Indian_Defence_Sector KPMG

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0 5 ROADBLOCKS IN THE DEFENCE SECTOR

EVOLUTION OF THE DEFENCE INDUSTRY IN INDIA

CURRENT INDO-US RELATIONSHIPGEOPOLITICAL

MARKET OPPORTUNITY

DEFENCE PROCUREMENT CHANNELS IN INDIA





Preface from KPMG

Investment in the emerging markets byglobal Aerospace and Defence companieshas witnessed an increase, driven primarilyby a search for low-cost manufacturingoptions, research and developmentcapabilities and acquisition of engineeringand related critical talent. The nature of therelationship between the major Aerospaceand Defence companies and theirinvestment into emerging markets has also

undergone a transformation with thesecompanies attempting to establish strongerpresence locally. This is driven by factorsassociated with optimisation of their supplychains and forging stronger ties with suchemerging economies, which are oftenpotential customers for future defencesales.

The progressive policy level changesinitiated by the government of Indiacoupled with normalisation of India’sgeopolitical relationships have provided asignificant opportunity to Indianorganisations to enter the defencemanufacturing sector. This understanding ismanifest in the large number of tie-upsforged by large Indian companies withglobal Aerospace and Defence companiesin the recent past, as illustrated by the tie-up of Sikorsky aircraft with the Tata Groupand the BAeS tie-up with the Mahindra

1, 2Group , primarily with the twin objectivesof broadening their market access to supplycomponents to the Original EquipmentManufacturers (OEM) and global defenceprimes directly and also allowing them toadequately leverage their manufacturing

capabilities domestically.

Taking note of these developments, USAerospace and Defence companies, facedwith declining or stagnant growth indeveloped markets, are increasinglyfocusing on the emerging markets. In thiscontext, this report provides insights intothe consequent broadening of thelandscape for a potential Indo-UScommercial enterprise focused on thedefence sector.

01 INDIAN DEFENCE SECTOR



1. www.sikorsky.com2. www.baesystems.com



02

The KPMG-AMCHAM report, released in the backdrop of closer bilateral relations

between United States (US) and India, speaks to the keen focus the two countrieshave on national security.

These closer ties have enabled US defence companies to offer a variety of defence

products and technologies to the Indian defence forces. Currently, the nationaldefence budget in 2010 -2011 for India has been earmarked at USD 32 billion. Of

this, USD 13 billion is to be spent on acquisitions for new weapons systemsequipment and services. Indian defence procurement spending is expected to increase

in the years to come, making it one of the most attractive defence markets in theworld. And US defence companies can play a significant role in partnering India in itsdefence needs.

US is a relatively new player in the large international pie with domestic

manufacturers meeting smaller needs. The ratio between domestic and internationalsuppliers is expected to reverse in the future. US companies can partner India in

developing the indigenous aerospace manufacturing industry into a global supplychain. This will also further India’s objective to create new avenues for employment,spur technology development, help India become a critical link in the international

supply chain, and transform India into a self reliant nation with indigenous aerospaceand defence capabilities. India’s existing wealth of talent, technology and cost

advantages together can help make defence products globally competitive.

A program on Indo-US Defence Cooperation was held on the eve of Def Expo 2010with discussions around India’s offset policies and Defence Procurement Policy. The

event was supported by senior representatives of the US Pacific Command and theUS Embassy in New Delhi as well as by India’s Ministry of Defence and the defence

industry. This program initiated further engagement as offset partners between UScompanies and the Indian suppliers.

I would like to commend AMCHAM and KPMG for their efforts in putting this reporttogether. AMCHAM with its defence committee will play a significant role in

expanding the defence industry in India.

.

President, Amcham in India

Dr. Dinesh Keskar

INDIAN DEFENCE SECTOR

Foreword by AMCHAM





01 Evolutionof Defence Industry in India

Expertise developed in precision manufacturing, qualitycontrol, project management and the skilled manpower

accumulated in sectors like engineering, automobile and

medical devices manufacturing, in conjunction with an

enabling policy environment and economic growth, have

allowed for a potential step up into defence

manufacturing which can provide the foundation for a

credible Indian defence industrial base.






04

1. www.mod.nic.in2. www.drdo.gov.in

3. Defence procurement: challenges and New Paradigm Shift by-J.V. Singh

4. www.outlookindia.com


The impetus for upgrading India's defencemanufacturing capabilities is provided by

the country's defence expansion cycledriven by the country's extensivemodernisation plans, an increased focus

on homeland security, and India's growingattractiveness as a 'home market' defencesourcing hub.

The foundations of India's defenceproduction base were laid in 1801 with theestablishment of the Gun Carriage Agency

1in Kolkata by the East India Company . This

has grown considerably over time to reachthe present situation wherein the countryhas created a strong network of Defence

Public Sector Undertakings (DPSUs) andother defence focused labs and researchand development institutions. This has

resulted in a strong talent pool that hasdeveloped over the preceding decades.

Presently, the Defence Research andDevelopment Organization (DRDO), anetwork of defence laboratories, have over

5,000 scientists and over 25,000 technicalstaff working on major projects. AnotherIndian DPSU, Hindustan Aeronautics

Limited (HAL), is currently ranked 38thamong the top global Aerospace and

Defence companies and plays a major rolein defence aviation in India. However, inspite of this dedicated infrastructure, India

still has to rely on imports to meet morethan 70 percent of its overall defence

2equipment requirements .

Post-independence, India had a limited

defence capability. There were several

attempts towards undertaking correctiveaction including diversification of defence

procurement beyond the UK, focusing onlicensed manufacture of defence

equipment to boost self reliance indefence production, establishment ofDefence Public Sector Undertakings

(DPSU's) such as Bharat ElectronicsLimited (BEL), Hindustan AeronauticsLimited (HAL) and Goa Shipyard Limited

(GSL).

The setback in the Sino-Indian War of 1962made the government take notice of the

state of affairs and consequently, the

1960s witnessed significant forwardmomentum in the shape of creation of a

separate Department of DefenceProduction under the Ministry of Defence

1(MoD) . There was a rise in procurement ofarms on highly subsidised terms from the

erstwhile Soviet Union and, consequently,indigenous design and development

programs receded to the background withlicensed production becoming the centralfocus of arms acquisition policies. The

change in the political scenario in the thenSoviet Union during the 1990s led to yetanother shift in India's strategy for defence

equipment procurement with India nowstarting to explore the possibility ofexpanding its defence procurement base

by developing strategic defence relations3with countries like the US, UK and Israel .

The decade of 1990s witnessed economicreforms and policies that were targetedtowards inviting foreign investment to

promote development of domestic

Defence policy reforms by the

government of India

industry through deregulation,privatisation, tax reforms, and inflation-

controlling measures. These reforms werelargely focused on the manufacturingsector and later on their purview was

expanded to cover the telecom andinfrastructure sectors. A need for similarreforms in the defence sector was felt

post the armed conflict between India andPakistan in 1999. This conflict exposed thestate of obsolescence in the equipment

used by the defence forces of the4country . This underlined the need for

broadening the defence industrial basebeyond DPSUs using specific policyincentives in order to streamlineequipment procurement process for

modernisation of the equipment used bythe defence forces.

Following the Kargil conflict and faced with

increasing public criticism and scrutiny, thegovernment formed the Kelkar Committeeto suggest changes in the acquisition

procedures and enable a greaterparticipation of the private sector indefence production. The major

recommendations of this Committeecentred around facilitating the creation of adomestic defence equipment

manufacturing capability through privatesector participation to serve the defence

needs of India in the long term byadopting a broad array of policy measureslike the creation of defence-qualified

private companies, investment fundsavailable to fund defence innovation, andindustry offsets. The Government






Towards this end, the Government of Indiaseems receptive to suggestions from the

private industry, both domestic and globalcompanies, on the defence procurementprocedures, offset implementations,

transfer of technology and other relatedissues, which will help bring the entire

procurement policy in line with the

industry expectations.

