The 10+01 Must-Knows about the Indian Aerospace/Defense Sector

STRATEGIC ISSUES

1. The practice thus far has been to rely heavily on imported technology, with state monopolies license-producing equipment (with serious technology continuing to be sourced from the manufacturer) while at the same time trying their hand at indigenous spin-offs. Systemic weakness has meant that the import-to-indigenize model has suffered from a variety of problems - time delays, quality-control issues and sub-optimal post-delivery discipline, to name a few.

2. However, state monopolies carry considerable weight, in terms of influencing government policy (controlled largely by bureaucrats and politicians having sub-par subject-matter expertise). Potential spoiler-attitude by state monopolies is likely to demand adequate 'prepping prior to pitching' on the lines of engagement-cum-hedging options (some of which find mention below).

3. The private players in India are still in the process of business-model and strategy evolution, a major impediment being a lack of expertise (technical talent as well as strategic planning - in defence-techology gestation terms) geared towards the demands of the aerospace/defence sector. To make up for this, these firms are actively pursuing JVs (as per the 49% FDI policy announced by the government in the recently announced Union Finance Budget) with foreign players. A few notable domestic firms in the fray include:

(a) The relatively smaller players like Quest, Taneja Aerospace and Centum, the latter having signed a noteworthy pact with Thales.

(b) Traditional industrial powerhouses that include the TATA group and the Mahindra Group with Reliance Industries Ltd having joined the party recently (having floated an aerospace subsidiary in 2013). With the political heft they carry, it remains to be seen how the industry (proud of its 'big boys aren't the big players' tag) evolves into the future, in terms of the realignment of market-space between the big boys and the smaller players.

4. Foreign players are not new to India. Firms like Boeing, Raytheon, EADS, Airbus Industrie, Honeywell, BAE Systems, GE and Lockheed Martin have been operating in India for a while now, albeit with varying degrees of involvement, mostly in subsidiary-system sourcing. First mover advantage confers them substantial benefits in exploring business opportunities, especially with established domestic players.

5. Considering the poor health of indigenous state players and the popular call to revitalize their capabilities, in the short-to-medium term, private players are likely to be contracted for sourcing equipment and transferring technical expertise, with the idea being to filter the spin-offs into local businesses, state and private. Historic pattern of defence industry evolution in India dictates that the ‘medium term’ time frame may exceed the usual norm, creating a healthy demand for the foreseeable future.

6. 49% FDI, while not an optimal balance – in terms of attracting the best technology at the most attractive terms – is a reality that has to be accepted. The private powerhouses have enough influence in the corridors of power to allow foreign players to circumvent them (>50% FDI) in the race for overarching control over this strategic space. Reconciling supply-side concerns with rising demands can be based on pragmatic approaches of the kind described below:

(a) Direct agreement with governments regarding end-user protocols, especially with regards to dual-use technology.

(b) For prized technology, beyond the usual IP protection methods, remuneration may be tailored to satisfy both sides – long-term engagement, broadening the scope of engagement, completion of the technology transfer process in phases, spin-offs into other sectors of the industry, etc.

With DoD budget cuts in the US and other constraints elsewhere, the Indian aerospace/defence sector is an opportunity not to be missed, with many players, big and small, offering a myriad of partnership options as they seek their share of the prize - take the 49 and improvise.

PLANNING CONSIDERATIONS

7. With committed liabilities choking the capital acquisition budget, days of upfront payments are over, while barter transactions of the Soviet era are out of the question. In such a scenario, prudence dictates a move towards innovative sales strategies in the face of stiff competition. This could take the shape of:

(a) Flexible payment schedules combined with credit lines on the financial front,

(b) Transfer-of-Technology transactions and R&D exchanges through adoption of adjustable pricing strategies that facilitate long-term play in an already crowded marketplace.

8. The notorious middlemen of the Indian Defence Market are likely to lose their significance with the advent of JV based investments. It is likely that influential individuals are likely to get absorbed into some of these firms. With the stakes for private players increasing, freelance ‘lobbying’ is likely to come under fire, largely as a result of industry-led pressure (in the face of the government’s recent experiences with scams/graft plaguing the defence procurement process – entailing cancellation of contracts and wastage of time & effort).

9. Considering budgetary constraints at one end and the demand for big-ticket purchases on the other, definitive purchasing decisions are likely to involve considerable waiting periods – a case in point being the Rafale ‘mother of all’ deal. Alternatively/in parallel terms, focusing on relatively inexpensive but equally crucial low hanging fruits like ‘unmanned technology’, ‘smart weapon systems’, ‘rotable equipment’, ‘software-cum-avionics related technology’, infrastructure development, etc. is likely to aid parties gain a firm foothold in niché sectors, entailing long-term sustainable presence at favourable terms. The big boy-small player gap as currently exists offers adequate flexibility in contractual terms for such endeavours.

10. Limited Out-of-the-box in terms of future trends plagues the Indian aerospace/defense policy circles (especially in terms of ‘red-teaming’ endeavours). An interesting case in this regard is India’s potential purchase of the ShinMaywa US-2 amphibious aircraft from Japan. Judging by this article, the deal seems to be primarily geared towards satisfying foreign policy objectives, with strategic military considerations and tactical operational factors being almost an afterthought. This presents an attractive business opportunity to the industry. A greater focus on Research/Analytical processes in terms of strategic planning considerations (encompassing geopolitics and security spheres) as well as cost-benefit dynamics (reconciling financial constraints with security demands over a protracted transaction cycle) is likely to entail a win-win situation for the concerned stakeholders. Importantly, this is likely to widen the scope of engagement for such firms within the user-base.

THE PLUS ONE CONSIDERATION

• For long-term players having/planning on physical presence:
• Enhancing social footprint – a broad-based initiative involving local communities in the fields of healthcare, education, employment and environment (especially Disaster Risk Reduction) is likely to address the CSR demands mandated by the government, while also helping shape public opinion positively. Importantly, this approach is likely to mitigate any negatives arising out of ‘civil-society’/’state monopoly’ spoilers.

• For stand-off transactional exchanges with Indian private players/state monopolies:
• Business strategy needs to cater to ad hocism in defence forces’ procurement patterns – a result of the strategy vacuum referred to earlier and a lack of comprehensive engagement between the finance & defence ministries – leading to numerous projects lingering on for years at end, with the government machinery responding in jumps and starts, resembling a whimsical approach than a carefully studied strategic plan. A case in point being the US-2 purchase referred to earlier.

Lastly, I would like to reiterate that irrespective of the type of engagement sought, shifting emphasis from 'platform-centric' sales pitches to 'capacity-centric' solutions may well be the manna that addresses to a significant extent the worries plaguing the Indian aerospace / defence sector.

(Picture Courtesy: fbmaza.com)