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Integrating with Global Supply Chain

 

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Till recent past DPSUs were preferred partners in defence deals, however the policy has not been very successful. Time has come to create competitive environment and encourage the competent private sector entities to enter into collaborations, as this will not only serve indigenous defence sector but will also help in being a part of global supply chain.

 In order to enhance the national competence in producing state-of-the-art defence equipment within the price lines and timelines that are globally competitive; all viable approaches such as formation of consortia, joint ventures and public private partnerships etc. within the Government approved framework need to be undertaken. As part of its operational strategy and risk sharing, number of  Joint Venture Companies (JVCs) in the field of design development of defence products and systems, information technology, software development, operation and maintenance, manufacturing, avionics & simulators, design and development to facilitate development of new technologies and products and services were formed mainly in the public sector earlier. Till recent past DPSUs were preferred in sustaining partnerships due to government preference in defence deals, however these have not been very successful. The recent CAG report on JV mainly formed by HAL, brings out only three out of 12 JVCs were earning profits, one JVC was yet to commence commercial production and the balance 7 JVCs had accumulated losses, as on 31 March 2014. The performance is given in the table below:-

Some of the other issues and exceptions raised by CAG on those formations are:-

  • Non compliance to requirements for formation of JVCs
  • Failure to avail professional services in selection of JV partner and formation of JVCs
  • Non-compliance with provisions of Companies Act, 1956.
  • Overall monitoring of the performance of the JVCs
  • Non-achievement of intended objectives:
  • Status of achievement of intended objectives of the JVCs

Notwithstanding above, DPSUs have had other inherent advantages too, with comparatively low-risk, in terms of approvals, funding and payment and they had an edge over private sector with almost monopoly. The ratio of defence programmes awarded in India has been skewed towards government run DPSU, is the reasons perhaps why Russia, Israel etc. chose the route to enter into deals. Despite, DPSUs have not been liked due to their business performance, quality and work culture but the OEM hardly had any choice either work with them or you have no entry. On the other hand, several foreign companies, which approached the government for partnership with Private sector directly, found the going tougher.

Initiatives and Emerging Market

Recent amendments to Defence Procurement Policy (DPP), such as increase in FDI, a level-playing field for Indian and foreign private companies, 'Make India' category only local companies alone to bid,  doing away with the "process of nomination" for choosing companies for MRO segment in aero platforms are welcome change. The foreign OEMs are optimistic about the policy changes that will go long way to encourage the development of capable, agile, efficient and profitability oriented private-sector Indian firms. The collaboration with private vendors will serve indigenous defence sector and they will be able to build a strong supply chain.

With Defence contracts worth around Rs. 90,000 crore being finalised during the last year and further with acquisition worth around Rs 100,000 crore are  expected to be signed in 2016, there lies huge opportunity to the private sector companies in India. Further, with the Government providing an impetus to 'Make' and 'Buy and Make (Indian)' procurement categories for the acquisitions, would prove to be beneficial for the private sector's participation in defence production. This is also likely to pave ways for consolidation/joint ventures for defence manufacturing.

Alliances is the Way Forward

With shorter product life due to fast changes in technology, key alliance partners and suppliers will be critical for growth. Thus need for partnership for collaboration and joint ventures, thereby stimulating further internationalization of the industry.

The answer lies in the promotion of joint ventures in the private sector with foreign companies which boast of know-how in the field. The foreign companies will be willing to bring in required technologies in case they are provided attractive share holding in the joint ventures. However, it will be prudent to identify initial and basic areas in aerospace, land, sea and underwater regimes where the energies of the private sector should be encouraged to form joint-ventures with foreign companies.

There are two aspects involved. First, rapid Transfer of Technology and second, from thereon, the ability of joint venture to continuously research, develop and upgrade technologies for newer versions and models in the future.

They consider it as an opportunity to engage in efficient business practices that promote mutually successful outcomes with the Indian Private sector. Not withstanding above, the OEM have their set of concerns. The problem is the OEM are often unsure of their ability to protect IP and satisfy their national integrity laws when they have  less investment in Indian JVs.

JV with Private Sector

The policy of allowing indigenous private sector companies to enter in to joint ventures on both strategic and product specific bases with reputed arms manufacturers across the globe will help in bringing in state-of-the-art technology in to the country quickly. some of the private sector JVs for entering in the recent past are given below:-

Name of the JV/ Implementing CompanyName of the JV/ Implementing Company
M/s Bharat Electronics Ltd  M/s Larsen & Toubro Ltd, Mumbai
M/s Alpha-ITL Electro Optics Private Limited  M/s Jubilant Aeronautics Pvt Ltd, Delhi
M/s HBL Elta Avionics Systems Private Limited  M/s Maini Precision Products Pvt Ltd
M/s BF Systems Limited  M/s Park Controls & Communications Ltd
M/s. Alpha Electronica Defence Systems Pvt. Ltd.  M/s Rossell Aviation Private Ltd
M/s Armet Armored Vehicles (India) Ltd  M/s Indian Rotorcraft Ltd.
M/s Samtel Thales Avionics Pvt. Ltd. New Delhi  M/s Tara Aerospace Systems Ltd, Mumbai
M/s Astra Micro wave Products Ltd, Hyderabad  M/s Larsen & Toubro Ltd, Mumbai
M/s Mahindra Defense Systems Ltd, New Delhi  M/s Space Era Materials and Processes Pvt Ltd
M/s Taneja Aerospace & Aviation Limited  M/s Track Systems India Private Limited
M/s Vyoneesh Technologies Pvt Ltd.  M/s Amertec Systems Pvt Ltd
M/s ICOMM Tele Ltd, Hyderabad  M/s Hical Technologies Pvt Ltd
M/s Lakshmi Machine Works Limited  M/s. BF Elbit Advanced Systems Pvt. Ltd.
M/s Tata Aerostructure Limited M/s SasMos Het Technologies Limited
(Source: Compiled by Q-Tech )  

Besides national security requirement of availability of military equipment during times of crisis, achievement of self-sufficiency, ability to buy much more with the allocated defence allocation, there are many other benefits of private sector forming JVs

  • It will bring in competitiveness which would in turn result in less cost, better quality of the weaponary/equipment and timely delivery schedules.
  • Lead to enhancement of indigenous production capacity. Rather if the country is able to create surplus capacity, it can be beneficially used for harnessing the defence exports industry.
  • Entry of private sector would add to the overall research capability of the country which are lacking behind considerably. At present, the country's R&D agency DRDO is way behind in developing relevant and requisite technologies.
  • Lead to generation of additional jobs and employment opportunities within the country, thereby improving the economy of the country as a whole.

There is a requirement of providing incentives by the government to the private sector to encourage them to form joint venture into the defence sector. Changes are in the offing if they have not already begun, however a trust-based relationship takes time to develop and commitment to sustain.

 

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