Indian Defence Review

Narendra Modi and Israel's PM Benjamin Netanyahu at the Technology Exhibition, at Tel Aviv, Israel

Both countries carved their national identity as a fragile balance of cultures, religions and minorities. Both have significant expatriate communities in foreign countries, giving significant contribution to the country’s wealth, and international influence. For India, it was a struggle for unification and defending the borders from external threats. For Israel, it was the epic culmination of immigration movements that began in the 18th century, gathering the Jewish people from diaspora. The Jewish immigrants that returned to their homeland after 2000 years in exile established their homeland in the promised land, in the heart of a hostile region.

India, the world’s second largest nation, and Israel, among the smallest on the globe, have much in common. Both are young and old, with historical roots thousands of years old. Both emerged from British colonial rule to become independent states about 70 years ago. Both struggled in their first years of nationhood, in their pursuit of an independent economy and national sovereignty.

Both countries carved their national identity as a fragile balance of cultures, religions and minorities. Both have significant expatriate communities in foreign countries, giving significant contribution to the country’s wealth, and international influence.

For India, it was a struggle for unification and defending the borders from external threats. For Israel, it was the epic culmination of immigration movements that began in the 18th century, gathering the Jewish people from diaspora. The Jewish immigrants that returned to their homeland after 2000 years in exile established their homeland in the promised land, in the heart of a hostile region.

The First Years

In their first years India and Israel were far apart, but in the 1990s bilateral relations were crafted, first in secrecy and later in broad daylight, leading to the first presidential visit of Israel’s president Ezer Weizmann in India in 1996. India returned with a presidential visit to Israel 20 years later, with the historic visit of Prime Minister Narendra Modi in Israel earlier this year. Apart from the frequency of visits, the bilateral relations between the countries continued and improved over the years.

It was the Indo-Pakistani war in 1999 that brought the two countries together, as Israel rushed to supply India with critical military supplies for the war effort, at a time when India’s main provider – the Soviet Union – practically ceased to exist.

The generous helping hand offered by Israel during the Kargil War opened the doors for closer cooperation, mutual trust and deeper alliance between the military forces of the two countries. Following years of military buildup that relied on indigenous capabilities, in the early 2000s, Israel was well positioned to provide India with defense systems that could fulfill some of the needs the Russians were unable to deliver at that time. Modernization of Russian tanks and Russian produced helicopters and planes, conversion of aircraft into aerial refueling tankers and development of early warning radars denied by other suppliers were only the tips of the iceberg. The Indian side was keen to obtain and locally produce sophisticated systems, such as Electro-optical, communications and electronic warfare equipment, considered as strategic capabilities that Russia or other suppliers could not deliver at that time, and Western suppliers were not willing to provide.

Since those days the geopolitical map changed. India established its position as a dominant military and economic power, and, with ongoing modernization of its huge military force, evolved as the world’s largest defense importer. Now as Russia recovered its defense industry, both in the level of sophistication, production scale and competitiveness, India’s biggest suppliers are the world’s two superpowers. The USA that was reluctant to export to India in the past have entered the market with full swing driving billions in annual military sales. European manufacturers that went through conglomeration in recent years are now larger, hungrier and more powerful and influential, leveraging political pressure by European leaders to promote military sales. Can Israel maintain its position facing these odds?

While the Indian defense market is huge, it is also complex. Endurance needs extreme patience and commitment, to walk the long way with the customer, particularly in the changing landscape created by the new reforms. Overall, Israel welcomes the new regulations under the ‘Make in India’ since the new rules enable Israeli companies to operate in India with more confidence. The successful maturation of major projects, including the Phalcon AWACS and LRSAM naval defense systems, proved how Indo-Israeli development programs are over coming obstacles and succeed when both sides join in true partnership.

These programs were launched in times when Joint Ventures (JVs) were more challenging but culminated in a market environment much more hospitable for business as foreign companies can set up JVs in India with almost equal shares (49:51),in compliance with Indian rules on foreign direct investment (FDI).With a bigger stake in the business, foreign partners are more comfortable in sharing and transferring sensitive technologies needed by the Indian side, enabling the JV to leverage the full potential of future sales.

In the past, locally produced weapon systems were considered inferior and costlier to those produced by Original Equipment Manufacturers (OEM). Moreover, Transfer of Technology (TOT) demanded by the Indian authorities as part of major programs was never easy to fulfill, since foreign suppliers were reluctant to release technologies that could turn today’s partners into future competitors. Today, as the foreign side keeps an almost equal ownership in JVs, TOT can be done with more confidence. Furthermore, joint procurements, where both sides share the production and support, assure that manufacturing and supply chain will be efficient and meet the quality on both sides.

