Guns and vehicles: the Mahindras bet big on defence

Top: The FH-77B and the M777 Ultralight Howitzer dominate the Mahindras and BAE Systems displays at the Defexpo 2010

Centre: A closer look at the M777, which has, painted on its side, "Combat proven", "600 delivered" and "lightest 155mm artillery system in the world"

Below: Anand Mahindra conveys his optimism about Mahindras' future in defence to Broadsword

(A three-part series, looking at major private sector players in defence)

by Ajai Shukla

Business Standard, 17th Feb 2010

As Anand Mahindra unveiled his new defence company’s latest product --- the Mine Protected Vehicle for India (MPVI) --- the lights, music and camouflage-clad women models could only briefly obscure the most glaring truth at the ongoing Defexpo 2010 in Delhi: that India’s private sector, even after investing thousands of crores into defence technology, infrastructure and corporate structures, is still waiting for MoD orders.

The new MPVI, like Mahindra Defence Systems’ Rakshak, Marksman and Axe vehicles before it, has been developed with the pro-active strategy of creating and stimulating MoD demand. So far, those orders have failed to materialise. MDS’ order book mainly features the Ministry of Home Affairs (MoHA) and state governments buying protection for their police forces.

Ironically, the Mahindra Group’s breakthrough in defence could come from guns, not vehicles. Parked alongside the MPVI, and dominating the display hall, are two 155mm guns that could shape the future of MDS. One is the modernised version of the well-known FH-77B Bofors gun; the other is the M777 ultralight howitzer (ULH). India is considering buying hundreds of these guns for several billion dollars.

The Bofors gun will be leaving for the next phase of long-running Indian Army trials in Leh at the end of the Defexpo; army sources say it has been the leading contender so far. Meanwhile, New Delhi has approached Washington for buying the M777 ULH, which is manufactured in America.

Anand Mahindra is betting big on BAE winning these contracts; in an audacious play he has increased his stakes in the defence business rather than reducing his exposure. A joint venture --- called Defence Land Systems India or DLSI --- has been formed with MDS holding 74% of the Rs 100 crore JV, and BAE Systems 26%. The government turned down a request for BAE Systems to be allowed to hold 49%.

Speaking to Business Standard, Anand Mahindra pointed out that the MoHA’s and state governments’ orders of protected vehicles had kept MDS in the black, even in the absence of MoD orders. The Faridabad plant that built those vehicles, which was now transferred to DSLI, would keep rolling. And, as soon as the gun contract was won, DLSI would set up a Greenfield factory to build 55% of the gun system in India.

Mahindra believes that, “The negative perception against the Bofors gun no longer exists; the gun never committed any crime. And, after the gun’s performance in the Kargil conflict, the country and the MoD are ready to buy it. We have already created a business model to be prepared for that moment and will build the facilities that are needed for manufacturing the gun in India.”

Haryana Chief Minister BS Hooda, is believed to have suggested that the Mahindras set up the new gun factory in Haryana, near Rohtak.

Anand Mahindra says that BAE Systems is genuinely committed to transferring to DLSI the crucial technologies needed to build the gun in India, even though BAE Systems has, in the past, expressed concern about holding just 26% of the equity. “There is no option for BAE Systems; this is a business necessity for them. The price sensitivity of buyers today requires them to cut costs and we have displayed our competence in high-tech manufacture while building automobiles.”

A riskier challenge ahead for the Mahindra group is its ambitious venture into developing and manufacturing the Future Infantry Combat Vehicle (FICV) for the Indian Army. The MoD will choose between the Tatas, L&T, MDS and the public sector Ordnance Factory Board, and Mahindra believes that its strong automotive heritage and the foray into manufacturing protected vehicles, such as the MPVI, equips it to develop a quality product.

It is not yet clear whether MDS would partner BAE Systems, the world’s largest grounds systems company, in developing the FICV.

In the immediate future, the MPVI will compete for orders with similar vehicles developed by several domestic manufacturers, including Ashok Leyland and the Tata Group. The MoD has procured a significant part of its requirement of almost 400 MPVs from the public sector Ordnance Factory, Medak.

The Axe and the Rakshak --- two of the vehicles that MDS has developed for security forces --- are currently competing for a big Rs 350 crore army order for some 950 vehicles.