Tuesday, 3 April 2012

Made by India, not Made in India


It is for the government -- through FDI caps and licensing -- to nurture Indian defence players rather than exposing them to a brutal marketplace

by Ajai Shukla
Business Standard, 3rd Apr 12

In a timely article on this page, Nitin Pai has addressed the vital question of how to equip India’s military, without delays and with bang for the buck (“Buying into superstition instead of military strategy”, April 1). A debate on this crucial issue is a black hole in our national discourse. The defence of the realm will cost some Rs 2 lakh crore this coming year. With defence spending rising some 15 per cent annually, that figure could double every five or six years.


Pai’s conclusions, however, are questionable. He argues that the dogmatic pursuit of indigenisation is a mistake that has led to powerful defence public sector undertakings (DPSUs) capturing policy, and to burdensome procurement regulations. Far better, says Pai, to throw open the door to foreign industry, which will promote defence indigenisation just as it did in the automobile sector.
In fact, there is ambivalence rather than dogmatism over defence indigenisation. There is broad national consensus on indigenising atomic and space capabilities because no country parts with the technology that drives nuclear weapons, reactors and fuel enrichment — or rockets and satellites. But in defence there is a two-faced approach. Advanced countries eagerly seek buyers for legacy equipment and technology. But in cutting-edge defence technologies, which have cost billions to develop, the rules of atomic and space commerce apply.

Technology denial exists not just in strategic systems like ballistic missiles but increasingly in tactical systems. Take, for example, the electronic command systems that determine winners and losers in today’s digitally networked battlefield. In the good old days, your new fighter required just an interoperable radio for joining the air defence network. “Mission 101, hard right, 300 degrees, buster 500 knots, maintain 3,000 feet; target bearing 270 degrees; 40 nautical miles, six aircraft in trail formation, low level,” you would hear in your headphones and you gunned your Mirage-2000 into aerial combat. Today, it plays out differently. The intruding fighters might be picked up by your airborne warning and control system (AWACS); or radar network; or even an unmanned airborne vehicle; or satellite. An “identification friend or foe (IFF)” kit would electronically ascertain that these were hostile aircraft. An electronic decision support system (DSS) that tracks every “Blue Force” aircraft would determine that your Sukhoi-30MKI was best placed to intercept the intruders. The engagement order would be passed as a coded digital message to your weapons systems officer in the rear cockpit; and you would swoop down on the enemy without a word having been said.

Since all these systems must talk to each other, indigenisation becomes ever more essential as the battlefield becomes increasingly networked. Foreign electronic command systems, or a DSS, or AWACS, or IFF kit, or the electronic warfare (EW) systems that make your fighter invisible to enemy radar would pose not just issues of interoperability, but also carry security risks: malware that snoops, or kill-switches that render it inoperable at crucial moments. Linking new fighters, or radars, into this electronic network would only be possible if the vendor parts with software source codes, something that most manufacturers are loath to do.

The pursuit of indigenisation, therefore, has to be sharply focused. Clarity is essential to avoid reinventing the wheel, and for this the ministry of defence (MoD) is (finally!) coming out with a 15-year Long-Term Integrated Perspective Plan (LTIPP) for 2012-2027. This will provide the defence industry with a road map of the capabilities and technologies that the military will require, thus providing a clear direction for R&D efforts. The MoD’s defence acquisitions chief, Vivek Rae, promised during last week’s Defexpo that this would be promulgated on the MoD’s website in three or four months.

This would provide a more level playing field for Indian private industry, which has historically played second fiddle to the eight DPSUs. Pai incorrectly ascribes their enormous clout in South Block to the “dogmatic pursuit of indigenisation”. In fact several DPSUs, notably BEL and BEML, have undermined indigenisation by serving as fronts for the back-door induction of foreign technology through partnerships with foreign vendors. The real problem with DPSUs is structural; placing them under the MoD has crowded out the private sector since bureaucrats, themselves members of the DPSUs’ boards, have patronised the DPSUs over the private sector.

There is, therefore, a need to review the DPSUs’ control structure. One option would be to break their patrimonial links with the MoD by placing them under the Department of Heavy Industries. But to throw out indigenisation itself while reforming the defence public sector would be a self-destructive ejection of the baby with the bathwater.

Finally, it is naïve to apply the automotive industry template onto defence production. Unlike the former, where purely market forces are in play, the strategic dimensions of defence technologies result in tight government regulation. America’s International Trafficking in Arms Regulations and the licensing rules of the US State Department ensure that US defence manufacturers, which are custodians of defence technology, require a licence for even a dialogue with an Indian partner. Government decisions, not market forces, determine whether technology is transferred or not.

