the final batch of three Mi-17V-5 military transport helicopters from Russia, bringing the total to 151. The models are the most technically advanced of Rostec Corporation’s Mi-8/17 type including a KNEI-8 avionics suite. The new suite replaces the previously used multiple systems indicators with four large multi-functional that are easy to read and reduce the intensity of pilot’s workload. The completion of the sale comes as both India and Russia continue 
Guest article by Sebastian Sobolev and Aleksandar D. Jovovic
Some years back, global defense companies flocked to the Indian defense market in search of opportunities that could offset declining home budgets. India’s attractiveness as a market was understandable: the country was embarked on an ambitious military modernization program to mitigate perceived threats from neighboring Pakistan and to compete with China in the maritime, air and land domains.
These initiatives ballooned military procurement accounts, which grew at an annual rate of 14% between 2005 and 2010. Yet contractors soon found themselves frustrated by opaque bureaucratic procurement processes, onerous domestic offset and work share requirements, and seemingly endless delays. With the emergence of a new government, what’s ahead for India?
The Indian Market: Structure, Inertia & Movement
India has made attempts to reform its procurement processes in the past; can contractors, foreign and domestic, expect anything different this time? The real battle may center on the competitive nature of India’s domestic defense firms, with the outcomes impacting opportunities for global defense providers. If Western defense suppliers are to compete in the Indian market, they would be well-served to understand the roots of the Indian procurement process, its current trajectory, and the potential opportunities that recent reforms may create.
Development of defense industrial capacity has been a key priority for India since the Nehru administration. Investment in the sector was seen as a means of spurring economic development, providing regional employment, and avoiding dependence on either Cold War bloc. Because development of this sector was a strategic economic and security priority, it was always centrally controlled, a structure that persists today. The choice of whether to import, co-produce, or indigenously develop a defense capability is made at the political level of the executive and Defense Ministry bureaucracies. Much of the decision-making authority beyond that lies with the Defense Research and Development Organization (DRDO), which governs the R&D and production activities of the state-controlled defense industries (DPSUs).
This structure also governs how foreign suppliers interact with indigenous industries. It imposes offset obligations, mandates technology transfer requirements, and, up until recently, it dictated which local institution a foreign supplier had to partner with on a given project. Waiving this last requirement has the potential to improve the business environment for foreign companies in India by introducing an element of competition into the indigenous industrial base. This will be particularly meaningful if India’s vibrant private sector is invited to the table.
As the initial cycle of great expectations deflated, some firms chose to shift their focus away from the Indian market entirely. Others settled in for the long haul, trading their rushed marketing campaigns for patience, and working to better understand what programs and requirements were real and enduring.
As downward budgetary pressure persists in the United States and Europe, companies continue to look abroad for growth opportunities, and the size of India’s defense budget and the scope of its modernization ambitions have again drawn attention. In the midst of this, India has experienced a transformational election, bringing to power a new and dynamic leadership armed with a strong parliamentary majority and public mandate for change.
Almost immediately, India extended its prohibitive FDI restrictions on the defense sector from 27% to 49%. Soon after, the Modi government took the radical step of decoupling the high profile corruption investigation of AgustaWestland from the firm’s ongoing support and supplier activities, as well as allowing the company to continue – with some restrictions – to place bids on upcoming rotorcraft programs. But clues on the trajectory of the defense market may be most evident in India’s domestic competitive landscape, rather than high profile developments involving foreign firms.
The Public – Private Divide
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India’s private firms have been angling for a greater defense market share, with a few wins in areas such as shipbuilding. But even here, complex efforts such as the P-75 submarine program have been channeled to teams of foreign and Indian public sector shipyards.
The upcoming Avro transport aircraft replacement is the next test opportunity for foreign technology players and India’s private sector. However, in true statist fashion, the private sector was promised this program by decree, rather than real competition with the public sector’s HAL and others.
Other privately-owned firms have trumpeted their greater play in the defense sector. The Tata Sons conglomerate included defense in its major investment drive, while Larsen and Toubro announced a $400 million expansion in naval shipbuilding, and have set a target of growing their defense business fourfold. Mumbai-based Mahindra, which has boasted a modest defense footprint in land vehicles and naval subsystems since India’s independence, is investing in radar and aerospace production.
