Sunday, 27 March 2016

Calling for opinions: "Strategic Partnership" model of defence production

Given the number of well-informed military experts who visit this blog, may I tap into the bank of their wisdom.

We have all heard about the "Strategic Partnership" model mooted by the Ministry of Defence (MoD). The Aatre Committee has submitted recommendations (see my article in January) for choosing one private companies in each of seven "strategic segments" --- aircraft; helicopters; aero engines; submarines; warships; guns and artillery; and armoured vehicles --- and two private companies for each of three other segments --- metallic material and alloys; non-metallic materials; and ammunition, including smart munitions --- who will be the MoD's "preferred partners" for manufacturing in India, based on foreign ToT.

The committee has also laid down eligibility norms for being chosen as a "strategic partner".

My question is: does the "strategic partner" model merely replace a public sector monopoly with a private sector one? Should the MoD leave it to market forces to choose the Indian partner, rather than forcing a pre-nominated "strategic partner" on the foreign vendor?

Would it be wiser to narrow down the field by specifying eligibility norms for private companies, along the lines of the Raksha Utpadan Ratna (RuR model) that had been mooted between 2005-2007?

Your thoughts please.

19 comments:

sachina88 said...

This must be the million dollar question doing the rounds in India's strategic community today. My answer is, YES, this policy is going to be detrimental to India's aspirations of developing a truly independent indigenous defense industry. My reasons below:-

1. The policy of choosing one strategic partner in each category is like promoting a highly monopolistic defense industry. The Indian defense industry, esp. the private sector companies are still taking baby steps and is still figuring out who can build what and how well can they build. By enforcing such a policy, the Govt. is actually removing the level playing field. Such a policy should not be implemented until two or more industrial houses prove themselves by acquiring the technologies required and mass producing products in each category.

2. The current policy only mentions choosing partners for getting TOT and then manufacturing. It doesn't mention R&D, even though nurturing the industry, so that in future it is able to do independent and end-to-end R&D, manufacturing and support is the real intention behind all this. When the Govt. chooses strategic partners for manufacturing, it is obvious that the partner so chosen will be the obvious choice when there is a future demand for R&D in the same category. This is because the company which has the potential for mass production will clearly have an edge.

3. By going ahead with this policy, the Govt. is removing all chances of competition in the industry. This will in turn have a big negative impact on the quality of the products. And because of the single vendor situation, the military will be forced to buy what they are given. Competition has always been a critical factor in the military R&D programs of the U.S. Eg: Boeing and Lockheed Martin competition for the F-35 contract.

My conclusion:- It is too early to implement such a policy. If the Govt. is still enforcing it, they should choose 2-3 strategic partners for each category.

morpheus said...

Defence production should be chiefly public sector enterprise to prevent covert war mongering by private sector through manipulation of people's thoughts for profits.
Subcontinent should not go into privatised arms race and resultant chance to our country to have bad image may help media create a hype for war by showing neighbors in enemity profile just for hype sake.
Strategic partners should be those countries who have least or no stake in the subcontinent for thier own interest except sale of defence related eqpt or raw materials to prevent internationalization or globalisation of war.
In fact even indigenous war manufacturing industries should always have spinoff for public use of new technology like robotic surgery from us army.
All vehicle manufacturing must be inside defence organisation according to needs of the different arms.

Randhir said...

I'm not too clear on the state of financial capability of the pvt sect to take on a major defence commitment without major govt assistance.
Considering financial health and long term fruition of defence projects (anything up to 25 years) it is not a bad idea to have a monopoly on a major defence project as long as everything is above board.
The problem is of political dispensation as a project progresses over the years

Anonymous said...

Here's my thoughts. I think the Government needs to be a combination of risk taking and being risk averse. The risk taking component is for creating, prototyping new innovations and testing their value. The risk averse component is for manufacturing equipment used by forces for their day to day and strategic needs.

I have stated that we, in India were very lucky that we have been sanctioned by most states. This has forced us to innovate and has helped build the philosophy of manufacturing in-house. This has laid the foundations of some of the key institutions in India. Such as our Space program, our IGMP, Nuclear program. Even the IT Boom in India happened because of sanctions (computers were under sanctions in the '70s)

The cascading impact of these institutions are now visible for all to see.

To my mind, there is just one country on this earth that has been under "permanent sanctions" - ie. the US. They are so much on the cutting edge, they cannot go to someone and buy the "latest" technology. This forces them to innovate continuously. To lead globally, we need to get there very quickly and use the "Make in India" & "Design in India" to do so.