Nevertheless, foreign defence industry must be allowed into India. It enhances production quality by exposing Indian industry to global standards and helps in creating the broad industrial eco-structure essential for developing high-technology defence systems. However, Indian private developers of high-technology systems (and the first level is already emerging) apprehend that the unconstrained entry of foreign vendors would allow them to kill off nascent Indian capabilities through predatory pricing policies and strategic acquisitions. It is for the government – through FDI caps and licensing requirements – to nurture the fledgling Indian defence players rather than exposing them prematurely to a brutal marketplace.

17 comments:

Anonymous said...

Ajai. You are asking the government to be "smart", have a "policy" and actually do something sensible. Sorry. I am highly skeptical of the Govts in India to do such things. The Govt is corrupt,short sighted, driven by vested interests, available for sale and is driven by political calculations of the Neta/Babu/Defense Agent triangle (in defence, in other areas, instead of agent, substitute industrialist). Oh, yeah, an individual bureaucrat/mantri might be fine and upright and brilliant, but the system as a whole is shot and geared towards it.

And good luck to any industrialist willing to put money on the promises and policies of the MoD. It happened 30/40 years ago (including multiple companies), which never saw a single paisa in returns, same will happen with the L&T, Kalyani's and others of the world who are venturing into armaments. The best that can happen is a Tata or AL selling trucks and jeeps to the army.

Parvez Khokhar said...

Thank you, Ajai, for a very balanced view and arranging the facts in perspective. I have one comment on the Source Codes...For all our EW systems and for Network Centric Operations, they are invariably indigenised, not only because the OEM is reluctant to part with them, but also to ensure that no one else is privy to these codes.
No defence technology can enter this country, without an Indian partner. Whilst DPSUs have had a head start on this and often label products produced via this route as 'indigenous', the Private Sector is cautiously entering into such partnerships for obvious reasons. The latter require a firm commitment fro the end user to justify the investment. The IAF's decision to buy a replacement for the Avro HS 748 which is locally produced by the Private Sector, albeit with a Foreign partner, is an encouraging move. More such commitments have to be made by the Services to get the Private Industry off the ground. The competition thus created may be just the catalyst needed to shake the DPSUs from their smug reverie into action to improve quality and adhere to time-lines.
To suggest 'accountabilty' into DPSUs may be a bit Utopian at this stage, since this word is alien to all civil governmental organisations! But that is the panacea for all the ills that beset the government and its various organisations.

Rohit Agarwal said...

As long as they have captive customers in the armed forces, the DPSUs and Ordnance Factories have no incentive for improving their products. Substandard products are thrust on the forces in the name of promoting indigenous production. When it comes to testing their mettle in the open market, these white elephants have failed miserably - I wonder if you remember the Jongas that VFJ had launched for the market about a decade or so back. Needless to it sank without a trace.
I wonder if the success, in contrast, of similar organizations in Space and Nuclear energy, are due to the fact that the research / production agencies are directly accountable to the customer / user?

Anonymous said...

Well done!

Anonymous said...

Good analysis, you have rightly pointed out that we mustn't move from one extreme[DPSU is king] to another[LM and Boeing are king].

But, move we must and this should be done quickly and decisively not the dithering everyone is becoming used to.

Lets hope they, who are paid to make decisions make them quickly and correctly.

Anonymous said...

DARPA, Technology Readiness Level, Capability Maturity Model, Total Quality Management, Systems Engineering

There are the things which we need in India right now, and as it appears from your article we have just started on our first step towards forming something similar to DARPA, something which the US did in 1958!

And these are concepts which won't be solved through FDI, privatisation or even by changing the control structure of DPSU's. The Military needs along with DRDO needs to implement these !

P.S: A very insightful article and a point well made about DPSUs and their control dichotomy!

Deshdaaz said...

Kya baat hai! Maja aa gaya :)It's so soothing to see Ajai ji take self-proclaimed "think-tank" dood(read dude) to cleaners....sale koi naukri-dhandha hai nahi isliye baithe baithe India ki marte hai...I hate to remain courteous to such idiots...Read that libertarian fellow more & check his views on Kashmir...

Hari said...

Excellent article Ajai sir, it is sad to see people like you not being in the decision making boards but rather writing articles although your readers wouldnt complain :)

Unknown said...

Minor nitpick here Ajai sir with regard to the choice of word employed.

Realm is a territory that is ruled by a monarch i.e. a dynastic state. India was a realm until 26 January 1950, after which it became a republic.

Vijay said...

Pai responds, "Next, the argument that the defence industry as a whole is different from the automotive (or any other industry) is untenable. Beyond the point that the defence industry has fewer customers than other industries, they are all made of the same people, have the same economic incentives, draw capital from the same economy, react to competition in similar ways and so on. It is unfathomable why Mr Shukla should consider this naïve"

Because, kind sir, it IS naïve! Tomorrow, Chevy can choose come to India and start manufacturing a US-spec Volt (easily their technologically most advanced product) here and sell it to Indians.

