Industry Defence Linkage_CII_EY

Confederation of Indian Industry

Industry-Defence Linkage

1Industry-Defence Linkage

Message from Chairman, Defence Task Force, CII Eastern Region CII Eastern Region has a dedicated Task Force on Defence to identify linkages and explore business opportunities between Industry and Defence Sector. As a part of this initiative, the Confederation is organizing the third edition of Industry Defence Linkage which had proved to be an ideal forum in facilitating the Indian industries to engage with the defence sector.

The objective of this conference is to bridge the gap between industry capabilities and defence requirements.

India has emerged as the largest market for the defence products, technologies and services and we are expected to spend approximately 235 Bn USD on defence systems over the next 10 years. Indias imports increased by 38 percent between 2007 to 2011. India But as it said that No nation can aspire to be a power to reckon with on borrowed strength, Self reliance in Defence is of vital importance for both strategic and economic reasons. Industrial and technological growth in the past decades has indicated that it is possible to achieve this self reliance in defence by harnessing the emerging dynamism of the Indian Industry.

Government sector alone can not fulfill the requirements of defence forces and therefore, the private sector has to come in a big way. In countries such as the US, UK, Russia, Australia, etc., it is the private sector that meets key defence requirements. In fact, as per the global practices, the private sector is consulted for key inputs during policy formulations.

In India also, government has taken a slew of policy initiatives including 100% private equity with 26% FDI in the defence sector and the defence offset policy which mandates that foreign vendors must invest 30 per cent of the contract value in building Indias defence industry for contracts worth Rs 300 crore or more.

In its ambitious plans to upgrade its defence forces, Government is counting heavily on the private sector. The Government of India seeks to meet 70 percent of the countrys defence needs internally over the next 5 years or so. With several large equipment and modernization programmes lined up, it is estimated that the overall expenditure will be in the range of USD 80-100 billion in the next 5 years. This also means that the local industry doubles in size and approx. 120,000 new jobs are created.

I see this as a multi-billion-dollar opportunity for the industry, and countless new jobs.

The government has recently come out with Defence Procurement Procedure 2013. This will provide the Indian Private sector a chance to move up the value-chain in the area of defence production in the country. There are still many concerns, but Im sure they will be addressed soon.

Ideally, the public and private sectors work alongside, combine their skills and develop a partnership to maximize resources. However, I wish to let it be known that formulation of focused and pragmatic strategies will be critical to enhancing Indias opportunity to leverage its advantages.

I hope this report on Industry Defence Linkage would go a long way in strengthening the linkages between the industry and defence sector.

Rear Admiral A K Verma (Retd.)

Chairman, Defence Task Force, CII Eastern Region

2 Industry-Defence Linkage

Foreword by CII The third edition of the Industry-Defense Linkage, billed for 4 July 2013 in Kolkata, is yet another significant initiative by the Confederation of Indian Industry (CII) Eastern Region to foster partnership, increase competitiveness and spur growth in the defense sector. The context is just right.

We all know that in the next 15 years, India will see an investment worth around INR6 lakh crore. This is something that will create numerous jobs, drive economic growth and ensure prosperity for people.

Significantly, of the INR6 lakh crore, at least INR80,000 crore will be spent in the eastern region comprising Bihar, Chhattisgarh, Jharkhand, Odisha and West Bengal. The scale and scope is stupendous, with opportunities bright for sectors such as machineries, electrical items and hulls.

Furthermore, private players, which are currently engaged in the defense industry sector as sub-contractors and ancillary units supplying raw materials, semi-finished products, parts and components to Defense PSUs and ordnance factories, would be stepping up their participation.

By all accounts, it is a win-win opportunity. The challenge, however, is how state governments and the center play their part and create the right ambience to be able to cash in on the opportunities.

Given that the international defense industry has a complex network of supply chains, there is an urgent need for Indian companies, especially the 4,000 SMEs that supply metals, clothes, leather and various semi-finished products to ordnance factories, to integrate themselves into the supply chains of global and domestic defense majors.

CII Eastern Region has undertaken a number of initiatives with a clear focus on creating a conducive atmosphere. We have a Defense Task Force dedicated to helping MSMEs and the industry cash in on emerging opportunities and catalyze growth of the defense sector industry in the East. We also organize forums and facilitate interactions to explore more business opportunities, particularly for MSMEs.

Notably, CII Eastern Region organized a Defense Conclave on 20 December 2012 in Kolkata. The aim was to build a strong platform for the private sector in the Eastern Region and for defense PSUs, and to explore mutual business opportunities.

This year, too, several programs including the upcoming Industry-Defense Linkage, a series of vendors meets and interactive sessions have been lined up. Such exercises are necessary to enable the defense sector industry to come up with ideas and innovation and make the big leap forward.

It is no longer a distant dream to create a technologically feasible and economically viable industry, and become one of the mightiest military powers in the world.

Thank you.

Sudhir Deoras,

Chairman, CII Eastern Region


Foreword by Ernst & Young India is the single-largest importer of defense equipment worldwide. Its history of conflict with two of its largest neighbors makes it imperative that the countrys armed forces have access to state-of-the-art equipment. In times of strife, a large nation such as India cannot rely on imports and needs to become self-sufficient. On a separate note, the Ministry of Defense (MoD) has long recognized this need and has stressed on the importance of being self-reliant. Furthermore, it is striving to meet this objective. The offset policy under the Defence Procurement Procedure (DPP) is an example of this.

The offset policy, after being introduced in 2005 and promulgated through the DPP, has undergone several iterations to ensure that it is easy to understand and implement. The Indian government introduced the offset provisions to facilitate foreign investment in the indigenous defense industry, both in terms of foreign direct investment (FDI) and capability building. The banking of offset credits incentivizes foreign OEMs to make long-term commitments to the Indian economy. It also helps in the building of an indigenous defense base independent of the obligatory confines of a timeline. While the policy has evolved at a great pace, certain roadblocks hamper the actual potential to be realized. To address this concern, the MoD and various other government agencies have begun focusing on compliance and execution, while liberalizing the offset policy with the inclusion of newer methods, products and services to discharge offsets. This opens up an offsets market worth approximately US$20 billion in the next decade for the Indian industry. In this backdrop, we have tried to throw some light on the processes governing offsets and the opportunities arising out of the offset markets in India.

Prior to the opening up of the defense industry to the private sector, Defence Public Sector Undertakings (DPSUs), along with the Ordnance Factory Board, catered to the armed forces requirements. Majority of the defense infrastructure in the country is constituted of the 41 Ordnance Factories and 9 DPSUs. The model of production of DPSUs is based on the production of technologies conceptualized by DRDO, nominated projects of the MoD and licensed production of platforms from foreign OEMs. Owing to the modernization drive of the armed forces in the last couple of years, DPSUs have had to bear with overflowing order books and stringent project timelines. They have responded by creating innovative models of subcontracting and joint production with the private sector, with the latter stepping up participation. We have attempted to give a brief overview of the arising opportunities, and the methods that private companies may employ to engage with DPSUs on these opportunities and contribute toward nation building.

It has been our endeavor to make this report both relevant and actionable. Hope you find it useful.

K. Ganesh Raj

National Leader- Aerospace & Defense

EY LLP


ContentsPart 1 Opportunities with DPSUs in IndiaChapter 1: Indian defense industrial base - public sector ............................................. 10

DPSUs and OFB ............................................................................................................. 11

Organizational structure ................................................................................................ 11

OFB ....................................................................................................................... 11

DPSUs ....................................................................................................................... 13

Hindustan Aeronautics Limited (HAL)...................................................................... 14

Bharat Electronics Limited (BEL) ............................................................................. 14

BEML Limited (BEML) ............................................................................................. 14

Mazagon Dock Ltd (MDL) ........................................................................................ 15

Garden Reach Shipbuilders & Engineers Ltd (GRSE) ................................................. 15

Bharat Dynamics Ltd (BDL) ..................................................................................... 16

Hindustan Shipyard Limited (HSL) ........................................................................... 16

Goa Shipyard Limited (GSL) .................................................................................... 16

Mishra Dhatu Nigam Ltd (MIDHANI) ......................................................................... 17

Financials of the DPSUs ................................................................................................. 17

Supply chain and vendor registration .............................................................................. 17

Modernization of DPSUs and OFs .................................................................................... 18

Chapter 2: The Indian defense market and opportunities ............................................. 19

Challenges for Defense Industrial Base ............................................................................ 21

Opportunity matrix ........................................................................................................ 22

Targeting opportunities .................................................................................................. 24

Driving successful relationships ...................................................................................... 24

JVs/MoU ............................................................................................................... 24

Way forward for DPSUs and OFs ..................................................................................... 28


Part 2 - offset policy of the Indian MoD: effects, implications and opportunites Chapter 1: What is offset? ...........................................................................................32

What is offset? ..............................................................................................................33

