The MMRCA contract is humongous and could prove to be a turning point for the Indian aerospace industry and a game changer especially in the private sector. While the benefits for the aerospace industry will be unquestionable, it will also have a cascading effect on other industries as well.

Depleting numbers of MiG-21s and the need to replace the ageing MiG-27 and later Jaguar fleets compelled the Indian Air Force (IAF) to scout for a replacement aircraft. After a lengthy and gruelling process of selection, the French Dassault Rafale emerged as the preferred medium multi-role combat aircraft (MMRCA) among the six contenders. The total requirement is for 126 aircraft with an option for another 63. The government had initially allocated Rs. 82,000 crore ($14.92 billion) for the contract, a figure that is now believed to have crossed $20 billion ( Rs. 1,10,000 crore), making it India’s mother-of-all defence deals. Dassault Rafale emerged as the winner essentially due to its lower life-cycle cost. Contract negotiations are now on. The first 18 aircraft will be supplied directly by Dassault within three years and the remaining 108 aircraft would be built in India by the Hindustan Aeronautics Ltd (HAL) under transfer of technology (ToT).

Operational Cutting-Edge

The Rafale is a state-of-the-art aircraft, capable of simultaneously undertaking air-supremacy, air-interdiction, reconnaissance and the airborne nuclear deterrent missions. It will infuse new technologies and greater operational capability in the IAF. It has a modern digital fly-by-wire flight control system. Although not a full-aspect stealth aircraft, Rafale has reduced radar cross section (RCS) and infrared signature. There is also extensive use of modern composite materials in airframe construction.

The glass cockpit is designed around the principle of data fusion. An integrated direct voice input system allows a range of aircraft functions to be controlled by voice commands. There is an advanced hands-on-throttle-and-stick with a right-handed side-stick controller. An onboard oxygen generating system (OBOGS) eliminates the need to carry bulky oxygen canisters. The advanced avionics suite has an integrated electronic survival system from Thales and the Areos all-weather, night-andday-capable reconnaissance system. The active electronically scanned array (AESA) radar will bring in the latest technology. The French aircraft have traditionally maintained high mission success rate and fleet serviceability backed by no-strings attached product support. Experience of the IAF with the Mirage 2000 fleet only reinforces this fact.

New Technologies for DRDO

While the IAF will benefit operationally, there are win-win scenarios for several other players. Provisions for ToT in the contract will facilitate infusion of advanced technologies into the Indian aerospace industry. There will be access to the AESA radar, advanced cockpit avionics, OBOGS, digital fly-by-wire control laws, stealth, composite structures, RCS reduction and self-protection suites. The total value of the radar, electronic communications and self-protection equipment is about 30 per cent of the cost of the aircraft with 50 per cent offset purchases and work-share with Indian companies will amount to Rs. 55,000 crore. The annual budget of the DRDO is just Rs. 10,850 crore ($2 billion). The MMRCA deal will be a golden opportunity for DRDO to cash-in on new technologies.

Best Manufacturing Practices

When HAL undertook assembly of Jaguar aircraft, there was noticeable improvement in its capability of component manufacturing, sheet metal work and milling of turbine blades. The Mirage 2000 overhaul facility at HAL again ushered in industry best practices and also improved the work-culture at the shopfloor and management levels. A large quantum of work beyond just assembly will have to be undertaken by HAL and other Indian companies. HAL achieved sales turnover of Rs. 14,204 crore ($2.58 billion) during the Financial Year 2011-12. The contract has inbuilt provisions for HAL to get bulk of the work and hence the Indian aerospace major will have control over outsourcing of work under offset obligations of Rs. 55,000 crore. Has HAL built enough vendor-base to outsource tasks? Will HAL be able to maintain the production quality standards? One of the issues yet to be resolved is the responsible for quality assurance, warranty and delivery schedule of aircraft built in India.

Windfall for the Industry

The Indian aerospace industry has literally been salivating ever since this $20 billion deal appeared on the horizon. In May 2001, the government opened the defence industry for up to 100 per cent participation by the private sector and permitted foreign direct investment (FDI) up to 26 per cent, both subject to licensing. Major private players in the defence sector today are the Tata Advanced Systems Limited (TAS), Larsen and Toubro (L&T), Kirloskar Brothers, Mahindra Defence Systems and Ashok Leyland. Many foreign aviation companies have set up ventures in India. Dassault was in search of a strong cash-rich Indian offset partner. Its focus initially was on the Tata group which has a history in aviation and could be an easier-to-handle partner. Reliance being a large cash-rich group was the other choice. With Mukesh Ambani’s personal wealth of $21.5 billion ( Rs. 1,18,250 crore) and Reliance Industries total assets of $60.85 billion ( Rs. 3,34,675 crore), it was also a strong contender. Reliance today has a fledgling but significant aviation arm which is trying to understand the industry mechanism. The strengths of the Indian industry are well known. They can take on a variety of tasks related to manufacture of components, electronics, software, heavy engineering, sheet metal work, high quality milling, etc. Synergising the activities of the Defence Research and Development Organisation (DRDO), the Hindustan Aeronautics Limited (HAL) and the private industry; would be a critical requirement.

