compromise customer commitments made by Pilatus.
The solution Tata Advanced Systems has hit upon is to buy special air suspension trucks and retrofit them with equipment to provide a better cushion against jerks.
“We are buying the trucks and retrofitting them with special systems. It’s like the system in Volvo buses (more cushion) you have a similar system here. There are very few of those trucks in the country," said a Tata engineer as he showed a noisy hangar-like facility full of green Pilatus airframes being tooled together. The engineer did not want to be named.
Tata Advanced Systems, which plans to increase its Hyderabad output to three Pilatus airframes a month from the current two, can’t take chances with the strict quality requirements demanded by customers. Even the smallest component is fully documented and can be traced back to the raw material stage in case of any problems later on.
This level of quality control may sound daunting, but for India’s emerging defence and aerospace industry the opportunity over the coming years is so big it is actively looking for solutions to the problems and pushing for more business.
Companies such as Larsen and Toubro Ltd (L&T), Tata group, Mahindra and Mahindra Ltd (M&M), besides recent entrants like the Reliance and Adani groups, are hoping that the appointment of a full-time defence minister in Nirmala Sitharaman will help propel their defence manufacturing mission.
“Till one-and-a-half years back we didn’t even have a level-playing field— that was brought in by then defence minister Manohar Parrikar in the form of new DPP (defence procurement procedure). However, he moved out within a year of that with many reforms and policy changes nearly complete but awaiting implementation. Now that Sitharaman has come in as a full-time minister it’s time for urgent action given that there is just one-and-a-half years left before the country readies for next general elections, and we are very hopeful that she will," said Jayant Patil, head of defence and whole time director of L&T, referring to the defence public sector units which still control most of the defence business in India.
The private sector in India has less than 5% (which is about Rs5,000 crore annually) share of direct orders from the defence ministry for manufacturing and is gradually moving towards 10% in tandem with the Make In India initiative. The expectation, says Patil, is that the private sector’s share will rise to 20-25% in the next three-four years as major defence contracts in the decision pipeline enter the execution phase.
Under Parrikar, who left to become the Goa chief minister earlier this year, the ministry of defence drafted an out-of-the-box strategic partnership model by building on recommendations of several expert committees and groups.
Parrikar, who had earlier set up a small defence firm supplying hydraulic systems and parts to a defence public sector unit, had joked about his own experiences of the hardships faced by private sector companies and promised to streamline procurement.
According to the model, for each of these SP (strategic partnership) verticals—single-engine fighter planes, helicopters, air independent propulsion submarines and armoured fighting vehicles/main battle tanks—the government will choose a few foreign OEM (original equipment manufacturer) partners as well as local Indian firms. Indian firms will then team up with foreign OEMs and bid for RFPs (request for proposals) under the strategic partnership policy on a competitive basis. The bid winner will manufacture the products and service them through the life cycle, locally—creating jobs, and building infrastructure and indigenous capabilities.
Encouraged by these initiatives, even big Indian conglomerates with no real defence experience have made an entry.
For instance, Gautam Adani, head of Gujarat-based Adani Group, has announced a tie-up with Swedish fighter jet maker Saab AB, which produces the Gripen fighter jets, to bid for a multibillion-dollar deal. The $12 billion Adani Group has interests in energy, logistics, real estate and packaged consumer goods, among others.
“We are keen to play an instrumental role in helping transform India into a destination for world-class high-tech defence manufacturing," said Adani, adding that the deal will be “historic".
Tata Advanced Systems has already tied up with Lockheed Martin Corp., which manufacturers F-16 fighter jets, and is also pitching for the same Indian Air Force multibillion-dollar fighter jet deal that Gripen is lobbying for.
Tata group, which has already demonstrated its capability to build aerostructures like those for Sikorsky helicopters, Pilatus trainers and the Lockheed Martin C-130 tail, could also look at bidding for contracts for helicopters and armoured vehicles, besides fighter jets, through different group companies.
“We have built capability that when an Airbus comes to India or Lockheed looks for partners, we are the likely partner that they look for which can manage end-to-end and they have ended up choosing us. That I think is very satisfying because that means the best in class are auditing us and saying okay we are there," Sukaran Singh, chief executive officer and managing director of TASL, said in an interview. “We are extremely excited about our Lockheed partnership for F-16s as well."
Besides Tata Advanced Systems’s Hyderabad unit, other group companies also make parts of Boeing planes.