Offset policy of the Indian MoD .......................................................................................33

Objectives .............................................................................................................33

Modalities of executing offsets ................................................................................33

Offset process ........................................................................................................35

Submissions ..........................................................................................................36

Agencies involved in the offset process ...................................................................36

Comparison with offset policy in other countries ......................................................36

Evolution of the offset policy ...................................................................................38

Chapter 2: Defense offsets in India ..............................................................................39

Benefiters ....................................................................................................................40

Focus areas of offsets in India .........................................................................................41

Key trends shaping offset demand in India ......................................................................41

Chapter 3: Offset-related opportunities .......................................................................43

Offset opportunities in the programs of the Indian MoD ...................................................44

Emerging methods of offset discharge ............................................................................45

Innovative models ..................................................................................................45

Key products and services ......................................................................................45

Conclusion ...................................................................................................................46


Part 1: Opportunities with DPSUs in India


Chapter

1Indian defense industrial base public sector


Figure 2: DPSU and OFB production figures

OFB & DPSU Production

0

1000

2000

3000

4000

5000

6000

7000

2008-09 2009-10 2010-11 2011-12

Amou

nt in

USD

Mill

ion

DPSUs OFB

Source: MoD Annual Report

Organizational structureDPSUs and OFB fall under the administrative control of the Department of Defence Production (DDP), Ministry of Defence. The Department of Defence Production deals with the indigenization, development and production of defense equipment, both in the public and private sectors. The DDP organizational structure is depicted in the figure below.

Figure 3: Organizational Structure of the MoD

Ministry of Defence (MoD)

Dept of Defence (DoD)

DGOF

Dept of Defence Production (DDP)

Defence PSUs

Defence Research & Development Organization

(DRDO)

DGQA

Source: Data compiled by q-tech synergy

OFBThe OFB is the largest and oldest departmentally run production organization in the country and is engaged primarily in the manufacture of defense hardware. It was established 200 years ago as departmental manufacturing units with the main purpose of meeting the requirements of the armed forces. The organization functions under the DDP and is a dedicated facility for manufacturing weapons, ammunitions,

DPSUs and OFBIndian defense had been a restricted sector under the exclusive control of the government and dominated by the Department of Defence Production with 41 defense OFs and 9 DPSUs. These bodies jointly met the majority of the armed forces requirement. These units, with an employee base of more than 2 lakh personnel, are under complete

Figure 1: Network of ordnance factories in India

Uttarakhand

Uttar Pradesh

Punjab

Bihar

West Bengal

Orissa

Andhra Pradesh

Madhya Pradesh

Maharashtra

Karnataka

Tamil Nadu

OFMOMFCOEFHZ

OFCSAFFGKOEFOPF

OFDUNOLF

OCFC

OF Nalanda

OFKATVJFGIFGCFOFKOFI

MPFOFAAFKHEF

OFDROFBAOFCHOFV

OFBHOFAJ

HFVOCFAV

EFAOFT

HAPPCFA

OFPM

OFBOL

RFIMSFGSFOFDC

MDL

GSLBEMLHALBEL

BDLMIDHANI

HSL

GRSE

Ordnance Factories DPSUs

Goa

Source: Data compiled by Q-Tech Synergy

government control. Combined turnover stood at US$5261 million (INR26305 crore) in 200708. Over time, annual production has seen a sustained growth at 13%, and it now stands at US$7663 million (INR42145 crore). Products include combat aircraft, helicopters, unmanned aerial vehicles, warships, submarines, missiles, defence electronics, small arms and ammunition, tanks, and heavy earth-moving equipment.


five operating divisions based on technology grouping, as given in the table below, and each is headed by a board member/additional DGOF. These include:

Table 1: divisions of the OFB

DGOFs operating divisions

Division Number of factories

Ammunition and Explosives (A&E) 11

Weapons, Vehicles and Equipment (WV&E) 10

Materials and Components (M&C) 11

Armoured Vehicles (AV) 3

Clothing, Equipment and General Stores (OEF)

5


Product rangeThe factories, spread all over India, operate a wide range of technologies and product mix. The product range consist of more than 1,000 principal items, including tanks, infantry combat vehicles (ICVs), artillery guns and rocket launchers. The product portfolio focuses on:

Civilian arms and ammunition

Weapons

Ammunition, explosives, propellants and chemicals

Military vehicles

Armoured vehicles

Optical devices

Parachutes

Support equipment

Troop comfort and general stores

Material and components

Financials IOFs have reported a turnaround in their performance, with a steady increase displayed on an annual basis. Improvement in performance is indicated below.

vehicles (armored and transport), clothing, general stores, as well as equipment for defense services.

Indian OFs are managed by the OFB, which comprises the Director General functioning as Chairman and nine members in the rank of additional Director General of Ordnance Factories (DGOF). The factories are divided into five operating divisions based on the type of products and manufacturing technology. Four members are responsible for staff functions, viz, Personnel, finance, planning and material management and projects, engineering and technical services. The organizational structure is explained below.

Figure 4: Administrative structure of the OFB (as on Dec 2011)

Addl DGOF/Members (8)

DGOF and Chairman/OFB

Production divisions

Weapons, Vehicles & Equipment

Ammunition & Explosives

Materials & Components

Armoured vehicles

Ordnance equipment

Staff division

Planning & Material

Management

Technical services

Personnel

Finance


The production lines of OFs are product-specific. The DGOF has


Table 2: Financial Performance of the Indian Ordnance Factories

Year 200708 200809 200910 201011 201112

In USD million

Value of Issue 1261.45 1314.36 1584.55 2039.09 2127.27

Percentage increase (%) 12.5 4.19 20.56 28.69 4.32

Source: MoD Annual Report

CustomersIndian OFs cater to the Indian armed forces, viz., Indian Army, Indian Navy, Indian Coast Guard, Indian Air Force besides the Central Armed Police Forces, State Armed Police Forces, Paramilitary Forces of India and the Special Forces of India, Civil Trade, and foreign customers.

Relationship and interdependence with other government undertakings

DPSUs and OFs, geographically distributed all over the country and operating with a wide range of products and technological disciplines, function with a high degree of interdependence. The OFB/DPSUs has (have) an in-house system of vendor base, i.e., maximum input derived from sister concerns. Some inputs are procured from other government agencies as well.

DPSUsDPSUs have a flexible form of operation, decentralized

management and adequate operational autonomy. Nine undertakings established under DPSUs are:

1. Hindustan Aeronautics (HAL)

2. Bharat Electronic Ltd. (BEL)

3. Bharat Earth Movers Ltd. (BEML)

4. Mazagon Dock Ltd. (MDL)

5. Garden Reach Shipbuilders & Engineers Ltd. (GRSE)

6. Goa Shipyard Ltd. (GSL)

7. Bharat Dynamic Ltd. (BDL)

8. Mishra Dhatu Nigam Ltd. (MIDHANI)

9. Hindustan Shipyard Limited (HSL)

GovernanceDPSUs come under the governance and administrative control of the Secretary of DDP, MoD, through the respective JS in the department. The organizational structure is explained below.

Figure 5: Administrative structure of the DDP

GRSE

MDL

GSL

HSL

Joint Secretary (Naval Systems)

Secretary DDP

BDL

BEL

Supplies

DGQA

Directorate of Standardization

Joint Secretary (Electronic Systems)

Addl. Secretary DDP

OFB

Coordination

Vigilance

Joint Secretary (Ordnance Factory)

MIDHANI

DGAQA

HAL

Joint Secretary (Aerospace)

Joint Secretary (Missile Systems)

Export

Joint Secretary (Land Systems)

BEML



Aerospace equipment

Aero engines of Russian origin

Aero engines of Western origins

Future product range

Bharat Electronics Limited (BEL)BEL, a Navratna PSU, was established in Bangalore, India, in 1954 to meet the specialized electronic needs of the defense services. Over the years, BEL has grown into a multi-product, multi-technology, multi-unit company catering to customers in diverse fields in India and overseas. The company is engaged in the design, development and manufacture of sophisticated state-of-the-art electronic equipment/components for the use of defense forces, paramilitary organizations and infrastructure providers in the telecom sector. About 7080% turnover of the company comes from supplies to the defense sector. BEL ranks 64th among the top 100 defense companies in terms of revenues. BEL has 9 production units and 31 manufacturing divisions spread across 7 states. BEL has a significant role in the civilian professional electronics sector, particularly for the Ministry of Information and Broadcasting. It supplies the bulk of its infrastructure requirements such as studio equipment, transmitters, satellite uplinks and OB vans for radio and TV broadcasting.

BEL is a technology-driven company. All of the units have their own R&D groups, which are supported by three central laboratories for developing cutting-edge technologies. BEL is spending 6% to 7% of its annual turnover, every year, on R&D. The company offers contract manufacturing services for both domestic and international customers. It has automated assembly, inspection and testing facilities, as well as precision machining capabilities. It adheres to strict process and manufacturing standards to make world-class products.

