Monday, 1 August 2016

Boosting defence manufacturing

Ajai Shukla
Business Standard, 2nd August 16

It is clear that Manohar Parrikar’s defence ministry has encountered difficulties in its two-fold plan to boost defence manufacture: first, by handing large private companies a driving role; and second, simultaneously liberalising foreign direct investment (FDI) to encourage the inflow of cutting-edge technology from global original equipment manufacturers (OEMs).

On April 25, at a meeting with heads of private defence firms, Mr Parrikar spelt out three priorities for “Make in India”. First, kick starting the manufacture of single-engine, light fighters to fill alarming shortfalls that retiring MiG-21 and MiG-27 fighters will soon leave in the Indian Air Force (IAF). Second, building six conventional submarines for the navy under the so-called Project 75I; and, third, establishing manufacturing lines for military choppers, including the Kamov-226T, and two others that Hindustan Aeronautics Ltd (HAL) is developing --- the light combat helicopter (LCH) and light utility helicopter (LUH).

Yet, the ministry has failed to identify and nominate private firms as Strategic Partners” (SPs) to lead these manufacturing projects. The difficulty in finalising a SP policy has forced the ministry to release the new Defence Procurement Policy of 2016 (DPP-2016) earlier this year with a missing Chapter 6, where the SP policy will be inserted, once finalised. One reason for the delay has been cutthroat rivalry between private sector behemoths; all of who believe that being nominated as an SP is fundamental to their futures in defence. Given such rivalry, it is unrealistic to expect the ministry to invite charges of favouritism by choosing between the private players. It would be far better, and supportive of market economics, to allow the foreign vendors to select the Indian SP it wants.

Industry chiefs who attended the April 25 meeting recount that Mr Parrikar thrice repeated he would welcome private industry proposals to manufacture the Tejas LCA Mk II (while HAL builds the Tejas Mark I, an order that could run to 100 fighters, including the improved Tejas Mark IA). The defence minister assured the gathering that the IAF’s large and assured requirement of Tejas fighters would make an attractive business case for establishing a manufacturing line. He promised the IAF would order 200 fighters, over and above the 100 being built by HAL.

Despite those assurances, not one Indian firm came forward with a proposal. The message was clear: no company is ready to risk investing Rs 10,000-15,000 crore into a manufacturing line that involves mastering complex (and, therefore, risky) technologies. While this cautiousness is understandable given the ministry’s woeful record in backing the private sector, it has created space for Saab of Sweden to push its proposal for manufacturing the Gripen NG fighter in India. Apparently to facilitate this, on June 20, the government liberalised FDI in defence, permitting 100 per cent ownership by a foreign vendor that brings in “modern” technology (there is no elaboration of what exactly “modern” means). That would allow Saab full ownership of the project, while establishing sub-vendors for an Indian supply chain, as Suzuki had done while establishing production of the Maruti car. Small Indian defence firms see in this an opportunity to grow their business; they say this would be ideal for creating an aerospace manufacturing eco-system in India.

The proposal for Saab to build in India is not new. In 2011, Saab held discussions with the Defence R&D Organisation (DRDO) on establishing a Tejas production line. In early 2012, Saab presented a detailed project report, offering to co-develop the Tejas Mark II, and to set up a factory with an Indian partner, and roll out the fighter within five years. The Swedish company was then developing the Gripen NG, and already dealing with the key challenges the Tejas Mark II would present --- fitting in a more powerful General Electric F-414 engine, and establishing a high-rate manufacturing line. However, with little buy-in from then defence minister, AK Antony, Saab’s proposal fell by the wayside. Now, the conservatism of the Indian defence industry has brought it to life again.

With 100 per cent ownership of an Indian Gripen NG manufacturing facility, and domestic supply chains in place, Saab would also be in pole position to build the LCA Mark II. The DPP-2016’s new “Indian Developed, Designed and Manufactured” (IDDM) category, which is the highest priority for procurements, requires indigenous manufacture worth 60 per cent of the product cost. Saab could propose a “phased manufacturing programme” (PMP), offering to roll out the first fighter in 36 months, with an indigenisation content of 50 per cent, which would be increased to 60 per cent in the next 24 months. To sweeten this, Saab could offer to co-develop the Tejas Mark II with the DRDO. The indigenous fighter project would be greatly benefited with the PMP creating manufacturing chains and technology capabilities for systems like the active electronically scanned airborne (AESA) radar, data links and sensors.

Mr Parrikar wants to ensure that “Make In India” kicks off with this kind of positive example, sending out a global message that India is ready to do business seriously. The FDI liberalisation is intended to signal India’s openness to beneficial defence manufacturing proposals. Looking also to create jobs through export-oriented manufacture, Parrikar also promised on April 25 that proposals independent of Indian orders, i.e. purely export oriented manufacturing units, would be allowed 100 per cent FDI, without hesitation.

