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DEFENCE INDUSTRIAL PARTNERSHIP: ARE WE READY?

“Make in India” mission is a major initiative for ushering a turn-around of the Indian Defence Industry. It is opportune time to review as to where the Defence Industry stands today.

India's attempts to create a domestic defence industrial base is one of the missed opportunities, extended deadlines and glaring inefficiencies,  which became the hallmark of the defence public sector units' functioning. The Indian Defence Industrial base dominated by DRDO/DPSU/OFB with their 'copy-paste' and 'cost plus' production values have made the country dependent on import. This happened largely due to the inertia of the Ministry of Defence and the stranglehold of the defence public sector units. Over-governance promoted conservative, cautious and risk-averse organisational culture, with procedures being paramount and outcomes secondary. Consequently, the PSUs have drifted from monopolist to bit-player due to regulatory protection relative to private-sector rivals. Although Private sector said to have been allowed entry into the defence production in 2001 but it did not get any big-ticket orders till date. Despite the rhetoric and the claimed intent to push through the procurement cycles to reduce the monopoly of the defence public sector units and to allow a meaningful role for the private sector, the status quo continued.

            The 'Make in India' policy, is potentially a turning point in India's endeavour to have a robust home-grown private defence industrial base. India's 'Make in India' initiative will pave the way for Defence Industry to realize its dream for self reliance and sustainance. To accomplish the dream, India needs to take many harsh decisions and it has to bring a change in its policies and working.  However, the big question is, ARE WE READY? All the decisions would have its pros and cons but India needs to think from all perspective to take the best decision for its future.

Strategic Partnership

There is a great need to create military-industrial production capacities through strategic industrial partnerships. The underlying objective is to create the additional capacity in the private sector on a long term basis 'over and above the capacity and infrastructure that exist in the public sector units' for projects that are of strategic importance. The Strategic Partnerships model envisages to harness the strengths of private industry to create the capacity and infrastructure for the selected segments, above all to fire up the competitive zeal into the defence public sector units.

            The strategic partnership policy is set to change all this by explicitly identifying the private defence companies which can forge a joint venture with foreign companies to build major equipment. List of the JVs formed recently is given below:-

JV with OEM Segment
Punj Lloyd- Israel Weapon Industries (IWI)  Punj Lloyd JV with Israel Weapon Industries (IWI)
Lockheed Martin -TASL F16 Block 70 aircraft
Reliance Defence-Yugoimport Ammunition Items
Dassault’s  Rafale -  Reliance Defence Dassault-Reliance Aerospace Limited (DRAL) JV
L&T - MBDA 5th generation anti-tank guided missiles (ATGM5s), missiles for coastal batteries and high speed target drones.
Saab - HAL Saab Grintek Defence and Hindustan Aeronautics Limited's Avionics Division
IAI - Kalyani Strategic Systems Limited Specific air defense systems and lightweight special purpose munitions.
IAI -Dynamatic Technologies Limited Production, assembly and support of mini UAVs
Raytheon -Tata Advanced Systems Limited (TASL) Co-production of Stinger air defense missile components
BDL- Thales Transfer of technology of the flagship Star Streak missile capability
Thales -Bharat Dynamics Limited Transfer of technology of the flagship Star Streak missile capability

Public-Private Partnerships

There is need to ensure that the DPSUs are not nominated for projects by default or design. India needs to develop the entire eco-system and a robust supply chain as it is in the Auto sector, the same must be for manufacturing the defence platforms involving Tiered suppliers for the component and materials with a life cycle product support to maintain, repair, overhaul and upgrade the platform.

We need to analyse the issue a bit further in national interest as:-

  • There is already an extra capacity and infrastructure in existence with OFB/DPSU and the question is - why national resources are unnecessarily spent on creating additional infrastructure private-sector to build Helicopters, Aircrafts tanks and Small Arms etc ?
  • Why don't we privatise all DPSUs to become publicly listed so that they can choose their own partners from the country's private-sector?
  • And most importantly why should the Govt be manufacturing and it is time to bite the bullet and go in for privatisation of DPSU/OFB?

It is understood that Government is dwelling on a proposal to bring four Small Arms manufacturing units under the PPP (public-private-participation) model, in keeping with the central government's intent to increase private participation into this sector. The four units identified for the PPP model are - Small Arms Factory (SAF) in Kanpur, Ordnance Factory Tiruchirappalli (OFT), Rifle Factory Ishapore (RFI) in Bengal and Ordnance Factory Korwa in UP. Sources, however, added that no private player had been identified yet. These four factories manufacture 9mm carbines, 7.62mm rifles, light machine guns (5.56mm), rifles (5.56mm), artillery guns and other infantry weapons along with other items.

