In The Long Race For Defence

Anil Ambani likes to be known as a long-distance runner. Defence manufacturing is the next marathon he wants to run — and win, big time.

In the year-and-a-half since Prime Minister Narendra Modi launched the Make in India programme, Ambani has gone about acquiring India’s state-of-the-art Pipavav naval shipyard (the Pipavav Defence and Offshore Engineering Company) and forging a number of agreements with some of the world’s leading defence manufacturers in air, land and naval domains of weaponry.

In the course of one year, Reliance Defence (RDL) has entered into as many as 30 partnerships in 10 countries. Reliance Defence is a wholly-owned subsidiary of Reliance Infrastructure and has spawned 13 subsidiaries in niche segments of the defence sector, like propulsion systems (Reliance Propulsion Systems), defence infrastructure and aerospace (Reliance Defence & Aerospace).

“At the Reliance group, we are proud to be at the forefront of the national effort. In consonance with the Prime Minister’s vision of Make in India and Skill India, we have ventured into the defence sector by making India’s largest defence acquisition at an outlay of more than Rs 10,000 crore. The acquisition of the Pipavav Shipyard is a demonstration of our resolve to walk the talk and make India’s and the Prime Minister’s vision a reality,” Ambani said at the Andhra Partnership summit in Visakhapatnam some months ago.

As on date, he has 27 licences for cross-spectrum manufacturing of defence equipment, platforms and systems; design, development and production of missiles; helicopters; cryogenic technology-based enhanced vision systems for military application; manufacturing and upgrade of airplanes and choppers for military applications. The companies under the Reliance Defence umbrella also have licences for upgrading all kinds of naval vessels and manufacturing simulators for air, land, and naval platforms. Taking into account the eight licences that the erstwhile Pipavav Defence and Offshore Engineering Company already had, the tally of licences with the group led by Ambani now goes up to 35.

So, with the exception of small arms (which only government concerns are allowed to manufacture in India), the group has shown interest in manufacturing every conceivable defence system — from nuclear submarines to military (and civil) aircraft, from artillery guns to UAVs (unmanned aerial vehicles). Ambani wants defence to be his flagship business over the next five years. Today, Reliance Defence is the most talked about and most valued Reliance Infrastructure subsidiary.

“The defence business is likely to be one of our flagship businesses in the coming year. The decision to enter the defence business was made in early 2015 because of the forward looking policies of Prime Minister Modi and the liberal FDI (foreign direct investment) policy regime aimed at attracting the best-in-class global defence manufacturers and international OEMs (original equipment manufacturers),” a Reliance Defence spokesperson told BW Businessworld recently.

The group’s defence business is likely to be commercially viable over the next three years, according to Reliance Defence and Aerospace president Rajesh Dhingra. Some industry insiders, speaking on condition of anonymity say “Lack of experience and credibility is the biggest challenge for the group,” arguing that “the group had walked away from a few large infra projects.”

“The Reliance Anil Dhirubhai Ambani Group (RADAG) was the first of the large Indian business houses with no prior relevant experience to have invested in the defence manufacturing space,” says Ankur Gupta, vice- president, Aerospace & Defence, EY. Speaking at the DefExpo 2016, in Goa, Ambani had remarked, “There would have been no Reliance in existence today if experience was the sole defining yardstick of entrepreneurial success.”

It’s not difficult to figure out why Ambani is betting big on defence. According to government and industry estimates, the defence market in the country would be worth $250 billion over the next ten years. India currently imports 70 per cent of its defence requirements. With its thrust on Make in India, the Modi government wants the import figure to go down to 30 per cent over the next five years — a target most industry watchers describe as “too ambitious”. They, however, do say that the private players in the defence space may be able to contribute 20 per cent to India’s defence requirements over the next five years.

So, if the private players in defence production, namely, the Tatas, Mahindras, Larsen & Toubro, Bharat Forge and some other minor players, command a market share of $100-150 million a year, the size of the pie should increase substantially to $5 billion annually, over the next five years. Ambani wants a lion’s share of this pie. Some of his confidants say that the feat would not be impossible to achieve, “given Ambani’s hands-on involvement, strategic planning and long-term vision for his group in the sector”. The group is also preparing its manufacturing systems for the global market, which is at least 50 times as large as the Indian market.

The Pipavav Defence and Offshore Engineering Company was the group’s largest private sector defence acquisition. The shipyard was rechristened Reliance Defence and Engineering (RDEL) after the acquisition, enabling the group to set its eyes on naval warships and repair and overhaul of ship and warships.

RDEL is all set to deliver the first batch of two naval offshore patrol vessels (NOPVs) by early 2018. In all, five NOPVs worth Rs 2,500 crore, are being constructed in two batches of two ships and three ships for the Indian Navy. These will be the first ever warships to be constructed at a private sector shipyard. The company also has plans for offshore patrol vessels and training ships for the Coast Guard.

The group plans to build a shipyard along the eastern coast and construct a yard near Visakhapatnam for building nuclear submarines for the Navy. Thanks to the Pipavav Shipyard acquisition, Reliance Defence expects the naval part of its business to be the first to take off. For its foray into aerospace, the group has acquired 289 acres of land reserved for special economic zones at Mihan near Nagpur, where it will provide prime system integration with various global partners.