Product rangeBEL offers products including communication equipment, radars, opto-electronics, electronics warfare systems, tank electronics and simulators. BEL also has presence in the areas of access control systems, security systems, solar systems and select non-defense applications.

BEML Limited (BEML)BEML Limited (BEML) is a Mini-Ratna (Category I) multi-location, multi-product ISO 9001-2000 public sector undertaking company under the administrative control of Ministry of Defence. It is engaged in the design, manufacture, marketing and provision of after-sales services for a wide range

Hindustan Aeronautics Limited (HAL)Formed in October 1964 with its corporate office in Bangalore, HAL is a Navratna company and the largest DPSU. HAL has 19 production divisions and 10 R&D centers located in 8 states. It has positioned itself as a comprehensive solution provider in the aerospace sector, spanning fighter aircraft, trainer aircraft,light helicopters and unmanned aerial vehicles. The company conducts in-house, as well as collaborative, R&D to develop new products and technologies. R&D centers, which have dedicated facilities for research, design and development, and prototype activities, are co-located with the respective manufacturing divisions for effective development and design support.

This state-owned company maintains high focus on the aerospace industry, which includes manufacturing and assembling aircraft, navigation and related communication equipment, as well as operating airports. HAL has a number of specialized product divisions catering to the manufacture of aviation hardware as follows:

Aerospace Division

Aircraft Division Nasik

Avionics Division, Hyderabad

Hindustan Aeronautics Limited Korwa

Engine Division Koraput

Foundry & Forge Division-Bangalore Complex

Helicopter Division Bangalore Complex

Industrial & Marine Gas Turbine Division

Overhaul Division

Transport Aircraft Division

Product rangeHALs product range consists of aircraft, helicopters, aero-engines, accessories, avionics and related services. It has diversified into the manufacture of structures for aerospace launch vehicles and satellites, and industrial and marine gas turbine engines. Products manufactured by the company are:

Aircraft of Russian origin

Aircraft of Western origin

Helicopters

Products in current manufacturing range

Advanced communication equipment

Accessories for aircraft, helicopters and aero engines


The company has embarked on a modernization plan to upgrade infrastructure and technology, primarily involving the erection of a 300-ton goliath crane, creation of a modular workshop and the construction of an additional wet basin at a total cost of around INR826 crores. These facilities, on completion, are expected to reduce build periods of warships/submarines.

Product rangeThe company is primarily engaged in shipbuilding. Its activities include manufacture and export of naval ships, submarines, coast guard ships, merchant vessels, fabrication of offshore platform, jack-up rigs, transportation and installation of platform, pipe coating, laying of subsea pipes, diving and vessel management services, also undertakes construction work of well head platforms, water injection and process platforms, jack-up rigs and other offshore structures.

Garden Reach Shipbuilders & Engineers Ltd (GRSE)Garden Reach Shipbuilders & Engineers Limited (GRSE) was incorporated on 1 April 1960 as a wholly owned Government of India enterprise under the administrative control of the Ministry of Defence. It has its own Engineering and Engine manufacturing divisions and operates primarily through three locations in Kolkata, i.e., hull manufacturing unit, fitting out jetty and the design department. It is a multi-unit shipyard-cum-general engineering company and has been in the Mini Ratna- Category I since 2006. The shipyard has six units in and around Kolkata and a diesel engine plant in Ranchi (Jharkhand). Its corporate office is in Kolkata. It builds and repairs commercial and naval vessels. It is also involved in the refitting of ships belonging to the Indian Navy and the Coast Guard. The shipyard has produced 80 warships for the Indian armed forces and 700 other vessels for commercial use. Presently, GRSE has an order book of 21 ships, which includes an export order for the Government of Mauritius.

Product rangeGRSE builds and repairs a wide range of vessels ranging from warships to commercial vessels. Its products spectrum includes shipbuilding and ship repair, deck machinery and shipboard equipment, engines, deep-well water pumps, portable bridges, material handling, general engineering and technical

of mining and construction equipment, defense and aerospace products, and rail and metro products. The company has its corporate HQ and central marketing division in Bangalore and four manufacturing complexes with nine production units located in Bangalore, Mysore, Kolar Gold Fields and Palakkad. BEML operates in the following three major business verticals for associated equipment manufacturing:

Mining and construction

Defense and aerospace

Rail and metro

It also has three Strategic Business Units (SBUs):

Technology Division for providing end-to-end engineering solutions

Trading Division for non-company products

International Business Division for export activities

Product rangeOn the defense front, BEML manufactures variants of Tatra vehicles for all terrain operations including bridge layer, field artillery tractor, medium and heavy recovery vehicles, pontoon main bridge system, mobile mast vehicle, mine plough, transportation trailer, weapon loading vehicles, armored recovery vehicles, military rail coaches, wagons, aircraft weapon loading trolleys, crash fire tenders and radar carrying vehicles.

Mazagon Dock Ltd (MDL)Mazagon Dock Ltd (MDL) is the premier warship building yard in India. It falls in the Mini-Ratna CategoryII and is involved in the manufacturing of warships and submarines, as well as offshore platforms and associated support vessels for offshore oil drilling. The company has the capability to build warships, submarines and merchant ships up to 30,000 DWT, and is engaged in the fabrication of well head platforms, process and production platforms and jack up rigs. For outfitting work, the company has a large number of workshops with sophisticated equipment and machines specific to hull fabrication and ship construction work. Repair work is also under taken using the available facilities.

Currently, it is one of the most heavily loaded warship-building yards in the world. It is the backbone of war shipbuilding in the country and produces sophisticated world-class stealth frigates, destroyers and submarines for the Indian Navy. Mazagon Dock currently accounts for more than 85% of naval vessels built in the country.


Hindustan Shipyard Limited (HSL)The company was founded in 1941 and is based in Visakhapatnam, India. It established a ship repair unit in 1971. In 2009, HSL was transferred from the Ministry of Shipping to the MoD. The yard played a critical role in the development of nuclear-powered, Arihant class submarine. Hindustan Shipyard Ltd., a shipbuilding company, is engaged in the design, construction, conversion and repair of ships. It also engages in submarine retrofitting and constructing offshore structures, as well as provides submarine repair services.

The shipyard is relatively compact at 46.2 hectares (0.462 km2). It is equipped with plasma cutting machines, steel processing and welding facilities, material handling equipment, cranes, logistics and storage facilities. It also has testing and measuring facilities. It has a covered building dock for building vessels up to 80,000 DWT. There are three slipways and a 550-meter (1,800-ft) fitting-out jetty. HSL has a dry dock, wet basin and repair delphin for ship and submarine repair and retrofitting.

The PSU has three divisions:

Shipbuilding

Ship Repairs

Submarine Retrofitting

As of 2009, it had built over 170 vessels and repaired almost 2,000 ships.

Products rangeIt builds bulk carriers, offshore patrol vessels, survey ships, drill ships, offshore platforms, and repair and support vessels. It also conducts major overhauls of Indian Navy submarines. It is being equipped to construct nuclear-powered submarines. HSL has an order book of 24 vessels, of which 14 are under construction. The value of the shipbuilding orders is INR1108.21 crores.

Goa Shipyard Limited (GSL)GSL was established in 1957 and is engaged in building and designing a wide range of vessels for the defense and commercial sectors, with expertise in building modern patrol vessels of steel and aluminum hull structure. Services provided by the company include designing and building of vessels, repair and modernization of vessels, and technology transfer.

GSL is modernizing its yard to adapt to the latest technology in shipbuilding. For this purpose, it is negotiating with well-

training. The company has its own engineering and engine manufacturing divisions.

Shipbuilding

Engineering

Engine

Bharat Dynamics Ltd (BDL)Established in 1970, BDL is primarily engaged in the manufacture of guided missiles and allied equipment. It has corporate offices and units in Hyderabad. The company provides a range of weapon systems including surface-to-air missiles, air defense systems, heavyweight torpedoes and air-to-air missiles. It is the primary production agency for the manufacture of four new Indian missile systems: Prithvi, Trishul, Akash and Nag.

The company is working in close coordination with the DRDO for the technology absorption of other missiles under IGMDP. The Government of India has nominated BDL as a Mini Ratna Category-I company. BDL, with its ISSO 9002 certified manufacturing division and NABL-accredited electronics laboratory, is the leading manufacturer of guided missiles and allied defense equipment of international standard.

BDL has three production facilities located in Kanchanbagh, Hyderabad; Vizag and Bhanur, Medak District. BDL is headquartered in Hyderabad, Andhra Pradesh, India. Its production and testing facilities are modern and are tuned to cater the stringent qualitative requirements of guided weapon systems. Component production facilities include a precision shop with CNC machining centers, CNC turn-mill centers, CNC 4 axes, T&C grinder and precision machines; a general machine shop; a tool room; a vacuum fumance and surface finishing facilities. BDL is setting up additional production units to expand its capacity. The company is already working on its third unit in Vishakhapatnam.