In this context, the Department ofDefence Production, MoD, is currently

framing the Defence Production Policy toencourage the establishment of a defencefocused Military-Industrial Complex in

8India . The policy document states ‘the

importance of self-reliance in defence isaxiomatic. It is of vital importance for both

strategic and economic reasons and hastherefore been an important guiding

principle for the government sinceindependence. Government considers thatthe industrial and technological growth in

the past decades has made it possible toachieve this objective by harnessing the

emerging dynamism of the Indian

industry, and the capabilities available in

Source: KPMG Analysis

accepted most of its recommendations

and with their full implementation, thedefence industry in India should evolve

under the purview of the ensuing reforms.

Creation of Defence ProcurementProcedure (DPP) in 2002 to formalise theentire procurement process was a

landmark step towards streamlining the6procurement process . This policy was in

the nature of a set of guidelines and

attempted to categorise defenceprocurement programs under several

distinct heads. Offset Policy was

in a fair, objective and transparent manner.

Over time, this should minimise the delaysthat have marred the Indian defence

procurements to date. The policy hascontinued to evolve with a further iteration

8expected towards the end of 2010 , a shiftaway from the mandated two year revision

schedule. This is an encouragingrecognition on the part of the MoD of theviews of private industry.

introduced for the first time in 2005 with

the aim of promoting foreign investment inthe Indian defence sector. The procedurecontinues to be a 'work-in-progress' and

underwent constant evolution with afurther iteration of the DPP in 2006, a

revision undertaken in 2008 and furtheramendments to DPP 2008 issued in 2009,all of which were geared to strengthen the

6, 7policy framework .

Present policy emphasises shortening thetime frame of procurement cycle and on

ensuring that the procurement is executed

INITIAL REFORMS INTRODUCED CONSOLIDATION OF REFORMS CONTINUING REFORMS TO BOOST INDUSTRY INVOLVEMENT

2010

2009

2008

2006

2005

2002

2001

Policy Reforms Undertaken by the Government of India

?

AcquisationCouncil (DAC)Formed

? DPP introduced

Defence ?

defence offsetpolicy

Formulation of ?

FacilitationAgency(DOFA) formed

Defence offset ?

categories for offset

? Offset bankingintroduced

DPP 2008 lists 13 ?

category introduced

? More transparentprocurementprocess

“Buy and Make Indian” ? DPP 2010?

participationallowed

? FDI capped at 26percent

100 percent private

6. www.mod.nic.in7. KPMG analysis

8. Ministry of Defence sources (draft DPP)





06

1. Draft Defence Production Policy by the Department of DefenceProduction,

2. www.investmentcommission.inMinistry of Defence

3. Company websites

low infrastructure costs and strongmanagerial capability are some of thekey factors that give India thecompetitive advantage in themanufacturing domain. Various globaldefence manufacturing primes havenow formed joint ventures and enteredinto sourcing agreements with Indianindustry players.

? Enabling Policy Framework by

Ministry of Defence:

Recent years have witnessed

significant liberalisation of ForeignDirect Investment (FDI) policies in thecountry. Several enabling policymeasures have been introduced,including the DPP which brought intransparency in the procurementprocess and Press Note 2 (2002)which removed defence manufacturingfrom the list of restricted sectorsrequiring prior government approval(currently, licensing requirements ofDepartment of Industrial Policy andPromotion still apply to entitiesengaged in activities in this sector).

? Human Capital Advancement:

The easy availability of a technicallyskilled workforce is a key strength ofIndian industry today. India is amongstthe youngest nations in the world (interms of median age) and is expectedto register the largest addition to theworking age population in the worldand the largest working age populationworldwide by 2050. Estimates suggest

that India adds over 2.5 milliongraduates to its workforce every year,including 300,000 engineers and

2150,000 IT professionals .Furthermore, the Indian educationsystem, with its strong emphasis onmathematics and science, produces alarge number of engineering graduateswho are proficient in quantitativeconcepts. This skilled manpower iscritical to establishing a military-technical industrial complex in India.

? Infrastructural Progression:

The progression in availability of theindustrial infrastructure is aiding theindustrialisation of the country.Encouraged by the interest evinced byIndian and foreign industry players insetting up manufacturing bases inIndia, governments of different IndianStates have taken steps to promoteSpecial Economic Zones (SEZs) fordeveloping an ecosystem where allcore and ancillary activities related todefence manufacturing can co-exist.

Dedicated industrial parks backed bysupporting infrastructure and anenabling policy framework will furtherhelp enable India in emerging as aregional hub for defencemanufacturing activity.

? Political Stability:

India is today the world's largestdemocracy and one of the world's 10fastest-growing economies. Thecountry is seen to have an advantageof being an age-old civilisation as well

as an emerging modern marvel. Thishas a critical bearing on industries likedefence manufacturing, which arehighly susceptible to the political risksreflected in the macro operatingenvironment of a country, especially inthe context of the large amount ofresources required to set up suchmanufacturing facilities. Coupled withnew economic policies and a stablepolitical scenario, India is attractingstrong global partnership opportunitiesin this sector.

These factors working in conjunction withnormalisation of India’s geopoliticalrelationships, have led to the creation ofan economic atmosphere wherein globaldefence companies could establish apresence in India and Indian privateindustry is equally keen to support thegrowth of this planned military-industrialcomplex with several major Indian entitieslike the Tata and the Mahindra Grouphaving firmly set their eyes on emergingas complete system integrators of

3defence equipment .

the academia and Research and1Development Institutions’ . The overall

policy objective is to achieve substantiveself reliance in production of the requireddefence equipment in as early a timeframe as possible. The policy seeks to givepreference to indigenous design,development and manufacturing ofdefence equipment and also encourageindigenous research and developmentthrough adequate policy measures tomotivate the relevant public and privatesector entities to strengthen their research

and development wings.

The Indian industry has evolved rapidlyover the last decade and has proved itsmanufacturing, technological and researchand development prowess in automobilemanufacturing, medical devices and ITindustry. Expertise developed in thesedomains has now made it possible for theindustry to look for diversification andupgrade opportunities. The in-houseprecision manufacturing expertise,stringent quality control mechanisms andhighly skilled manpower accumulated bythe Indian industry are beingcomplemented by an enabling policyenvironment and economic growth, whichcould fuel the foray of the industry in tothe defence manufacturing space throughdiversification or new entry.

Some of the key strengths of the Indianindustry that are enabling a step up intodefence sector and leading to thedevelopment of a military-technicalindustrial complex in India are:

? Expertise and skills acquired by the

Indian manufacturing industry to

emerge as a manufacturing hub:

India has firmly emerged as anengineering hub with manufacturingand IT capabilities coupled with ahighly skilled low cost workforce.Factors like availability of precisionmachining, fabrication, subassemblyfacilities, engineering design services,

Key strengths of Indian industry to step

up into the defence sector






02 Current Indo-USGeopolitical Relationship


The shared interests of India and US encompasshumanitarian assistance, counter-terrorism cooperation,

fighting violent religious extremism, maritime security

activities, weapons proliferation monitoring, regional

stability maintenance and related aspects. The defence

relationship between India and the US seemingly

underwent a transformation with the endorsement of the

National Missile Defence Program by India in May 2001

and has grown substantially over the years, especially

since the completion of the 2005 Defence Framework1Agreement .

1. newdelhi.usembassy.gov





08

ground combat joint exercise with theIndian Army code named 'Yudh Abhyas' inUttar Pradesh while simultaneouslyconducting the Air Force exercise 'Cope

3India – 09' at Air Force Station, Agra . Astatement by the US Ambassador to India,Timothy J. Roemer, said "the broadenedand unprecedented scope of Yudh Abhyasstands as a testament to the growingpeople-to-people and military-to-militaryties of the US and India, one of the keypillars of the expanded US-India strategic

partnership. Yudh Abhyas signals the boldfuture of US-India relations marked by thegrowing confidence and trust shared byour two great democracies as, together,we face the challenges that lie ahead. Ourtwo nations have made great strides indefence cooperation to help ensure peaceand prosperity in the region." In thiscontext, the Indian defence personnel willalso participate in the 'Balance Iroquois'wargames to be held in Alaska. Also,Indian navy is likely to participate in theamphibious exercise “Habunag” in Japan

with US Navy.

