- Language: English
- Published: March 2013
- Region: India
Indian Defence Industry Report
- Published: July 2007
- Region: India
- 136 Pages
- Cygnus Research
It is estimated that defence procurement up to 2012 will be over USD45 billion, which makes it one of the most attractive defence markets in the world in terms of business potential.
Currently about 70% of the procurement in value terms, is from foreign sources. The current defence market for private sector firms in India, which includes outsourcing from Defence Public Sector Units and Ordnance Factories is estimated to be USD700 million. This spend will further increase since the Indian Defence Industry is determined to increase the participation of private players. Presently more than 5,000 Indian companies are supplying around 25% of components and subassemblies to state-owned companies.
Scope of the Report
- This report discusses about Indian defence structure and various organizations along with their role and Defence Procurement Policy 2006 in detail.
- The report presents Offset policy and its implications, need for technology in armed forces and emerging opportunities for Indian industries to supply various equipments and technology.
- The report presents the details about major defence public sectors and some private companies, critical success factors and growth drivers
- Future outlook has been discussed from the perspective of policies and defence budget.
- Foreign armament and equipment suppliers For Defence
- Defence analysts across the world
- large Indian heavy engineering companies
- SMEs in light engineering
- Banks and financial institutions
- Investors, consultants
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Highlights 1. Indian Defence Setup and its Various Organisations
1.1 Department of Defence
1.1.1 Indian Army
1.1.2 Indian Navy
1.1.3 Indian Air Force
1.1.4 Indian Coast Guard
1.1.5 Inter Service Organisation
1.2 Department of Defence Production
1.2.1 Ordnance Factory Organization
1.2.2 Public Sector Undertakings Further details about these companies are given in chapter9.
1.2.3 Other Organisations
1.3 Department of Defence Research and Development
1.3.1 Defence Research and Development Organization
1.4 Department of Ex-Servicemen Welfare
2. Defence Acquisition Initiatives
2.2 Trend in Defence Acquisitions
2.3 Defence Acquisitions Processes
2.3.1 Defence Acquisition Council
3. Defence Procurement Procedure-2006
3.1 Objective and scope for Defence Procurement Procedure 2006
3.2 Capital Acquisitions
3.3 Defence Procurement Procedure (MAKE)
3.3.1 Categories of procurement through indigenous development 3.4 Procedure for Naval Ship Building
3.5 Procurement Procedure for DRDO
3.6 Procurement Procedure for IT Products and Services
3.7 Procurement Procedure for other infrastructure facilities
3.7.2 Armed Forces Medical Services
3.8 Indian companies currently associated with Defence
3.9 Industrial license issued to private companies
4. Trend of Technology Adoption in Services
4.1 Need and trend of Technology adoption-Indian Army
4.2 Need and trend of Technology adoption-Indian Navy
4.3 Need of Technology-Indian Air Force
4.4 Trend in Technology Adoption
4.5 Current Suppliers of Technology
4.6 Apprise the Indian Industry in Specific Requirement of Services
4.7 Future Need of Technology
5. New Offset Policy
5.2 Defence Offset Obligations
5.3 Defence Offset Facilitation Agency (DOFA)
5.4 Acceptance of Necessity Stage
5.5 Solicitation of Offers
5.6 Technical Evaluation of Offset Offers
5.7 Commercial Offset Offers
5.8 Examination of Offset Offers
5.9 Monitoring Implementation of the Offset Contract
6. New Initiative & Emerging Opportunities
6.1 Raksha Udyog Ratnas (RURs)
6.2 Opportunities for JVs with foreign companies
6.3 Implications for recent Indian and international tie-up
6.3.1 India-Russia Defence Co-operation
6.3.2 Major Joint Development and Production Projects
6.4 Government Initiative
6.5 Critical Success Factors
6.6 Business opportunities for SMEs
7. Growth Drivers
7.1 Rising Defence Expenditure in India
7.2 Private Investments on the rise in the Indian Defence Industry
7.3 Increasing Public-Private Collaborations
7.4 India's offset Policy to Encourage Domestic Production
