Giving Them Wings To Fly

The two key takeaways from the recent visit of defence minister Manohar Parrikar to the US are the signing of the bilateral Logistics Exchange Memorandum of Agreement (LEMOA) and the elevation of India as a ‘major defence partner’. Both these measures are part of the 28-months of sustained efforts by the NDA government to boost India’s defence capabilities after being voted to power. While LEMOA allows the militaries of both India and the US to access each other’s facilities for supplies and repairs, the designation of major defence partners allows defence trade and technology-sharing of a higher grade, Ash Carter, US defence secretary said after signing the agreement with Parrikar. With this agreement, India becomes an even closer ally of the US thereby giving a new vigour to the defence contractors and hardware manufacturers in both countries just as in the recent past when Prime Minister Narendra Modi visited France and the United Kingdom.

And that is the reason global defence contractors such as Thales from France, Lockheed Martin from the United States, BAE Systems from United Kingdom and several others have extended their whole-hearted support to the ‘Make in India’ initiative of the government, particularly in the defence sector, that talks of greater emphasis on local sourcing and local manufacturing and enhanced limit of foreign direct investments. And why not? After all, India is the world’s largest importer of defence equipment; it spends around $24 billion a year on defence equipment. As a result, several giant defence contractors have renewed their interest and participation in the defence requirements of India which is beginning to translate into the order books of the small and medium enterprises engaged in manufacturing of components for the Indian defence forces.

A recent report by FICCI and Centrum Capital said India will see a total defence budget allocation of $620 billion between 2013-14 and 2021-22, of which half will be capital expenditure and the annual opportunity for Indian companies — both public and private sector — is expected to touch $41 billion by 2021-22, it said. There’s more good news for private sector companies.

In February, at a session on defence at the Make in India Week in Mumbai, A.K. Gupta, secretary, department of defence production, had said that private sector manufacturers will now get an opportunity to pick up a 25 per cent share of defence production. And by end-March, defence minister Parrikar had cleared the decks for enhanced local manufacturing as part of the new defence procurement policy (DPP) 2016. Under the new DPP, the government has introduced a newly incorporated procurement class called “Buy Indian-IDDM”, where IDDM stands for Indigenously Designed Developed and Manufactured. The category refers to procurement of products from Indian vendors products that have been either indigenously designed, developed and manufactured with a minimum of 40 per cent local content or, products with 60 per cent indigenous content, even if not designed and developed locally. The policy has also significantly liberalised the offset liability for foreign vendors, which made it compulsory for companies to invest, or source, at least 30 per cent of the contract value in India. The new DPP has also increased the offset for all contracts from Rs 300 crore to Rs 2,000 crore.

Lockheed Martin & India Commitment
According to Lockheed Martin India chief executive Phil Shaw, the Government of India’s goal of indigenising the defence industry while creating more opportunities and easing the business environment for local manufacturing will have a two-fold benefit. “One, the outflow of precious foreign exchange will reduce as more and more defence equipment is manufactured in India itself. And two, as defence manufacturing increases, it will have a positive impact on job creation as well as provide additional tax revenue to the government,” tells Shaw to BW Businessworld adding that Lockheed Martin fully supports the ‘Make in India’ initiative of the Indian government.

The joint venture partner in Tata Advanced Systems, Lockheed Martin manufactures large aerostructures for the global supply chain of C-130J in Hyderabad. The C-130J Super Hercules is a four-engine turboprop military transport aircraft. It is a comprehensive update of the venerable Lockheed C-130 Hercules, with new engines, flight deck, and other systems. As part of its commitment to the ‘Make in India’ campaign, “all C-130Js manufactured have these large Indian built components incorporated for delivery to customers all around the world,” says Shaw.

Tata Sikorsky Aerospace, a joint venture between the Tata Advanced Systems and US-based Sikorsky Aircraft Corporation (a Lockheed Martin subsidiary) is producing thousands of components for the S92 helicopters and is the largest integrated component manufacturing facility in the private sector in the country, says Shaw.

Recently, Lockheed Martin has offered India the exclusive opportunity to produce, operate and export F-16 Block 70 aircraft, the world’s most successful combat-proven multi-role fighter aircraft. “Discussions are ongoing and further details will be determined in conjunction with the respective governments, Lockheed Martin, and Indian industry,” says Shaw. Additionally, the company is in talks with the government for finalising the deal of 16 multi-role advanced S-70B Seahawk helicopter for the Indian Navy.

Thales For India
In an interaction with BW Businessworld in May, Patrice Caine, chairman and CEO of French multinational Thales Group, the world’s 10th largest defence contractor, had said that it fully supported the ‘Make in India’ movement and that the Mirage 2000 upgrade programme is serving the strategic requirements of the ‘Make in India’ initiative. “Thales has been working on the upgradation of the Indian Air Force’s Mirage 2000 fleet, and the first four Mirage 2000 I/TI fighters have already been delivered,” said Caine. Thales’ interest in India is not new, the group has had a five-decade long association with the Hindustan Aeronautical Limited (HAL). Additionally, it has also created joint ventures with Indian manufacturers such as Samtel, BEL and L&T Technology Services.

Commenting on the success of its Indian JVs, Caine recounted: “Thales and HAL have been long-term partners in providing airborne avionics, mission systems and equipment for aircraft and upgrade programmes. One of the key programmes, the Mirage 2000 upgrade, which we are undertaking together with Dassault Aviation is a fine example of our association with HAL,” he said. The BEL-Thales Systems (BTSL), a joint venture between Bharat Electronics Limited (BEL) and Thales, which was incorporated in August 2014, is dedicated to the design, development, marketing, supply and support of civilian and select military ground-based radars for both Indian and international markets.