The cluster of Tata factories in Hyderabad, which all work for different aerospace and defence companies, are fully functional separate units with high-grade security. No photography is allowed on the premises.
Tatas, Singh said, will produce key aerostructures for 100 aircraft/helicopters in the next 12 months. “We today have pre-invested in human capabilities who actually have done final assembly of large aircraft," he said.
To be sure, most of these deals with Tatas come as a result of the offset obligations foreign defence manufacturers have under which whenever India buys a defence product, foreign manufacturers have to source about 30% of the value of the contract from India.
Could this mean that as offsets end, so will the contracts at the facility?
Once the offset obligation is over, the real test of the facility will start. Tatas, like others, will then have to compete with others in the global supply chain.
Pilatus, for example, moved its manufacturing to Tatas from Poland-based PZL-Swidnik as India turned out to be cheaper. The Swiss company has offset commitments emanating from the sale of PC-7 MkII training aircraft system to the Indian Air Force.
Similarly, Boeing is shifting its Apache attack helicopter manufacturing to Tata Advanced Systems from its current supplier Korean Aerospace in South Korea. The first Apache AH-64E multirole attack helicopter fuselage will be delivered by Tata Advanced Systems’s Hyderabad facility next year.
The Tata engineer cited above said when Lockheed reduced a certain portion of manufacturing from Hyderabad as its US facility was producing enough, it did not matter much because the space that was vacated can quickly be used for doing something else. Similarly, the entire facility could be reworked to produce products for another manufacturer.
Also, the Tatas are trying to move up the value chain. Currently some 3,000 parts come from the US to make the C-130 Lockheed Martin tail arrangements and assemblies. The next step is to manufacture some of those parts in Hyderabad which requires many levels of international certification.
Another Indian firm that is taking steps in aerospace is Mahindra and Mahindra. Known for its tractors and sport utility vehicles, it is the only private sector Indian company that can build a full plane today, thanks to its acquisition of the Australian firm GippsAero Pty. Ltd.
It has also used its automotive base to enter the defence business and hopes to pitch for multiple contracts under strategic partnerships.
“While we have the capabilities to cater to all the three wings of our defence forces—Army, Navy and Air Force—our capabilities for producing large integrated platforms mainly lie in the armoured vehicles and aerospace domains," said S.P. Shukla, group president (aerospace and defence sector) at the Mahindra Group.
Mahindra is also adding a 10-seater plane to its portfolio, besides its popular eight-seater GippsAero plane. It, however, does not plan to go for the big one yet.
“Capabilities for creating platforms have to be built in a phased manner. You cannot start producing a 200-seater aircraft from day one—it doesn’t work like that. You have to start and learn the basics as it is a very complex process to design, develop, produce an aircraft, and then get it certified in different countries. We began with an eight-seater utility aircraft and then moved up to a 10-seater Turboprop," said Shukla.
Like the Tatas, Mahindra is also doing offset work including assembling Howtizer guns for BAE Systems Plc.
As the government allows the private sector to expand its footprint, dozens of jobs will be created outside the current state-run units, said Shukla.
L&T, among the oldest major private sector companies with a defence footprint, is considering bidding to manufacture submarines as well as armoured systems under strategic partnerships, besides continuing to bid for various procurement categories of programmes under land-based weapon systems, air defence and artillery systems and upgrades, communication, avionics and missile systems (70% of the Akash surface-to-air missile airframe is produced at an L&T factory in Coimbatore and Talegon in Pune).
L&T’s Patil said the company would look to bid in all verticals in which it has proven capabilities.
Make in India
In the past three years, the government has laid down a framework for the private sector so that when it places orders, there are companies that have the ability to implement them.
When the Narendra Modi government took over in 2014, it took five major steps to pave the way for defence reforms.
One of the first was to do away with licensing for nearly 80% of items. In the first year itself, the government came out with rules saying as long as a company was not making tanks, guns or fighter planes (lethal systems) on its own, there was no need for licences. Licencing became confined to about 15-20% of the items.
Secondly, the government raised the ceiling for approving automatic foreign direct investment (FDI) in defence firms to 49% from 26%. FDI can be increased to 74% through the approval route if the technology being brought in is needed by India.
The third major step was that the exchange rate variation protection while bidding for contracts, which was allowed only to the public sector, was extended to the private sector as well.
Fourth was the formulation of the strategic partnership policy. Lastly, the procurement categorization was prioritized with top priority for indigenously designed, developed and manufactured items while making buying from international market the least preferred category.
