Indian aerospace market is the most attractive market amongst Original Equipment Manufacturers (OEMs), with requirement for over 1000 air platforms. It will also envisage increase in the private sector's share in manufacturing, including India's Small and Medium Enterprises (SME's).
The Indian aerospace industry is one of the lucrative markets in the world, alluring many OEMs and manufacturers. It manifold's opportunities for foreign and as well as domestic manufacturers, as market projections indicate that India would need commercial and military aircraft valued at $100-150 billion over the next 20 years. India defence needs approximately 1000 airplanes, worth roughly $ 75 billion in the next 20 years indicating that there exists significant opportunities for the private sector to tap, as most of its existing fleet needs to be replaced.
The aerospace market is the second largest market in Indian, after maritime and land systems being the least. In the aero-space there are many sub-sectors and amongst all Aircraft is the biggest segment followed by Missile and Missile Systems, helicopter and UAV respectively, as shown in the Table and Diagram above.
Indian Air Force requires varieties of aircrafts and helicopter to safeguard the skies. Whereas, Army/Navy and Indian Coast Guard requires mainly helicopters for their secondary operational needs. The major procurement are listed in the Table.
Indigenous Manufacturing Capabilities
Till date, HAL remains the leader in India with its 19 production units. It has manufactured 26 different types of aircraft, mostly military, through indigenous development and licence-production deals. HAL is the only entity which has state-of-the-art machine and testing labs. They are expert in integration, testing and certification of basic and advanced trainers and combat aircraft, ground testing of aircraft structures and systems, and wind tunnel validations. HAL supplies certain components to major global companies and outsources work to private companies as well. At present, most of the private sector industries and SMEs are only engaged as suppliers, fabricators and designers to Defence Public Sector Units (DPSUs), accounting for 17 per cent of outsourcing. Some of the major private players today have the technological capabilities to undertake complex manufacturing required for the sector; however, they are rarely system integrators or recipients of technology.
This year (2017) the order book of HAL is about Rs 41,000 crore. Additionally, it is looking for the order of 83 LCAs which has been cleared earlier. The Basic Trainer Aircraft HTT-40 for which HAL would take decision after its test flights, by the beginning of next year, is too in the pipeline, also upgrades part Jaguar DARIN-III was close to its Final Operational Clearance (FOC). HAL would also get AESA radars for the Jaguar fleet, which is being modified under DARIN-III.
No doubt that HAL is the only aerospace manufacturing entity in India but due to its heavy order book and many projects in pipeline, it won't be able to handle the manufacturing of other aircrafts and helicopters. Therefore, we require more establishments like HAL; hence, involving private sector can be another best possible option.
In order to make India self-sustainable, Government is making all the possible moves to bring technology to strengthening its industrial base. The biggest and concrete amongst all is the “Strategic Partnership” (SP) model under 'Make in India” initiative. Under this SP model, the government will choose interested foreign Original Equipment Manufacturer (OEM) along with local Indian firms. Indian firms will then team up with selected foreign OEMs and bid for Request for Proposals (RFP) under the SP policy on a competitive basis. The bid winner team will manufacture the products and service them through the life cycle, by strengthening indigenous capabilities. This initiative will not only benefit the manufacturers but to the India's Small and Medium Enterprises (SMEs) entities, who will be the part of manufacturing sub-parts. Once indigenous manufacturing takes roots, research and design for indigenous capability will be the next step.
The strategic partnership model for each of these verticals single-engine fighter planes, helicopters, air independent propulsion submarines and armoured fighting vehicles/main battle tanks - the government will choose a few foreign OEM partners as well as local Indian firms. Indian firms will then team up with foreign OEMs and bid for Request for Proposals (RFPs) under the strategic partnership policy on a competitive basis. The bid winner will manufacture the products and service them through the life cycle, locally creating jobs, and building infrastructure and indigenous capabilities. The tentative projections for projects under SP is about $1.5 Trillions.
Aerospace manufacturing is a high-technology and capital-intensive industry, hence till now the activity has been dominated by government-owned agencies and Original Equipment Manufacturers (OEMs), who have set up Joint Ventures (JVs) or Technical Centres. However, in a move to boost indigenous capability, the government is uplifting private sectors and providing them the opportunity to come forward and join the league. Some of the Indian companies likely entrant in the field are:-
Tata Advanced Systems Ltd (TASL)
Tata group, which has already demonstrated its capability to build aero-structures like those for Sikorsky helicopters, Pilatus trainers and the Lockheed Martin C-130 tail, could also look at bidding for contracts for helicopters and armoured vehicles, besides fighter jets, through different group companies. Tata Advanced Systems has already tied up with Lockheed Martin Corp., which manufacturers F-16 fighter jets, and is also pitching for the Indian Air Force multibillion-dollar fighter jet deal.
The $12 billion Adani Group has interests in energy, logistics, real estate and packaged consumer goods, among others. The group has a tie-up with Swedish fighter jet maker Saab AB, which produces the Gripen fighter jets, to bid for a multibillion-dollar deal.
Mahindra and Mahindra
It is the only private sector Indian company that can build a full plane today, thanks to its acquisition of the Australian firm GippsAero Pty. Ltd.
Indian firms are still way down the defence and aerospace value chain compared with international companies. Capital investments in the defence space have also been slow because India has preferred to order many big-ticket items directly through government-to-government deals. Building aero-structures are OK to begin with but these are just 10-15% in terms of cost of a platform. The real capability is design, engineering, system integration, maintenance and upgrade to provide sustainable ecosystem. Capabilities for creating platforms have to be built in a phased manner. It is a very complex process to design, develop, produce an aircraft. The issue of technology transfer will continue to dog the defence manufacturing sector. India will need real technology to get transferred to the companies in the next 7-15 years creates a fairly good base of military tech to produce hardware.
Technology Transfer - Technology transfer is the main focus of strategic partnership drive to build a domestic industrial base. Due to reluctance in to sharing technology in previous deals, India's manufacturing units, especially DPSU's have largely been left to assemble knock-down kits under license from the OEM's. The new SP model lays down the roadmap for establishing partnerships between OEM and Indian companies. However, as technology is a crucial aspect and OEM's are still looking to see increased clarity on several aspects.
Control of proprietary technologies - The Foreign OEMs are reluctant to transfer technology and want the full control over its proprietary technology. However, with current limit of FDI - 49% is allowed and more than 49% FDI is only possible if the Foreign OEM bring-in the state-of-the art technology. Therefore, foreign firms are seeking a guarantee that they would retain control over sensitive technology.
Quality issues - As per the clause in the new rules that held foreign firms jointly responsible for the quality of the platforms provided to the military, is not acceptable to OEMs. Besides, there is also a concern of foreign players about the lack of experience of domestic partner in the aerospace sector. Where some players are new to the segment and have to start from scratch, having never built even an aircraft component.
Integrating with Global Supply Chain
To be sure, most of the deals which come as a result of the offset obligations, foreign manufacturers have to source about 30% of the value of the contract from India. Once the offset obligation are over, the real test of the facility will start. Tata, like others, will then have to compete with others in the global supply chain.
Till date, the Defence Public Sector Units control most of the defence business in aerospace, where the private sector only gets 5% share out of about Rs. 5,000 crore per annum, as a direct orders from the Defence Ministry. Now, it is gradually moving towards 10% in tandem with the 'Make in India' initiative. However, it is expected that, the private sector's share will jump to 30-35%, as major defence contracts are in the pipeline.
[Issue: 1, January-February 2018]