The group has already inked a deal with the Ukraine-based Antonov for assembling and manufacturing Antonov platforms in India, for both commercial and military aircraft. The group has acquired more than 400 acres of land close to Indore and is in the process of acquiring another 500 acres or more. In the pipeline are artillery guns, armoured vehicles and ammunition.

The company is seriously looking at UAVs and radars. It is also setting up centres of excellence where the thrust would be on “absorption” of technology instead of simply borrowing technology, to enable Reliance Defence to manufacture third and fourth generation defence systems.

Significantly, the group is looking at the civil and commercial market too. It expects the new aviation policy to open up the market for private players, enabling it to manufacture choppers and fixed wing aircraft for the civil market. “The possibilities are huge. For instance, in a country of India’s size, we have just 300 choppers. So, we have entered the race at just the right time,” says a company spokesperson.

The optimism in the group’s ability to get its teeth on the defence business spills beyond insiders. “Points in favour of the Reliance Anil Dhirubhai Ambani Group is the strong commitment shown by the company’s chairman himself, investment in the Pipavav shipyard and Nagpur SEZ, several MoUs with global defence majors including the big one with Antonov,” says Amber Dubey, partner and India head, Aerospace and Defence at global consultancy firm KPMG. “Reports suggest that the ADAG is offloading stakes in its infrastructure and financial services business to pare debt and to fund its capital intensive defence forays,” he added.

Some sceptics do warn of a bubble around the ADAG plans. “It will be 15-20 years before the group can expect reasonable profits,” says Harish H.V., partner, Grant Thornton. Reliance executives, however, say that the Pipavav shipyard is already executing orders and that the time required to break even should not be more than three years.

“The key challenges that most Indian players face in defence manufacturing are slow and small orders from the MoD (Union ministry of defence), extreme hostility from the DRDO (Defence Research and Development Organisation) and defence PSUs (public sector undertakings) worried about their falling clout, over-dependence on foreign technology partners and the long breakeven period. RADAG is no different,” says Dubey.

“The MoD now needs to reinforce this belief by giving orders in a competitive environment to these new entrants. This will, without doubt, encourage others to give this sector a closer look and that is how the Make in India initiative will truly achieve its goals,” says Gupta. Industry watchers are not skeptical just because of the notoriously slow defence procurement process and long gestation period. They also believe that the group “was being overambitious by aiming for virtually everything in the defence business”. They point out that international OEMs were usually known for their specialised products.

An interesting anecdote points to how the group got interested in the defence space in the first place. According to a Reliance spokesperson, Ambani had met Prime Minister Narendra Modi on the sidelines of a function in Delhi sometime in November 2014. The Prime Minister asked Ambani if he had ever thought of veering into defence manufacturing. The PM apparently informed him that even the tear gas that the police force use in India was imported, not to speak of arms and armaments.

The conversation had a lasting impression on Ambani. By December 2014, he had decided that Reliance would foray into defence production through the group company, Reliance Infrastructure. A hands-on boss, Ambani today spends more than two-thirds of his time at Reliance Defence. On an average day, says Reliance executives, Ambani may call Reliance Defence bosses no less than 20 times. Over the last one year, he has met almost every single significant global defence equipment manufacturer, crisscrossing the globe.

Reliance executives joke about Ambani (now 58) training from 5.30 every morning. The joke is that he is training to compete in a triathlon when he turns 60. “At work, by the time he reaches his office in the morning, he has already started training for a different triathlon — making his sea, land, and air defence businesses grow and compete with the best,” says a Reliance executive. This remark is made in all seriousness.

THE OTHER PLAYERS

BHARAT FORGE has a joint venture with Rafael of Israel for the Spike missile. The company has also received titanium related work from Boeing and French company SNECMA. The group has a joint venture with ELBIT of Israel for Howitzers

TATA ADVANCED SYSTEMS has JVs with US firms. It also has large work share agreements with RUAG, Rolls Royce, Cobham and Pilatus. It also has an agreement with Airbus as the Indian production agency for the Avro replacement programme

DANTAL HYDRAULICS is indigenising hi-tech foreign hydraulic systems for the IAF fleet. It is also designing and supplying hydraulic equipment for Indian missiles

LARSEN & TOUBRO designs and develops equipment, systems and platforms for naval vessels. It has associated with the design, engineering and construction of India’s first nuclear powered submarine, INS Arihant

TATA MOTORS supplies several kinds of vehicles to the defence sector and is also competing for the Future Infantry Combat Vehicle programme. Tata Advanced Materials does composite work for global original equipment manufacturers

DYNAMATIC TECHNOLOGIES has an enviable order book from Airbus and Bell Helicopter (part of the Textron group). It is also doing large chunks of aerostructure work for the Sukhoi Su-30 aircraft

MAHINDRA AUTOMOBILES has a JV with Telephonics for dual use (defence and civil) radars. It has an MoU with Airbus for helicopters. It has a state-of-the-art ‘sheet metal’ facility for aerostructure in Bangalore

TATA POWER SED has significant orders for the Pinaka rocket system and the Akash missile launcher. It is also in the race for contracts to make Tactical Communication Systems and Battlefield Management Systems

KINECO has a joint venture with Kaman Aerospace of the United States and is doing a lot of work for international original equipment manufacturers in the composites space

suman@businessworld.in; @skjsumankjha