The increasing convergence betweenIndian and US defence establishments ismanifested in the signing of several major

procurement contracts between the twocountries:

The US government's approval for

supply of Boeing's P-8I aircraft, meantto replace Indian Navy's aging Tupolev

Tu-142M maritime surveillance

? P-8I Poseidon maritime4reconnaissance aircraft :

The Indo-US defence relationship 1

The defence relationship between Indiaand the US remained stagnant for a longtime given factors like India’s strategicrelations with the then USSR, US supportto Pakistan and imposition of US sanctionson India post the Pokharan nuclear testsconducted by India in May 1998. Followingthe end of the Cold War and the collapseof the former Soviet Union, Indiaundertook a review of its foreign policy.During this period, India and the US beganto explore the possibility for a normalised

relationship based on shared democraticvalues and converging economic interests.India also undertook significant economicpolicy reforms beginning in 1991, whichwere perceived positively by the US.

The defence relationship between Indiaand the US began to undergo atransformation with the endorsement ofthe National Missile Defence Program byIndia in May 2001. India’s support to theUS post the September 11, 2001 terroristattacks seems to have acted as a powerful

force in cementing ties between the twocountries. This phase also witnessedremoval of some of the sanctions againstIndia by the US, imparting furthermomentum to the military ties betweenthe two countries. The signing of theFramework Indo-US Defence Agreementon June 28, 2005 and the Indo-US CivilNuclear Cooperation Agreement in 2008further helped in strengthening theevolving relationship. 2010 saw the signingof Civil Nuclear Cooperation Agreementand the lifting of a majority of the

sanctions on dual-use technologies pavinga path for the free flow of US defence

technologies to India and considerablyaiding India's quest for self-reliance in theweapons technology.

The shared interests of India and the USencompass humanitarian assistance,counterterrorism cooperation, fightingviolent religious extremism, maritimesecurity activities, weapons proliferationmonitoring, regional stability maintenance

and related aspects. The Indo-US defencerelationship has grown substantially,especially since the completion of the2005 Defence Framework Agreementwhich highlighted 10 areas of cooperationbetween the two countries

Faced with an increasing threat of terroristattacks, the United States and India beganto perceive each other as strategicpartners in the anti-terrorism war. Therecent bilateral exchanges, joint militaryexercises, increasing economic trade and

the expanding defence ties between thetwo countries represents a fundamentalshift in their relationship. The growingdefence trade is seen as a naturaloutcome of the overall expanding defencerelationship.

Increasing proximity between the Indianand the US defence establishments is alsohighlighted by joint military exercises ofincreasing size and complexity carried outby the two countries. In fact, India and theUS have held over 60 joint military

2

exercises over the last decade . In 2009,the US and India conducted their largest

Convergence of interests between India

and the US defence establishments 1

1. newdelhi.usembassy.gov2. http://timesofindia.indiatimes.com/india/Military-pacts-on-hold-

but-India-US-continue-with-exercises-arms-deals/artic leshow/6601777.cms

3. www.boeing.co.in4. http://www.usarpac.army.mil/YudhAbhyas09/Yudh%20Abyhas

%2009%20-%20Meda%20Roll-up%20for%2019-20%20October%202009.html






09

turboprops, was a watershed dealbetween the two countries. Valued atUSD 2.1 billion, it has been deemed asthe largest defence procurement dealsigned between the two countries todate. Recently, the DefenceAcquisition Council, the apex bodymanaging the procurement of defenceequipment in India, cleared theacquisition of another four of theselong-range surveillance aircraft for theIndian Navy, thus boosting the overall

value of this procurement contractover the USD 3 billion mark. Thestrategic significance of this dealstems from the fact that the Indiannavy is the first international customerfor Boeing Company's P-8I aircraft.

This contract is for supply of 145 ultralight howitzers by BAe Systems. Thecontract, valued at USD 647 million, isa direct government-to-governmentcontract between the US and the

Indian governments

5? Ultra light howitzers :

6? F414-GE-INS6 for the LCA :

5? Harpoon anti-ship missiles :

7? C-130J transport aircraft :

GE Aviation has recently won thecontract to supply the F414-GE-INS6engines for India's Light CombatAircraft (LCA). The contract, worth USD650 million, involves supply of 99engines with an option for 49 moreengines that can be exercised later.Eight engines will be bought off-the-shelf, while the other 91 will bemanufactured in India under thetransfer of technology

The latest procurement contract to besigned between the two countries isfor 24 Harpoon Block-II anti-shipmissiles, worth USD 170 million, toarm the maritime strike Jaguar fightersin IAF's combat fleet

The contract for the supply of 6Lockheed Martin C-130J `SuperHercules' aircraft for Indian Special

Forces is worth USD 1 billion. As part

of the contract, the US agreed toprovide India with an entire solutionspackage including six aircraft, threeyears of initial support, training ofaircrew and maintenance technicians,spares, ground support and testequipment and a team of technicalspecialists based in India during thethree year initial support period.

These agreements underline the growingcloseness between the defenceestablishments of the two countries.Together, these Indo-US equipmentprocurement contract have created offsetobligations of over USD 1 billion, whichnow account for 42 percent of allinternational offset obligations since the

8DPP made offsets mandatory . This hascreated significant opportunities for thecollaboration between the Indian and theUS firms.


Distribution of Offset Contracts Awarded by India (March, 2008 – October, 2010)


(Total Value of USD 2.65 billion)

US companies account for 42 percent (by value)of total offset contracts awarded in India

US Companies 42%

RAC MiG 11%

ELTA 3%

Fincantieri 5%

Israel Aerospace Industries 16%

Rafael 3%

Rosonboron Export 10%

Finmeccanica 9%

BAeS 1%

Lockheed Martin 11%

GE Aviation 7%

Boeing 24%

5. indiadefenceonline.com6. www.defpro.com

7. www.lockheedmartin.com8. KPMG analysis





10

Future outlook of Indo – US defence

relationship

The current size of the ongoing andplanned acquisitions in the defence sectorin India has attracted global attention. In

fact, a statement from Boeing said thatthe planned acquisitions by India will allowit to bid for deals worth USD 31 billion by

92019 .

Several US companies are competing tosupply defence equipment to India as part

of the Indian armed forces ongoing

modernization program. This includesBoeing and Lockheed Martin’s involvement

in the USD 10 billion competition for10supplying 126 fighter aircraft to India .

The Indian Ministry of Defence's mission

to become self-reliant and a net exporterof defence products is opening manydoors for partnerships in the Indian

defence industry. This has been evident inthe increasing trend of joint ventures

being formed by the US defencecompanies with Indian entities.

There are some challenges and roadblocks

in sustaining this forward momentum in

the evolving strategic relationship

between India and the US. India hasexpressed specific concerns regarding theLogistics Support Agreement (LSA),

Communication Interoperability andSecurity Memorandum of Agreement

(CISMOA) and the Basic Exchange andCooperation Agreement for Geo-SpatialCooperation (BECA), that are required

under the US domestic laws to transfersensitive defence technology. In fact, the

US insistence on signing the CISMOA and

the Indian reluctance towards the sameled to a special CISMOA and End-UserAgreement being reached by the two

countries for the sale of four VVIP Boeing11aircraft . The Indian government has

expressed skepticism at different forums

about the intended use of theseagreements. These misgivings from eitherside require priority attention and

clarification in the interest of both nations.

