Boosting defence manufacturing

Ajai Shukla

Business Standard, 2nd August 16

It is clear that Manohar Parrikar’s defence ministry has encountered difficulties in its two-fold plan to boost defence manufacture: first, by handing large private companies a driving role; and second, simultaneously liberalising foreign direct investment (FDI) to encourage the inflow of cutting-edge technology from global original equipment manufacturers (OEMs).

On April 25, at a meeting with heads of private defence firms, Mr Parrikar spelt out three priorities for “Make in India”. First, kick starting the manufacture of single-engine, light fighters to fill alarming shortfalls that retiring MiG-21 and MiG-27 fighters will soon leave in the Indian Air Force (IAF). Second, building six conventional submarines for the navy under the so-called Project 75I; and, third, establishing manufacturing lines for military choppers, including the Kamov-226T, and two others that Hindustan Aeronautics Ltd (HAL) is developing --- the light combat helicopter (LCH) and light utility helicopter (LUH).

Yet, the ministry has failed to identify and nominate private firms as Strategic Partners” (SPs) to lead these manufacturing projects. The difficulty in finalising a SP policy has forced the ministry to release the new Defence Procurement Policy of 2016 (DPP-2016) earlier this year with a missing Chapter 6, where the SP policy will be inserted, once finalised. One reason for the delay has been cutthroat rivalry between private sector behemoths; all of who believe that being nominated as an SP is fundamental to their futures in defence. Given such rivalry, it is unrealistic to expect the ministry to invite charges of favouritism by choosing between the private players. It would be far better, and supportive of market economics, to allow the foreign vendors to select the Indian SP it wants.

Industry chiefs who attended the April 25 meeting recount that Mr Parrikar thrice repeated he would welcome private industry proposals to manufacture the Tejas LCA Mk II (while HAL builds the Tejas Mark I, an order that could run to 100 fighters, including the improved Tejas Mark IA). The defence minister assured the gathering that the IAF’s large and assured requirement of Tejas fighters would make an attractive business case for establishing a manufacturing line. He promised the IAF would order 200 fighters, over and above the 100 being built by HAL.

Despite those assurances, not one Indian firm came forward with a proposal. The message was clear: no company is ready to risk investing Rs 10,000-15,000 crore into a manufacturing line that involves mastering complex (and, therefore, risky) technologies. While this cautiousness is understandable given the ministry’s woeful record in backing the private sector, it has created space for Saab of Sweden to push its proposal for manufacturing the Gripen NG fighter in India. Apparently to facilitate this, on June 20, the government liberalised FDI in defence, permitting 100 per cent ownership by a foreign vendor that brings in “modern” technology (there is no elaboration of what exactly “modern” means). That would allow Saab full ownership of the project, while establishing sub-vendors for an Indian supply chain, as Suzuki had done while establishing production of the Maruti car. Small Indian defence firms see in this an opportunity to grow their business; they say this would be ideal for creating an aerospace manufacturing eco-system in India.

The proposal for Saab to build in India is not new. In 2011, Saab held discussions with the Defence R&D Organisation (DRDO) on establishing a Tejas production line. In early 2012, Saab presented a detailed project report, offering to co-develop the Tejas Mark II, and to set up a factory with an Indian partner, and roll out the fighter within five years. The Swedish company was then developing the Gripen NG, and already dealing with the key challenges the Tejas Mark II would present --- fitting in a more powerful General Electric F-414 engine, and establishing a high-rate manufacturing line. However, with little buy-in from then defence minister, AK Antony, Saab’s proposal fell by the wayside. Now, the conservatism of the Indian defence industry has brought it to life again.

With 100 per cent ownership of an Indian Gripen NG manufacturing facility, and domestic supply chains in place, Saab would also be in pole position to build the LCA Mark II. The DPP-2016’s new “Indian Developed, Designed and Manufactured” (IDDM) category, which is the highest priority for procurements, requires indigenous manufacture worth 60 per cent of the product cost. Saab could propose a “phased manufacturing programme” (PMP), offering to roll out the first fighter in 36 months, with an indigenisation content of 50 per cent, which would be increased to 60 per cent in the next 24 months. To sweeten this, Saab could offer to co-develop the Tejas Mark II with the DRDO. The indigenous fighter project would be greatly benefited with the PMP creating manufacturing chains and technology capabilities for systems like the active electronically scanned airborne (AESA) radar, data links and sensors.

Mr Parrikar wants to ensure that “Make In India” kicks off with this kind of positive example, sending out a global message that India is ready to do business seriously. The FDI liberalisation is intended to signal India’s openness to beneficial defence manufacturing proposals. Looking also to create jobs through export-oriented manufacture, Parrikar also promised on April 25 that proposals independent of Indian orders, i.e. purely export oriented manufacturing units, would be allowed 100 per cent FDI, without hesitation.

The ministry could further signal its seriousness by offering to lease space for manufacturing at one of the IAF’s base repair depots, which have the land and airfield infrastructure needed for production facilities. Instead of its customary standoffishness, the ministry should step forward and actively handhold the vendor through the inevitable teething troubles.

In conclusion, the ministry is coming to realise that it will be hard to nominate SPs, and to create private sector monopolies out of a chosen few companies like the Tata Group, L&T, Mahindras, Bharat Forge, Godrej & Boyce, etc. While it is important to create Indian “systems integrators” --- large firms with design and development capabilities --- that should be done through “Make” projects, for which the ministry reimburses 90 per cent of the development cost. The SP route is for simple manufacture, aimed at creating employment and developing a defence production eco-system that would support the larger, indigenous “Make” projects. Numerous smaller companies are capable of absorbing production technology and improving upon it, incrementally developing the technology level of the overall defence industrial base. They must all be allowed to compete as SPs, from which the foreign vendors can pick and choose.