The Indian market remains very attractive for the Israeli offerings, as, unlike its competitors from East and West, Israeli companies offer upgrades and enhancements to all types of equipment, from east, west as well as indigenous Indian systems. Combat aircraft, helicopters, vehicles and vessels, electronic equipment and air defenses, can all be improved with Israeli know-how. In the past,such upgrades relied primarily on Israel’s own combat experience, but today, many programs use research and development invested jointly by India and Israel, to field the most suitable equipment to fulfill the customer’s requirements.

Make with India

As a small country, export is what makes Israel unique. Unlike its competitors, that consider export secondary to their domestic and regional activities, Israel’s defense companies are all export oriented, with share of export ranging from 75% to 50% of their annual sales. On the other hand, research and development (R&D) is often oriented to address local needs. Leveraging joint research and development programs Israel could benefit from R&D cost sharing, with industries leveraging the follow-on sales and support of such products through their JVs with Indian companies.

Israel’s defense establishment has recognized this opportunity and Israel’s Ministry of Defense (MOD) named the cooperation with India in the highest priority, by streamlining the activities of Defense R&D Agency (Mafat), Defense Export Control Regulator (API), Security and Defense Export and International Cooperation Directorates. All these stakeholders are brought together to speed up permissions and processes and minimize bureaucracy to promote Israeli-Indian cooperation.

As an important and trustable ally, India has access to most of the technologies, systems and capabilities Israel can export and is now sharing research and development of future systems and capabilities that will gain their military forces an overmatch over future adversaries.

Make in Israel – lessons learned

In the 1950s – 1970s Israel went through government directives that imposed ‘Made in Israel’ policy, aimed to encourage the use of domestic products and establishment of local industrial ventures regardless of efficiency or scale. This policy came to a climax in the 1970s, under the international embargo that followed the Six Day War in 1967, when Israel was cut off its defense suppliers in France and the UK and had to develop self-reliance in major weapon systems over a period of few years. This dramatic turn caused government owned companies to expand and scale up their operation, and also encouraged the private sector to join the supply line as subcontractors and manufacturers of specialty products, creating a new industrial ecosystem that supported Israel’s rapid military growth. The Yom Kippur War, the war that followed in six years accelerated this process added to Israel’s accepting the need for self-reliance but also realizing its costs and limits.

By then Israel was producing its combat planes, missile boats, and armored vehicles. A decade later, Israeli government canceled the Lavi – Israel’s indigenous fighter program. Israel decided to buy combat aircraft off the shelf from the USA, and shift investments to new areas that would provide overmatch over its adversary well into the future. Intelligent standoff weapons, guided missiles and drones were among those ‘surprises’ that overwhelmed Israel’s enemies in the battles and became popular defense export items.

Today Israel buys most of its military hardware from abroad, but even without producing major platforms, it is ranked among the world’s top 10 arms exporters. The fact that Israel does not provide main platforms, and some of the world’s biggest markets are closed to Israeli exports makes Israel a major competitor in the markets it is active in – Asia, Europe, and North and Latin America.

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Excellence and innovation are among the main drivers of this competitiveness and success. Embracing the digital revolution and technological race, Israel no longer seeks a ‘Made in Israel’ attitude for everything, but rather those that are truly unique and superior over what can be obtained abroad. This attitude is more suitable to Israel’s typical innovative character and is what makes Israeli products competitive abroad. As such, Israel acts as a ‘testing lab’ for new products, enabling local companies to expand overseas with a competitive advantage that bigger and slower companies rarely have. On the national level support is given to certain areas deemed critical for national defense or other priorities, in investments, regulation and other forms of assistance, nurturing ‘’centers of excellence’’ for the defense industry, electro-optics, security and cyber, as well as agro technology, water, and health.

Heron

The IAI Example

With nearly US$ four billion in annual sales, Israel Aerospace Industries (IAI) reported US$2.5 billion new sales in India in the first half of 2017, as multiple projects of large scale mature after years of negotiations.

“We look at India as one of the most dominant markets for IAI,” said Eli Elfassi, VP Marketing of IAI. “Our goal is to continue and strengthen our position in this strategic market, despite the growing competition,” Elfassi added that the excellent reputation and confidence IAI have won over the years with the Indian customers are instrumental in continued success.

Over three decades of operation in India IAI now serves all the Indian military branches and many government agencies throughout the sub-continent. As a global leader in air and missile defense, IAI’s systems now protect Indian naval vessels and are becoming part of the country’s air defense system. Airborne Early Warning aircraft, ground and naval based radars are among the building blocks of major defense systems developed for use with India’s and Israel’s defense forces. IAI and its Indian partners are extending those mature systems, introducing more models, tailored to discuss specific customer requirements.