US companies involved in the ongoing major procurement programs


Procurement program CompanyContract value(in mn USD)

127 Multi Mission Role Combat Aircrafts Boeing, Lockheed Martin 10,000

15 Heavy lift Helicopter Boeing/Sikorsky 700

10 C-17 Globemaster-III Giant Strategic Lift Aircraft Boeing 3,000

22 Apache Attack Helicopter Boeing 550

16 Multi Role Helicopter Lockheed Martin/Sikorsky 300

Javelin Anti Tank missile Raytheon/Lockheed Martin 900

510 CBU- 105 Sensor Fuzed Weapons Textron Systems 375

F125IN Engine for Jaguar Fighter Aircraft Honeywell 670

Quick Reaction Surface to Air Missile Weapon Raytheon 1,400


9. Company website10. Primary KPMG Research

11. www.defenseindustrydaily.com







12

2. IDSA Webs ite3. CIA World Factbook 2008

4. KPMG analysis


Procurement contract winning entity(March, 2008 - October, 2010)

Contract Value (in million USD)Offset amount (in million )USD

0

500

1000

1500

2000

2500

3000

A m o u n t

( m i l l i o n i n U S D )


1000 1000

325

300 300

97.5

R A C M i G

L o c k h e e

d M a r t i n

F i n c a n t i e r i

F i n c a n t i e r i

10030

13841.4

R o s o n

b o r o n e x p o r t

260

78

R a

f a e l

2100

630

B o e i n g

C o m p a n y

E L T A

225

67.5

I s r a e

l A e r o s p a c e

I n d u s t r i e s

1400

420

B A e S

82.524.8

800

240

F i n m e c c a n

i c a

700 650

210 195

R o s o b o r o n e x p o r t

G E A v i a t i o n

India’s defence spending has grownsignificantly in the past decade, rising from

approximately USD 12 billion in 2000-01 to2nearly USD 32.6 billion for 2010-11, thus

emphasizing the increasing prioritization ofthis sector by the Indian government. The

country is currently the ninth largestdefence spender in the world with anestimated 2 percent share of global

defence expenditure, but with the third3highest growth rate . Due to the need for

updated equipment, India is set toundertake one of the largest equipment

procurement cycles in the world.

With this background, the government,

through the offset clause contained in theDPP, aims to create offset opportunities fordomestic industry worth USD 30 billion

from the current procurement programs.Currently, offsets worth USD 2.65 billion

4having already been created .

Recent defence procurement contracts





13

8. http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=54926


Global defence companies are now

looking at India for establishingpartnerships for product design,

development and testing and for sourcingcomponents locally, thus making India apart of their global supply chain. From the

perspective of these companies, theIndian defence opportunity is typicallymanifested through the engineering

services outsourcing, supply chainsourcing and associated MaintenanceRepair and Overhaul-related activities.

The global primes are looking at Indiawith cautious optimism. Hitherto

Indian firms were not fully equipped toserve the global companies from asupply chain perspective and lacked

global competitiveness in engineering,quality and technology aspectsrequired for Aerospace and Defence

products. There has been someimprovement in these areas which hasled to the creation of a significant

opportunity for Indian companiespossessing precision manufacturing

capabilities.

An emerging trend is the entry of

several large Indian companies toventure into component manufacturing

with the stated vision of emerging astotal system integrators themselves.The Tata Group, for example, has

sought the necessary approvals andhas already signed agreements withseveral international companies,

including one to manufacturecomponents for Boeing. It has further

proceeded to acquire a one-third stakein Italy's Piaggio Aero while IsraelAerospace Industries and Tata have

established a new company, NovaIntegrated Systems Limited to developmanufacture and support a wide range

5of defence and aerospace products .

Such measures will allow the group tofulfill its vision of moving into full-scaleaircraft assembly and production in

both the civil and military markets.

1. Supply chain sourcing opportunity

The entry of Small and MediumEnterprises (SMEs) will further aid thedevelopment of a globally integrateddefence supply chain in India. Whilethese SMEs are currently involved insub contracting work for DPSUs andlarger companies, the government’soffset policies, procurement policiesand regulatory incentives will spur thegrowth of a domestic defenceindustry, with SMEs playing a key rolein the supply chain.

Aerospace and Defence Special

Economic Zones

Encouraged by the interest evinced byIndian and foreign industry players insetting up manufacturing bases inIndia, governments of different stateshave taken steps to promote SEZs fordeveloping an ecosystem where allcore and ancillary activities related toaerospace manufacturing can co-exist.State governments of Tamil Nadu,West Bengal, Maharashtra and Gujarathave already announced their plans for

setting up such industrial parks andSEZs to provide an eco system fordesigning, building and maintaining alltypes of aircraft.

These parks will result in creating thecomplete ecosystem which will beconducive for the growth of thedomestic aviation industry.Furthermore, such industrial parksshould have the potential to createsignificant direct and indirectemployment and generate

considerable foreign investment.

Some of the leading global defencecompanies are now looking at India toset up maintenance, repair andoverhaul (MRO) facilities, primarilydriven by the improved infrastructureavailable in India for such activities,India's geographic location in theSouth Asian region allowing access topan-Asia, local availability of skilledworkforce and associated cost

2. Maintenance Repair and Overhaul

opportunity

advantages. Such MROs should allowthese companies to serve theirregional customers better whilesimultaneously leveraging their localpresence for future salesopportunities.

Airbus, Boeing and the government ofSingapore are understood to beconsidering setting up MRO facilities inIndia. Additionally, the US Defence firmRaytheon has signed an agreementwith India's Elcom Marine Company toprovide spare support for themaintenance of Phalanx close-inweapon system on board IndianNavy's INS Jalashwa amphibiouswarship. Eurocopter, has alsoannounced that it would establish anMRO facility to serve the large

6Dauphin fleet being operated in India .

Engineering Services Outsourcing(ESO) in India is growing rapidly with

most of the major global Aerospaceand Defence companies havingestablished tie-ups with Indian ITcompanies. A majority of these tie-upsare geared towards product design,development and testing with thefocus areas being CAD/CAM design,fluid dynamics, two and three Dmodeling, remote monitoring, systemarchitecture development andassociated technologies.

The ESO industry is set to achieve7USD 55 billion in revenues by 2020 .

Currently out of the estimated USD 30billion spent on engineering services inthe Aerospace and Defence sector,only approximately USD 700 million isbeing off-shored so far. Traditionallylow-end work like testing, validationand design documentation serviceshave been outsourced and high endareas of engine control, navigationsystems and air control managementsystems are still largely left

8untouched .

3. Engineering Services Outsourcing

opportunity

7. http://economictimes.indiatimes.com/infotech/ites/Indias-engineering-outsourcing-market-may-touch-55-bn/articleshow/5237845.cms

5. business.rediff.com6. www.indiastrategic.in, www.business-standard.com,

beta.thehindu.com/business/article125150





The sector has witnessed some mature

outsourcing deals with the global defenceprimes like Boeing, Airbus, Raytheon, Prattand Whitney, Northrop Grumman and

Magellan Aerospace. Also, about 10Aerospace and Defence companies havealready set up captive centres in India with

the objective of reducing their design

costs by up to 30-40 percent andshortening their lengthy design cycles. TheIndian IT prowess coupled with an

inherent cost arbitrage is motivating thesecompanies to expand their Research andDevelopment pool beyond their home

countries.

INDIAN DEFENCE SECTOR 14

Outsourcing Maturity in Aerospace

Future outsourcing

areas

Emerging outsourcing

opportunites

Currently being undertaken

by the Indian IT Vendors

? Engine control systems? Air control management systems? Navigation systems

? Embedded development? Control system design? Simulation? High-level aeronautical system design? Testing services? Cockpit equipment support software? Composite structuring

? Detailed design for modeling? Manufacturing? Drafting and field failure analysis

Source: Nasscom website





15

Defence companies are aiming to capture

the Indian market and establish amanufacturing and sourcing presence

locally to make India a home market.