Product rangeThe company manufactures weapon systems such as surface-to-air missiles, air defense systems, heavyweight torpedoes and air-to-air missiles. Its products include fagot launcher adapted for Milan, indigenous launcher for Milan ATGM, test equipment for Konkurs Missile, and counter measure dispensing system.


Table 3: Financial performance of the DPSUs

DPSU Value of sale 201112

Value of Production 201112

Profit after Tax 201112

In INR Million

HAL 3040.28 2584.05 461.71

BEL 1068.90 1053.38 153.95

BDL 257.89 180.53 42.72

GRSE 241.56 201.60 19.64

HSL 104.49 102.55 -15.63

MIDHANI 94.28 90.18 12.45

BEML 501.87 741.31 10.41

GSL 131.43 122.99 15.05

MDL 558.16 458.85 89.87

Source: Respective DPSUs Annual Reports

Supply chain and vendor registrationPSUs and OFs have, as a policy, been outsourcing many of their requirements and have developed a wide vendor base, which includes a large number of mid- and small-scale enterprises, apart from large-scale industries. Percentage growth in vendor base is expected to increase by 6% until 201516 Figures on outsourcing by DPSUs and OFs for the last three years are given in the table below.

Table 4: Outsourcing snapshot of the DPSUs and OFs

Year PSUs/Govt agencies

SSI sector

Non-SSI sector

Total Annual turnover

(INR crores)

%

In USD Million

2008-09

284.73 378.55 677.45 1340.91 5024.18 27

2009-10

290.91 467.45 743.27 1501.64 6293.64 24

2010-11

521.64 352.18 910.73 1784.55 6761.83 25

Source: Report of Working Group on Defense Equipment

known shipbuilders for proposing collaboration. To date, it has built 167 vessels including barges, tugs, landing craft, offshore patrol vessels and other vessels for the Indian Navy and Coast Guard and for export to countries such as Yemen.

Product rangeThe company manufactures ships and hi-tech components for the defense and commercial sectors. It also offers services such as the designing and building of variety of vessels, repair and modernization of vessels and technology transfer.

Mishra Dhatu Nigam Ltd (MIDHANI)Incorporated in 1973, MIDHANI is as a MINI-RATNA-Category I PSU under the administrative control of DDP. Set up primarily for achieving self-reliance in the manufacture of critical alloys, Midhani is a hi-tech metallurgical facility and has been supporting programs of national importance in strategic sectors including space, defence, aeronautics, atomic energy and general engineering.

The company is located in Hyderabad, Andhra Pradesh. Most of the products of MIDHANI are import substitution. The company is planning to foray into the aeronautical and power sector with supplies of another special nickel and cobalt-based super alloy for the manufacture of engines and other aircraft parts. Manufacturing facilities include melting furnaces, forge presses, conditioning, heat treatment, hot rolling, cold rolling, tube shop, investment casting, bar and war drawing, machining, Kanchan Armour Plant, pickling and quality control lab.

Product rangeThe product range includes super alloys, titanium alloys, maraging steels, heat resistance alloys, controlled expansion alloys, tungsten and molybdenum in a variety of mill forms. The company also offers technological (testing and evaluation) and consultancy services to its customers.

Financials of DPSUsMost of the DPSU cater to units under MoD. An overview of the financial performance of the nine DPSUs during 201112 as follows:


Table 5: Snapshot of the modernization of DPSUs and OFs

Investment XIth plan expenditure

XIIth plan projection

In USD million

New capital 125.27 1867.46

Renewal and replacement

231.82 452.73

Source: MoD report

The table lists the amount spent on modernization and the projected amount for some of the DPSUs and OFBs in coming years.

Table 6: Investment for modernization of OFs and DPSUs

Organizations 20092010

20102011

201112

201213 Projected

201314 Projected

In USD Million

Modernization of OFs

89.64 127.82 128.18 134.55 141.27

Modernization of shipyards

58.00 68.55 72.73 80.55 84.55

Modernization of BDL

1.64 7.64 9.09 10.00 10.73

Modernization of HAL

67.27 48.18 72.73 81.82 86.00

Modernization of BEL

22.36 23.64 34.55 36.36 38.18

Modernization of Midhani

5.09 6.91 8.18 9.09 9.64

Modernization of BEML

23.09 22.00 18.18 19.09 20.00

Source: MoD Report

DPSUs, along with OFs, outsource 24%27% of their orders to small- and mid-sized enterprises (SMEs). Requirements and tender documents are available at their respective websites in government tenders under respective heads. DPSUs websites give reference to the purchase manual and sub contracting registrations of vendors and sub contractors. The Defence Procurement Manual, 2009 (DPM 2009), which covers all revenue procurement and procedures for the registration of firms, follows the Joint Services Guide: 015:13:03:2007 (JSG-015). This guide provides the methodology of assessment and registration of vendors, as well as their performance appraisal on technical and financial aspects and classification. Interested firms can download Supplier Registration Form and submit it duly filled. Along with this, they are required to enclose their company profile/catalog and details of similar jobs undertaken, details of staff and operatives, annual reports, CVs of key officers, list of customers and other relevant information to prove their competence to undertake the job.

Vendors registered with one department of the MoD can be considered for procurement by other departments of the ministry.

Despite a common format, procurement agencies such as DGOF, DPSU, DRDO and DGOS follow their own vendor registration process. There is no single source database available. More than 6,000 vendors are estimated to be available, of which around 95% are reportedly from the SME sector.

Modernization of DPSUS and OFsThe infrastructure at OFs and some of the DPSUs is aging and needs continuous updating. This is plausible through state-of-the-art technologies. To keep pace with the quantitative and qualitative requirements of the services sector and of other users and also keeping in view the continuous process of modernization, the government has prompted investment through various greenfield and brownfield projects, as well as through new capital, and renewal and replacement of obsolete plant and machinery. Modernization is carried out with a view to improve quality and productivity, achieve economy of scale and acquire new production technologies. The OFB alone has an ambitious plan of modernization, envisaging investment of around INR2761 crore) during the 12th plan period (201217). Investment on modernization of plant and machinery during the XIth and XIIth Plan is given in the table.


Chapter

2The Indian defense market and opportunities


Figure 7: the growth of the defense market in India

Growing defence market (2010)

21-22%

13-14%

9-10%*

4-5%

8-9%

Russia China India UK US

*India is one of the fastest growing market


Figure 8: Amount spent by the Indian MOD on foreign equipment procurement

Amount Spent on Foreign Procurement (in $ bn)

2.26 2.2632.98

3.43

2007-08 2008-09 2009-10 2010-11


Keeping in mind the state of equipment and the need to modernize the armed forces, it is clear that there is ample opportunity for both the indigenous defense industry and foreign companies. Assuming that nearly 80% of the capital budget is allocated to platforms capital acquisitions, of which 60%70% is earmarked for committed liabilities and 30%40% for new schemes, a substantial amount will be available for capital procurement in coming years. The current capital budget of the three services, currently pegged at US$15.9 billion (INR79,500 crores), is set to reach US$25.6 billion (INR1,28,000 crores) by the end of the 12th Five-Year Plan period. It is set to cross the US$60 billion (INR3,00,000 crores) mark by 2027. Capital budget of the three armed forces is set to cross the US$250 billion (INR12,50,000 crores) mark by

India is currently the eighth-largest defense spender in the world, with an estimated 3% share of global defense expenditure. India has become one of the fastest-growing defense markets after Russia and China. Besides, it had emerged as the worlds largest importer of arms between 2007 and 2011, accounting for 10% of global arms imports. The share has been increasing over the year.

Figure 6: The state of Indias defense equipment

Defence Equipment State in %

30

30

40

15

50

35

State of the art Obsolescent Matured

Desired

Existing

Source: MoD official data

Over 50 % of equipment of the armed forces is nearing obso-lescence and needs immediate replacement. This, coupled with the growing capital budget for fresh defense procurements of 10% year-on-year, clearly outlines a plethora of opportunities. The country is anticipated to spend over INR5,00,000 crore (US$100 billion) over the next decade to modernize its armed forces, particularly entailing spend on the procurement of weapons and other systems. This indicates a minimum capital procurement of INR50,000 crore (US$10 billion) every year.


aims to reverse this balance and manufacture 70% or more of its defense equipment needs in India. However, it is to be noted that DPSUs alone will not be able to meet the requirements of the armed forces with their order books already under pressure from pending orders. Realizing this fact, the government has started launching policies to encourage the emerging dynamic and efficient private industry. Promulgation and fine tuning of the DPP, recent changes in the Offset Policy and the Defence Production Policy would go a long way in ensuring the development of the indigenous defense industry. The recent case of the replacement of 65 Avro Aircraft for the Indian Air Force and procurement programs such as FICV, TCS and BMS for the Indian Army, wherein the private sector has been called in, are cases in point.

