Sunday, 8 August 2010

You got it! Now deserve it

by Ajai Shukla
Business Standard, 10th Aug 10

Three Indian private companies with ambitions in the defence sector won a major battle when they were invited to compete, on level terms with the public sector, in developing a Future Infantry Combat Vehicle (FICV) for the Indian Army. In the FICV project, the Ministry of Defence (MoD) has conceded almost everything that the private sector has demanded since it was allowed into defence production in 2001. The MoD will fund 80% of the development cost of the FICV. And, with the army looking to buy in quantity, economies of scale are guaranteed during production.

For those who did not read yesterday’s Business Standard, four Indian companies --- Tata Motors; the Mahindra Group; L&T; and the MoD-owned Ordnance Factory Board (OFB) --- will submit proposals on 25th August for designing and building 2600 new-generation FICVs. Two vendors with the best proposals will be invited to develop a prototype each, contributing just 20% of the expense. Then, after the army chooses the better design, the winner will build 65-70% of the army’s requirement of FICVs; the runner up will build the rest.

In this welcome decision the MoD has followed the American defence procurement model, in which the Pentagon funds a development competition between two or more private companies for each new weapons system. So far New Delhi has usually nominated the Defence R&D Organisation (DRDO) to develop such systems and the OFB to manufacture them.

But with big changes come high expectations. Having granted the private sector its wish list, the MoD and the Indian Army will carefully observe how the private vendors handle their first-ever development contract. Any shorfalls will reinforce long-held MoD prejudices. “We told you so!” will go the chorus in South Block, “Only the public sector has the skills and the commitment needed for defence production.”

The comparison may even be directly tested, since the OFB --- potentially in partnership with the DRDO --- is in contention to develop the FICV.

There are three pitfalls that the private sector must avoid. Firstly, the selected vendor(s) must not fall short of the army’s expectations, or in providing users with a development experience that contrasts tellingly with past experience with the DRDO and OFB. In this, a draw would be a loss; only an innings victory would suffice.

Secondly, the private sector must not front for foreign partners, who seek to bring in existing products by the back door. As the debutante private vendors step into the FICV arena, the spotlight will play unkindly on those clutching the arm of a muscular foreign partner.

Global arms majors have figured that a risk-free way of cracking India’s difficult procurement procedures is to partner an Indian company in a “Make” contract, and pass off existing products under the rubric of “joint development”. A top manager in one of the private companies vying for the FICV contract recounts, “I have received more partnership proposals for the FICV than I ever received for any other weapons platform.”

Reflecting this trend, private companies worry that the OFB is about to join hands with Russian export controller, Rosonboronexport, to “jointly develop” a variant of the tested BMP-3 ICV. To circumvent such a possibility, the private vendors must accept the developmental risk of proposing an FICV that is technologically beyond anything on the market today. They have been asked to develop a Futuristic-ICV. The specifications they submit on the 25th must go well beyond avant-garde.

Thirdly, when history is written, the FICV will be less about who built it or how much profit was made. This chapter will be more about whether India’s private sector used this heaven-sent, MoD-funded opportunity to build its technological capability. Private sector managers argue that each technology decision --- whether to develop or buy --- should be treated as a business case. But this irreproachable commercial logic misses the significance of this turning point. The private sector’s success in grabbing the moment will be measured in the currency of technologies that were developed along with the FICV.

Certain technologies that will go into the FICV are presently beyond the vendors, e.g. an indigenous engine, or transmission system. If a technological breakthrough seems impossible during the FICV’s development, a foreign partnership is a better option than holding the project hostage. But there are many achievable technologies and sub-systems --- e.g. in electronics, ballistic computation, night-vision devices, fire control systems, and gun control systems --- that can realistically be achieved by putting more money into R&D. If the MoD is unwilling to go beyond what was tendered, private vendors need to loosen their purse strings. At the end of the FICV project, the private vendors must be able to point out key technologies that they developed in-country.

The MoD’s “Make” procedure mandates that 50% of the FICV must be indigenously produced. This is easily achieved by producing low-and-mid-end systems and components like the armoured hull and turret, the suspension system, the electricals and the basic electronics. A more convincing measure of success for the private sector would be an ability to claim that it met that 50% requirement in components that were developed and refined during the course of the FICV project.

12 comments:

Bring it on said...