With nearly US$ four billion in annual sales, Israel Aerospace Industries (IAI) is looking at around one billion US$ Billions of sales per year in India, as multiple projects of large scale mature after years of negotiations. “We look at India as one of the most dominant markets for IAI,” said Eli Elfassi, VP Marketing of IAI. “Our goal is to continue and strengthen our position in this strategic market, despite the growing competition,” Elfassi added that the excellent reputation and confidence IAI have won over the years with the Indian customers are instrumental in continued success.

Over three decades of operation in India IAI now serves all the Indian military branches and many government agencies throughout the sub-continent. As a global leader in air and missile defense, IAI’s systems now protect Indian naval vessels and are becoming part of the country’s air defense system. Airborne Early Warning aircraft, ground and naval based radars are among the building blocks of major defense systems developed for use with India’s and Israel’s defense forces. IAI and its Indian partners are extending those mature systems, introducing more models, tailored to discuss specific customer requirements.

Other projects IAI fielded in India include sales of Heron and Searcher unmanned aerial systems. Foreign sources also reported on the sale of Harop and Harpy loitering weapons. The latest addition to IAI’s offering is the UAV operation center, giving operators at the territorial command or national level with the ability to manage, control and support a large force of drones.

Satellites are another area of leadership for IAI; satellites developed and produced here are orbiting in space supporting remote sensing and communications for national security and commercial users. IAI also offers unique payloads for satellites, enabling users to conduct reconnaissance missions in day or night, and during monsoon season, regardless of cloud coverage.

Projects worth billions need significant local work share and, over decades of cooperation with the Indian industry, IAI was the first foreign company to fulfill offset obligations and have spent over US$800 million buying in India. The company has excelled in developing close relations with local contractors, suppliers, and partners. “Through the years, we developed a network of subcontractors and partners. We found here all the necessary technologies; there is a mature infrastructure, suppliers have the will and technical and quality levels to enter development and production of advanced systems, we transfer more orders with time.” Elfassi said.

To make the most of the new MAKE IN INDIA policy IAI is planning to expand its operation here. “We plan to go beyond the JVs we already have here and expand our partnerships to JVs established on a divisional basis, with different Indian partners. This will enable us to better compete for specific opportunities and broaden the cooperation within our Indian JVs.” Elfassi said that new JVs are not replacing existing partnerships and cooperations. “Each model has its benefits and strengths, and our ongoing activities will continue to prove themselves,” he noted. This is particularly true in the new and uncharted waters of Make-in-India regulations, Elfassi added that new JVs the company plans to launch under IAI’s divisions, will diversify the company’s activities and benefit from wider access to opportunities and capabilities in the country.

Early Adaptors

The Israelis were among the first to spot the change of the wind in the Indian market and, as early adaptors; they set up local JVs and partnerships even when the formation of such enterprises was not too attractive from a business perspective. In fact, Israel was first to endorse ‘Make in India’ schemes in its business in India, even before this strategy was announced. Soon after the official establishment of relations between the two countries leading Israeli companies recognized the advantages of established subsidiaries in India to outsource and produce in the country. Some involved transfer of technology to Public Sector Undertaking (PSU) and others moved production lines to Joint Ventures with companies in the private sector. Among the products were radars, electro-optical devices, electronic warfare and avionics that were developed in Israel and produced and supported in India for the local market.

The first cooperation between Indian and Israeli companies was formed with PSUs, primarily BEL, HAL and OFB. Only recently, having almost equal ownership in partnerships enabled the Israelis to set up JVs with the private sector, and once the gate was opened, there is a flood of opportunities.

As ‘Make in India’ policy came into place it found Israel’s defense industries more than prepared and Indian partners, from giants mega corporations to Micro, Small and Medium Enterprises (MSME), are happy to cooperate. Since the beginning of 2017 many JVs were announced, by large and small companies, many programs are already set to produce products and services for ongoing programs, other still idling in anticipation of new programs. Following is a selection of some of these announcements:

IAI, Israel’s largest exporter to India, is already associated with hundreds of Indian suppliers and partners and runs several JVs on different programs with major private sector companies in India. In February 2017 the company announced an agreement with the Kalyani Strategic Systems (KSSL), the defense arm of a Kalyani Group, to develop, build, market and manufacture selected air defense systems and lightweight special purpose munitions. A few months later the two companies expanded this cooperation to operate a maintenance center in Hyderabad for the air defense systems they intend to offer.