Challenges for Defense Industrial Base

Drivers Challenges

High obsolescence percentage of existing inventory; demand for state-of-the-art technology due to modernization drive

Attractive low-cost manufacturing destination with a large working population

Large pool of technical manpower

Private industry participation: expansion of industrial base.

Offset policy

Economic slowdown in other countries

Formalizing of procurement procedure and policies

End of technology denial regime, with countries looking forward to India as a strategic partner

Self-reliance being the stated goal of the government

Restrictions on foreign investment impede technology transfer

Lack of infrastructure restricts the capacity to absorb technology

Need to bring structured improvements in supply chain of defense industry.

Decision making and spend allocation take long

Short lead time to develop/scout for suitable partners

High R&D cost

High investment requirement

Uncertainty of orders

Long gestation period and project delays

Complex and biased taxes

the 14th Five-Year Plan period (202327), considering a 10% year-on-year increase during this period. Thus, the cumulative capital expenditure between 2012 and 2027 would exceed US$500 billion (INR25,00,000 crores). The likely expenditure on platform spread is depicted below.

Figure 9: Breakup of anticipated defense expenditure on the basis of platforms

Anticipated defense expenditure technology/platforms

Air30%

Land15%

Naval15%

R&D10% C4ISR

5%

Other25%

Source: Data compiled from SIPRI

Figure 10: Forecast of Indias defense budget

Indian Defence Budget Expenditure Forecast

0

10

20

30

40

50

60

70

2012-1314-15 16-17 18-19 20-21 22-23 24-25 26-27

Committed Expenditure (65%) New Procurements (35%)


As stated previously, India currently procures approximately 65%70% of its equipment needs from abroad. The government


Opportunity matrixPublic sector companies possess huge infrastructure and manufacturing facilities; experience in systems integration with imported technology; trained engineering and manufacturing manpower; and access to defense research facilities, coupled with strong financial backing by the MoD. Also, they enjoy facilities in domains such as taxations, EVR, prioritization in tenders, making them the preferred choice of global manufacturers.

Some of the near-term projects where these DPSUs have been nominated and awarded/will be awarded comprise the following:

Organization Projects in Hand Nominated Future possibility

HAL Mirage 2000 upgrade FGFA Light Combat Helicopter (LCH) - Attack Helicopter

Chetak and Cheetal helicopters Multi-Role Transport Aircraft (MTA)

LCA Trainer Aircrafts Indigenous Light Utility Helicopters (LUH)

Sukhoi-30 MKI Indian Multi Role Helicopter (IMRH) Basic Trainer Aircraft (Follow-On)

Advance Light Helicopter (ALH) Advanced Jet Trainers

Intermediate Jet Trainer (IJT) Mini & Macro UAV

Hawk Light Utility Helicopters

Dornier D0-228 NG Heavy Lift Helicopter

Jaguar DARIN-III Upgrade MMRCA

Jaguar Engine Upgrade

Intermediate Trainer Aircraft

BEL Point to Multi-point Radio Relay Command Information Decision Support System

Battlefield Management System

Software Defined Radio (SDR) Night Vision Devices for Armed Forces

Mountain Radar

Tactical Control Radar Walkie Talkie Radio Sets for Army Tactical Communication System

Coastal Surveillance System High Data Rate Multi-band Software Defined Radio

Weapon Locating Radar

Akash Weapon System Missile Warning System

Battlefield Surveillance System Passive Night Vision Devices

Passive Night Vision Devices & Low Intensity Conflict EW Systems

Upgradation of Schilika Hand Held Thermal Imager with Laser range Finder

Coastal Surface Surveillance Radars

3 D tactical Control radars

Upgraded Weapon Locating Radar Missile Warning Systems

MIDHANI The company received orders from OFB, DRDO and applications of Air, Naval, Land Forces; ISRO, Department of Atomic Energy (DAE) for Super alloys, Titanium Alloys and Special Stainless Steels.

T-72 and MBT Arjun ----

Kaveri engines (of LCA)

Advanced Technology Vessels (Indias indigenous nuclear submarine)


BEML 204 ARV WZT-3 Tatra Heavy Duty Trucks (Production has been stopped)

Light Tanks Wheeled and Tracked

Pontoon Mid stream (PMS) Bridge

System and Railway wagons for transporting trucks and Defense wagons

Armoured recovery Vehicles (ARVs) Wheeled Armoured Personnel Carrier (APC)

Ground support equipment (personnel carrier, rocket launchers, ammunition, etc) required by defence forces.

Arjun Tank

FI CV

FMBT

BEML is expected to produce and supply spare parts for MBT Arjun required for both OEM and spares requirement

Light Armoured Multi Purpose Vehicle (LAM)

Overhaul of T-72 M1 and Infantry Combat Vehicle BMP-II

BDL Akash SAM for IAF And Army K-15 (submarine launched ballistic missile, SLBM)

QRSAMs

C-303 Anti Torpedo Decoy Productionisation of several items such as Advanced Light Weight Torpedo, Heavy Weight Torpedo (Varunastra)

Company will be joining a major joint development programme of SRSAMs required by IAF and IN

ATGMs Konkurs-M ATGM

Milan-2T ATGM

Invar ATGM

MDL P-17 or the Shivalik class stealth frigates

Project 15B OPVs for Coast Guard

Project 75 I Project 17 A

OPVs for Coast Guard

Six Scorpene class submarine (Project 75)

Under fit of Shishumar class submarine

Three P-15A (Kolkata) class destroyers

GRSE Anti Submarine Warfare Corvettes 8 nos. Landing Craft Utilities Project 28 A Corvette

Landing Craft 4 Anti Submarine Warfare Corvettes Hydrographic Survey Vessels

Water-jet FACs 8 nos. Inshore Patrol Vessels for Coast Guard

Landing Craft Utility (LCUs)

ASW shallow Water Craft

Project 17 A Frigate (Shivalik Class)

GSL Six 105M Offshore Patrol Vessels for Indian Coast Guard

Offshore Patrol Vessels Project 28 A Corvette

Order for construction of Pontoons and Service barges for INS Vikramaditya

Interceptor boats for Coast Guard Hydrographic Survey Vessels

Order from MDL for supply of 3 in no. 6.5m RIBS and 3 in no. 7.3m RIBS for P15A

8 Kangam type mine counter measures vessels

Landing Craft Utility (LCUs)


HSL One Fleet Support Vessels for Navy Arihant-class ships Advanced Technology Vessel (ATV) or SSBN

8 Inshore Patrol Vessels for Coast Guard

Construction of 2 Landing Platform Docks (LPDs)

Three 50-T Bollard Pull Tug for Navy

1 Fleet Support Vessels

The Medium Refit cum Upgradation of INS Sindhukirti

Project 75 I

Interceptor boats for Coast Guard

OFB Arjun Tank Ammunition and Explosives 155 mm Towed Howitzer

Pinaka Rockets 155 mm Wheeled Self-Propelled Guns

Smerch Rockets 155 mm Mounted Howitzer

Manufacturing of 155/ 39 mm and 155/ 45 mm artillery guns

Vijayanta MBT TCS

Licensed Production of T-90 Tanks FMBT

Licensed Production of T-72 Tanks FICV


Targeting opportunitiesThe government has recently issued guidelines for the formation of JVs. DPSUs are now open to collaboration with private sector companies. This would allow them to enjoy broader market access, and deliver better quality and innovative products. To meet the challenge of expanding capacity, as well as ensuring timely delivery, DPSUs need to harness the potential of private sector/SMEs/MMEs and create capabilities and capacities to outsource production and processes to them. The economy of private sector/SMEs/MMEs operations has the potential to reduce production cost for DPSUs. Also, the private sector may be able to complement the R&D infrastructure of DPSUs to deliver world-class products. Developing partnerships with SMEs would help DPSUs and OFs tap opportunities in the offset segment as well. As is evident, the recently issued Defence Offset Guidelines (DOG) provide for a multiplier factor of 1.5 in the discharge of offset obligations where the Indian Offset Partners (IOPs) are SMEs. This would provide an incentive to the foreign vendor to seek IOP in the MSME category. DPSU-mentored SMEs would be the default choice, given their exposure to defense manufacturing. DPSUs, through such partnerships, would thus be the indirect beneficiary of new technology, processes, upgrading of skills and infrastructure.

Driving successful relationshipsThe public and private sectors have started working harmoniously and are competing for orders from the Indian MoD. The public sector needs to mentor and enhance the potential of SMEs for indigenization production. Furthermore, it needs to broaden the defense R&D base of the country and use the policy changes to form JVs and PPPs with tier II and III private sector players to meet their production targets and enable these industries to graduate to the tier I level.