During Aero India 2013, it was heartening to note that many Indian aircraft component manufacturers were already supplying items to the global aerospace industry. HAL and the Indian Space Research Organisation (ISRO) vendor base could make sizeable numbers. Some companies have made offset management itself their focus area. They were acting as interface between Indian manufacturers and foreign companies. Thales and Safran traditionally have a strong presence in the country and relationship with Indian companies. The Safran group has already invested in India through Safran Engineering Services, Snecma HAL and Turbomeca India Engines. Thales has joint ventures with the Bharat Electronics Limited (BEL) and Samtel for avionics and with Roltas for command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) systems, besides having a software development company in Chennai for its global customers. At present, India is a source for only 1.5 per cent of its total global defence business. The company is currently getting 50 per cent of India-based revenue from setting up ticketing system for the various metro rail networks in the country. Thales has a major stake in India with the ongoing Mirage fleet upgrade in France and would be anxiously awaiting the conclusion of the Rafale contract.

A report by PriceWaterhouseCoopers (PWC) released earlier this year on behalf of the Federation of Indian Chambers of Commerce and Industry (FICCI) highlights the challenges before the Indian aerospace industry in the private sector. Rahul Chaudhry, CEO, Tata Power, Strategic Electronics Division, says, “There are a number of reasons for the poor progress made towards indigenisation. The policy structure and lack of a proactive approach to involve the private sector are the main. The inverted duty structure where imports are at zero duty and component sub-assemblies and domestic value-add is taxed, makes defence procurement an import-friendly regime. In the last six years, the ‘real’ indigenous content i.e. the true value of indigenisation versus imports, has progressively deteriorated from 45 to 36 per cent. Ram Prasad, Managing Director, Rockwell Collins India, observes, “We foresee market potential worth $800 million ( Rs. 4,400 crore) in the defence communication and avionics space in the next five years. We are partnering with both the defence public sector undertakings (DPSUs) as well as small and big private sector players. However, the long acquisition cycles and delayed decision-making remains a challenge for the defence sector in India.” Sandeep Wadhwa, Director, Nash Industries, feels, “Given the high entry barriers characteristic of this sector, besides the long gestational periods involved, only companies who have the wherewithal and patience should consider entering the sector especially at a time when the global markets have slowed down.” S.M. Kapoor, CEO, Taneja Aerospace Ltd, says, “There is certainly more hope and optimism in the past six to eight months and can be attributed to the positive direction that has been provided by the Defence Offset Guidelines announced by the government in August 2012. Global aerospace majors are now approaching Indian companies with a much more focused intent.”

Enormous potential Satish Kaura Chairman & MD, Samtel The Indian Government has allocated Rs. 86,741 crore ($16.06 billion) for capital expenditure in the Union Budget 2013-14, meant for fresh procurement of military hardware and platforms, which is an increase of nine per cent over the last fiscal. As per fresh data, more than 70 per cent of the capital goods required by the defence forces still gets imported from foreign vendors. Notwithstanding the variety of options available with the global vendors, the Indian Government is committed to take measures that promote the Indian defence industry. In this direction, many initiatives have been launched by the government in the last decade to build a strong defence industrial infrastructure for reducing import dependence. Government’s determination to increase indigenisation and also to induct private sector in this domain is obvious from the recent policy innovations, the latest being the amendments to DPP 2011. All eyes are now on the conclusion of the medium multi-role combat aircraft (MMRCA) contract. Not only will this project provide a fillip to our strategic defence strength, it will also give a big boost to indigenous production. As per the stipulation of the project, the original equipment manufacturer (OEM) is committed to meet the 50 per cent offset requirement for this project. For the first time in history, a significant portion of the aircraft will be manufactured indigenously in the private sector. The transfer of technology (ToT) clause will also bring in substantial technical knowledge within the country, which the indigenous defence industry can benefit immensely from. Today, the OEM and its partners are actively engaged with the Indian industry for building the necessary domestic infrastructure. On the other hand, there is a lot of excitement and eagerness in the Indian industry to be a part of this illustrious and historical project. The capability and the capacity required to fulfill the offset targets of this project are enormous. Indian private industry is gearing up to meet this challenge. During the execution of the MMRCA project, Indian private industry will develop in-depth capacity in design, development, engineering, manufacturing, testing, qualification, repair and maintenance. The MMRCA project will provide enormous opportunity for the private sector to evolve and lead a major transformation of the landscape.

Gautam Maini, Director, Maini Group, is of the view that “the aerospace business takes a lot of patience and time to build, but once that is done as in our case, we will start to see exponential growth in the future”. Chris Rao, Vice President, United Technologies, states, “When Goodrich started in Bengaluru more than a decade ago, there was practically no vendor base in India. Over the past 13 years, Goodrich has been able to successfully build a handful of quality vendors. Today, we source 22 per cent of our raw materials from India and this is likely to increase to 70 per cent over the next 10 years. Big Indian players have a crucial role to play. In a highly capital-intensive sector, they should bring in greater synergies and be more forthcoming in collaborating rather than competing.”

The defence and aerospace industry can act as a force-multiplier for the economy given India’s capability in engineering together with jobs and export opportunities like it has happened in the auto and IT sectors. In due course, India can also emerge as an outsourcing hub for global defence players.