Indian Defence Review

HAL-LCH

HAL thrives primarily due to its monopoly and government patronage, rather than any inherent excellence. It is happy with being indispensable. A sense of complacency is generated by a plethora of captive orders from the defence forces. While its domestic sales are steadily increasing, exports – a more accurate measure of competence – are few and far between. Competition serves to make any industry more efficient but HAL has never faced serious competition. In fact, it appears reluctant to compete with the private sector.

Licensed production, that HAL hankers after, stifles original thinking and innovative design skill. It also hugely increases costs. For instance, a Sukhoi 30MKI fighter comes for about $55 million if imported from Russia. However, the price of the same aircraft when assembled by HAL soars to $68 million. As a result, HAL has neither been able to build a genuine expertise base nor the technological infrastructure necessary to design and produce advanced combat aircraft.

To cap it all, though HAL is embroiled in the development and production of many different types of military aircraft, it wants more. Its fighter production facilities are fully committed to the Su-30MKI and the Tejas LCA, so much so that satisfactory product support for the Su-30MKI fleet is reportedly lacking. HAL is also in various stages of manufacture or development of the Hawk Advanced Jet Trainer (AJT), the Dhruv Advanced Light Helicopter (ALH), the Rudra Light Combat Helicopter (LCH), the Light Utility Helicopter (LUH) and the Dornier-228 light transport plane. Many of these projects are experiencing significant delays. Yet HAL is angling for another slice of the defence aerospace pie – the Avro replacement project.

Replace in Time to Save Nine

In industry circles, the HS-748 Avro replacement deal is emerging as a test case of the government’s sincerity about involving the private sector in defence aerospace manufacturing. The twin-turboprop Avros with a payload capacity of 5.1 tonnes were acquired from Britain’s Hawker Siddeley from 1964 onwards and later produced under licence by HAL. About 56 aircraft remain in service, well past their useful life. They are in urgent need of replacement in order to pre-empt emerging flight safety issues. A global tender valued at about $2.5 billion for the supply of 56 new aircraft was issued in May 2013. These aircraft are to be bought from a foreign OEM who must tie up with one or more Indian private sector partners and nominate an Indian Production Agency (IPA).

Avro HS748

While 16 aircraft will be bought off-the-shelf from the selected vendor, 40 must be produced in India. The Request for Proposal (RFP) was sent to eight foreign manufacturers – Airbus Military (Spain), Alenia Aermacchi (Italy), Boeing and Lockheed Martin (United States), Antonov (Ukraine), Ilyushin (Russia) and Embraer (Brazil).

However, an objection was later raised on the grounds that the PSUs (read HAL) were supposedly being denied an opportunity to submit their own proposals. This flew in the face of the fact that HAL is heavily overloaded with existing commitments. Besides, since the idea is to encourage the private sector to make a beginning in the aerospace industry, the Avro replacement deal seems tailor-made for the purpose. It is a typical entry-level project, neither strategic nor requiring advanced technology.

Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII) has warned that revisiting the programme at this advanced stage will not only stall the project but also discourage private industry from investing in future defence projects. The deadline having been twice extended any decision now awaits the new government.

Time to Go Private

Clearly the aerospace needs of India, civilian as well as defence, are growing. The public sector which has so far been tasked to meet these needs has failed to deliver. What’s more, as aerospace production becomes more complex, the public sector is likely to fall even further behind in the race.

Vested interests have long fostered the myth that private sector companies are less likely to uphold the national interest than the PSUs. The private aerospace industry has been kept in a stranglehold and not allowed to realise its potential. Isn’t it strange that reputed firms like Tata, Birla and M&M have been given the cold shoulder because HAL is supposedly more trustworthy when it comes to defence matters? Yet Boeing is a reliable partner in America’s defence, Airbus in Europe’s and Embraer in Brazil’s. The government must realise that both public and private sectors are national assets; both are necessary to achieve self-reliance in the shortest possible time.

While structural discrimination against the private sector needs to be addressed without delay, the purpose is not served by junking HAL. Synergising efforts is imperative to overcome the hurdles on the road to the indigenisation of defence aerospace manufacturing. HAL has excellent infrastructure and manufacturing facilities and a highly experienced personnel base. The private sector can contribute advanced technology, financial management and marketing skills. Quality assurance is another critical area where it is better paced to deliver. And the Public – Private Partnership (PPP) model of joint ventures can leverage the potential of both sectors.

