Friday, 26 May 2017

The defence ministry’s "strategic partner" policy is suboptimal


By Ajai Shukla
Business Standard, 26th May 17

The cabinet’s nod to the defence ministry’s strategic partner (SP) policy sets the stage for selecting six Indian firms to partner foreign original equipment manufacturers (OEMs) in building single-engine aircraft, helicopters, submarines and armoured vehicles in India. While the details of the SP policy are still to be made public and incorporated into the Defence Procurement Policy of 2016, the defence ministry had indicated its contours to private industry executives earlier this month. Broadly, the ministry intends to follow most of the recommendations of the Dhirendra Singh Committee (2015) and the VK Aatre Task Force (2016) in choosing Indian SPs. These will form joint ventures (JVs) with selected global OEMs and respond to defence ministry tenders for building defence equipment in the four chosen categories. With Manohar Parrikar having done the spadework, an optimistic Defence Minister Arun Jaitley has declared his intention to implement the SP policy at the earliest. This will please the air force, which has already approached global OEMs for building single-engine fighters in India; the navy, whose building of six conventional submarines can now proceed; and the army, which is in dire need of armoured vehicles and helicopters.

Yet, there is uncertainty whether the policy, pushed through hurriedly by Mr Jaitley, will indeed transfer defence manufacture to India. A key problem for Indian SPs, as well as for overseas OEMs, is the 49 per cent foreign direct investment (FDI) cap imposed on the JVs that must manufacture defence kit in India. The OEMs complain the cap leaves them with insufficient control over the technology they provide to the JV. This would lead to the manufacture of relatively low-tech equipment in India, with OEMs preferring to supply the high-technology components, sub-systems and systems from abroad. The Indian SPs are aggrieved for a different reason: they complain their minimum stake of 51 per cent leaves them with all the risk even though their foreign OEM partners hold all the big cards --- the technology knowhow.

There are also worries that the new SP policy is too narrowly focused. Its aim cannot be just to create “systems integrators” that assemble foreign-built sub-systems and systems into a military platform in India. Rather, the policy must ensure India develops the entire eco-system for manufacturing the defence platforms in question, including Tier-1, Tier-2 and Tier-3 suppliers, the component and materials manufacturers – not to forget the capability to subsequently maintain, repair, overhaul and upgrade the platform through its service life. The SP policy, as communicated to industry so far, does not cater for this. Nor does it acknowledge the complex manufacturing chains of global OEMs, which involve multiple tiers of independent vendors that feed into a complex weapons platform. Many Indian defence firm executives believe there is a strong case for giving the lead to the OEM, rather than the Indian SP, along with a majority stake and the responsibility to negotiate with its sub-vendors to ensure a specified percentage of manufacture is transferred to India. The ministry can ensure strategic control over the JV, even one where the foreign partner has a majority stake, by mandating that it be located on Indian soil, have only Indian employees and be run by Indian executives. The SP policy must be in touch with the realities of the global defence industry. 

6 comments:

Anonymous said...

Let the private parties start manufacturing first.
The first aim is to create manufacturing and then to create jobs in india.
The money, patience required for R&D exists only with government today.
The government has clearly identified areas for these Strategic partners. That us welcome

Rahul said...

If this same policy had been made by CONGRESS party ; you would have called
MMS ; SONIA and ANTONY as GOD's Gifts to India

Anonymous said...

Why only submarines are included? Warships have been left out!!

The only private shipyard associated with submarine construction is L&T. Does this mean they will automatically be an SP for submarine newbuilding? Smells bad!!!!

As far as construction of warships go, there are only two shipyards cleared for LPD - L&T and RDEL. If L&T is made an SP for submarines, RDEL will automatically be made an SP for warships!! Again, smells bad.

May be the earlier idea proposed by somebody, select the OEM first and let the OEM select the manufacturing facility in India was a better proposal. Less open to being challenged by competing companies and other POLITICAL PARTIES.

Anonymous said...

The Indian OEM cannot even manufacture a worldclass Truck or Car. Their only attitude is to earn money by doing work cheaply with cheap labor. This is not have any positive impact.Only option is to allow 100% FDI. Only then people in India will start working in true R&D.

Anonymous said...

India is yet to gear up with supply chain to support big ticket project. It would take lot of time to build the necessary T1, T2 suppliers and associate industry. First System integration and Manufacturing process learning is required. In second stage India can look at manufacturing key components within country. Let us not forget we also require huge capital investment to start manufacturing everything.

Abhiman said...

This policy is a made-in-India disaster.

Pray tell me, what's the difference between an HAL copy-pasting Russian and French wares in Bangalore, and a Mahindra or Tata copy-pasting American or Israeli fare in Pune ?

Nothing.

The only difference this time around is that the sarkari gatekeeper HAL, is replaced by a private local tout.

1) There would be ZERO tech transfer, regardless of the percentage of holding of the OEM in the joint entity in India. For, beyond 50%, the foreign partner will tightly control all tech (scrutinized by its home govt's Intel), and at less than 50%, the foreign partner won't give any tech !!

2) The Indian private partner will be at the beck and call of not the Indian army, or the Indian Defence ministry, but of his bosses and shareholders sitting 7 shores away.

3) The Indian army will forever be at the mercy of some private consortium of profiteering foreign and Indian companies, instead of the Nationalized DRDO, which runs purely on patriotism.

4)The Indian R&D effort, spearheaded by DRDO will badly suffer. Once the Indian armed forces get addicted to foreign wares, it will be very difficult to wean them off it, and make them use DRDO's hardware. This will be a huge step backward in self-reliance.

The Indian private sector must be made to partner with DRDO instead, and not foreign companies. Make the inefficient PSU manufacturers (OFBs) compete with the private sector in manufacturing.


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The whole world knows that an iPhone is an American product, despite the boldly emblazoned words, "Assembled in China". The same goes for every Coke bottle, even though the bottling plant is from Tamil Nadu.

Our PM and our Raksha Mantri must understand this vis-a-vis defence too.