Expanding presence of some notable US

Aerospace and Defence Companies to

leverage the current market opportunity

in India

India's mission to become self-reliant anda net exporter of defence products isopening many doors for partnerships in

the Indian defence industry. Increasing thenumber of American Aerospace and

The information gleaned from a survey and associated research undertaken by

KPMG to understand the strategies of some of the top US companies aspiring to7build a strong presence in India are given below :

BOEING COMPANY

We are taking a long-term view of partnership with India and are establishing astrong footprint in the country. We are collaborating with the Indian public and privateplayers to help achieve India's aspirations to become self reliant in indigenousdefence capabilities and be a critical link in the global supply chain.

Vivek LallVice President and India Country Head,

Boeing's Integrated Defence Systems


7. Information gathered from a survey response sent to companyrepresentatives, Company websites, KPMG research





16

7. Information gathered from a survey response sent to companyrepresentatives, Company websites, KPMG research


aircraft parts distribution centre in Noida

near New Delhi. Another Boeing subsidiary

Jeppesen, a provider of flight navigation

solutions, has also announced plans to

establish its presence in Hyderabad in

2009. Today, Boeing also has Field Service

offices in Mumbai and New Delhi and a

representative office in Bangalore.

In January 2009, Boeing won a multibillion-

dollar sale of eight Boeing P-8I long-range

The close relationship between Boeing andIndia goes back over 60 years when India

entered the jet age on the wings of Boeingcommercial jetliners. Boeing established a

wholly-owned Indian subsidiary - BoeingInternational Corporation India PrivateLimited (BICIPL) - in 2003 to support the

growing demands of India’s aerospaceindustry. In 2008, Boeing subsidiary AviallInc. established its presence in India and is

now in the process of opening India’s first

anti-submarine aircraft to the governmentof India. In early 2010, India sent the US

government a Request for Information (RFI)on the potential purchase of 10 Boeing C-17

Globemaster III airlifters, which wasapproved by the US Congress in May 2010,thus paving the way for negotiations to

begin between the two governments onthis Foreign Military Sale.

General Dynamics has two manufacturing

facilities in India and is currently pursuing

opportunities in India in the areas of

communications, specialised vehicles for

the defence and paramilitary forces,

armaments, ammunition, rugged

computing, naval systems and special

mission aircraft. US and India are currently

discussing the potential sale of General

Dynamics made Stryker all-terrain vehicle

to India at an estimated cost of USD 1.3

million per vehicle.

As India addresses its future defence and security requirements, General

Dynamics is eager to become a partner in meeting the needs of the Indian ArmedForces and other elements of the Government of India and identify opportunities

where our expertise may be of value in meeting India`s objectives

William O SchmiederVice President International,

General Dynamics

GENERAL DYNAMICS

GE Aviation has been present in India since

1982 when the first CF6 engines were

delivered to Air India. Its association on the

military side started in 1986 when the F404was selected to power the technology

demonstrator flight for the Light Combat

Aircraft program. Since then GE Aviation

has grown with India and now have over

400 engines in service and over 200 in

backlog. In addition, it provides propulsion

to the naval frigates with its LM2500

marine gas turbines, which provide the

necessary fire power to India's armed

forces.

GE Aviation has recently won the contractto supply the F414-GE-INS6 engines for

India's Light Combat Aircraft (LCA). GE'sF404-GE-IN20 powers the LCA-MkI (Tejas)and the CFM56-7 engines will power therecently ordered Boeing P8I aircraft. GE is

partnering with HAL and Indian Navy for

the indigenous frigate and aircraft carrierprograms with its LM2500 marine gasturbines.

GE AVIATION

GE Aviation is looking forward to partner with the Indian industry (both publicand private sector) as India embarks on modernization of its defence forces and

develop the Indian aerospace manufacturing industry.

Nalin JainCountry Director,

GE Aviation





17

GE has one of the largest researchfacilities in India located in Bangalore –John F. Welch Technology Center - with

over 5000 people including 500researchers in GE Aviation who work with

global teams to develop advancedtechnology products.

India's National Carrier NACIL will be part

of a niche network of MRO players whowill be able to overhaul the GENx engine,

Honeywell's relationship with India'sAerospace and Defence industry dates

back over 25 years with the NormalairGarrett TPE 331 engines for the Dornier-228 aircraft of the Indian Navy and Coast

Guard. Honeywell is a supplier ofcommercial and military avionics, auxiliary

power units, enhanced ground proximitywarning systems, collision avoidancesystems and weather radar systems – forboth fixed wing and helicopter aircraft,

environmental control systems, flightcontrol systems, flight displays and

guidance systems, repair and overhaulservices for a range of Honeywell systems

across various platforms of the Indian

Armed Forces. Honeywell also has anexclusive manufacturing relationship withHAL to source TPE 331 -10/-12 engines for

its global customer base. Honeywellsupports key platforms including Do-228,

Advanced Light Helicopter, Light Combat

Aircraft, Kiran, Jaguar, and Light CombatHelicopter and Cheetah/Chetak.

Honeywell is involved in providing

solutions for several upcoming platformssuch as Light Combat Helicopter, LightUtility Helicopter, Light Combat Aircraft

mark II, Intermediate Jet Trainer; contentsfor Retrofit/Modification/Upgrade (RMUs),tactical and navigation grade missile

guidance systems, 155 mm artillery gunmodernisation, etc. Honeywell hassignificant content on recently acquired

US defence platforms like maritimereconnaissance P8I and troop transport

C130J. In addition, Honeywell is activelysupporting Indian aviation infrastructure,including lighting for Delhi runway, video

docking guidance systems in Chennaiairport, terminal automation at Hyderabadand the Delhi airport.

which powers the Boeing 787. GE Aviationis also looking forward to partner withIndia as the Indian government embarks

on modernization of its defence forces anddeveloping aerospace manufacturing

industry in India. GE Aviation is a keyplayer for supplying the power plant andsystems for the Medium Multi-Role

Combat Aircraft (MMRCA) fighters andattack helicopters under consideration forthe Indian Air Force.

HONEYWELL

India is one of the most important strategic markets for Honeywell worldwide.In Aerospace and Defence, Honeywell continues to reinforce this commitment by

evolving from a key supplier of Indian Aerospace and Defence sub systems to astrategic partner delivering innovative, reliable, and cost effective solutions aligned tothe specific needs of India

Anil GuptaPresident,

Honeywell India






18

L-3 India was est ablished in April 1999 asthe Asian Centre of Excellence,Development and Deployment centre for L-

3 MAPPS (Montreal, Canada). Since itsinception, L-3 India has provided high

quality applications engineering andsoftware development services to L-3

MAPPS for ship control systemsworldwide. More recently, L-3 India hasalso become involved in supporting the

development of power plant simulators forprojects worldwide.

In 2009, L-3 India became the primecontractor for a major Indian Navy project

which required the establishment ofadditional capabilities locally in Bengaluruincluding program management, test and

integration facilities. L-3 India is leading theship commissioning and integration

support activities for L-3 MAPPS projectsin Asia with major projects beingcompleted in Malaysia and South Korea.

L-3 COMMUNICATION

L-3 MAPPS recognized the significance of the vast Indian market over 10 yearsago when we established L-3 India in 1999 to support the Indian Navy and regional

customers. With the growing strategic relationship between our countries, weexpect to grow our business by offering additional products from the vast portfolio ofL-3 technologies and continuing our indigenization strategy to meet the demanding

requirements of our defence and civilian customers in India.

Rangesh KasturiVice President of Marketing and Sales,

L-3 MAPPS


Lockheed Martin India was formallyestablished in 2006, but Lockheed and itsacquired companies have been active in

India for over 20 years. Its first success inIndia was the ~ USD 1 billion 130J FMSaircraft and DCS facilities contract with the

IAF in 2006; the first aircraft will bedelivered on time in Q1 of 2011.

Lockheed Martin is looking to expand its C-130J foot-print. Other major efforts include

the Team Romeo (US Government,Lockheed Martin, Sikorsky) FMS bid of the

MH-60R helicopter for the Indian Navy'sMulti-Role Helicopter, a pending FMSLetter of Request for Javelin missiles (a

Raytheon-Lockheed Martin JV), and theFMS bid (with the US Air Force) of theF-16IN Super Viper for the Indian Air Force.