“The fundamental difference (between the previous and the current government) is that now you have to make it in India and if you do that, you get priority over someone who is not making in India. The whole idea is you need real technology to get transferred to the company in India so that India in the next 7-15 years creates a fairly good base of military tech to produce hardware. We have neighbours with probably better hardware capability than what we have," Kalyani Group chairman Baba Kalyani said in an interview in Hyderabad after opening a new facility with Israel’s Rafael Advanced Defense Systems Ltd to produce anti-tank guided Spike missiles for the Indian armed forces in August.
The facility was being inaugurated even as a formal order from the ministry of defence had not been given out despite the price negotiations closing about two years back, said a person aware of the matter who did not want to be named.
“For a smaller player, the problem is if you don’t build it (facility) then they will say there is nothing on the ground—we will give it to state-owned firms," this person said referring to why the group chose to build a facility when it hasn’t got a written order yet.
Defence contracts typically take a long time to come through and while Kalyani praised the government for the ‘Make in India’ push, he said the process needs to be shortened.
The issue of technology transfer also continues to dog the defence manufacturing sector.
“India needs and requires control over technology and we have to at the same time respect that foreigners will not give all their core technology. I think we should try to negotiate what we can, but beyond that we should recognize that they won’t give, as it is not in their interest," said TASL’s Singh.
Perception is another issue. An official at a private sector firm, who declined to be named, said foreign manufacturers “lord around" Indian conglomerates as if they were start-ups and often end up working better with small firms— such as Bengaluru-based Dynamatic Technologies Ltd among others which, having started small, has grown gradually to building parts for Boeing Co. and Airbus SE, among others.
“Some Indian firms don’t have an integrated and focused long-term approach. There are multiple units doing different things or attempting multiple things without spending efforts in mastering a few before branching out," said L&T’s Patil. “One is aspiration and then there is capability—the gap shows up as frustration."
Indian firms are still way down the defence and aerospace value chain compared with international companies.
Capital investments in the defence space have also been slow because India has preferred to order many big-ticket items directly through government-to-government deals.
India in 2016 scrapped a multibillion- dollar tender for 126 fighter jets and instead bought 36 French Rafale jets off the shelf for an estimated Rs58,000 crore for the Indian Air Force.
Eric Trappier, chairman and CEO of France’s Dassault Aviation SA, has said that to manufacture the plane in India, the numbers have to increase. This means Dassault will execute the offset part of the deal which requires it to source 50% of the supplies from India. Building an entire fighter jet will have to wait.
Boeing, which has about $11.5 billion worth of contracts and therefore sizeable obligations from India, says its sourcing from India has risen to about $1 billion annually.
But the orders to Indian firms will continue to be based on the quality they deliver.
“If they keep performing on cost, quality and delivery, they keep earning the orders," said Boeing India president Pratyush Kumar, adding that almost all its Indian suppliers have got repeat orders.
In an interview in August, Marc Allen, president of Boeing International, said that Boeing was casting its “anchor deep into India".
“If you looked at the market 10-15 years ago, as we started the earlier conversation after civil nuclear arrangement, it was just a matter of what do US companies have to sell to India? Today, that’s not the conversation. Today, the conversation is where can we partner together to create mutual benefit for India and the US, the US and India, and those efforts only advance with trust with shared capability and with real tangible projects to work on. All three of those are present now," he said.
Still Indian firms can’t depend on foreign capital. Despite the public display of warmth between India and countries like the US, Israel, Russia and France among others, FDI in defence has been abysmal.
Until May in fiscal year 2018, minister of state for defence Subhash Bhamre told Parliament on 28 July, no FDI was received in defence production. In FY17, the FDI levels were even more disheartening: Israel invested about Rs66,000.
A lobby group that represents US defence firms wrote to India’s defence minister last month seeking a guarantee that American firms would retain control over sensitive technology—even as joint venture junior partners under the strategic partnership model, Reuters reported on 19 September citing a US-India Business Council letter.
“The public hugs are basically symbolic that send signals to respective leaders’ domestic constituencies and other intended targets, but the challenge lies at the ground level as to how to translate symbolism into tangible results. If there is unfathomable trust, then only technology may flow. But even this appears a chimera in global politics," said Deba Mohanty, head of Delhi-based Indike Analytics, a research firm on defence and strategic affairs. “India has no choice but to generate resources from within. Else we can forget about self-reliance in defence."