India has pretty impressive statistics when it comes to defense. It has one of the largest armed forces in the world. It is one of the largest importers of conventional defense equipment and spends about 40 percent of its total defense budget on capital acquisitions. More than 60 percent of its defense requirements are met through imports. Furthermore, about $37 billion has been earmarked for defense in the latest budget.
After years of stagnation in defense policies, in August of 2014 the Indian government finally increased the foreign direct investment (FDI) cap to 49 percent from 26 percent, increasing the number of Indian companies eligible to sell equipment to the military.
The Top 20 defense spending budgets by country according to IHS Jane's Aerospace.
“Of course, there have been problems over the past decades and we have not concentrated on this industry," said Manohar Parrikar, the Indian defense minister. "For customers, it is a disadvantage because unless they are very sure, they cannot invest. All those aspects have been considered and we are working on policies where 'Made In India' becomes reality in this sector."
That said, the most important change that needs to take place in the defense sector is changing the minds of the top decision makers. These companies need to realize that they can procure products and technologies that will be as good or even better from Indian companies and should not rely entirely on foreign imports.
Policy opens opportunities
Recently, a report in The Times of India stated that there has been a small change in foreign investment rules. By doing away with the minimum 51 percent holding by a single Indian entity in a defense venture, Mukesh Ambani's Reliance Aerospace and Punj Lloyd have been able to obtain licenses they have been waiting for.
The previous rule did not allow Reliance Aerospace to get the licenses to manufacture weapon launchers for combat and Punj Lloyd to manufacture torpedoes, rocket launchers and combat vehicles, since their holdings were less than 51 percent.
According to an official statement, 19 proposals for defense manufacturing from several large Indian corporate houses, including the Tatas, Mahindra and Bharat Forge, were also cleared.
The total opportunities for Indian companies over the next 10 years according to DAC International.
For several decades, the defense ministry has cold-shouldered the private sector and purely relied on imports, which often involved middlemen.
But things are slowly changing for the better and Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) government seems to be firing on all cylinders in attracting private and foreign capital in defense projects, according to Parrikar.
“Regarding manufacturing of major defense equipment by the private sector, it depends on the quantum, technology and technology transfer," Parrikar said. "There are many issues, but we will push through this over one or two years. If we are the biggest customer, we should get things done in our country.”
Private Firms Struggle Against the Old Guard
When the 26 percent FDI cap and government restrictions were still in place, there were a few private sector companies that were relentlessly trying to carve a niche in this concrete wall of defense plastered with hardened government clauses and eight public sector units and allied research labs. The Indian defense public sector units (DPSUs) have gotten used to having a monopoly and their stranglehold over defense orders was nearly complete. There was no breathing space for private players to maneuver and bring in fresh air.
“A DPSU might thrive solely due to its monopoly and not because of its merit," said Major General Mrinal Suman, head of the Defense Technical Assessment and Advisory Services Group of CII. "Whenever there is a transfer of technology, the nominated recipient would always be DPSU, even if a private sector company comes up higher in terms of infrastructure and know-how to absorb the technology.
“Moreover, requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result being that it does not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities," Suman said in an article in the Indian Defence Review. "The time given for the submission of technical and commercial proposals is grossly inadequate for a new entrant in the field."
But against all these odds, private sector players stuck to their guns and encroached inch-by-inch into the DPSU-dominated territory.
Late in 2011, Tata Power Strategic Engineering Division (Tata SED), an unlisted Tata group company, won a $186 million contract from the Indian Army to manufacture two electronic warfare systems to be deployed in the mountainous regions. Incidentally, it won by narrowly edging out Israeli firm Elta. Earlier, Tata SED had also won a $260 million contract to modernize 30 Indian Air Force bases beating out Selex ES, an Italian arm of Finmeccanica, which also owns AgustaWestland.
In May of 2009, a leading Indian conglomerate, L&T, had formed a joint venture with EADS Defense & Security, the largest defense player in the sector in Europe, to develop and manufacture defense electronics products. Today, L&T is a top notch private sector player in Tier-I subsystems in avionics.
Bharat Forge from the Kalyani group too had its own agenda and was aiming to become a major player in the artillery and specialized vehicles segment building full fledged artillery systems and land systems.
In 2011, Bangalore-based group, Centum, which provides aerospace and defense electronics became the first Indian company to supply to U.S.-based defense solutions provider Thales. After proving itself in the U.S. market, it can now supply directly to any of the 70-plus sub-groups that make up Thales's diversified businesses, from military communications in combat management systems for ships to integrated air defense systems for the U.S. military.
Start-ups Find Success
Several small companies such as Tonbo Imaging, Idea Forge, QuEST Global Engineering, Accord Software, Alpha Designs, Dynamatic Technologies, Avasarala Technologies, DefSys, Ravilla and Taneja Aerospace have also developed or acquired advanced technological capabilities.