It has smaller but equally important effortsin bids for providing the Indian Navy with

an acoustic target and submarine antenna,a Deep Submergence Vehicle for theNational Institute of Ocean Technology, and

weapons and sensors for the Indian ArmyApache Helicopter bid.

LOCKHEED MARTIN

We see the on-time, on-budget delivery of India’s first C-130J aircraft as awatershed event for the US-India relationship, and evidence of the 30-plus year

commitment for Lockheed Martin in India

Roger RoseChief Executive,

Lockheed Martin India Private Ltd





19

India represents one of Northrop Grumman's largest potential growth marketsfor defence products in Asia. The presence of Joe Parsley and the recentappointment of Commodore Sharma reflect the importance we are placing on

supporting India's growing defence and aerospace requirements. Our objective hereis to develop a business where capabilities can grow and shape the markets for ourcustomers.

John BrooksVice-president, Business Development for Northrop Grumman Integrated Systems President,

Northrop Grumman International Inc.

Northrop Grumman Corporation has won acontract to supply integrated bridge

systems for two new fleet tankers beingbuilt in Italy for the Indian Navy in March2010. Northrop Grumman Corporation is

outsourcing components of the F-16 APG-68(V)9 fire control radar from Bangalore-

based Bharat Electronics Limited and

Dynamatic Technologies Limited. Also, aspart of a comprehensive co-production

program, Northrop Grumman engineerswork side-by-side with engineering teamsfrom Bharat Electronics Limited and

Dynamatic Technologies Limited providingtraining and support to ensure a smooth

transition to production.

Raytheon has a history of supporting India

in a variety of defence and civilapplications. In 2002, Raytheon and the US

government entered into a groundbreakingagreement in which India contracted topurchase 12 Fire Finder Weapon Locating

Radars. Raytheon and the Indian SpaceResearch Organization jointly developedthe system – GAGAN (GPS Aided Geo

Augmented Navigation) - that was

successfully tested in July 2006. This is the

first phase of the ISRO-AAI sponsored

project to implement a space-basednavigation system in Indian airspace. Thefollow on fully operational system is being

implemented presently.

Raytheon has entered into businessrelationships with a number of Indiancompanies including Tata Power SED and

L&T to jointly address major Indian

defence acquisitions.

RAYTHEON COMPANY

We're committed to help India strengthen its local industries as well as itsdefence capabilities and we look forward to a long, mutually beneficial partnership

William L. BlairPresident Raytheon India &

VP Raytheon International Inc.


NORTHROP GRUMMAN CORPORATION





20

United Technologies Corporation Groupcompanies have been involved in helpingIndia meet its defence requirements for a

long time. In 1954, Sikorsky AircraftCorporation delivered its first helicopter toIndian Air Force. The company sold its first

commercial helicopter in India in 2007.Sikorsky formed a JV with the Tata Group

to manufacture Sikorsky S-92(R) helicoptercabins in India. Sikorsky is pursuing IndianArmed Forces requirements for various

categories of helicopter.

Another group company, Pratt andWhitney, plans to expand its relationship

with LandT, HAL, Infotech Enterprises Ltd.and Tata Advanced Materials Ltd. to

outsource engine components, tools,design analysis work and composites and

has firmed up plans to outsource overUSD 100 million worth of components anddesign work to Indian vendors over the

next five years. The company is exploringthe potential for supplying engines to theIAF and is examining the possibility of

setting up a MRO facility in India.

Hamilton Sundstrand, another UTC group

company, signed a long term agreementwith Titan Industries Ltd. to manufacturehigh precision components for auxiliary

power units, ram air turbine, flap actuatorsystems, engine control, and environmentcontrol systems. It also signed a long term

supply agreement with InfotechEnterprises Limited, a Hyderabad-based

global technology solutions provider.

UNITED TECHNOLOGIES CORPORATION

The market is evolving. Sikorsky has a market presence and the product is wellreceived. It is expected that a good number of machines will be added in the near

future. Tata Advanced Systems Limited is producing Sikorsky S-92 cabin in theirfacility at Hyderabad. The first cabin is due for delivery in Nov/Dec, 10.

AVM (Retd) AJS WaliaManaging Director, India and South Asia,

Sikorsky Aircraft Corporation, a UTC Group Company






04Both Foreign Military Sales and Direct Commercial Saleshave a place in meeting the equipment and services

needs of the Indian Armed Forces.

Defence Procurement Channelsin India









Categorisation of proposals in DPP

Source: KPMG analysis

pure commercial transactions betweena buyer government and industry. InDCS, the US companies compete withproducers from other counties to sell

their products. As in an open globalcompetition, all vendors are invited tofield their equipment. Techno-commercial evaluation is carried out bythe purchasing country as per thecriteria laid down in the RFP, postwhich an order is placed with an entity.

The tenders for procurement of

defence equipment launched by theIndian Ministry of Defence aregoverned by the DPP, which was

created in 2002 to formalise the Indianprocurement process. The differentcategories of defence procurement in

the DPP are:

Buy & Make (Global)Buy & Make (Global) Buy & Make (Indian) Make2 3 4

DRDOProduction ofstrategic,Complex &Security SensitiveSystems

Acquisition Wing (Make)High TechnologyComplex Systems

Acquisition Wing (Buy)Low TechnologyMature Systems(Min 50 percentIndigenous)

Buy1

Buy GlobalFor outright purchase fromforeign vendor

Buy IndianPurchase from Indian firmsincluding JV with Globalfirm

Buy & Make (Global)Purchase from a foreignvendor followed bylicensedproduction/indigeno usmanufacture

Buy & Make (Indian)Purchase from an Indianvendor only

Offset min 30 ofcontract value

percent No offset if indigenouscontent >50 percent elseoffset on Foreign andcomponent content

Min 30 percent ofestimated cost in Foreignand component for importof subsystem

Private player responsiblefor complete project andchoice of JV/Coproduction with globalplayers

use and accountability for the

equipment/services supplied to otherparties through FMS over the entirelifetime of the equipment/service

(commonly referred to as 'cradle-to-grave' monitoring).

These are in the nature of Direct

Commercial Sales (DCS), which are

2. Competitive bids by the Indian

Ministry of Defence 3



3. Ministry of Defence website



24

? Buy Procedure: ‘Buy’ pertains to anoutright purchase of equipment. Based

on the source of procurement, thiscategory would be classified as ‘Buy(Indian)’ and ‘Buy (Global)’. ‘Indian’

would mean Indian vendors only and‘Global’ would mean foreign as well asIndian vendors. ‘Buy Indian’ must have

a minimum 30 percent indigenouscontent if the systems are being

integrated by an Indian vendor.

?

Buy and Make (Indian) Procedure: ‘Buy and Make (Indian)’ relates topurchase from an Indian vendor

including an Indian company forming ajoint venture/establishing a productionarrangement with an Original

Equipment Manufacturer (OEM)followed by licensedproduction/indigenous manufacture in

India. Buy and Make (Indian) musthave a minimum 50 percentindigenous content on cost basis

? Buy and Make (Global) Procedure: Acquisitions covered under the ‘Buyand Make (Global)’ decision would

mean purchase from a foreign vendorfollowed by licensed

production/indigenous manufacture inthe country.

? Make Procedure: Acquisitions covered under the ‘Make’decision would include high technology

complex systems to be designed,

developed and produced indigenously.

The defence procurement policies and

processes in India are discussed at lengthin an earlier KPMG-CII publication titled‘Opportunities in the Indian Defence

4Sector . DPP lays down guidelines to

govern the the procurement processacross all stages of procurement, from the

initiation of a procurement programthrough RFIs to its final delivery.


Process Stage Procurement Process Time Involved

Service requirementsidentified

Commencement of procurement process by issuing a Request for Interest which includes:? Services Qualitative Requirements (SQRs)? Acceptance of Necessity (AoN).