8. Issues and Challenges
8.2 Major Issues and Challenges for defence Equipment Acquisition
8.2.1 Integration of multiple vendors
8.2.2 Integrity pact & controversy about single vendor selection
8.2.3 Registration of vendors
8.2.4 Slow pace of decision making
8.2.5 Time and cost overrun
9. Major DPSUs/Pvt. Players
9.1 Bharat Dynamics Limited (BDL)
9.2 Bharat Earth Movers Limited (BEML)
9.3 Bharat Electronics Limited (BEL)
9.4 Garden Reach Shipbuilders & Engineers Ltd (GRSE)
9.5 Goa Shipyard Limited (GSL)
9.6 Hindustan Aeronautics Limited (HAL)
9.7 Mazagon Dock Limited (MDL)
9.8 Mishra Dhatu Nigam Limited (MIDHANI)
9.9 Larsen and Toubro (L&T) Heavy Engineering Division
9.10 Electronics Corporation of India Limited (ECIL)
9.11 Mahindra Group Defence Systems
9.12 Tata Motors
10. Future Outlook
Annexure I: Bibliography
Annexure II: List of Abbreviations
Annexure III: Location of Ordnance Factories & Key Information
Annexure IV : Defence Procurement Procedure
2006 LIST OF FIGURES Figure 1.1: Indian Defence Structure Figure
6.1: Department Wise Expenditure (2003-04 to 2007-08) Figure
7.1: Department wise Expenditure in Defence (2003-04 to 2007-08)
LIST OF TABLES
Table 2.1: Department wise procurement pattern (Imported/Indigenous)
Table 3.1: Industrial License issued to private companies for manufacturing items Table 4.1: Technology/Products and their supplier
Table 4.2: Area of application and need for potential equipment/ technology in Defence Department
Indian government budget allocation to defence for the financial year 2007-08 (April 2007 - March 2008) is Rs960 billion (about USD 23.42 billion), which is 14.11% of Federal Government expenditure. Out of this sum, Rs.419.2 billion (USD 10.22 billion) is under the capital head and would be spent on acquisitions of new weapons, systems and equipment. A proportion of the remaining Rs.540.78 billion (USD 13.19 billion), would be spent for buying spares, general stores, fuel, clothing, food, medical stores etc. It is estimated that defence procurement up to 2012 will be over USD45 billion, which makes it one of the most attractive defence markets in the world in terms of business potential. India stands out to be one of the top ten countries in terms of defence expenditure. During 2004–07, India spent about USD10.5 billion on importing defence equipment.
Government of India (GoI) came out with the Defence Procurement Procedure 2006 (DPP 2006) on 1st September 2006. DPP 2006 aims to further enhance the research development and production facilities in India, enlarge the Defence Offset Implementation policy benefiting the domestic private sector firms, introduce vendor registration through internet to facilitate the participation of Indian industries, maintain transparency in performance of field trials, and pre-contract integrity pact and level playing field for Indian industry along with DPSUs and ordnance factories (OFs).
It is pertinent to discuss the context of DPP 2006. In 2001, the Indian government opened up the defence production industry by allowing 100% investment by private sector firms and, at the same time, also allowed FDI of 26% in select areas in the defence production. Earlier, the private sector had only been a supplier of raw materials, semi-finished products, and parts and components to the Defence Public Sector Units, ordnance factories and base workshops of the armed forces; base repair depots of the Indian Air Force and dockyards of the Indian Navy. Public-private partnerships also started emerging for the manufacture of complete advanced equipment and systems. Mahindra & Mahindra, the Tata Group, Kirloskar Brothers, Larsen & Tourbo, Ashok Leyland were some of the key private companies who supplied defence equipment and services to the armed forces. However, as per the recommendations of Dr Kelkar’s Committee (Dr Kelkar was formerly the Economic Advisor to the Finance Minister), the GoI realised the need for a strong and healthy partnership between the public and private sector in strengthening India’s defence capability and sustaining a powerful domestic base for the future. This is the prelude for DPP 2006 to be introduced to strengthen domestic manufacturing base for defence.