IAI/ELTA also has HELA Systems as a joint venture company with TATA Advanced Systems. HELA specializes in the development and manufacturing of defense electronics in India, combining ELTA’s latest technologies with TATA Advanced System’s experience and resources including radar, communications, electronic warfare, and homeland security and surveillance systems.

The LRSAM missile is an excellent example of such process, developed under a cooperative program lead by IAI, with DRDO, RAFAEL and Bharat Dynamics, resulting in one of the world’s most advanced weapon systems, offering a highly versatile point and area defense system that has already found new customers worldwide. While IAI is the prime contractor for the program, and is aggressively marketing it worldwide, India handles half of the program and will benefit from the program success in India and abroad. Indian industries are already producing significant parts of the systems, including the serial production of missiles celebrated at BDL in Hyderabad recently.

While IAI was the prime contractor for the weapon systems’ development, once the system enters production IAI becomes a subcontractor under the Indian partner. In May 2017 BEL received the first order to deliver four LRSAM for the Indian Navy.

A similar undertaking follows the manufacturing of Spike missiles. The missiles were developed in Israel, but BDL will assemble, and integrate the missiles for the Indian Army. To bring more content to its local operation and meet ‘Make in India’ guidelines RAFAEL wanted to do more and entered an agreement with Kalyani to produce systems and components for its missiles.

In August 2017, the JV inaugurated a modern production facility in Hyderabad where the JV intends to produce components and subsystems for guided missiles. Kalyani Rafael Advanced Systems (KRAS), is India’s first private-sector defense sub-systems manufacturing entity. Spread across an area of 24,000 sq.ft., the facility will enable the production of high-end technology systems for the Spike systems and other munitions, for use by the Indian Armed Forces. It will be engaged in the development of a wide range of advanced capabilities like Command Control and Guidance, Electro-Optics, Remote Weapon Systems, Precision Guided Munitions and System Engineering for System Integration. The facility will also target to export products to other countries. For Air Defense and Air to Air domain, both products selected by the Indian Air Force, Navy and Army, Rafael is forming a JV company with Reliance, Rafael Reliance Advanced Defense Systems (RDS). The JV will be able to support the Indian customer an indigenous manufacturing and support for ongoing programs as well as new ones.

Rafael is also creating another JV company in Hyderabad-Astra Rafael Communications (ARC) with Astra Microwave, this enterprise is needed to enable it to maximize the indigenization of its Software Defined Radio (SDR) and EW systems selected by the Indian Air Force. RAFAEL is also producing LITENING weapon designation pods for the Indian Air Force. In its delivery of Litening targeting pods, Rafael went above the expectations of merely providing 30% offsets, and is now producing the majority of the pod in India through a tech tie-up with DEFSYS located in Gurgaon. DefSys will also start manufacturing various Israeli designed EO systems under another JV struck with RAFAEL’s part-subsidiary Controp.

Other JVs recently announced by Israeli and Indian companies include the inauguration of a small arms factory in Malanpur in Madhya Pradesh under a JV between India’s Punj Lloyd and Israel Weapon Industries (IWI) to produce firearms in anticipation for the selection of a new close combat weapon for the Indian Army. The plant will produce parts for IWI’s X95 and Tavor carbines and assault rifles, Galil Sniper Rifles and Negev light machine guns. At a later phases, it would be expanded to manufacture complete small arms, thus becoming India’s first private sector small arms manufacturing plant. IWI sister company Meprolight has already established JV with Rolta to produce advanced weapon sights.

Israel’s largest privately held defense company Elbit Systems is also involved with some JVs in India, some, established years ago with PSU such as BEL and HAL are operating successfully for many years. Others, announced more recently, include entries into new fields. A JV with private sector enterprises included Bharat Forge, of the Kalyani Group, eying major land systems including artillery and mortars. Another, with Adani and Alpha Design (“Alpha-Elsec”) focused on unmanned aerial vehicles (UAV), electronic and EO systems.

Why is it important to India

Israel is not the only foreign player in the Indian market. In fact, the major competitions for fighter aircraft, submarines or helicopters are competing ‘over the head’ of the Israelis since Israel is not competing to sell major platforms. However, when specific capabilities of weapon systems, command and control or cyber warfare are considered, all those programs become relevant. That is where Israel’s offerings excel.

Indo-Israeli JVs also become relevant to the adaptation, indigenization and upgrading of such platforms to maximize performance and value, relying on domestic skills, know-how and support with access to the design innovation and accelerated development offered by the Israeli side.

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It is relevant particularly with complex systems, as demonstrated in the recent wins of LRSAM, MRSAM and SPIKE programs.

The close cooperation between the defense R&D establishments of the two countries help formulate new, classified programs to offset and overmatch adversaries in defense, HLS and the cyber domains.