Wednesday, November 23, 2011

Importance of having hard military assets in India

Brahmos Missile - successful product of a Joint Venture
Now-a-days global tenders for high ticket military purchases are not rare. We saw big deals like MMRCA, Scorpene, Gorshgov, C17, heavy lift aircraft's, long range helicopters etc. These off-the-shelf purchases and attached service contracts will effectively transfer a huge amount of money from Indian government accounts to that of foreign partners (offset clauses may allow some money to stay here). But how far these activities will take us in the realm of sophisticated defence technologies? Will it help the Indian companies to acquire the technologies overtime?

If you are thinking that, I am also advocating for 100% indigenous production, I beg to differ, I am not. I am not a fan of that. We may be able to produce a-z of defence equipment indigenously, but at the cost of quality and profitability. What we have to focus is on differentiating the sectors where we can compete and where we need help. Isn’t better to study Newton’s laws of motion in school text than reinventing it every time?

But the catch here is the word ‘Differentiation’. We have to find the sectors where requires many years to catch up with the current level of sophistication and to implement the schemes to fix the problems. If we are going for off the shelf purchases like the ones we are doing in the case of Gorshgov Carrier or C-17 Globemaster we are not going to reach anywhere other than just plugging the gaps. It is as simple as paying 6000Rs rent when your salary is only 10000Rs. The scenario may be better, if we are doing the manufacturing through HAL or any other government companies under licensed production but certainly not enough.

The name of the game is creating hard assets in the country, no matter whether it belongs to us or to foreign companies. Once you have hard assets (in the areas where we are struggling) in the form of manufacturing plants, assembling hubs by foreign companies then it will be matter of time for people to acquire experience and take the initiatives to replicate the success.

Considering the fact that India will remain one of the biggest buyers of defence equipment for atleast next two decades we have considerable bargaining power. After all a country which faces both asymmetric warfare on land and potential threats in sea will end up buying more - a potential opportunity for defence firms.

But the million dolor question is how to attract them to come here and setting up the factories? For this to happen we have to rewrite our procurement procedures. The current offset clauses may be a good start, but it’s not enough for the foreign companies to come here and invest. By forcing them to shed some of their return here, we may have something to start with. But it won’t be enough as nobody will like to distribute their priced technological sophistication to win some contracts, after all it's the secret of their survival. How can we create a win-win situation?

The best way is to offer good terms to the foreigners, allow them to build manufacturing plants here with majority ownership (say 75%). Offer good terms to both eastern - like Mitsubishi Heavy Industries, Toshiba etc and western - BAE Systems, GE, Lockheed Martin, Boeing etc - to come and invest. Good offer doesn’t mean cheap land but strict patent protection laws, good operating environments, protection from nationalization, strict enforcement of contracts, quick dispensation of justice, excellent infrastructure, reliable supply chain etc.

At the same time we have to force them to build hard assets like main factories, assembly hubs, service centres etc in India. The last mentioned things are very important for us, we need them to build factories here - instead of mere marketing offices, we need the assembly lines - instead of technicians coming here on demand, we need service centres - instead of waiting indefinitely for spare parts.

For all this to happen we need to remove some of the red tapes. There is no point of limiting foreign partner’s ownership to 25%. Will you ever invest huge amounts to beautify your room, if you are only entitled to 25% of ownership? Won’t you think about accumulating that money for a new home in the future? If majority of technologies are coming from foreign partner, how we can restrict their ownership to 25%? What the logic of stopping a foreign company from acquiring majority ownership in their joint ventures with Indian companies in the name of making our defence industry indigenous, if we are buying hundreds of weapons, missiles, launchers, avionics etc from abroad that too off the shelf. Let them have joint ventures - with majority ownership - with native companies without any string attached.

One of the good case in point - even though the foreign investment is limited to statutory 25% - is the recent announcement of joint venture (JV) between 'Mahindra and Mahindra' and Telephonics Corporation. Telephonics Corporation is an experienced player in integrated, advanced sensor and communication systems technology sectors; serving aerospace, defence and commercial markets. They are very much active in the fields of - Surveillance, Radar, Identification Friend or Foe Surveillance Systems, Mixed Signal IC, Wireless Communication Products etc.

Telephonics - a wholly owned subsidiary of Griffon Corporation – also had a contract with Boeing to supply Multi-Mode Radar (MMR) for India’s P-8i aircraft. This also includes systems for (8) P-8i Aft Radar installations, integration and support services. They are also responsible for the installation of sophisticated intercommunication systems in C-17 Globemaster contracted for Indian Air Force.

Let’s come back to the joint venture, according to the reports,
"...JV to provide the Indian Ministry of Defense (MOD) and the Indian civil sector with radar and surveillance systems, Identification Friend or Foe (IFF) devices and communication systems. In addition, the JV intends to provide systems for Air Traffic Management services, Homeland Security and other emerging surveillance requirements..."
"...envisages establishing a plant in India which would manufacture and service airborne radar systems that are already being supplied to Hindustan Aeronautics Ltd (HAL) and to support airborne maritime surveillance systems for the Indian Navy and Coast Guard. The JV will license technology from Telephonics for use on a wide range of products that have both defense and civil applications."
Just imagine the potential of having a factory or hard asset in land. It will certainly create a win-win situation  for the nation as well as for the partners. Partnerships with foreign companies will certainly raise the standards, discipline, better financing, spread of technological know-how etc. We don’t have to go anywhere else to see the examples - just look at Indian IT service companies.

In this open world we should utilize the opportunities, especially in defence sector. It’s sweet hear about 100% indigenous production, manufacturing A-Z equipments etc. In practical, it’s not only difficult but also has the potential to become white elephant. If the companies like Mitsubishi etc are struggling to design a new generation aircraft on their own, even after having much technical know-how and experience, it will be much more difficult for us. Even if we made one, it won't guarantee the success of the project as it very much depend on the demand side too (otherwise it will end up as B2 bomber contracts).

Partnership with Sukhoi is one of the successful examples for joint production, but the point we missed in this case is bringing the Sukhoi (Physical assets) to India instead of contract manufacturing at HAL.

As I earlier said we need to differentiate where we are good and where we need assistance. We have to concentrate on our core areas and leave the rest to reliable foreign partnerships – as I mentioned earlier their physical assets should be on India. Consider the case of naval ship building; one of the areas where we are good, so concentrate in this area. Also consider the case of manufacturing engines for fighter planes; here we have to improve a lot. So instead of buying a GE engine outright, ask GE to build a plant (with ownership ratios of their choice) here for engines. If it’s not commercially profitable for them give incentives.

A joint venture with foreign companies will bring in expertise, discipline, new ideas etc. So for having better returns tomorrow we should concentrate on our strengths, rest can be outsourced – to the companies who have plants here. We have to make sure that we will not end up in buying the products off the shelf and then indefinitely wait for spare parts. Let them come to India and create factories here...

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