The ministry could further signal its seriousness by offering to lease space for manufacturing at one of the IAF’s base repair depots, which have the land and airfield infrastructure needed for production facilities. Instead of its customary standoffishness, the ministry should step forward and actively handhold the vendor through the inevitable teething troubles.

In conclusion, the ministry is coming to realise that it will be hard to nominate SPs, and to create private sector monopolies out of a chosen few companies like the Tata Group, L&T, Mahindras, Bharat Forge, Godrej & Boyce, etc. While it is important to create Indian “systems integrators” --- large firms with design and development capabilities --- that should be done through “Make” projects, for which the ministry reimburses 90 per cent of the development cost. The SP route is for simple manufacture, aimed at creating employment and developing a defence production eco-system that would support the larger, indigenous “Make” projects. Numerous smaller companies are capable of absorbing production technology and improving upon it, incrementally developing the technology level of the overall defence industrial base. They must all be allowed to compete as SPs, from which the foreign vendors can pick and choose. 


Anonymous said...

To make in india the first and foremost is volumes. The tri sevices need to reduce variety at all levels and increase volumes.
e.g IAF can reduce its fighter inventory to just 2 or max 3 varieties, then manufacturing will get a boost. Same with ships of inidan navy, we need to order in lots of 6-8 rather than 3 now.

Manne said...

We will see companies begin to step forward for LCA once artillery, gun and FICV projects start going into production and companies are more certain of MoD's to-be-installed legacy. Submarine project will be relatively easier to award.

- Manne

Anonymous said...

I don't understand the logic to have a zoo of planes with poor quality built up where the availability of the planes is less than 50% is useless to have such number of planes.It is useless to have Rafale and that too in 36 numbers as you need another twin engines MMRCA plane in numbers to achieve the strike capability. It is shameful to restrict the number of tejas to 120 planes as I feel massive numbers are required which India can afford to build , maintain , upgrade and use it . If tejas achieves MK1A performance and easy servicibility is achieved then it can do atleast ten sorties in 24 hrs. And may be more and imagine 500 planes out of which atleast 80% ready for combat may achieve more than 4000 sorties which can counter Evan the massive numbers of Chinese Air Force.production of anything less than 40-45 planes is not worth it and drop the effort.i feel it is not that difficult to change the engine to 414 in MK 1A if a determined effort is made. Multi rack pylons are essential and I don't understand what is problem that they stop for radome and did not do other modifications which are essential.

I was pained to see the video of HAL production facility where are worker putting a rebate with handgun and other holding metallic piece to keep the rebate in place. There has to be a robot to do that as automation only gives perfection. They should try to follow Airbus model of manufacturing and get different pieces manufactured by different builders and get radar manufactured in a technology park in Bangalore with colloberation withelta and ask GE to make engine with some manufacturer. Ask HAL to install it and there should be two and may be three shifts to complete the work with avionics be plug and play and very strict manufacturing standards be followed with timebound work.

They can ramp up production and try to use only four types of screws the way it was done in YF 23 as just with four devices they could maintain the plane and Evan open the engine that helps easy maintanence. The plug and play devices are easy to replace and if it needs to be repaired then sent to the original manufacturer so that it becomes very easy for maintenance. There should be a good inventory coordinator and Q/A specialist who supervises every step of manufacturing.


Anonymous said...

SP is the only way out Ajai and in all fairness we are being impatient, if we gave an inept RM 8 yrs we must give this man another 2 yrs and see where we are with DPP. I think by Mar'19 all major contracts will be closed. the present RM has to clear the mess which in itself is like a 5 yr task - from corruption, OROP, DPP, pvt industry's lobby, DPSU, Armed forces issues, border issues, DRDO the list of things to do is very long and slowly they have to be taken care of. let's give him some time, hopefully by this year end we should have clarity on DPP'16 and SP. the pvt sector has no orders and with current system some of them will never get any orders in their lifetime. how can you give orders to all PSU shipyards on nomination and not do the same for L&T and Reliance? what's wrong with that? you save years in discarding the nonsensical tendering system, just simply divide (equally) and rule!!

Manne said...

I have said time and again on BRF that the ecosystem development model followed by BARC & NPCIL can be and needs to be followed for defence as well. Add to that what ISRO did to develop their supply chain. Whilst some challenges will remain (e.g. material engineering & manufacturing for turbofans) most of the challenges can be overcome if the bureaucracy is managed properly. To be fair, current RM does appear to be very very different from you-know-who.

- Manne

Anonymous said...

All I wish to say is that we DO NOT need a Gripen (any version), when we have a Tejas. Regardless of any "offer" by SAAB to set up Indian manufacturing lines of Tejas.

We must not fall for that caveat of SAAB's. For, it not really a caveat....its a bait.