DPSUs should be encouraged to focus on their core capabilities and strengths, as well as increase the quantum of the ancillary business that they outsource to the private sector, entailing the possible divesture of non-core capabilities.

JVs/MoURecently, the government took a significant step to bolster the domestic defense industrial base by laying down guidelines for its DPSUs to establish JVs with private firms. This would increase opportunities for obtaining advanced technologies from foreign sources. Salient features of the guidelines (which are also on the MoD website) are as follows:

Enhancing fairness and transparency in the selection of a JV partner

Ensuring a well-defined nature and scope of the JV


Retention of the affirmative right of DPSU for prior approval to key JV decisions such as amendments to the Articles of Association of the JV Company, declaration of dividend, sale of substantial assets, and formation of further JVs/ subsidiaries

Exit provisions for the DPSU

Regular reporting and monitoring of the functioning of the JV company

The formation of JVs will be undertaken by board-managed DPSUs within the framework of the JV guidelines

The JV guidelines will provide a streamlined, fair and transparent framework for entering into JVs by DPSUs, with the ultimate objective of better risk management/ greater efficiency/ shorter time frames for delivery to meet the increasing demand of our armed forces, and for enhancing self-reliance in the defense sector as a whole. The guidelines could help foster better and deeper partnerships between DPSUs and private partners.

Following these guidelines, state-run Mazagon Dock Limited (MDL) has entered into two JVs with private sector giants Larsen & Toubro and Pipavav Defence and Offshore Engineering. Larsen & Toubro will help MDL construct submarines, while Pipavav will build surface warships. Both the JVs are based on a 50:50 partnership model.

Following are JVs/MoUs/Agreements signed by DPSUs and the OFB with foreign and Indian private companies in the last few years.

DPSU Foreign Company Nature Of Tie-Up

Bharat Dynamics (BDL)

EADS New generation of missile systems.

Whitehead Alenia Sistemi Subacquei (WASS)

Production of C303, an anti-torpedo countermeasures system.

Lockheed Martin JV for the production of anti-tank guided missiles.

Others BDL in discussions with Israel Aerospace Industries, Israel Military Industries

Bharat Electronics Ltd (BEL)

Boeing Integrated Defence Systems

Develop an analysis and experimentation center in India that will be equipped with the latest modeling, simulation and analysis tools

General Electric Medical Systems

Manufacture of CT Max and other state-of-the-art X-Ray Tubes

Rafael Advanced Defense Systems Ltd, Europes Selex Galileo and Thales, Boeing and the Hyderabad-based Astra Microwave

Technology tie-ups/MoUs in missile electronics, guidance systems, microwave components, electro-optics, homeland security, coastal surveillance systems and airborne electronic warfare systems

Elbit Systems Electro Optics ELOP Ltd

Electro-optics and thermal imaging systems

Defence Research and Development Organization (DRDO)

Akash Missiles

Israel Aerospace Industries (IAI)

Developing unmanned aerial vehicle systems (UAVs)

Elisra Airborne electronic warfare programs for Indian defense requirements.

IAI Cooperation on Long Range Surface to Air Missile (LRSAM) Ship-Defence Systems


Bharat Electronics Ltd (BEL)

Multitone Ltd Mobile communication products

Northrop Grumman, and Dynamatic Technologies Limited (DTL)

Manufacturing components for the F-16 fire control radar

Finmeccanica (SELEX) Terrestrial Trunked Radio (TETRA) Standard Secure Radio Systems and military ATC radar

Rafael Advanced Defense Systems Ltd

To develop advanced missile systems

Thales JV to jointly manufacture radar

WASS JV cooperation agreement for torpedoes and autonomous underwater vehicles (AUVs)

Terma Memorandum of Agreement (MoA) on cooperation in various fields of defense technology naval radar technology and aircraft self-protection

BHEL MoU to explore a 250-MW joint manufacturing facility for solar photo voltaic cells, modules and silicon wafers

Lockheed Martin MoU to explore business opportunities on potential co-production avenues for domestic aerospace and defense electronic needs

SAAB MoU to manufacture radars

JV to produce and market Sea Giraffe Agile Multi Beam and Arthur Weapon Locating System radars

Sagem MoU in the field of Land Navigation and Artillery pointing applications

DHS Systems Agreement for the supply of shelters

Bharat Earth Movers Ltd. (BEML)

CSM Software Pvt. Ltd Strategic MoU for establishing a framework for the execution of the engineering services

OBRUM MoU for designing and developing Futuristic Main Battle Tank, the armoured recovery and repair vehicle on Arjun, overhaul of T-72 and BMP-II upgrade

Tanax Agreement with Slovak firm Tanax for armored vehicles

UAC Memorandum of Agreement (MoA) to explore and exploit business opportunities in production, sales, marketing and maintenance of civil transport, as well as passenger aircrafts in India.

Alenia Aeronautica MoU to pursue mutual collaboration for designing, manufacturing and selling a new Primary/Basic Training Aircraft (BTA) and a befitting replacement for the existing HPT-32 Deepaks Trainer Aircrafts

SLOVAKS For 155mm Self Propelled Wheeled Gun

Poland For 155mm SP Tracked Gun System

Bumar To build vehicles for Pechora project

Eurocopter BEML foraying into the aerospace sector by signing the MoU with Eurocopter of France

WFEL group MoU to produce 46 m of dry support bridges for the Indian Army


Bharat Earth Movers Ltd. (BEML)

SAS group Agreement for supply and manufacture of Self Propelled Mine Burrier

General Dynamics Agreement to manufacture four-wheeled armored small arms and mine protected patrol vehicle

TATRA SIPOX TOT agreement with Britains TATRA SIPOX for Technology transfer, production and marketing of 20 ton to 25 ton capacity tippers to Indian metal, mining and coal markets

Garden Reach Shipbuilders and Engineers Limited (GRSE)

Infotech and Direction des Construction Naval Services (DCNS)

Three-way JV with French Naval Ship builder DCNS and an Indian IT company Infotech named as Garden-Vision Design P Ltd for a ship building facility

DCNS Propulsion system for corvettes; another project for cooperation on torpedoes

Hindustan Aeronautics Limited (HAL)

UAC Joint development and production of Fifth Generation Fighter Aircraft

UAC & Rosoboronexport Co-development and co-production of Multirole Transport Aircraft (MTA)

BAE For development of aerospace and other dedicated software for domestic and export markets

SAFRAN Manufacture of precision components of engines for civilian aircraft

Snecma Manufacturing of engine spares and components

Sagem Production and maintenance of inertial navigation systems and automatic flight control systems

Rolls Royce Maintenance of Rolls-Royce Avon, Adour, Gnome and Dart Aero Engines, as well as Avon and 501 K Industrial Gas Turbines

Local manufacture Adour 871 engines for the new Indian Air Force Hawks

50:50 partnership for the manufacturing of compressor shroud rings

CAE Inc Helicopter training center (HATSOFF) to offer complete training solutions for the Bell 412, Eurocopter AS365 Dauphin and both civil and military variants of the Hal-built Dhruv advanced light helicopter

IAI Joint development of an unmanned helicopter

Airbus Agreement for supply doors

National Aeronautics Ltd For 14-seater Saras Aircraft

Boeing Manufacture of aircraft components and assemblies

Rafael Upgrade contract of Jaguar to provide nuclear strike capability with Rafael Lightening Pod

Elbit Systems JV company HALBIT for the design, development, marketing and support of simulators and training systems and avionics parts

Timco State-of-the-art airframe MRO facilities at HALs Bangalore airport and manufacturing complex for narrow body and Airbus & Boeing commercial aircraft


Hindustan Aeronautics Limited (HAL)

Edgewood Ventures Development and manufacture of high-technology miniature electronic modules for aerospace applications

Infotech For design services work, viz., Aero-thermo and mechanical design, structural stress, thermal and rotor dynamic analysis

Incat For design and engineering related airframes and aerostructures

Samtel Display Systems JV in the aerospace segment to co-develop defense products

Nasmyth Group Infotech HAL Limited, a 50:50 JV company between HAL and Infotech Enterprises Limited, has entered into a technological alliance with Nasmyth Group; both the companies will jointly work on design and redesign of aerospace components

EADS Signed MoU to expand their cooperation into new market segment and exploring mid-term and long-term strategies on the key segment of the aerospace business

TATA Work packages related to engineering design services in aero structures and also the captive offshore and onsite workload from OEMs including offset program

Hindustan Shipyard (HSL)

Larsen and Turbo (L&T) Hindustan Shipyard Ltd (HSL) will soon be forging JV with Larsen & Toubro (L&T) for shipbuilding

Mazagon Docks Pipavav Defence and Offshore Engineering Co. Ltd

Building warships and submarines for the Indian Navy.

