Corporations sign joint ventures with foreign majors to tap a potential market of over Rs 50,000 crore in 5 years.
Just 10 days ago, the Tata group signed an agreement with US-based Sikorsky Aircraft Corporation to manufacture its S-92 helicopter cabins in India. The cabins for the four-bladed helicopter, meant for both military and civilian markets, are expected to roll out from a green-field facility in Hyderabad by late 2010.
On May 5, Larsen & Toubro (L&T) announced a joint venture with European defence electronics major EADS to manufacture high-end defence electronics products. The venture is expected to start by March next year and L&T is expecting to get Rs 2,500 crore worth of business within five years.
Just 10 days later, in a first for an Indian military aircraft programme, L&T, Godrej & Boyce and Tata Advanced Systems put in bids to develop and build an unmanned aerial vehicle, or drone, used in surveillance operations. The medium-altitude, long-endurance aircraft, named Rustom, will be designed to fly at least 250 km at a stretch.
A month before that, Mahindra & Mahindra inaugurated a state-of-the-art, six-acre plant in Faridabad to make specific military manufacturing applications, including armoured vehicles.
Sensing a booming opportunity, India Inc is making rapid strategic moves on the defence business. Rolta India chief Kamal K Singh said the defence business was growing at a stunning compounded annual rate of 40 to 50 per cent and most Indian companies were working on cutting-edge technology.
Rolta, which has been in the defence business for over two decades, renewed its agreement with IntergraphCorp in April this year for engineering and geospatially-enabled software. It also has a venture with the $30-billion Thales of France to build equipment for military intelligence.
One major reason why Indian companies have been in a hurry to step up their footprint in defence is the “offset clause”, under which all foreign companies that get a defence contract of above Rs 300 crore from the Indian government will have to bring back 30 per cent of the contract value into the country, either by way of purchases or as investments in the sector. That means a huge opportunity just waiting to be tapped.
Here’s why. Chales Pybus, head (defence advisory) at KPMG, said the Indian government was expected to issue over Rs 150,000 crore worth of defence orders in the next five years. At 30 per cent offset, that’s a plough-back of over Rs 50,000 crore
into the Indian defence industry. It’s something India Inc can hardly ignore.
That explains the flurry of moves by companies like the Tata group, L&T, Godrej & Boyce, Mahindra & Mahindra, Walchandnagar Industries, Punj Lloyd and the like.
The array of joint ventures signed is mind-boggling. Apart from Sikorsky, Tata Advanced Systems has also formed joint ventures with Israel Aerospace Industries for building unmanned aerial vehicles, missiles, radar systems. The group also builds components for Hindustan Aeronautics, DRDO and the Indian Space Research Organisation.
Mahindra Defence Systems has a joint venture with Lockheed Martin to jointly develop simulators for the Indian defence sector and with BAE Systems for building heavy artillery. Another major in the fray, Godrej & Boyce, supplies the Vikas engines for India’s rockets.
L&T makes military vessels for the Navy and has built a radar system with Bharat Electronics for the Army in addition to being involved in other aerospace projects. The company’s defence division already makes ancillary equipment for ships, such as propulsion steering gears and shafts and is now planning to build ships for the Indian Navy.
There’s more. Infrastructure major Punj Lloyd has joined hands with Singapore Technologies Kinetics (STK) to manufacture land defence systems — essentially weapons, including howitzers, mortars and small arms — and has announced a greenfield project near Gwalior, with an initial investment of Rs 200 crore. The Hero Group has also announced a Rs 500 crore, 292-acre defence and aviation special economic zone (SEZ) in Madhya Pradesh.
One of the major benefits of the offset clause is that foreign companies have no option but to forge partnerships with Indian companies to make the country part of its global supply chain. Take US major Boeing. Last year, the company entered into an agreement with TAL Manufacturing Solutions, a wholly owned subsidiary of Tata Motors, to make structural components for the latter’s 787 Dreamliner. Boeing has signed up with another 37 Indian companies too.
Lockheed Martin, one of the world’s largest defence companies, is also aiming for deals with India worth $15 billion in the next five years and wants to develop defence technology with Indian companies.
Companies looking to be part of the Indian expansion include US aircraft parts maker Rockwell Collins Inc, which plans to quadruple its staff in India by 2012. Lockheed Martin and BAE Systems are also forming multiple partnerships in India.
But the ambitions of some Indian companies have gone much beyond these partnerships. M V Kotwal, director and senior executive vice president (heavy engineering), L&T, said Indian players were competent enough to build large systems and sub-systems. “But the government should make sure the participation of Indian industry goes much beyond parts sourcing only,” he said.
That’s threatening to become a chorus and India Inc cites the support provided by the US government that enabled Boeing and Lockheed Martin to compete for military plane projects. The F-16 is built by Lockheed, while Boeing builds the F-18.
Companies said the delay on the part of the government to allow greater entry of private companies in defence had already done enough damage. For example, L&T and Tata Power Strategic Electronics Division had partnered with Defence Research and Development Organisation (DRDO) to develop the prototype of a multi-barrel rocket launcher, Pinaka, for the Indian Army about 20 years ago. But business scope materialised only in 2002 when the government opened up defence equipment production to private sector companies. It took four more years for the two companies to get orders for Pinaka.
Kuljeet Singh, head-defence advisory, Ernst & Young, said “The offset clause was working out well for Indian companies in acquiring orders or signing for technologies. But for more growth, research and development (R&D) and manufacturing should be outsourced to private players. And, in turn, the companies should acquire or develop proprietary technology.” The government is taking some more initiatives as well to facilitate this. For example, it has revived the Raksha Udyog Ratna (RUR) scheme that was put in cold storage because of opposition from the Left. Tata Motors, L&T, Tata Power, M&M, Godrej, Bharat Forge, Infosys, Wipro and Tata Consultancy Services are among the 12 companies that have been cleared by a defence ministry committee.
Once awarded RUR status, these companies will be treated on a par with defence public sector enterprises. RUR-status companies will also be allowed to access foreign technologies and build main systems for the defence department, besides getting substantial government financial investment (up to 80 per cent) for design, development and manufacture of defence products, including fighter aircraft, tanks and warships.
Brigadier (Retired) Sukhwindar Singh
http://www.svipja.com/ 