Awesome Article. Hats off to you Shukla Sir.

Anonymous said...

Can u please tell us if the companies will hold any kind of student design competition and then improve on their designs or if is there anything of this sort in India which encourages students to pursue a career in defense R&D

Rahul said...

the winner will build 65-70% of the army’s requirement of FICVs; the runner up will build the rest.
Will runner-up build winning design or their own design? And if winning design then does it mean winner will ToT to looser?

Ajai Sir please clarify.

Thank You.

darshan kumar said...

technology has an eco-system and environment for development. Having worked in high tech and engineering field for over a decade after 15 years in various branches of AF and DRDO, I can safely foresee the results of these excercises.

The result is : DRDO+OFB winner.
runner up:DRDO+ OFB.

We bid for an open tender recently - in competition with two state owned enterprises: our quotes were valued at 10 % higher than PSUs automatically.
Secondly, no govt agency will give 80 % of money (tax payer money)without due diligence based on a future promise, otherwise CAG/CVC will tear such a thing apart. Thirdly, no pvt agency can satisfy frequently changing QRs of Moon of army and defence. Only DRDO has the capability of forcing down the throat of whatever indigenous product they develop.

Spirit of Exuberance said...

Dear Mr. Ajay,
A very fine article, as always from you. But still how the contract will actually materialise is the fear in most of people`s mind. There was some news about Special Economic Zone specially dedicated for Defence equipments. Few moons back there was some statement from the state of Gujarat about providing land for the same. We all are very eagerly waiting for your detailed article on the forward/ backward report on Indian Defence PSU.

Anonymous said...

Best thing would be that drdo shares its know-how already developed with each private sector in exchange for royalty/unit sold basis. And OFB is retracted from participation and this be made exclusively indian private-sector competition

Ra said...

Exactly! It is a turning point and now the ball is in the court of private sectors. Now it is the turn of Pvt sector to prove their mettle.

Pvt sector should not feel fussy about the presence of the OFB, as they have to compete not only against the OFB but also among themselves.

They have nothing to lose as I think there are more than one winners.

Anonymous said...

Hope to see a good effort by the pvt companies.

AK said...

Excellent article Ajaiji. I think most of us have failed to realise the historic significance of this defence deal.

Lets face the bitter fact that India's private sector has never created any intellectual property in any hi-tech field.
For example, Hero Honda can't even develop a 100cc engine and transmission after decades of manufacturing experience. All their technology is licensed from Honda. Now that Honda has opened it's own shop in India, they are slowing turning the screws on Hero to capture Indian market. Since Hero has zilch IP and they are feeling the pain now. Maruti (Suzuki), Hyundai (Korean), Fiat (Italian) all the top brands are foreign and do not do any reasonable research and development work in India even after decades being here. Even Tata uses Fiat sourced diesel engines on the better models. Mahindra also sources their engines from Austria on higher end models.

So basically, India has never developed and manufactured any world class , reliable vehicle.

In such a bleak scenario, we now have the same private companies vying for a hi-tech and extremely complicated system. At the outset it looks like an impossibly challenging task. If they can rise up to the challenge and are able to locally develop a world class system then it will forever change the defence landscape. It would lay the foundation of a true Indian military industrial complex. However, the failure of this project can cast a dark and gloomy shadow on the same for a long time to come.

We can only wish that something positive comes out of this whole process. Godspeed and tailwinds!

Anonymous said...

@AK
You made a good point. But buddy I think Indian private sector has one strength to pull any elephant from any part of the world over here. So lets lets see what will happen

Anonymous said...

the key issue is whether the three private players make good of this oppourtunity. because if the OFB is going to join hands with the Russian arms exporter then the contractual prospects for the private industry could be grim.

the other issue is how does one reconcile the 80% government share for development of the prototype and that too for four different players. would that be a fixed amount or open ended. i think this could even affect the quality of prototype produced.

Nellis said...

You guys are missing the point. It should not be that the pvt sector needs to prove itself. The most important thing the govt should be doing is making sure high tech knowledge comes to india and india becomes a leader. To do this, it needs the pvt sector (DRDO/HAL cannot do this, they havent been able to for 60 years) to take part in defence, which automatically means giving them contracts,funding etc

But the govt seems to be missing the point and trying to make it a pvt vs public contest. This wont help india in the long run