Lockheed-Martin/Dassault/EADS cannot even manufacture third generation fighters here without approval from their governments. And even then, there are a million caveats: can't use it for X, can't resell it to Y, have it inspected by us every Z months, and so on and so forth.

The day Boeing comes to India of its own volition, sets up a manufacturing line for Super Hornets here, and sells them to India in spite of opposition from the GOTUS, we can talk similarities.

Unknown said...

With regard to allowing foreign companies access to the India market, there are three points you've made here -

1. Technology denial regimes require domestic programs:

Agreed. No doubt about it. But, then allowing foreign companies access doesn't prevent DRDO and BEL from continuing development on items of strategic importance.

2. Security concerns require foreign companies to be kept out:

Disagree completely. The issue here is foreign ownership not foreign control. Eg-

The British Racal Elec. plc was bought out by the French Thomson-CSF in 2000 and provides classified electronics equipment to the British MoD today as Thales UK. Equipment that France has no access to.

The British MoD contracted MBDA (a European company) to develop the Brimstone anti-tank missile but when the French Air Force wants to integrate it into the Rafale, its officials fly to London to talk the UK govt.

The British flagship company BAE Systems today generates greater revenues from the US market than its home market. Its the fifth largest supplier to the US DoD, and is working on highly classified projects. All its activities in the US are regulated - the majority of the company board is comprised of US nationals and only they may work on classified projects.

3. Foreign companies will force out domestic suppliers:

Disagree. As the BAE example above illustrates, the subsidiary effectively acts as a domestic company that only pays dividends abroad. Its activities within the country will be regulated by the MoD and the company will be completely subject to Indian laws. It'll be allowed to ship in technology but not ship it out without authorization.

IBM made a relatively discreet entry into the Indian market in 1992, today much to chagrin of Americans, today it employs more people in India than it does in the US.

While not a perfect apples to apples comparison, I believe if you were to allow foreign defence companies free access to the Indian market, in 10 years time, the Americans and Europeans will be crying themselves hoarse about defence jobs leaving their shores for India.

Jay said...

May I point out (as a software engineer) that the plural of the phrase "source code" is still "source code" and not "source codes".

Sheshank Kaul said...

Mr Broadsword,

Many congratulations on an excellent and detailed analysis. When I first read Mr Pai's article similar points rang through my head. I am greatful that you have taken time out to publish a detailed article on the same. By your leave I would like to add a few more points to add greater weight to your argument:
1)Almost 30 years after Indian automobile sector was opened to international players, we are yet to develop a car completely for Indian requirements.
2)Critical technologies like engine, driver interface, drive train etc. remain foreign to each and every car sold on Indian roads today.
3)At the present moment less than a handful of models are designed ground up for Indian conditions, inspite of the fact that we sell more than a million cars a year. (Compare this to the Australia, Canada & Sweden and u will begin to understand how poorly we are doing)
4)Finally, because of 100% FDI allowed at an early stage today more than 80% of the domestic market is dominated by foreign players. Even the two major Indian competitors today cannot be considered top of the line manufacturers in the industry

If we keep these and other learning's form the automotive industry in mind it clearly elucidates that although foreign competition is welcome it is no garuntee to achieve our goal which is of indegenisation of entire weapons systems rather than production. The need of the hour is to allow increased competition within the industry and destroy the government monopoly which has clearly proved counter productive.

The one and only way made by India products will become world class would be when our defense products are manufactured keeping export orders in mind. The story of India's industrial competitiveness after 1996 would be a great testament for the same.

Anonymous said...

Col - firstly, great article. It certainly pushes everybody to put thinking caps and as it is evident the quality of discussion is extremely cerebral.

This discussion is ending in a tie in having FDI in defense or not. But i will still go for no FDI in defense as we do not have 100% governance in the first place.

I see total disaster as controls that many have mentioned can cease to exist in India at any given jolly good time. With such a policy, it is very much possible that our technology may reach our enemies even faster. Plug governance first to have BAE, LM and Boeing in India or else foundation of another mega scam will be laid.

Lastly, Deshdaaz - your contribution to this discussion is Zilch, Zero. At least be sensible about what you write.

Mihir said...

Sheshank Kaul, I would like to respond to a few of your points:

>> 1)Almost 30 years after Indian automobile sector was opened to international players, we are yet to develop a car completely for Indian requirements.

That is patently untrue. There are several four-wheeled vehicles that are manufactured for Indian requirements alone. For example, in some parts of the country, the Mahindra Commander is used to transport 20+ people in one go. That is about the capacity of a small bus. Such capabilities are not a co-incidence, but are often designed into the vehicle based on customer feedback (although Mahindra will never officially admit that the Commander is designed for such capacities). The Indica was also designed keeping Indian conditions in mind.