However, as the Avro replacement deal highlights, private enterprise is unlikely to be attracted by small piecemeal contracts. Huge investments are needed to set up a new indigenous production line, train workers, and establish supply chains, and the proposed order of 56 aircraft seems insufficient to reap the benefits of economies of scale. Unless the government makes a long-term commitment and provides some assurance of follow-on orders, what rational entrepreneur would be willing to invest in an expensive venture of this kind?

Indian aerospace firms are already strongly competitive albeit at the lower end of the value chain in offering quality products at reduced cost. However, HAL’s 2,400 suppliers, for instance, are all of Tier 3 category. They need to be encouraged to move up the value chain and become Tier 1 and Tier 2 suppliers. Aerospace and defence Special Economic Zones (SEZs) are a promising way to achieve this. SEZs save time and expense by accommodating many vendors in close proximity where they can interact and synergise their efforts to set up a precision engineering and manufacturing ecosystem. Their nearness also helps to save time and money that would otherwise be wasted in moving materials and components from one place to another. The SEZ site can be strategically chosen to make use of low cost of land, infrastructure, power and water. Raw materials development capability also needs to be gradually built up in the close vicinity.

Take the Outstretched Foreign Hand

Aerospace is a highly specialised industry with only a handful of global players. Analysts believe that India’s private aerospace industry may be some years away from being able to undertake complete assembly and systems integration of a medium transport aircraft like the Avro. However, it needs to make a start. And foreign collaboration is the quickest and best way to energise the sector.

Globalisation and liberalisation have created a network of interdependence across the global aerospace scene that is mutually beneficial. Joint ventures with foreign corporations can help the domestic aerospace industry in rapidly building aerospace knowledge and introducing state-of-the-art manufacturing processes, thus catalysing growth. However, the lurking suspicion of the ‘foreign hand’ needs to be overcome first.

For Indian private aerospace manufacturing to flourish, the FDI limit needs to be raised to at least 74 per cent. Chronic opponents of FDI will immediately object, “What about indigenous industry? What about security in this sensitive sector?” Truth be told, the domestic aerospace industry is in no position to achieve modern production standards without foreign investment, expertise and high-end technologies. Security concerns can be rationally addressed by including necessary clauses in the initial licence – including the right to take over a facility if the terms and conditions are breached. Actually when it comes to assurance of uninterrupted supply, especially in an emergency, indigenous production under licence is far superior to pure imports.

If properly leveraged, the government’s Defence Offset Guidelines can also provide major impetus to the private aerospace manufacturing sector. In November 2013, Air Marshal P.P Reddy, Director General (Inspection & Safety) disclosed that the service is likely to procure equipment and platforms worth $150 billion over the next 15 years. Since the Guidelines specify that any foreign defence contract valued at Rs 3,000 million or more will entail an offset obligation of between 30 and 50 per cent, the total value of offsets accruing can only be imagined.

For instance, the deal with Dassault Aviation to acquire 126 Rafale Medium Multi-role Combat Aircraft (MMRCA) may generate $10 billion through offsets. Offset obligations can be met either through direct purchase, investment or technology transfer. The government needs to ensure that they are not frittered away but are used by industry, especially the private sector, to acquire innovative aeronautical technologies and gain expertise in the vital areas of aerospace design, development, and precision manufacturing. This would satisfy the primary aim of the Guidelines “to foster development of internationally competitive enterprises”.

Finally, it goes without saying that aerospace products are highly engineered and all production processes must be meticulously certified. From the smallest screw to the largest integrated assembly, each part needs to be traceable and everything must precisely meet specifications and stringent quality controls. Otherwise safety could easily be compromised. That is why no country today dreams of manufacturing aerospace assemblies all by itself. Even the world’s leading conglomerates such as Airbus and Boeing source components and sub-assemblies from several countries. They find it cheaper, faster and more efficient to obtain items from locations that have specialised in their production and in rigid quality control. Why should India’s private aerospace industry be any different?