1 months

Request for Proposalsissued

Description of key requirements such as:? Technical parameters? Quantity, acquisation catergory offset obligations, training requirements? Evaluation criteria

4 months

Field trials andtechnical evaluationsconducted

?

Evaluation of offers by Technical Evaluation Committee (TEC)? Vetting of TEC report? Field trials

11-17 months

CommercialNegotiations held andconcluded

? Technical Oversight Committee included for procurements over USD 75 million? Negotiations with Commercial Negotiation Committee (CNC)? Approval by authorities including Ministry of Defence, Ministry of Finance, Cabinet Committee on

Security

4-11 months

Contract signing andconclusion

24-36 months


4. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Opportunities-Indian-defence-sector.aspx





The private industry's involvement in

fulfilling India's defence requirementsincreased significantly post theeconomic liberalisation and the

ensuing deregulation in the 1990s. Thisderegulation, in conjunction with the

Indian government's drive towardsindigenization of defence equipmentmanufacturing, has provided significant

boost to the industry. The result hasbeen the mushrooming of companiesin the SME segment focused on this

sector.

The DPSUs have also collaborated with

many foreign companies towardsdesigning high-end military useproducts. Some of them are as follows:

? Ballistic Missile Defence (BMD)

System: With the help of Israel andFrance, Defence Research andDevelopment Organization (DRDO)

is developing a BMD system to bedeployed by 2015. The system willbe based on radar technology for

tracking and fire control

? Indian Aircraft Carrier Project 71

INS Vikrant: Fincanteri is currentlya design consultant for integrating

the propulsion system and Russian

? firm NDB is contributing to aviation

technology to Cochin Shipyard Ltd.in this project that started in 2001-02

? Light Combat Helicopter (LCH):

The HAL is developing a 5.5-tontwin engine LCH is a derivative ofDhruv Advanced Light Helicopter

(ALH) with tandem seating. Likethe Dhruv ALH, the LCH is

powered by two Shakti enginesjointly developed with France's

7Turbomeca

? BrahMos Missile: BrahMos is asupersonic cruise missile that can

be launched from submarines,ships, aircraft or land. It is a jointventure between India's DRDO

and Russia's NPOMashinostroeyenia, who have

together formed the BrahMos8Aerospace Private Limited

? Lockheed Martin, Boeing, NorthropGrumman, EADS, Rafael Advanced

Defence Systems and IsraelAerospace Industries have enteredinto strategic partnership with

Bharat Electronics Limited.

Besides this, a 'Fast Track Procedure' was

promulgated in September 2001 to ensureexpeditious procurement for urgentoperational requirements foreseen as

imminent or for a situation in which a crisisemerges without prior warning

India maintains an extensive defenceindustrial base with 40 Ordnance

Factories and eight Defence PublicSector Undertakings (DPSUs) whichare engaged in the manufacturing of

state-of-the-art weapons and systemsfor the armed forces.

The Indian private sector has played acritical role in supporting the defencesector in India by acting as sub-

contractors to DPSUs, OFBs, BaseWorkshops of Army and Base Repair

Depots of Air Force and the Dockyardsof the Navy, primarily for supplying rawmaterials, semi-finished products,

parts and components. The DPSUs andOFBs outsource about 20-25 percentof their requirements from the private

sector (mainly SMEs). About 25percent of this requirement is met

6through small-scale sector

3. Working with the Defence Public

Sector Undertakings 7


5. Ministry of Defence website6. www.ciidefence.com/events/MSME_DEFENCE/SME_flyer.pdf

7. http://www.turbomeca.com/public/turbomeca_v2/html/en/actu /archives2009-detail.php?aid=1383anda=2009

8. http://www.drdo.in/pub/nl/2010/jun10.pdf





26INDIAN DEFENCE SECTOR





05There is a sense of guarded optimism in the Indian andglobal defence industry regarding the market opportunity.

Feedback from the industry highlights several factors

associated with this opportunity which can potentially

act as drags to the sector's development in India.

Roadblocksin the Defence Sector






28

? Lack of domestic capability to cater to

the demand from global primes:The domestic manufacturing industrywill be hard pressed to cater to thedemand from the global primes forcomponents, which they will need toprocure from India to discharge thepotential offset obligations. This

capacity constraint can be a potentialdeterrent to the foreign companies,especially when seen in light of efficientsupply chain and program managementwhich are at the core of suchmanufacturing projects

? Taxation Issues:India has a complex taxation regimewith a large number of taxes applicableat different stages of the manufacturingprocess. The tax regime is perceived asaggressive and bureaucratic in itsapplication. For example, while theindirect tax laws provide variousexemptions and concessions frompayment of custom duty (on imports)and excise duty (on domesticmanufacturing) of capital goods,machinery, equipment, spares, tools,etc. for use by the Armed Forces anddefence sector, such benefits arespecific in nature and have beenrestricted to certain types ofequipment, machinery, etc. or to variousprograms or development projects

1undertaken by the Ministry of Defence

? Restrictions on foreign investment:Currently, 26 percent FDI i s allowed inthe defence sector which is regarded ashighly restrictive by foreign defencecompanies. This limit does not allow theforeign company significant control overthe Indian JV entity, which has directimplications for adequate managementcontrol

? Limitation of liability:The current policy framework and

contractual issues relating to through-life product liability and indemnification

While the overall industry feedback in Indiais upbeat about the potential opportunitiesin the Aerospace and Defence sector,DPSUs continue to have considerableadvantages in the form of excise dutyconcessions, payment term considerations,contract award and offset preferences. TheIndian private companies and SMEs would

find the Indian government's decision-making timeline and procurementprocesses onerous and may indeed beconsistently non-price competitive relativeto the DPSUs, given the advantagesoutlined above. In the case of foreignsuppliers, the incumbency of DPSUs,Russian and Israeli suppliers, through-lifeprogram liability clauses and associatedinsurance costs, technology transfer andservice taxes, Foreign Corrupt Practices Act(FCPA) risk, as well as the requirement toself-finance all DPP-mandated pre-contract

tests and evaluations by the Indiangovernment are outstanding issues toresolve.

All the same, the attitude of the largerindustry, both domestic and global, withrespect to leveraging this opportunityadequately can at best be described as beingone of guarded optimism. This is primarily onaccount of several factors associated withthe defence sector which can potentially actas drags to the sector's growth in India.

Feedback from the industry provides thefollowing cautions regarding thedevelopment of the defence industry in India

? Lack of a coherent industrialization

policy:For India to realize its objective ofbuilding the military capabilities, theGovernment needs to develop acomprehensive industrialization strategyfor defence to coordinate the use ofoffsets, transfer of technology, FDI andthe public and private sector defenceindustry in India will be critical to this

industrialization strategy

are particularly onerous to domestic andforeign private companies. Under thecurrent system, the liability of thesupplier extends to the entire life cycleof the product, even when the productis not under the supplier's care, and ispotentially unlimited. These provisionscan act as a potential deterrent to active

involvement of foreign suppliers

? Restrictions on dual use technologies:The extent of qualifying offsets, whichis currently limited to a list of 13permitted categories of productsmanufactured by the Indian defenceindustries as contained in DPP 2008, isperceived as being limiting andrestrictive. These provisions restrict anadequate realization of the policyobjectives. Ideally, offset credit shouldbe afforded to purchases from theIndian industry for products in sectorswhich have a direct bearing on thedefence of the country, like commercialaerospace and homeland security. Theambit of this category can later beexpanded to make the provisions moreenabling

? Inadequately trained manpower:Defence acquisition is a highlyspecialized process and needsadequately trained manpower. In India,we lack a dedicated cadre of personnelfor capital acquisitions along with any

specific training programs for staffinvolved in the acquisition process. Thecreation of a separate and dedicatedinstitutional structure to undertake theentire gamut of procurement functionsis required to facilitate a higher degreeof professionalism and cost-effectiveness in the defenceprocurement process.


1. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Opportunities-Indian-defence-sector.aspx







30

About AMCHAM

The American Chamber of Commerce

(AMCHAM) in India is an association ofAmerican business organizations

operating in India. AMCHAM wasestablished in India in 1992 and today

has about 500 members, out of whichUS companies make up about 95

percent of the members and individualsor honorary members the remaining 5

percent.

AMCHAM - India is accredited to the

Chamber of Commerce of USA,Washington DC, USA (COCUSA). It is

also a full member of the Asia PacificCouncil of American Chambers of

Commerce (APCAC). AMCHAM enjoysproximity in relations with the US

Embassy officials with the incumbentUS Ambassador to India being theHonorary President of AMCHAM. It

receives continuous support from the

US Embassy in fulfilling its primeobjectives of promoting activities thatwould encourage and stimulate

investment by US companies in India,supporting ongoing business operations

of its members and encouraging bilateraltrade between India and USA.

AMCHAM fulfills these objectives in avariety of ways, such as providing a

forum on an organized basis in whichAmerican business organizations in India

can discuss and identify common issuesand interests regarding their economic

and commercial interests in India and/ orthe United States, maintaining Sectoral

Committees to implement the primaryobjectives of these committees,undertaking advocacy on policies and

procedures affecting AMCHAMmembers' operations in specific sectors

as well as affecting the growth offoreign direct investment in India, etc.

AMACHAM currently has the followingsectoral committees which focus onspecific sectors to achieve their primeobjectives:

? Defence Equipment Committee

? Education Committees

? Energy Committee

? Finance, Banking and Insurance

? HR Forum

? ICT Committee

? IPR Committee

? Infrastructure Committee

? Medical Equipment and Devices

Committee

? Tax & Tariff Committee

AMCHAM's defence equipment

committee is working towards the aim

of building stronger relations between

US and Indian defence sector, building

partnerships and encouraging

investments by US companies in India.

Currently the committee has over 30

members who meet about once a month

to share sector expertise, discuss the

current defence scenario, brainstorm on

possible partnerships and engage the

governments of both the countries to

come together and help strengthen their

relations.






About KPMG

KPMG is a global network of professional firms providingAudit, Tax and Advisory services. We operate in 144countries and have 137,000 people working in member firmsaround the world. The independent member firms of the

KPMG network are affiliated with KPMG International, a Swisscooperative. Each KPMG firm is a legally distinct and separateentity and describes itself as such.

KPMG in India, the audit, tax and advisory firm, is the Indianmember firm of KPMG International Cooperative (KPMGInternational) was established in September 1993. The firmsin India have access to more than 3500 Indian and expatriateprofessionals, many of whom are internationally trained. Asmembers of a cohesive business unit they respond to a clientservice environment by leveraging the resources of a globalnetwork of firms, providing detailed knowledge of local laws,regulations, markets and competition. KPMG has offices inIndia in Mumbai, Delhi, Bangalore, Chennai, Chandigarh,Hyderabad, Kolkata, Pune and Kochi. We strive to providerapid, performance-based, industry-focused and technology-enabled services, which reflect a shared knowledge of globaland local industries and our experience of the Indian businessenvironment.

31

We at KPMG recognise the significant opportunitythat the defence sector presents to our clients. We have a

dedicated and specialist team to help clients and to provide acomplete solution – from strategy formulation to

execution

“

”-Richard Rekhy,

Head of Advisory - KPMG in India








32

Acknowledgement

During the course of preparation of this report, we received extensive support from

several industry participants, to whom we would like to extend our thanks.

For providing specific information and assistance, KPMG would like to thankfully

acknowledge the support received from the following participants

Executive Director

AMCHAM in India

President – Amcham in India

President – Boeing India, and

Vice President – Boeing International

Chairman – Defence Equipment Committee, AMCHAM in India

Vice President and India Country Head – Boeing Defence, Space and Security

Co - Chairman – Defence Equipment Committee, AMCHAM in India

Chief Executive – Lockheed Martin, India

Ajay Singha

Dinesh Keskar

Vivek Lall

Roger Rose




AAI

ALH

BEL

BMD

CAD/CAM

CoE

DCS

DPG

DPPG

DPP

DPSU

DRDO

DSCA

ESO

FDI

FMS

GSL

HAL

IDSA

INS

ISRO

JV

LCH

LOA

LOO

LOR

MOU

MRO

NASSCOM

OEM

RFI

RFP

SEZ

SME

Airports Authority of India

Advanced Light Helicopter

Bharat Electronics Limited

Ballistic Missile Defence

Computer Aided Design/Computer Aided Manufacturing

Centre of Excellence

Direct Commercial Sales

Defence Policy Group

Defence Procurement and Procedure Group

Defence Procurement Procedure

Defence Public Sector Undertakings

Defence Research and Development Organization

Defence Security Cooperation Agency

Engineering Services Outsourcing

Foreign Direct Investment

Foreign Military Sales

Goa Shipyard Limited

Hindustan Aeronautics Limited

Institute for Defence Studies and Analysis

Indian Naval Ship

Indian Space Research Organization

Joint Venture

Light Combat Helicopter

Letter of Acceptance

Letter of Offer

Letter of Request

Memorandum of Understanding

Maintenance Repair and Overhaul

National Association of Software and Services Companies

Original Equipment Manufacturer

Request for Information

Request for Proposal

Special Economic Zone

Small and Medium Enterprise

33

List of abbreviations






KPMG in India

Kochi4/F, Palal TowersM. G. Road, Ravipuram,Kochi 682 016Tel: +91 484 302 7000Fax: +91 484 302 7001

KolkataInfinity Benchmark, Plot No. G-110th Floor, Block – EP & GP, Sector VSalt Lake City, Kolkata 700 091Tel: +91 33 44034000Fax: +91 33 44034199

MumbaiLodha Excelus, Apollo MillsN. M. Joshi MargMahalaxmi, Mumbai 400 011Tel: +91 22 3989 6000

Fax: +91 22 3983 6000

Pune703, Godrej CastlemaineBund GardenPune 411 001Tel: +91 20 3058 5764/65Fax: +91 20 3058 5775

BangaloreMaruthi Info-Tech Centre11-12/1, Inner Ring RoadKoramangala, Bangalore 560 071Tel: +91 80 3980 6000Fax: +91 80 3980 6999

ChandigarhSCO 22-23 (Ist Floor)Sector 8C, Madhya MargChandigarh 160 009Tel: +91 172 393 5777/781Fax: +91 172 393 5780

ChennaiNo.10, Mahatma Gandhi RoadNungambakkamChennai 600 034Tel: +91 44 3914 5000

Fax: +91 44 3914 5999

DelhiBuilding No.10, 8th FloorDLF Cyber City, Phase IIGurgaon, Haryana 122 002Tel: +91 124 307 4000Fax: +91 124 254 9101

Hyderabad8-2-618/2Reliance Humsafar, 4th Floor

Road No.11, Banjara HillsHyderabad 500 034Tel: +91 40 3046 5000Fax: +91 40 3046 5299





The information contained herein is of a general nature and is not i ntended to address the circumstances of any particularindividual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

h i f i i h i f i l d i f h h i i f h i l i i

KPMG in India Contacts

Head of Advisory Servicese-Mail: [email protected]: +91 124 307 4303

Executive Director andHead of Marketse-Mail: [email protected]: +91 22 3090 2320

Defence Advisory Services

Executive DirectorTax and Regulatory Servicese-Mail: [email protected]: +91 124 307 4172

Executive DirectorBussiness Performance Servicese-Mail: [email protected]: +91 80 3065 4500

HeadDefence and Security Advisory Servicese-Mail: [email protected]: +91 124 307 4167

Richard Rekhy

Vikram Utamsingh

Gaurav Mehndiratta

Shalini Pillay

Wg Cdr (Retd) Neelu Khatri

Documents

Indian_Defence_Sector KPMG