In the recent years, many Indian private industries have been involved with several defence 'Make' projects, though at small level.

These projects include - Integrated Material Management System (IMMS), Tactical Communication System (TCS), Battlefield Management Systems (BMS) and Futuristic Infantry Combat Vehicles (FICV). They are in the early stages of development. Award given for various projects under 'Make' category to Indian private industries is a new beginning in Indian defence industrialization.

In addition, under the “Make in India” initiative of the Government, a list of potential “Make” Projects has been identified by the Service Head Quarters (SHQs) in consultation with the other stakeholders in the Ministry. These projects are being contemplated to be undertaken as per category - Make-I or Make-II of new revised Chapter-III on Make Procedure of Defence Procurement Procedure-2016. The government has already opened some non core areas of weaponry to the private sector, including ammunition production. Indian Private Sector companies are matured today to initiate system integration in India.

OEM Concerns

About 90 percent of the major defence equipments produced in India at present are under license from foreign firms. They do not provide the complete 'know-how' of product design which is almost over 60 percent of the value of a platform. Consequently, the desired level of indigenization is not achieved, example being  SU30, T-90 and 84mm rocket launchers, thus remain dependent during life cycle for maintenance and upgradation, which is quite expensive. OEM clearly indicates their unwillingness to transfer the technologies to Indian companies unless there is substantial improvement in the IPR and technologically safe environment in India. Another important factor that has influenced the OEMs' reluctance to transfer critical technologies to India is the US, European and Japanese technology export experiences with China. Analysing from the OEMs perspective, entering into a manufacturing arrangement for Co-development/Co-production, Sub-contracting, Contract manufacturing and Licensed production etc. which may require a transfer of technology poses significant legal and commercial risks as tabulated. (Refer Table above)

Indian CompanyForeign OEM
Co-production/Co-development .
  • Preferred route as it would provide them an opportunity to absorb existing technologies
  • Baseline for future development, thus reducing development costs and increasing efficiency.
  • Require detailed planning and a clear roadmap while evaluating the technical, commercial and legal issues.
  • Valuation of technologies is complex and subjective.
  • Protection of the IP, legal dispute
  • Jointly developed intellectual property sub-license into new markets
  • Sub-contracting/Contract Manufacturing .
    Relatively easier to develop, implement and monitor.
  • Opportunity to absorb manufacturing technologies.
  • Limited to low level activities such as fabrication and assembly skills.
  • OEMs intellectual property protection
  • Indian partner engagement with multiple OEMs.
  • Need for exclusivity, to prevent leakage of confidential information.
  • Licensed Production .
    The transactional documents need to provide restrictions on usage of the disseminated technology. Sharing of technology and hand-holding fear of creating a competitor.

    Some of other IPR risks rated highest by the OEM are:

    • Illegal sharing of software codes, blueprints, specifications, industrial designs, trade secrets and confidential know-how.
    • Patent and design infringement.
    • Piracy and copyright violations.
    • Counterfeiting of products and components manufactured from blueprints, algorithms of OEMs.
    • Indiscriminate production of licensed technologies.
    • Indiscriminate copying of processes and proprietary frameworks.
    • Non-payment of royalties and licence fees.
    • Ownership issue - There is a chance of clashes due to ownership issue. The largest share of the ownership would remain with the Indian partner, taking the control of the business.
    • A partner may fail to absorb the technology in the right way due to lack of expertise.

    In view of the above, Indian partner selection need to  be based on its ability to absorb technology, financial capability, experience in managing joint development arrangements and strong ethical & governance standards.

    The Government will have to put more efforts to materialise its slogan for creating a self reliant defence industrial base in India. The foremost being attitudinal shifts on defence production and procurement. The SP and PPP proposals have already resulted in massive protest meetings organised by workers' unions of DPSU and OFB. Job creation is perceived as one of the weakest spots in an otherwise solid economic record: privatising PSUs now, only to see them fire lots of workers in the run-up to elections in May 2019, is a non-starter. There is a great need is to create ecosystem that will allow Indian companies and professionals to learn, innovate and export back to the OEMs.  Hopefully, some of the measures will be adopted in national interest to establish the competitive defence Industrial base and  devolve more freedom and powers  to the private sector  to enter the fray and be equal partners in making the “Make in India” successful in Defence Sector.

     

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