By Rebika Singam
Not many can venture into the defence electronics domain, as the Indian government has strict rules relating to procurement, which are strictly defined under the defence procurement procedure (DPP) introduced in December 2002 by the Ministry of Defence. DPP 2006 mandates that the suppliers of defence electronics products or equipment have to sign pre-contract integrity pacts with the government.
“Defence electronics is a strategic industry—more than mere commerce. Issues of obsolescence, technology denial and restricted trade operate here. Presently, the government has the monopoly in operating in the defence industry, as it is the manufacturer as well as the buyer. It also defines its requirements based on the available technologies, worldwide,” says Sujoy Ghosh, head, business development, Tata Power Strategic Electronics Division (SED).
Currently, about 70 per cent of the defence equipment is imported. However, the government is now emphasising on indigenisation in the design, development and production of defence equipment. “With the amendment of DPP in 2011, and the introduction of the Defence Production Policy in January 2011, the Ministry of Defence (MoD) aims to create conditions conducive for Indian industries, both public and private, to play an active role in this domain. It now aims at expediting decision making, simplifying contractual and financial provisions to establish a level playing field for the Indian defence industry, for both the public and private sector. This will create opportunities for the private sector and also create enormous employment opportunities as well as contribute to GDP growth,” adds Ghosh.
The amended DPP will also act as a catalyst to enhance the potential for small and medium enterprises (SMEs) to be part of the indigenisation drive as well as help in broadening the defence R&D base of the country.
Stumbling block
Venturing into strategic/defence electronics industry requires huge capital expenditure in the initial years, which is a restraint for startups and small companies. Once a company starts doing well in this domain, it can foray into the export market as well. For example, Tata Power SED, which has been active in the defence sector for the past 30 years, has started exporting for the last two years. It has taken 30 years to mature and venture into the export market.
Across the globe, the ‘tierisation’ model is followed in the defence sector. The strategic electronics industry comprises lead systems integrators (tier I category), and component and sub-system manufacturers (tier II) and so forth. Systems integration with outsourced components and sub-systems is the most viable business option in this segment. Component manufacture needs large production volumes in order to remain competitive, but the chances of discouraging factors like volume rejection and technology obsolescence are limited. Sub-systems may require a good design and technology base.
Drawing a comparison to the United States’ Department of Defence (DoD), companies like Lockheed Martin and Boeing come under the tier I category, whereas companies like Raytheon, Honeywell and General Dynamics come under tier II. However, in India, PSUs like Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL), etc rule the defence electronics sector. But now, with the introduction of new DPP rules, a handful of companies like Tata Motors, L&T and Mahindra Aerospace have forayed into this sector. This is a major shift in the sector—from a public sector monopoly to private sector participation.
The much awaited Raksha Udyog Ratna (RUR) is another major game changer in the offing. Several private Indian companies had been shortlisted, however, the policy never saw the light of the day. This RUR declaration was another plan for a major step towards providing a level playing field between defence PSUs and large and capaple Indian private sector companies.
Domestic companies can initially target the offset areas, where there are immense opportunities. The list of eligible offsets will now cover areas such as civil aerospace, including aircraft, both fixed wing and rotary, air frames, air engines, aircraft components, avionics systems, etc. These changes are likely to provide a wider range of offset opportunities to vendors participating in defence procurements and will also encourage the building up of indigenous manufacturing capabilities in crucial areas.
Opportunities ahead
The future of strategic/defence electronics looks quite promising. An increased budgetary allocation for the armed forces, the army’s replacement of old equipment, and compulsory sourcing of Indian components by foreign defence equipment vendors are some of the key drivers for the growth of India’s strategic electronics industry. According to an estimated report, in 2009, defence electronics sector revenue was Rs 90 billion (Rs 9000 crore), up from Rs 60 billion (Rs 6000 crore) in 2008.
These current developments will change the course of the industry, making it more inviting to entrepreneurs. For example, Tata Power SED is a prime contractor to MoD for indigenous defence electronics production with some special licences.
The defence electronics sector accounts for around 6 per cent of the total Indian electronics market. With the country’s defence outlay going up by around 10 per cent every year, India is going to be one of the top 10 global spenders on defence. In addition, as the government plans to announce 26 per cent foreign direct investment in defence equipment production, foreign companies are also planning joint ventures with Indian companies, which, in turn, would increase the size of the overall industry.
Further, the new offset policy—making foreign defence equipment vendors source 30 per cent of the contract value, locally, if their order value exceeds Rs 30 billion (Rs 300 crore)—would also spur domestic production of electronics for the defence sector. And ultimately, it will develop home grown products.
“Strategic electronics players need persistence, perseverance and patience. Long gestation periods and lots of investments are needed for long term projects. There are no quick fix solutions. However, a high return on investment is assured,” says Ghosh.
How to venture
A very stringent selection criteria is followed in the defence electronics sector. A company should have been listed for a minimum of 10 years. Its foreign holding (excluding FII stake) should not exceed 26 per cent, and its turnover should be at least Rs 100 billion (Rs 1000 crore) in each of the past three years. The company should also hold a credible record in engineering, manufacturing and quality assurance.
However, the domain is open to 100 per cent Indian private sector participation with foreign direct investment permissible up to 26 per cent. The recent introduction of the ‘buy and make (Indian)’ category in the defence acquisition process has been introduced to enhance participation by Indian companies who can meet the requirements of state of the art defence systems and platforms by getting into tieups with technology providers through the mechanism of technology transfers in joint ventures. This is a major step taken by the government.
This article is based on the talks given by Sujoy Ghosh, head, business development, Tata Power Strategic Electronics Division, at the ELCINA-EFY CEO Summit in February 2011, in New Delhi