To do this, the MoD must open itself and it's DRDOs up to foster a culture of extreme innovation across the nation. They will need to be extremely supportive as such innovations have a very high rate of failure. But the few successes are what make all the difference. The impact of this will be:
* A culture of innovation spreading through the civil society, helping many new innovative startups to get off the ground. This one thing will have a cascading impact on Indian society.
* A closer link between Civil and defence. Something that is missing today.
* New technologies, completely suited to our needs.
* Over time, greater knowledge and leadership in many more fields.

To make my point, this video by Steve Blank describes how the Silicon valley actually happened: https://www.youtube.com/watch?v=ZTC_RxWN_xo
Steve is currently a Prof. at UC Berkeley, an angel investor and was a serial Entrepreneur. He had a ring side view of how the Silicon Valley happened - the US DoD was key in making the Silicon Valley happen. We need to replicate this India. The difference is - The DoD worked with just two Univs. - MIT and Stanford, we need to work with the complete Indian Innovation system - Colleges, Universities, startups, Mid-Sized and Large organizations. More on the secret history at: http://steveblank.com/secret-history/

The second part is manufacturing and production. The key here is first building (within the Civilian Orgs) the cability to manufacture products needed for defense and secondly, building an export market. I would give the example of what happened in the Telecom sector. Today India has the LOWEST call charges in the world and most everyone in the country has a cell phone. We need a similar model of opening up and outsourcing defense manufacturing to mid-sized and the larger Organizations such that there is competition between these Organizations.

Competition is the one thing that will very quickly improve quality and bring down prices and spur incremental innovation.

Radical innovation will of course only come out of the small startups. This means, the MoD needs a mechanism of identifying great technologies and productionizing them.

Finally, the US has one institution, who's equivalent we don't have. And that is DARPA: https://en.wikipedia.org/wiki/DARPA
DARPA looks beyond today's needs and has had a profound impact on human society (a lot of the MIL technologies, the Internet etc., etc., have originated out of DARPAs work). We need our own version of DARPA that is a bit more Asian/Indian focused.

I hope this helps.

Krish said...

Single "strategic Partner" in high value and hi-tech sectors seems a bit like monopoly in private sector. There are strong arguments on both sides:

If it stays open for all competitors, the scope for nonsense is too much. There have been instances of companies which have quoted low and disappeared after getting the tender. The foreign OEMs and other vested parties can artificially construct entities and make too much mess in even simple procurements.

Therefore, strategic partnership/RUR model is required, no doubt. However, a perfect model eludes the policy makers now. The sectors can be at least 2-3 for healthy competition even among strategic partners or RURs. However, in terms of submarine construction, now only one strategic partner is needed in private sector as MDL is already there. Too many partners here will make it idiotic.

Therefore, it is advisable that the government should start with any one model.There is no point in holding all decisions while looking for the best and perfect model. Any model can be further modified as and when the need arises. Institutions are not built in optimum shape, right at the outset.

Thanks

Ravi said...

Ajai, I am an alleged expert, though every year I feel I know less and less.

Don't have ANY suggestions for you since you're one of the few who thinks deeply on defense production. So its up to you!

General thought: our 70-yr old defense production system is not working, for whatever reason.

So it has to be scrapped and we have to start again. The structure is too messed up to reform.

Mahender said...

Col.Ajay sir , As a lay man i want to understand the difference between National security guard and para troopers , secondly the pattern of defence spending since ancient , medieval , British era and post independent era

I hope you will reply me at the earliest sir , @Mahi405 twitter account

Birendra Swanni said...

We have no defence industry because the Military wants the best plane and tanks, they think second best is not good enough. if euro fighter is bad, still Europeans have it. We need to take second best and then move on to comparable's in the world. ( we need to develop and use Indian product even though they might not be as good in some circumstances.Next step would be better and next would comparable to the world.)

We are playing catch up game in term of technology and manufacturing. We are not going to develop new alloy. We are simply duplicating or coming up to the standard currently in the world, Which is easier than inventing (easier said than done but still ). If we have a competition for developing a alloy in which companies are pitted against each other it would double the cost of development for the same thing. Hence it might be much more expensive than just to procure from outside. So it is easier when one or two companies are doing it. Whatever happens the Government is committed to get the alloy only from these 2 companies. It supports the initiative and develops the industry. When industry matures these restrictions can come off.

mathew dallas said...