Scope for the Defence Procurement Procedure 2006 will cover all capital acquisitions (except medical equipment) undertaken by the Ministry of Defence, Defence Services and the Indian Coast Guard — both from indigenous sources and ex-import. Defence Research and Development Organisation (DRDO), Ordnance Factory Board (OFB) and Defence Public Sector Undertakings (DPSUs) will, however, continue to follow their own procedures for procurement.
The naval shipbuilding is a capital and technology intensive activity that does not come under the Procedure because the process consists of ship design and construction. Hence, a separate procedure for acquisition of naval ships and Coast Guard vessels was defined through indigenous design and construction.
Capital acquisitions in armed forces are categorised as under:
a. ‘Buy’ acquisition describes an outright purchase of equipment. This category would be further classified as ‘Buy (Indian)’, meaning Indian vendors and ‘Buy (Global)’ meaning foreign as well as Indian vendors. Buy Indian must have minimum 30% indigenous content if the systems are being integrated by an Indian vendor.
b. ‘Buy and Make’ acquisition means purchase from a foreign vendor followed by licensed production through indigenous manufacture in the country.
c. ‘Make’ acquisitions consist of high technology complex systems to be designed, developed and produced indigenously.
Defence acquisition processes follow certain guidelines as discussed here. The acquisition proposals are forwarded to the Headquarters Integrated Defence Staff (HQIDS) by the Service Headquarters. HQIDS along with the representatives of various defence departments examine the technology in consultation with the DRDO and then categorises the case as ‘buy’ or ‘buy and make with transfer of technology’ or ‘make’. According to cost effectiveness and economy of scales, the issue of transfer of technology is analysed. These recommendations are given to the Defence Acquisition Council (DAC) headed by the Defence Minister.
The government has set up the Defence Acquisition Council (DAC) headed by the Defence Minister for making decision on the new planning process. The Council has been constituted to provide an overall guidance to the country's defence procurement programme. The decisions from the Council are to be implemented by the following three boards:
(i) Defence Procurement Board headed by the Defence Secretary
(ii) Defence Production Board headed by the Secretary, Defence Production
(iii) Defence Research and Development Board headed by Secretary Defence
Research and Development
Growing importance of defence procurement is reinforced by the fact that defence budget estimate for 2006–07 was USD20 billion and increased by 5% YoY. It is forecast to grow at an annual rate of 7% between 2008 and 2013. Due to strategic reasons, the defence budget increases over the years and most of the expenses are due to modernisation of arms, aircrafts, warships and other capital items mainly used for maintenance of such assets. Larsen & Tourbo (L&T) largely exploited heavy engineering requirements of defence by leveraging their strength of being a heavy engineering unit of international repute. While large industries like L&T could avail such opportunities, small and medium enterprises (SMEs) were largely involved with DRDO, ISRO, OFs, DPSUs, etc. in terms of component supply. In light of the dangers of depending on foreign sources, the GoI has taken initiative of creating larger opportunities for the indigenous industry. With DPP 2006 in place, more opportunities are going to be exploited by competing private firms. GoI is also assuring level playing field for private firms with DPSUs in terms of its procurement policy. However, while such opportunities are galore, key technology needs of the three services of armed forces are discussed below.
Indian Army: Database management, moving surface target imaging radar, radar image processing technology, wireless networking, robotics, unique identification of nuclear, biological, and chemical materials, etc.
Indian Navy: Advanced weaponry and weaponry systems such as the anti-submarine warfare corvettes, long-range SAM, communication satellites and early warning systems are required by the Indian Navy. It also requires new generation submarines and replacement for its present aircraft carrier (INS Viraat). However, the INS Viraat has recently undergone an up gradation;, its decommissioning has been postponed till 2010 from 2008. Other important technologies needed are satellite infrared surveillance systems, secure data links technology, automatic target recognition technology, simulation modeling and target configuration technology, etc.
