(Editor’s Note: The views are that of the author’s. For the writer’s other interests, read the credit line at the end of the article.)
By Rajiv Chib
A resurgence of COVID-19 cases in India has forced domestic defence companies to reintroduce strict restrictions. It again threatens to increase business uncertainty and cripple manufacturing operations and supply chains of aerospace and defence industries, who have started asking their customers for extension of their delivery schedules.
Foreign companies are further postponing visits for business development or for forging fresh partnerships. Demand side shocks are perhaps some of the most visible effects of the pandemic’s impact on the Indian defence sector.
The private sector is already smarting under the monopolistic clout of the Defence Public Sector Undertakings (DPSUs), which has been seen to increase in recent times. The favouritism reaches each and every level of government organisation.
Even for the Defence Research and Development Organisation (DRDO), the nominated recipient for a platform-level Transfer or Technology (ToT) is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology and has contributed to 70 per cent in the development of the product.
The present case of providing ToT of 18 Low Level Transportable Radars (Ashwini Radar) only to state-run Bharat Electronics Limited (BEL), when two ToT partners could be chosen is an example.
Old mindsets continue to act as a major deterrent to any meaningful participation as selection of a vendor by nomination gains ground. The Defence Acquisition Procedure 2020, duly endorsed in repetitive, servile tones by representatives of industry bodies fails to encourage the private sector in any concrete way. The private sector finds themselves relegated to the role of being minor sub-contractors to DPSUs.
The preceding year saw a bulk of fast-track orders placed either on DPSUs on a nomination basis, or with foreign Original Equipment Manufacturers (OEMs) in limited quantities. Moreover, export requests from friendly countries were diverted to DPSUs, even when track records exist with the private sector.
Earlier, at least offset related orders had played a major role in sustaining the middle rung private Indian industries but now domestic companies are realising that future contracts are not getting renewed.
The increase of the offset threshold to from Rs 300 crore to Rs 2,000 crore, which is the highest amongst the present 130-odd weapon importing countries, combined with removal of offsets from Foreign Military Sales or inter-governmental agreement procurement, has possibly sent a signal to foreign OEMs, as renewal of export contracts is on the wane.
Between 2010 and 2016, India found its defence exports doubling. Increased sourcing of aircraft/marine equipment parts from India for global supplies by Airbus, Boeing, Safran, GE Aviation, Rolls-Royce, and Fincantieri had established an international competitiveness of Indian enterprises.
A number of domestic companies could position themselves successfully in different product and technology verticals. it was offset orders, which forced the global OEMs to look at Indian companies.
A large number of local companies like Titan, Samtel Avionics, Taneja Aerospace, and Godrej Aerospace became a part of global supply chains. It is difficult to digest statements, that, offsets have generated only low technology work when one sees a Dynamatic Technologies exporting A320 flap track assemblies, Maini Aerospace exporting LP turbine of Leap Engines, or TAL Manufacturing Solutions exporting composite floor beams for the Dreamliner B 787.
The period also saw foreign OEMs and lower tier suppliers like Axon Cables SAS, Thales Group, Rafaut Group, Amphenol Group, Lockheed Martin, forming manufacturing Joint Ventures (JVs) in India, with the aim of addressing the offset market. In other words, these JVs aimed at becoming Indian offset partners.
Again, between 2010 and 2016, the formation of 25 such JVs, indicates that the offset policy had definitely played a role in persuading foreign OEMs to invest in India. These entities have brought in technology, provided local employment besides giving an exposure to their sub-contractors in India.
At present, aerospace and defence OEMs are seriously considering the risks involved in production offshoring, as supply chain disruptions are on the increase. COVID-19 has exposed the low-level visibility and transparency of aerospace supply chains and options of keeping production within the home state or in near shoring locations are being debated.
As far as India is concerned, the concept of “India sourcing” was built upon the principle of execution of potential offset obligations. If the government would like to retain its aim encouraging exports and bringing in Foreign Direct Investment (FDI) in the defence sector, then it is time to bring offset obligations in the good books again.
The private sector has to be included in the goals of ‘Atmanirbhar Bharat’ (Self-reliant India) and this has to trickle down to the DRDO, Ordnance Factory Board and all the DPSUs. Else, a misled or disincentivised private sector may reveal permanent scars, which will only be evident in the next exigency where shortages are of a different kind.
(The writer is the founder of Insighteon Consulting)