Hello Ajai,

I have often admired your way of thinking, which you share through this blog, be it defence matters with over lying political overtones to it or solely defence, they are stupendous!But i have grieved over it as well, because these valuable words are never accepted by the political leaders, they are like 'pearls before swine'. Other than Mr. Shashi Tharoor and Piysuush Goyal there is not a single one who reads or thinks. Just take 'Strategic Partnership' itself as an example, who doesn't know what India is planning, in this digital age with hacking so rampant, who is this Government trying to convince. In the Question itself you have given the answer and i totally agree with what you said, this golden opportunity will also be squandered, by showing favoritism to pro Government company's in the pretext of 'Strategic Partnership' rather than leave the whole thing to market forces to decide. If the Americans or Europeans did 'Stategic Partnerships' well they have so much to hide(Stealth technology battleship design,EMAL, UAV technology etc;) and they rule the world,don't they? As of us,how did the Government handle the Pathankot incident? When the Americans asked us to do joint patrols in the South China where did the Governtment hide?? So what is so Strategic in the Governments policies?? just BS! Now what have we to hide anyway, Tejas....Arjun MBT??

Ajai, thanks for your thoughts.....keep blogging

kulari94 said...

No idea.

Anonymous said...

Thoughts on defence production.

1. Privatise the DPSUs, shipyards etc. Private industry will quickly optimise them and bring in processes and practises for efficient production.
2. Defence labs to focus only on fundamental sciences not fancy MREs. There will always be some technology that will not be available on the market and these should be the mandate of government labs working in tandem with academic institutions.
3. All services/arms should have an in house design organisation working in coordination with the authors of tactical doctrine. For example ADE role to be split between in house IAF design(growth in ASTE role) and private design orgs. TACDE inputs to ASTE; ASTEs design/configuration arm works with privatised HAL as system integrator. Component procurement from private industry India/Global. This is more or less what IN is successfully doing.
4. Incentivise "Indian design" careful to exclude Indian branding. By keeping incentives linked to requirements set forth by the services unity of effort can be maintained.
5. Incentivise global vendors for manufacture in India and ToT.
6. For critcal technologies G2G strategic partnerships route should be taken.
7. At the end of the day the procurement of a given product should be on technical merit rather than origin. Put simply the better gun should be procured regardless of where it is built.

Basant Gupta said...

Ajai,

As a company that spun-off from Academia & having maintained Defense R&D (modeling, simulation, design & development) as its sole business activity, we feel extremely lonely finding no other fresh start-up / spin-off in this sector since we started ours 12 years back.

I will be glad if someone explains how this decision on 'Strategic Partners' can help attract young talent in this sector.

Regards,

P.K.Chaudhuri said...

Sir.
The Defence Procurement Policies being introduced by the present government are all against the larger interests of our country and its people. The purpose of all the policies is to favour various business houses and the MNCs. This government is totally against the PSUs. Defence Ministry has recently procured helicopters and other equipment at very high and unjustified prices. This is against the interests of the nation.
Despite so much talk about ‘Make in India’, the production capacities of none of the successful, indigenously developed products such as ALH, Dhruv Helicopter, have been increased. This is against huge backlog in supplies for all such equipment. The delay in FOC and subsequent series manufacturing of LCA and LCH appears to be deliberate. The production capacities of various manufacturing plants of Defence PSUs such as HAL Kanpur, HAL Koraput etc. have not been increased for many years now. What happened to the announcement that export of defence products will be promoted.
May I provide another example. The Hon’ble Minister of Defence belongs to Goa. As per Indian political practice, it is expected that Goa Shipyard Ltd. will receive some support in the form of expansion of production capacity, placement of orders etc. This would have generated local employment and improved economic conditions. Added to this, as a backward integration action, a marine grade steel production facility can be set up with the abundantly available iron ore in Goa. This would have provided a 'win-win' situation for Goa as well as the whole country. But the Hon’ble Minister is not taking any action for his own state.
I pray the MoD to take notice of all above and review.

Rajiv Narayanan said...

An 'enforced' partnership may not work. It is trying to impose a 'public sector' mentality on the 'private sector'.
If you see the West, no single company manages to make all systems and sub systems needed in a modern weapon system. There are lead integrators, some companies going in for niche expertise, and then a conglomerate that works together. Something similar in India, tweaked to 'Indian ways' may be the order of the day.
Let the OFs and DPSUs and the private players from their own conglomerates; let the market decide, but could have an oversight entity, a.k.a SEBI to lay down the ground rules since this would be India's first foray into this region.

Anonymous said...