Indian Air Force: Surveillance systems, i.e. the airborne radars for space surveillance systems for detecting launches of ballistic and cruise missiles, tracking them and trying to intercept it. Other technologies needs include the advanced space surveillance, atmospheric interceptor technology, airborne lasers for area missile defence, multi-mission space-based laser, etc. What opportunities then beckon for Indian companies in defence supply? India has the potential of becoming a global hub for engineering maintenance of aircrafts and in this regard lots of international aviation companies are examining the possible opportunities in partnering with Indian companies. Some of the advanced technology items are imported from Russia, the USA, Israel, France, and Italy. However, India can not simply afford to sustain such import cost in case of armament procurement. Hence, Indian private companies need to be developed to make India competent in armament technology.
The driving force for creating business opportunities for Indian private firms is the benefit of offset clause which would be applicable for all procurement proposals where indicative cost is above Rs3,000 million and the schemes are categorised as ‘Buy (Global)’ and ‘Buy and Make with transfer of technology’. The offset policy for defence goods will help in building the country’s position as a large buyer and exporter. It is estimated that USD10 billion is likely to flow back to India during 2007–12 through offset in defence deals. Lot of SMEs will be benefited by the Offset policy.
The most significant growth driver is that the GoI has planned to spend USD45.85 billion (around Rs1,800 billion) during 2007–2012 on acquisition and purchases of various equipment and technologies. This is going to give a big boost to the Indian industries to armour their units with state-of-the-art technology to take up the challenges ahead. The public sector is facilitating greater private sector participation in the area of defence goods production which will also contribute to the growth of domestic industries. The current defence market for private sector firms in India, which includes outsourcing from Defence Public Sector Units and Ordnance Factories is estimated to be USD700 million. This spend will further increase since the Indian Defence Industry is determined to increase the participation of private players. There are more than 5,000 companies supplying around 20%–25% of components and subassemblies to state-owned companies. Of India's current defence procurement of capital items more than 30% is imported, for which 25% requirement is met through Indian SMEs. However, this is expected to change with the creation of more public private partnerships.
Some of the critical success factors for Indian private industries to grab the full potential of such opportunities are:
- Understanding the product mix before taking up the order
- Understanding the Request for Proposal (RFP) carefully for design development
- Looking at all opportunities for tie up with the leading technology suppliers
- Upgrading technology base constantly and invest heavily
- Awareness of military standards
- Stringent quality control system in place and use of statistical tools are essential
- Economy of numbers is critical for any business to sustain. For certain high value product, order could be less but realisation may be very high. Hence, cost control and optimising the production without sacrificing quality is a must.
- A strong project management practice at all levels in the organisation
Though it is too early to estimate volume and value for any possible business with defence set-up, but Cygnus assesses that the scope and opportunities will be more for large companies compared to SMEs. However, SMEs will have a fair chance of joining hands with large companies for manufacturing specialised components, parts of capital goods to be used in defence and other items such as auto components for heavy vehicles, spare parts for various defence equipments. IT will also be benefited by the recent initiative because seamless integration of various processes in defence set-up is now very much sought after and already some IT companies are in avionics in Air force as well as Navy. Another potential area will be logistics and supply chain management where lot of IT application will be required in armed forces. Telecommunication is already exploiting potential of some of the DPSUs existing in this market space. Possibly, in near future lot of consortium will be there between the private and government research organizations. However, nevertheless industry has to constantly upgrade its technology and put the best project management in place because criticality of delivery time for defence supply will be everlasting. Cygnus believes in the strength of Indian industry and foresees that time will tell the success stories of many Indian companies to be part of the critical mass for defence requirement and self dependency of Indian armed forces will be an example by itself.
Bharat Dynamics Limited (BDL)
Bharat Earth Movers Limited (BEML)
Bharat Electronics Limited (BEL)
Garden Reach Shipbuilders & Engineers Ltd (GRSE)
Goa Shipyard Limited (GSL)
Hindustan Aeronautics Limited (HAL)
Mazagon Dock Limited (MDL)
Mishra Dhatu Nigam Limited (MIDHANI)
Larsen and Toubro (L&T) Heavy Engineering Division
Electronics Corporation of India Limited (ECIL)
Mahindra Group Defence Systems