>> 2)Critical technologies like engine, driver interface, drive train etc. remain foreign to each and every car sold on Indian roads today.

Again, untrue. There are several engines powering Indian vehicles (both two and four wheeled) that have been completely designed in India from ground-up. The Mahindra common-rail diesel is one of them. Bajaj Motorcycles pretty much designs all engines in-house.

>> 3)At the present moment less than a handful of models are designed ground up for Indian conditions, inspite of the fact that we sell more than a million cars a year. (Compare this to the Australia, Canada & Sweden and u will begin to understand how poorly we are doing)

*Most* cars on Indian roads (even the ones made by foreign companies) have been designed, or at least extensively modified to suit Indian conditions (bad roads, greater loads, dusty atmosphere, etc.) If a manufacturer refuses to do that, he cannot survive in the market.

Sheshank Kaul said...

Dear Mr Mihr

HA HA HA u said India has several cars and the best you can name is commander and Indica. First of all commander is based on a WWII design a direct copy and Indica was designed IDEA institute of Italy, the original engine used in Indica was based on a design developed by the help of Daimler benz engineers. Guess wat engine it uses now? Italian. If after 30 years Mahindra commander and INdica is the benchmark that Indian people have to aspire to then god help us.

As for that engine in Mahindra commander being indian, the less i say better because the common rail engine u have mentioned was a modification of Bosch CRD technology, which was by achieved by extensive hand holding from Bosch engineers themselves.

Now that I have proven how little you know about automotive technology let me concentrate on ur third point. You seriously think modification by stiffening the suspension or by using a more heavy duty filter to prevent clogging is designing a car ground up???? Sigh!

To summarize
1) Mahindra commander -
Design - 1940s vintage copy
Engine technology - From the house of Bosch
Creature comforts - does not exist
2) Tata indica -
design - Italian
engine - original was rubbish and developed with help from benz. current one used is fiat
creature comforts - laughable
3) Bajaj - Best selling bike from bajaj pulsar was designed by an englishman and engineering was developed by a Tokyo r&d
engine tech - was copied from kawasaki. and current twin spark technology being flaunted is almost 20 year old.

Wake up dear we have a looooong way to go before we can hope to call wat you have listed as in house products.

Mihir said...

Shashank,

>> First of all commander is based on a WWII design a direct copy and Indica was designed IDEA institute of Italy

Who is denying that these vehicles can trace their origins all the way back to what the industrially advanced countries made in the past? All I am saying that as they stand today, they are completely indigenous. Yes, the Commander still looks like the 1940s-era Jeep, but if you study the design further, you will see that apart from the looks, the two don't share anything else. The engine is different, the chassis is different... hell, even the body has undergone so many changes structurally that it bears little resemblace to the original. All this is a part of the evolutionary design process that applies anywhere in the world. Do you think the Japanese designed their first cars and motorcycles without initially basing their design on European/American work?


>> the original engine used in Indica was based on a design developed by the help of Daimler benz engineers. Guess wat engine it uses now? Italian

Sorry boss, that is simply untrue. I don't know where you get this information, but you obviously haven't been associated with either company in any capacity.


>> As for that engine in Mahindra commander being indian, the less i say better because the common rail engine u have mentioned was a modification of Bosch CRD technology, which was by achieved by extensive hand holding from Bosch engineers themselves.

Incorrect. Mico-Bosch obviously was a part of the design team because it provided a critical subsystem -- the common-rail injection system -- but the design was led by the engine R&D group. Other subsystems like the ECU, crankshaft, pistons, were all designed in-house. Testing was done in-house. The design was refined in-house. All by unassuming little people in their blue-gray uniforms.


>> Bajaj - Best selling bike from bajaj pulsar was designed by an englishman and engineering was developed by a Tokyo r&d
engine tech - was copied from kawasaki. and current twin spark technology being flaunted is almost 20 year old.

That 20 year old technology was patented by Bajaj. Tokyo R&D did do some handholding, but that is not reason enough to call the entire bike foreign. Glynn Kerr didn't sit around analysing stresses in the chassis or running CFD simulations of the DTSi system or fine-tuning the harmonics of the suspension. His work was limited to helping out with the initial concept and aesthetics and possibly with the general architecture of the bike. That doesn't mean it was "designed by an englishman"


>> You seriously think modification by stiffening the suspension or by using a more heavy duty filter to prevent clogging is designing a car ground up???? Sigh!

Keep sighing, and keep missing the point. In the meanwhile, please let us know if you have ever redesigned a suspension on your own.


>> Now that I have proven how little you know...


Ah. Sorry, I misunderstood. I thought you were more interested in serious debate than scoring points. Silly me.