One of the most interesting start-ups is Tonbo Imaging, which was founded in 2007 by Arvind Lakshmikumar, a BITS Pilani and Carnegie Mellon University alumnus. Tonbo develops intellectual property for products that sense, analyse and control complex environments. Tonbo’s systems allow soldiers to see during day and night, through fog and foliage, and do a real-time interpretation of the battlefield environment. Its applications also include surveillance and sensing automobile collisions before they happen. The company, which has 15 patents awaiting approval, has a 20-member engineering team. It has offices in Singapore and Palo Alto, Calif. Tonbo's key customers include Europe’s largest defense contractor BAE Systems, auto parts maker Visteon Corp and Autoliv Inc, the world’s largest maker of automotive air bags and seat belts.
Start-up Accord Software, a maker of aerospace, automotive, space and defense products, has been involved in the Indian space programs since 1999. Since being founded, the company has looked to expand its business to other countries but it has proved difficult
"We have managed to continue working in this sector and we are now selling in several countries including the U.S., EU and Australia," said Narayan Rao, CEO of Accord Software. "Basically, companies like ours have to develop domain knowledge and move onto to high end technology."
IdeaForge is yet another successful start-up that claims it has made the world’s smallest and lightest autopilot and the India's first small autonomous unmanned aerial vehicle (UAV).
“If you can demonstrate you can deliver some technology, I think there is a lot of hunger in the DRDO and other government research institutions to support that technology and build products based on that," said Ankit Mehta, co-founder of IdeaForge. "We were able to develop a different technology, hence there was a lot of interest from DRDO and we were able to make the first small autonomous UAV. That encouraged them to support us and get a lot of our systems like autopilot incorporated in their designs. So basically using that ecosystem and slowly supplying these products to them, their programs could get a huge boost in terms of execution and delivery. It was a painfully long process but we somehow managed to be a part of their systems."
Miles Still to Cross
According to Ramesh Radhakrishnan, managing director of Artiman Ventures, a venture capitalist firm which has invested in a defense start-up, India is a big domestic market for private companies to tap into. “But most of the VCs shy away from investing in defense electronics focused start-ups – we see that happening even in the U.S. and E.U," Radhakrishnan said. "Most of the cutting edge technologies come from DARPA, NSF and so forth. But the VC or any investor has to come in with a mindset that this is a long-drawn out affair. It is not like e-commerce where you see valuations jumping every day.”
One glaring point is the taxation structure. According to almost all the private players, large conglomerates and start-ups the procurement policies are skewed toward foreign players rather than Indian companies.
“As a foreign player your terms are excellent for procurement. If I were to sell to the Indian company, I would rather sell as a foreign player than an Indian company unless it is a compulsory Made-In India contract," Lakshmikumar said. "If you are a foreign player, you are given a letter of credit (LoC) at sight, which means it is payable immediately after the seller meets the requirements of the letter of credit. This type of LC is the quickest form of payment for sellers. A foreign player is also given duty exemption is given on the end product.
“But an Indian company, if it has imported certain raw materials, has to pay customs duty on that, plus a value-added tax and service tax," he said. "By that time you are not competitive at all.
“So the only way to overcome this disadvantage is to build it in India in an export processing zone, send it to [another office] and then sell it back to India and that is what we have been doing,” Lakshmikumar said. Another large Indian conglomerate is also planning to take a similar route for selling its products in the Indian market.
Another painful point is that core technology development is missing. “We have the IITs and Indian Institute of Science (IIS) and a handful of technology research labs," said Artiman Ventures' Radhakrishnan. "But we do not have any institutions doing hardcore fundamental research on materials, chemistry, physics and math. There are good students and good teachers too but the kind of infrastructure we need to do a higher level of advanced research is missing. So you have to look outside to get it."
Radhakrishnan believes that the decision makers should stop treating India in a patronizing way. “You think there a lot of companies in commodities goods but when it comes to the high-end technology, it always comes from abroad," he said. "For every Indian Institute of Technology (IIT) engineer who goes abroad, there are 10 people here who are equally good. We certainly have the talent. What we lack is the will and trust in our own workforce to be able to develop a world-class product and infrastructure. Also entrepreneurs need to step up their act as well.
"We have seen in e-commerce where Indian players can be equally competitive. We just need to give these companies a chance," Radhakrishnan added. "Of course there are going to be failures too—you can’t expect all the companies to be successful. We invest in 10 companies and one or two might just become successful. This is the story in every business and story in every decision making. You have to give a chance to a bunch of companies and a couple of them could become world class players.”
"India is developing fighters, but there are many items that it cannot afford to develop because either they are too little in number or the technology involved is too heavy," said Defense Minister Parrikar. “Ultimately, political and industrial minds need to go into it. The bureaucratic mind sometimes creates funny situations."
Questions or comments on this story? Contact dylan.mcgrath@ihs.com
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