During Defexpo India 2016, Thales and BTSL signed a partnership agreement for joint development of the PHAROS fire control radar. Thales holds 26 per cent equity in BTSL with Bharat Electronics has the balance. “We forged a joint venture (Samtel Thales Avionics) with Samtel in 2008 to locally develop and produce helmet-mounted sights and displays, military avionics and airborne sensor systems for the defence market,” said Caine. Samtel Avionics holds 74 per cent equity in the joint venture, while Thales owns the balance. The joint venture is fully operational and the production of displays for the Mirage 2000 upgrade programme paves the way for future opportunities to serve local and export markets, he said.

Support From BAE Systems
Alistair Castle, vice president and general manager India at BAE Systems, says India is a priority and that is the reason the company believes in co-producing and co-developing in India, for India and from India for exports. “This is already in progress at the Indian production line for the BAE Systems’ Hawk advanced jet trainer where 99 out of the total 123 Hawk aircraft ordered by India will be manufactured,” he says. BAE Systems is working with its local partner Mahindra Defence Systems, the defence production firm of the Mahindra Group, for the proposed in-country assembly, integration and test facility for the M777 Ultra Lightweight Howitzer. This programme is expected to integrate around 40 Indian companies into the global supply chain of BAE Systems. As Castle said, “Indian defence industry continues to build significant capability. As founding partners of defence manufacturing in India, we underline our longstanding commitment to sharing technology and capability with Indian industry.”

Boost To Local SMEs
Small and medium enterprises such as Noida-based Samtel Avionics and Kanpur-based MKU are reaping the benefits of local sourcing norms and the booming defence manufacturing market. Says Puneet Kaura, managing director of Samtel Avionics: “Samtel-HAL joint venture completed the delivery of 1000 Su-30 MFDs to HAL, which was a major landmark in this relationship. At the same time, the Samtel Thales JV completed the first phase of delivery of MFDs for Mirage 2000 upgrade to Thales France.” He says the growth in Samtel Avionics’ consolidated turnover over last year was more than 100 per cent. “The order book has also grown with more customers and projects getting added in the domain of vetronics and avionics,” says Kaura. Samtel has received some more orders during this year to supply 7 inch handheld displays to the army, the volume of the supply is expected to go beyond 10,000 units over the next four to five years, he says. “We also got the order for design and development of x3 display for Pilot Control Unit of LCH (Light Combat Helicopter). This will be our second product on the LCH platform,” he adds. Samtel is also the prime supplier for three Indian programmes for armoured vehicle displays for the Indian army. These projects have been won with the help of its partner General Dynamics Mission Systems, Canada.

Kaura says the initiatives taken under the ‘Make in India’ umbrella are a clear evidence that the government has a firm focus on developing the indigenous manufacturers, especially the micro, small and medium enterprises (MSMEs). “Changes like the introduction of the IDDM category in the DPP will go a long way in supporting companies like us who have proven competencies in indigenous design, development and manufacturing. Most importantly, what ‘Make in India’ has truly achieved is in focusing the world’s attention towards the manufacturing competencies of Indian companies,” he adds.

Neeraj Gupta, managing director of MKU — which is registered with NATO and the United Nations as a regular supplier of ballistic protection solutions such as body armour, vests, helmets as well as other solutions for both soldiers as well as armoured vehicles, ships and aircrafts —agrees with Kaura. “The Make in India initiative is a very positive step in the expansion of defence-industrial complex in the country. With a bit of hand holding by the Indian ministry of defence, the hurdles in export of defence items have been minimised. This is evident in the phenomenal growth in exports in the last two years,” says Gupta. MKU apparently has one of the largest manufacturing facilities globally for armour protection where it can manufacture 200,000 jackets and helmets annually. MKU also has setup a joint venture with German company EIS Gmbh to manufacture cable harness for the aerospace industry. The JV company is, however, also exporting harness to airbus industries in Europe. Talking numbers, Gupta says in 2014-15, the company had achieved a turnover of over Rs 250 crore which in 2015-16 increased by 35 per cent. “MKU has been making healthy profits, while in 2014-15 EBITDA was Rs 20 crore approximately, in 2015-16 it climbed up by 215 per cent. The gross profit also went up 73 per cent compared to 2014-15,” adds Gupta.

‘We support Make-in-India’’
Phil Shaw, CEO, Lockheed Martin India

Your assessment of government’s plans to push local manufacturing?
Lockheed Martin supports India’s goal of indigenising the defence industry via a strategy of creating more opportunities and easing the business environment for local manufacturing, which in turn will reduce dependency on imports.

Your views on relaxed FDI norms? Does it help you in any way?
Our preferred route is partnerships and we have excellent relations with the Indian industry. As far as FDI is concerned, Lockheed Martin reviews each business case on its individual merits and any decision is taken accordingly. Lockheed Martin is invested in Indian defence manufacturing. We support ‘Make in India’ and ‘Skills India’ initiatives with our two JVs that have trained the majority of their own staff through apprenticeships and on-the-job training. The numbers employed in both JVs has reached almost 1,000 personnel. In the C-130J joint venture, 600 personnel have been trained, with an additional 400 personnel that are now employed in local aerospace industries.

Upside for global defence contractors to set up manufacturing base here…
Lockheed Martin will be happy to support the government’s strategic partner initiative. We will happily comply with whichever procurement and production strategy the government elects to follow, which of course is to support “Make in India” and to develop the defence industrial base. We have supported similar industrial activity in other countries over the years and would be delighted to participate in the same here in India.

ashish.sinha@businessworld.in, @ashish_BW