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Rahul Bhonsle

Aug 17, 2012

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India’s Defence Industry – The Gold Rush

            The manic hurry of private companies, Indian and foreign, to enter defence industry in India reminds one of the Californian Gold Rush, as prospectors rushed to far away land in America in the 19th Century in a free for all to make quick, “bucks”. Today many Indian and foreign companies large and small varying from energy refiners to tea producers and pizza chain owners are jumping in the defence industry fray.

The lure is the purported $ 200 billion pie in waiting in defence manufacturing over the next decade or so and in the long term possibility of being a player in the global military production sweepstakes exploiting Indian entrepreneurship and low manufacturing costs to advantage. Who are these players, how deep are their pockets and staying power, what is their perception of defence industry dynamics and what is their ability to deliver will determine not just the fortunes of these companies but also modernization and indigenization of the Indian armed forces? A brief overview is offered herein.

            Defence industry is not a new sphere to India’s private sector. Major manufacturers such as Tata Motors, Mahindra and Mahindra, Godrej and Boyce and L&T have been in the field for long and have contributed substantially to various defence projects to include the nuclear submarine, BrahMos cruise missile and Pinaka artillery rocket launchers amongst others.

Many of these are diversified players whose product profile is large. However they have been so far restricted to play the second fiddle in the Indian defence industry dominated by the Ordnance Factory Board (OFB) and the Defence Public Sector Undertakings (DPSU). Making a breakthrough has been elusive for these established players despite the financial muscle and clout in the corridors of power in New Delhi.

            However new initiatives by the government to create an indigenous defence industrial base and India’s rising defence budget seem to have opened vistas for others to join in.

The latest entrants include Reliance Industries Limited (RIL) ranked 99 in the Global Fortune Companies list and slated to reach market capitalization of USD 100 billion by 2017 as per a Goldman Sachs report quoted by the Economic Times of 17 August 2012. The mother company has floated, Reliance Aerospace Technologies Pvt Ltd, aimed, "to design, develop, manufacture, equipment and components, including airframe, engines, radars, avionics and accessories for military and civilian aircraft, helicopters, unmanned airborne vehicles and aerostats," as per application filed with Department of Industrial Planning and Policy (DIPP) for industrial licence.

Reliance management is known to think big and long term and has deep pockets purportedly willing to invest USD 1 billion though the Indian markets have recently shown reduced confidence in the Company. Reliance’s hiring of Vivek Lall a veteran in global aerospace industry a few years back had raised speculations of entry of the company in this sector. Reliance may emerge as a front line prospect for large offsets worth over USD 5-6 billion once the contract between Dassault Aviation of France and Indian Ministry of Defence nominated agency for the 126 Medium Multi Role Combat Aircraft (MMRCA) is finalized. Will the Mukesh Ambani led RIL be able to replicate success in other areas in defence remains to be seen?

            Recently Rossell India Ltd as per a PTI report of 10 August 2012 has signed in with CAE Canada. Previously Rossell Tea Ltd, the company web site indicates that on the 19th of April 2011 to represent diverse interests it was rechristened as Rossell India Limited with three divisions – Tea, Aviation & Defence (Technology and Engineering) and Product Support Services (Aerospace).

PTI indicated that the company has recently tied up with CAE Canada for simulator training solutions with a 76:24 joint venture.  CAE is a reputed global simulation and aviation training services provider. Rossell India also lists, “collaborative strategic investments in the fast food business in Nigeria, Africa. With franchise rights from YUMS, the brand owners of KFC, Pizza hut and Taco Bell,” on its website. CAE has possibly preferred to enter India through the joint venture with a nontraditional defence industry player as Rossell.

            As per a report in the Hindu of 17 August 2012, Piramal Enterprises has acquired a 27.83 per cent stake in Bluebird Aero Systems. Piramal Enterprises is a pharma and healthcare major attempting inroads into defence industry. Bluebird Aero Systems is an Israel based Unmanned Aerial Systems (UAS) manufacturer. The reports that Hindu Blue Bird Aero Systems has an agreement with Bangalore’s Dynamatic Technologies for manufacture of UAVs. As per the latter’s web site the aerospace division is headed by Air Cmde. (Retd.) Ravish Malhotra, India's cosmonaut.

Recently the Ministry of Defenc has outlined the process for Joint Ventures. The Mazgaon Docks (MDL) has entered into separate joint ventures with Larsen & Toubro and Pipavav Defence and Offshore Engineering for constructing submarines and warships, respectively. MDL has an order book of over Rs 1 Lakh Crore which includes submarines, destroyers and frigates and is likely to, "explore the feasibility of diversifying its product profile by entering into partnerships with other eligible leading shipbuilders as well." "The JVs (with L&T and Pipava) will leverage the strengths of the respective JV partners in the public and private sectors to work out a collaborative strategy for taking the nation towards self-sufficiency in warship construction," said a report quoted by the Economic Times.

            The entry of new private sector players both Indian and foreign in India’s defence sector is more than welcome. There is enough space for players who can deliver quality products to our armed forces in time and at competitive costs.

However defence manufacturing calls for precision and quality, there is no room for fly by night operators that replicated the gold rush as this will impact performance of the military in war as well as peace. As far as the private sector is able to provide high degree of assurance it will prove to be a boon for the Indian defence industry. For this it would have to focus on leveraging advantages that it has to include flexibility and suppleness with greater transparency to deliver.

Due diligence and   security audit is also necessary, some recommendations have been made by the ASSOCHAM in this field recently. Hopefully various monitoring agencies including the DIPP and Ministry of Defence Production will look into these issues to ensure that the new entrants follow laid down norms and do not compromise security.

Recent exposure of the Tatra case wherein DPSU BEML Ltd ignored the fact that Tatra Sipox was not an Original Equipment Manufacturer does not raise confidence in this sphere. The Armed Forces should also step in where required bringing to light these issues rather than continuing to sign on the dotted line.

To sum up the entry of new private players with due diligence on their credibility and long term interest in the defence sector is welcome, however adequate checks have to be put in place to ensure that they are not entering the fray only to monetarily partake off the defence pie. Indian armed forces struggling to modernize can ill afford an exposure to those who are in for the Gold Rush without being serious entrants to what is a strategic sector which has to be secured from vested interests with short term outlook.

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