SPOTLIGHT EEPC INDIA-ERNST & YOUNG
Defence production challenges in India
Exhibit 6
The defence production sector in India has not fully evolved despite a long history of defence expenditure and significant production experience. This lack of evolution has become apparent due to some of the following issues: • Inefficient production: The present system of defence production is plagued with a number of problems, which include a) spillover production, b) underutilisation of capacity and c) excessive overheads and inventories. • Limited success of indigenisation initiatives: A detailed examination of the indigenisation figures reveal that only mature or obsolete designs are produced by the DPSU’s under license/technology transfer. As per details giventotheParliamentaryStandingCommittee on Defence, HAL has achieved 70-75 percent indigenisation and BEL has indigenisation of over 60 percent. Indirectly, that means that practically even for products with a history of manufacturing in India, it is still dependent on global OEMs to the extent of 25-40 percent. The continued dependence on foreign collaborators for updated designs even after several years of license agreements indicates ineffectiveness of the indigenisation initiatives. • Low level of exports: India performs abysmally in the area of defence exports and is it constitutes, at an average 1.5-2.5 percent of total production; 3 percent for the DPSUs revenues and 1 percent for the DGOF revenues. As a result, the Indian defence industry’s importexport ratio is inferior to countries with even smaller defence industrial infrastructure as seen in Exhibit 6. The lack of technology and competitive pricing; the existence of a negative list of countries where the exports of defence equipment cannot be explored; the large number of clearances required and stipulation of ‘End Use Certificate’ and lack of thrust on marketing efforts are a few major reasons for the low level of defence exports from India.
Indian Export Imports, USD million
Important trends in Indian defence sector In order to mitigate some of these problems
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AUGUST 2010
Export-Import ratio, 2001-04
2.305 1,175 1,414
Imports (In USD million)
Exports (In USD million)
Export Import ratio
USA
8,526
44
194.1
Israel
1,675
1,290
1.3:1
South Korea
2,755
313
8.8:1
Singapore
1,441
73
19.7:1
1,445
1,847
26
13
14
21
1
2004
2005
2006
2007
2008
Export
Country
Source: SIPRI Database, 2005
Import
Larsen & Toubro’s success in the defence sector The launch of the country’s first indigenous nuclear-powered submarine, INS Arihant, is an excellent example of productive public private partnership in the defence sector. A number of companies, including the leading engineering player, Larsen &Toubro, were part of the project along with DRDO. L&T was the single largest contributor in the project, involved from the plate cutting stage to the final launch. With the launch of INS Arihant, India has become a part of an elite group consisting of only the US, Russia, the UK, France and China. L&T got the project to build part of the vessel as it offered a lower bid than the government. The firm’s higher operational efficiency and productivity levels were major factors in reducing the bid costs. L&T has been a supplier to India’s defence sector since the late 1960s. The company plans to leverage its decades of experience to capture a major share of the domestic defence market. L&T’s licence to manufacture warships, submarines, weapon platforms and high-speed motor crafts is one of the first six issued to private companies for manufacture of defence equipment after this sector was opened up to private participation in 2002. The company has formed a JV with EADS Defence and Security, Europe’s largest defence equipment maker, to acquire technical expertise required to tap the Indian defence market. L&T has also formed alliances with three major nuclear reactor manufacturers including, Russia-based Atomstroyexport, US-based Toshiba Westinghouse and Canada-based Atomic Energy. The company is constantly looking for more alliances with companies such as US-based General Electric Hitachi and France-based Areva. Unlike other players, L&T’s business strategy is not based on project-specific tie-ups of convenience with foreign defence majors. The company sees itself as having covered the learning curve over decades and now intends to use its own experience and expertise to the hilt. Over the years, it has also become a one-stop integrator, which today is the key differentiator for the company.
Government of India has taken a number of steps aimed at altering the dynamics of the Indian defence industry to make it more efficient, competitive and self sufficient. • Private sector participation: In addition to the imperatives mentioned above, the capital intensive nature of the defence industry as well as the need to infuse foreign technology have led the government to facilitate greater levels of private sector participation in the area of defence goods production by allowing private sector participation with up to 100 percent of equity and with permissible FDI of up to 26 percent, both subject to licensing restrictions of 2001. This move has led to
many large domestic industries investing both in R&D and infrastructure to develop capabilities in defence production as well as to assume the role of system integrators. However, the anticipated FDI flow was not realised as foreign companies were averse to investing in any companies where they lack significant control. While the above ruling did allow complete private sector participation, the DDP had already kick-started the private sector participation by outsourcing a large percentage of sub-systems and components of main equipment to private players including many in the SME sector (Exhibit 7). The outsourc-
INDIAN ENGINEERING EXPORTS