Hello Ajai, firstly you have asked a very good question.
I think this new concept is worth trying. reason is present procurements especially are very opaque and time consuming. So nomination is the best way out (as they do with DPSU's). I would compare the strategic partnership to FMS and G2G where there are no tenders and all stakeholders are pre-determined.
let's take the case of USA, UK, Russia and France - in all these countries there are very few large companies which cater to almost all domestic requirements (Ex: USN contracts are given to 2 or 3 ship builders like HII, LM and GD BIW and USAF given to again 2 or 3 large companies LM, NG and Boeing, likewise UK has pretty much 1 large company BAe which takes care of their navy and AF requirements similar to France DCNS and Dassault). Bottom line is we cannot have 15 to 20 small companies in India fighting for all contracts all the time (like we have in Telecom space) and then this leads to sour grapes and court cases etc etc. besides evaluating bids for so many companies and then technical trials etc etc is a huge effort and time consuming. To keep all happy, divide all contracts amongst PSU's and private companies and also include lifetime service and upgrades in the agreements. Naval contracts can be a good starting point, IN and MOD should devise a strategy to give all contracts for large vessels (LPD, LHA, CVN, FSS, SSBN, SSN etc which are high value and low numbers plus long lead time) to HSL, L&T and CSL to keep them happy whereas DDG, FFG, ASW, MSMV, OPV and SSK can be shared amongst MDL, GRSE, GSL and Pipavav. for AF HAL and TASL can look after the combat aircraft and Heli requirements whereas for IA Punj, OFB, Bharat Forge, AL and TML can cater to the requirements. This way we can have sustainable companies which in turn can service SME and MSME in India. Besides it is always easier for large companies to win contracts abroad with their clout etc.
To be honest we must always challenge to status quo mentality (widespread during UPA) and try new things as Defence is one area where we an aspiring superpower cannot just afford to neglect. too much time has been lost in discussions and pressure from all quarters. whatever it takes to have home grown capability we must do it whether it is perceived as monopoly or nepotism we should't care. hope this helps :).

Raahul Kumar said...

1. I am no expert, but the current policy is disastrous. It is best to avoid monopolies in any field, that leads to the government being price gouged and there is no alternative. A disaster wherever it has happened in any field. At the very minimum 5 vendors for every product if possible, and if not at least 3. Competition is the key to constant improvement.

2. R & D must be properly funded to at least 2% of GDP.

3. Foreign companies have never brought any worthwhile technology, always offering 1950s obsolete technology such as the Hawk instead of anything halfway decent. This won't change, and it is a fools errand to assume foreign companies will give anything rather than useless junk. They never have.

4. Privatization is the white horse that can save the PSU's. Incompetent and inefficient, privatization will bring decent management, proper funding and better technology.

Jean Luc Picard said...

Without doubt, mentioning eligibility criteria is better.

However, In practicality Startegic partners are more easier to deal with.

I would tweak it and make strategic partners on a project by project basis or for a specified time period. say 5- 10 years.

Thanks for considering my opinion. : )

Akash said...

The Govt has no business in specifying who should do what. That is a hallmark of an overregulated industry. Instead set policy around outcomes. Ie if a Make in india program is selected on those grounds, then, it should be a x% indigenization by parts count or by cost/or value. Then specify what exactly should be indigenous based on constant polling with DRDO or third party evaluators so private or public PSUs cannot influence the process or are alleged as being vested. Constant progress needs to be monitored and pushed for, with funding by MOD. DRDO needs to be funded for core technologies long term like "electronic system" not mission mode program to program which inculcates a project based view and saddles them with high requirements.

Parsheau said...

Not necessarily Ajai. Please consider the model of Maruti. India made 40,000 cars a year - fiats and ambis when Maruti was set up in 1982. Though a govt monolpoly in a sense the initial support from govt made it possible to set up shop - in a country where even philps head screw drivers were not made locally.
Maruti Udyog patiently developed the amcillary industry - insisting on Total Quality Japanese style. The result of that initial "monopoly"? - India makes 2 million cars a year now. And our parts industry exports 5 billion dollars a year. And market forces rule.
It's virtuous in my view to have the "monopoly"- even private - for the incubation phase of the military-industrial complex - the investments will bear certain returns and they will flow in.
The only thing they have to suffer are sifarishi jobs. As long as they drive quality - and they will - it will be transformative for India.
An L&T-GE Kaveri engine that actually ticks the boxes? The possibilities are exciting, probably never done anywhere in the world before.
Lets do it.