Monday, November 29, 1999

Foreign cos warm up to Indian defence mkt

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The aerospace and defence (A&D) sector in the country is growing leaps and bounds and is fast emerging as a key participant in the Asia-Pacific region. The US and European aerospace companies are now recognising India as a critical market as well as a potential manufacturing partner.Also, the country is becoming one of the largest military spenders in the world and catching worldwide attention, with the third-largest defence procurement budget in Asia.According to a Deloitte study titled "Prospects for global defence export industry in Indian defence market", exports will be a major option to compensate the fall in domestic demand. The country, which has an offsets policy since 2005, needs to leverage its huge buying power in this environment.The present offset threshold limit of 30% needs to be scaled upward to 50% or more. At the same time, the limit needs to be applied across the board on contracts worth Rs 100 crore or less (presently offsets are applied on contracts worth Rs 300 crore or more).The study has observed that much of the defence equipment of the country are obsolete and a major "catch-up" effort is required.Major procurement programmes are going to take place in next few years. India is seeking to acquire some of the most globally advanced systems for its Navy — SLBM nuclear submarines and aircraft carriers, Army — large numbers of T-90 main battle tanks and other assets to equip eight divisional sized battlegroups) and Air Force — Su-30 advanced fighter aircraft and a follow-up state of the art air superiority fighters in about 2017.The country is also seeking to acquire sophisticated defence electronics and communications systems, including the intention to equip infantry soldiers. Overall, the acquisitions budget will grow from around $17 billion in 2011 to $19.20 billion in 2015, an increase of nearly 15%. Clearly an expansion such as this offers considerable opportunities to the international defence industry, including foreign companies. It is important, however, to recognise the very considerable challenges involved in winning defence work in India.The increased inflow of investments, to be generated through revised offset conditions, can then be suitably directed to pre-identified areas for strengthening domestic industrial capabilities. This will go a long way in reducing the import cost of defence items in the long-run.In 2010-11, $32.03 billion has been earmarked for defence sector. Of this, $13.04 billion is to be spent on acquisitions for new weapons systems equipment and services. It is estimated that Indian defence procurement will rise to an estimated $ 42 billion by 2015 (including $19.20 billion for capital acquisitions), which could make it one of the most attractive defense markets in the world. In other words, India is likely to spend nearly $100 billion on military procurement during the current Five Year Plan (2007-12) and $120 billion in the next Plan period (2012-17).There are greater opportunities for Indian defence industry to work with partnership or in collaboration with overseas companies, thus enabling them to have broader market access.According to the study, in light of the Mumbai attacks as well as the overall need to modernize its defensive capabilities, India's armed forces are expected to increase their purchases of new equipment and technology for the next 20 to 25 years. Liberalization of India's defense procurement policy offers a unique opportunity for Indian companies to provide services for the armed forces.Currently, about 70 % of procurement in value terms is from foreign sources-with Indian companies supplying only around 30% indigenous items (including 25 percent of components and subassemblies) to state-owned companies.In the near term, foreign companies will likely continue to have an edge in the supply of defence armaments and transfer of technology. In India, foreign acquisitions are expected to be more affordable at this time. Industry consolidation in India may be on the upswing for larger companies that have desire to enter manufacturing businesses. This would give them a presence abroad to interact and do business with OEMs and suppliers directly, while simultaneously harnessing the advantages that India as a manufacturing destination provides, the study observed.The key drivers of Indian aerospace and defence industry are high domestic demand, offset policy, cost advantages, talent base and leveraging IT competitiveness. It has pointed out that there are challenges too, such as infrastructure, customs clearances, complex tax laws, certifications, quality assurance, setting up measures like supply chain management, security, taxes and various legislations etc.Substantial benefits are to be derived if foreign industry can become more involved in overseas defence markets, either through exports or foreign direct investment. Apart from the obvious benefits of additional revenue and profitability, one major advantage concerns the potential for smoothing out the workload. A big problem for local firms is the level of investment that is required to participate in the Foreign defence industry when the workload can often reflect a feast or famine cycle. This not only causes considerable disadvantages for the local firms themselves, but also adds to Defence's costs in seeking to sustain the industry in pursuit of self-reliance, said the study."There are also strong potential benefits from involvement in overseas markets in terms of capability. The challenge of satisfying a new and demanding customer, perhaps by refining the particular product or developing new and more advanced applications, can bring private benefits to the firm concerned but also broader benefits to the global defence companies as the spin-offs are brought home," it added.Participation in a joint venture in a larger defence market overseas can also bring benefits in terms of economies of scale, movement down the learning curve and also some potential ToT and knowhow from related firms operating in the overseas market concerned.India is embarking on a very substantial programme toexpand and upgrade its defence force. The fact that territorial disputes with two powerful neighbouring countries (China and Pakistan) that arenuclear-armed and developing closer relations with one another opens up the possibility of a war on two fronts.

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