L&T Construction of submarines

Ordnance Factory Board (OFB)

Israeli Military Industries OFB has entered a 50:50 MoU with Israeli Military Industries for sharing technology and equipment including charges of 155 guns

Rosoboronexport and M/s Splav SPA

MoU to manufacture five versions of Smerch Rockets, based on the technology received from Russia


Way forward for DPSUs and OFsThe Armed Forces are undertaking major modernization programs. Over the next decade or more, all of the three services would be undertaking significant procurements.

The amount spent on capital acquisition from indigenous sources during the last five years was approximately 48% of the capital budget, as per government figures. A similar percentage spend this year would put the domestic market at US$7.6 billion (INR38,000 crores). These figures, however, include a significant amount spent on sub systems/components procured by the DPSUs/OF/Defence Industry ex-import. Thus, even if we consider a conservative ratio of 30% as expenditure on indigenous production, the current domestic market size is of approximately US$ 4.77 billion (INR23,850 crores). The government is keen to achieve 70% indigenization by 2020. However, the percentage may be capped at 50%, considering that DPSUs and OFs will continue to be major players, especially in the case of high-security projects. Even if this percentage reaches 50% by 2022 (end of the next five-year Defense Plan), the share of the domestic market would increase to US$15.7 billion and to US$30 billion by 2027.


Figure 11: Size of the Indian defense market

Indian domestic market size

2012$4.77 billion

2022$15.7 billion

2027$30 billion


The growing domestic market offers greater opportunities, both to foreign and Indian players. Furthermore, the introduction of a new category of acquisition Buy & Make (Indian) in DPP-2011 would enable Indian industries to acquire technology from foreign OEMs and manufacture the product in India.

Figure 12: A comparison Indigenous defense production with imports

Imports vs Domestic Opportunity

05

101520253035

FY12

-13

FY13

-14

FY14

-15

FY15

-16

FY16

-17

FY17

-18

FY18

-19

FY19

-20

FY20

-21

FY21

-22

FY22

-23

FY23

-24

FY24

-25

FY25

-26

FY26

-27

Amou

nt in

$ b

illio

n

Imports Indigenous Production (Domestic Opportunity)


Figure 13: Break of indigenous defense production

Domestic Market Share Public vs Private

0

5

10

15

20

25

30

35

FY12

-13

FY13

-14

FY14

-15

FY15

-16

FY16

-17

FY17

-18

FY18

-19

FY19

-20

FY20

-21

FY21

-22

FY22

-23

FY23

-24

FY24

-25

FY25

-26

FY26

-27

Domestic Production Public Sector Value Private Sector Value

Am

ount

in $

Bn


In terms of the value of production, DPSUs account for more than 65% of the total industrial output of all defense public sector entities in India. During 201011, the value of production by DPSUs totaled nearly US$ 3.9 billion. During 201112, OFs and DPSUs outsourced 20%25% of their orders to SMEs.


Part 2: Offset policy of the Indian MoDeffects, implications and opportunities


Chapter

1 What is offset?


These procurement reforms resulted in the introduction of the Defence Procurement Procedures (DPP) in 2002. These have since undergone evolution through revisions in 2005, 2007, 2008, 2009,2011and 2013 to achieve greater transparency and speedier processing of procurement cases

Offset provisions were added to the DPP in 2005 and came into effect on 1 July 2005. Accordingly, the Services Capital Acquisition Plan (SCAP) Categorization Committee was authorized to recommend the inclusion of an offset clause amounting to 30% of the indicative cost in the request for proposals in cases where the indicative cost was INR300 crores (equivalent to about US$60 million) or more, though changes could be suggested in the offset amount if believed necessary. The regulatory framework and procedural details were laid out in 2006 (became effective on 1 September 2006) by the Department of Industrial Participation and Promotion, in consultation with the MoD (Defence Acquisition Committee). India adopted the middle path of quasi direct offsets, where a foreign OEM could discharge offsets using products/services directly related to the platform and those that are not directly related to the platform. The move was meant to provide flexibility to foreign OEMs, while ensuring broad-based development of the Indian defense sector.

ObjectivesThe objectives of the offset policy have always been implicitly asserted by the MoD in their decision pertaining to the treatment of offsets. They were formalized and promulgated for the first time through the revised offset guidelines, applicable from 1 August 2012 onward. The objectives articulated in the revised offset guidelines are threefold: fostering an internationally competitive domestic industry; enhancing indigenous defense R&D capability; and fostering a dual-use industrial base. The offset policy intends to help achieve greater self reliance in defense production through the infusion of DFI.

The government intends to utilize the current procurement cycle to help Indian companies integrate themselves into the global supply chains of foreign OEMs and attract both investment and technology into the nascent Indian defense manufacturing base.

Modalities of executing offsetsThe offset clause is applicable for projects categorized as Buy and Buy and Make by the Defence Acquisition Council. The council, under the Raksha Mantri, decides the quantum

What is offset?An offset is a counter trade arrangement in which a foreign purchaser, usually a government, requires the contractor to agree to purchase a predetermined level of components/services from subcontractors located within the purchasing nation or to assist that nation in selling its unrelated products to third parties. An organization wanting to sell equipment to a foreign nation must invest back a portion of the expected revenue into the foreign nations economy

Offsets are utilized by countries to use their purchasing power to develop local capacities and channelize investments and technology to favored domestic sectors. As per the Government Procurement Agreement under the World Trade Organization (WTO), offsets are defined as measures used to improve local development or improve the balance of- payments accounts by means of domestic content, licensing of technology, investment requirements, countertrade, or similar requirements

Offset arrangements may be practiced in three forms:

Direct: In a direct offset transaction, the specific components or services sourced by the supplier from the importing country are directly related to the supplies envisaged under the principal contract,

Indirect: An indirect offset transaction is where the supplier agrees to assist the importing country in the development of its export or in investment requirements unrelated to the principal contract.

Semi-direct offsets: These are offsets relative to equipment and/or services that are very similar to items covered by the main purchase contract.

Offset policy of the Indian MoDIndian defense procurement was governed by general accounting and financial rules as other civil procurement agencies of the government until 1992. The procedure for the procurement of defense equipment was differentiated and separated in 1992. This was further reviewed by the Group of Ministers in 2001, the group submitted a report on reforming the National Security System in 2002, after which clear structures and guidelines were laid out for defense procurement by the MoD. This was necessary, as India was entering one of its most sustained and significant cycles of defense equipment procurement to modernize its forces.


of offsets applicable to a project. It may prescribe a quantum of offset of above 30% or waive off offset obligation, depending on factors such as the strategic importance of the program and the capability of the Indian industry to absorb offsets. After the offset clause becomes a part of the Request For Proposal (RFP), it cannot be done away with. The applicability of the offset clause is summarized in the table below.

Figure 1: categories of procurement in defense acquisition

Categorization

Buy

Buy and Make

MakeMake (High

Tech)

Indigenous development of high-tech complex systems with min 30%

indigenous content in prototypeOffset not applicable

Make (DRDO) Indigenous development of strategic,

complex and security sensitive systems by DRDO

Offset not applicable

Buy and Make

(Global)

Import partial requirement and produce balance in India by foreign or Indian

vendor

Offset applicable on the quantum of payment to be made in foreign exchange

Buy and Make

(Indian)

Import partial requirement and produce balance in India only by Indian vendor. Equipment should have minimum 50%

indigenous content

Offset applicable on foreign content above the

prescribed 50%

Buy GlobalOutright purchase of equipment from

foreign and Indian vendorsOffset applicable

Buy IndianOutright purchase of equipment from Indian vendors only. Equipment should have minimum 30% indigenous content

Offset applicable on the foreign content above the

prescribed 70%

Make (Low Tech)

Indigenous development of low-tech mature systems with min 50% local

contentOffset not applicable

The Indian offset policy is an ever-evolving, flexible one that allows for multiple modes of offset discharge through both direct (products and services directly related to the platform being acquired) and indirect (products and services not directly related to the platform) methods. A summary of the methods of offset discharge as per the latest offset guidelines is given below.

Figure 2: Methods of offset discharge

A. Export Direct purchase or executing export orders for manufacture of eligible products or provision of eligible services

B. FDI FDI in Indian enterprises for manufacture/maintenance of eligible product or provision of eligible services

C. ToT to Indian Enterprise Investment in kind in terms of ToT (without license fee, restriction of domestic manufacture or export) to Indian enterprises for the manufacture and or maintenance of eligible products and provision of eligible services


D. Transfer of Equipment to Indian Enterprise

Investment in kind in Indian enterprises in terms of provision of equipment through the non equity route for the manufacture /maintenance of eligible products and provision of eligible services

E. ToT and for Transfer of Equipment to Government institution

Provision of equipment and /or ToT to government institution and establishments engaged in manufacture /maintenance of eligible products and provision of eligible services including DRDO

F. Technology Acquisition by DRDO

Provision of high end critical technology to DRDO (list of identified critical provided by DRDO)

G. Offset Banking Foreign vendors could consider creation of offset programs in anticipation of future obligations

All methods of offset discharge are only applicable for a list of eligible products and services. The Indian offset policy allows for the discharge of offsets through products and services from not only the defense sector, but also the synergistic sectors of civil aerospace, internal security and coastal security. A list of these products and services is given under appendix D in the Revised Offset Guidelines 2012.

Dual-use products, components and raw materials with end-use in defense products, mentioned in the list of eligible products, may also be used for discharging offset obligations. However, the final decision on the eligibility of these products is taken by the monitoring agency in the MoD (Technical Offset

Evaluation Agency). Also, the revised offset guidelines clearly state that only value addition done in India will count toward the discharge of offset obligations. This is determined through purchase orders and other documentation that the OEM furnishes to claim offset credits.

Offset processThe process from submission to the signing of offset contract takes (should) 74 to 137 weeks. This includes the preparation and submission of the offset offer, which consists of the technical and commercial offset offer. The entire process must be approached with diligence, and professional help may be sought, wherever necessary, to ensure minimal delays.

Figure 3: offset process

Evaluation of Commercial Offset Offer by CNC- only for L-1

Signing of Main contract & Offset Contract

Execution of Main & Offset Contracts.

Submission of Offset Compliance Commitment (annex 1 to appendix

D) - With RFP submission

Acceptance by DG Acquisition

Technical & Commercial Offset offers in Separate Envelopes-

Within 12 weeks

Evaluation by TOEC & Revised Submission- If required


Directorate Of Industrial Policy & Promotion (DIPP): It is a government body that is responsible for evaluating cases for industrial licensing in consultation with other ministries.

Comparison with offset policy in other countriesThe Indian offset policy is as easy to execute as it is to monitor and implement. It is considered to be quite flexible in terms of the quantum of offsets applicable, methods of discharge, eligible products and services, and execution timelines as compared to the offset policies of some of the other nations. Presented below is a comparison of the Indian offset policy with those of other nations on the basis of some key parameters:

SubmissionsAs part of their offset plan, OEMs have to submit a technical and a commercial offset offer in separate sealed envelopes. The only difference between the two documents will be that the quantum of offsets in currency terms is only declared in the commercial offset offer that is opened post the declaration of L1.

The technical offset offer has to declare the OEMs Indian Offset Partners (IOPs), the offset projects being undertaken and the phasing of the offset project. The OEM also has to attach information on its IOPs and MoUs that it has entered into with the IOPs. The technical offer is checked by the TOEC for the eligibility of IOPs and their proposed projects. The MoD may reach out to the OEM from time to time to obtain clarifications. IOPs, phasing of projects and project scope may be changed at the commercial negotiation stage within the stipulated time.

Agencies involved in the offset processThe offset process is guided and monitored by several committees of the MoD with clear mandates and area of responsibility. Pre-contract monitoring of the offset process is the responsibility of the acquisition wing, while all post-contract work related to offsets is monitored by the Department of Defence Production (DOMW). The following committees and agencies are noteworthy in this regard:

DOMW, under the DDP, is responsible for the formulation of defense offset guidelines and all matters relating to post contract management.

Contract Negotiation Committee is responsible for scrutinizing the commercial offset offer and negotiating its contents.

Acquisition Wing is responsible for all pre-contract work. Its members are drawn from the respective service. It also comprises the Technical Offset Evaluation Committee.

Technical Offset Evaluation Committee: It is responsible for evaluating the technical offset proposal for the eligibility of IOPs and offset projects proposed by them.

Foreign Investment Promotion Board (FIPB): It is responsible for approving cases for foreign investment into Indian defense companies for JV purposes. It does so in consultation with other ministries.


Figure 4: comparison of the Indian offset policy with that of other countries

Country Poland Saudi Arabia South Korea Turkey South Africa India

Minimum Value of the contract

EUR 5.000.000 USD 107 Million 10 million USD US $10m >USD 2 Mn USD 62.5 Mn

Minimum Offset required

100%, direct must account for 50%

35% 30 to 70 % 50% 50% 30%

Term Min 3 years & Max 10 years

Within 10 years Contract length, flexible

Max 2 years 7 years Contract length+2 years

Nature of Offset Both direct & indirect

Civil & Military Mostly direct but indirect also prevalent

Only direct(indirect removed)

Defence industry

Defence, Civil Aerospace & Internal Security

Multipliers 1,0 and 2,0 (Direct)

0,5 & 1,5 (Indirect)

Subject to approval of offset authority

1-6 1-5, as mentioned in the directive

5 1.5-3

Source: EY analysis


Evolution of the offset policyThe offset policy, in its endevour to be transparent, easy to implement and to incorporate global best practices, has undergone five iterations ever since it was first introduced in 2005. A majority of the procurement projects that are currently underway fall under DPP 2006 and 2008.Only the very recent programs come under DPP 2011. The DPP has progressively liberalized the policy through various amendments. Thus, a careful study of DPP 2006 and 2008 is necessary for companies participating/willing to participate in ongoing programs.

Figure 5: evolution of the offset policy over the years

Building of an indigenous defence base by leveraging on the current cycle of procurement

Encourage investments

Monitoring body for offsets to measure impact & provide facilitation.

Year Changes Desired Effects

2006

Offset was made mandatory in defence contracts of the size and nature as prescribed in the 2005 policy

Foreign firms were allowed the flexibility of forming JVs

DOFA was established

Long term development of the industry

Simplify procedure for acquisition of critical equipment

2008

Offset Banking introduced

Exemption from offsets for acquisitions under the fast track process

Broad based development of synergistic sectors to induce knock on effect

2011

List of eligible products and services expanded to include products from the synergistic sectors of Civil Aerospace and internal security.

Inclusion of Training & Simulators as eligible product / service

To clarify the underlying purpose of offsets and enable correct interpretations of contentious issues

To attract transfer of specialized equipment into Indian IOPs

Attract technology to enable Indigenous R&D

Develop Defence MSME manufacturing base

Step towards creating a detailed list of defence products

Attract long term commitment from OEMs

Create a Potent body for Post contract management

2012

Listing of the objectives of the Offset Policy

Offsets through Transfer of equipment

Introduction of TOT

Introduction of Multipliers for MSMEs & TAC

Populating the list of products through additional classifications

Increase in Banking period

Formation of DOMW


Chapter

2 Defense offsets in India


approximately US$3.4 billion on account of major programs such as:

Purchase of C-130s and C-17 aircraft

Purchase of Mi-17 and VIP transport helicopters

Purchase of radars

Sensor fused weapons

Purchase of Harop UAVs

Upgrades for Jaguars and MiG-29s

The Indian Navy has signed offset contracts worth approximately US$843 million, including:

Purchase of two fleet tankers and radars

Purchase of P-8Is and UAVs

A deeper study of the offset contracts signed by the Indian industry reveals interesting facts. The major beneficiary of offset contracts (till the end of 2011) was the private sector, as opposed to the popular belief that DPSUs enjoy the lions share. Among private players, larger manufacturing companies such as Tata and L&T, along with engineering services companies such as HCL and Wipro, have accumulated the largest chunk of offset-related business. In the public sector, HAL and BEL have led the way in the quantum of offset-related business.

Figure 7: Benefitters of offset programs

Entity No. of Contracts

Value (Rs in Crore)

Offset Contracts breakdown

35%

38%

27%

DPSUsLarge Scale Private CompaniesMSME

HAL 6 1928

BEL 6 1576

Tata 4 1466

L&T 7 771

Alpha Design

2 575

M&M 1 984

HCL 1 235

Wipro 1 216

Source: impact of offset policy on Indias defense Industrial capability and policy

issues by S.N Mishra

The bulk of manufacturing-related offsets are for direct purchase and sub-contract. Investment and coproduction arrangements get a secondary pie. The response to FDI, in the production of R&D and JV arrangements, has been rather

According to the report of Comptroller and Auditor Genral in 2012-13 on Management of defense offsets, since the introduction of the offset clause (in the revised DPP announced on 1 July 2005), the MoD has concluded 16 offset contracts with various vendors worth US$4.3 billion. If the current pace of modernization continues, offset contracts worth US$24 billion will be signed in the next decade.

Figure 6: offset discharged per year

Offset discharged per year

54

768

1010

207

1684

386

0

200

400

600

800

1000

1200

1400

1600

1800

2007 2008 2009 2010 2011 2012Val

ue o

f off

set c

ontr

acts

in U

SD m

illio

n pe

r yea

r

Source: Defense Offset: An opportunity in the making for India by KPMG in

collaboration with CII

Investment to the tune of US$26 billion is set to flow into aerospace and defense and the allied sectors of civil

Documents

Industry Defence Linkage_CII_EY