Shifts in favor of India’s private sector have yet to materialize, however, putting considerable onus on the new government and its implementation – rather that regulation – of the defense procurement portfolio.
Foreign providers face similar quandaries: the Avro replacement program is also illustrative in this regard. The government had admirable ambitions to source this (foreign-designed) platform competitively, but its approach to the competition bears the hallmarks of centralized control that have defined the procurement process. The government dictated the terms, limiting suppliers and imposing considerable requirements for domestic industrial participation. The result was a dearth of interest from foreign suppliers, as well as complaints from local Indian partners that the small batch of aircraft to be made in India rendered required investments uneconomical. As of this writing, they have yet to receive a bid, and the competition has been extended. Barring a sudden turnaround, the program appears to be headed for cancellation and re-competition.
Another critical airborne program has suffered similar fates in the past. India’s Light Utility Helicopter program (LUH), the replacement of the revered but dated Chetak and Cheetah fleets, has now been cancelled twice. This program could shape up to be a true competition between the private and public sectors, in each case paired with foreign partners in a “buy and make Indian” program, requiring local assembly and content. Rather than simply assign this effort to one or the other side, India’s procurement officials may create a true competition. Indeed, the public sector HAL has been positioning and developing in-house IP for some time, via its Druhv and indigenous LUH programs.
Ultimately, the driver of true competition, as well as commensurate foreign engagement, lies in the severe capacity constraints faced by India’s public sector defense industry – first and foremost by the aforementioned HAL.
Recent history does contain some bright spots for American suppliers doing business in India. Despite the loss of the $12 billion Medium Multi-Role Combat Aircraft (MMRCA) competition to Dassault, Boeing has exported several high-end platforms to India, including the P-8i maritime surveillance aircraft and the forthcoming AH-64E Apache attack helicopter. Interestingly, the Apache is being sold with no expectation of co-production or technology transfer. Lockheed’s C-130 franchise has done well for itself in India, with repeat sales of its J-series Super Hercules. In this case, India’s private sector has embedded itself in the supply chain, with a Tata-Lockheed Martin JV supplying aerostructure components that include the center wing box.
Conclusion
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Ultimately, the real question in India is the extent of true domestic competition for defense funding. Will the new government open the market sufficiently to allow the private sector to compete and win, resulting in greater non-public sector investment in R&D and production capabilities? The circumstances seem favorable: this government is more committed to competition, has a more instinctive understanding of for-profit industry, and harbors greater awareness of the severe capacity constraints of the traditional public sector undertakings.
It is through this prism that global industry should consider its opportunities. The desire for more indigenous development and production will continue in an avowedly nationalist government. Nevertheless, global defense firms may be able to develop deeper and more fruitful partnerships with emerging private sector defense firms in India, perhaps even leading to greater exports of Indian content – much praised, but rarely experienced to date.
While higher FDI limits, greater flexibility in domestic industrial partnerships, and recent Western successes in exporting to India’s defense market are legitimate causes for optimism for foreign suppliers, aspects of India’s procurement process are likely to shed their bureaucratic and centrally-controlled past very slowly. India’s modernization ambitions are likely to continue drawing attention from Western contractors, but success in India will remain a longer-term proposition than the conventional wisdom of years past had suggested.
Avascent is the leading strategy and management consulting firm serving clients operating in government-driven markets. Sebastian Sobolev is a Project Manager, and Aleksandar D. Jovovic is a Principal. Use these links to reveal their emails and contact them.
Updates
February 4/16: India has received the final batch of three Mi-17V-5 military transport helicopters from Russia, bringing the total to 151. The models are the most technically advanced of Rostec Corporation’s Mi-8/17 type including a KNEI-8 avionics suite. The new suite replaces the previously used multiple systems indicators with four large multi-functional that are easy to read and reduce the intensity of pilot’s workload. The completion of the sale comes as both India and Russia continue negotiations for forty-eight more of the helicopters, which are to be used in a variety of operations such as in deserts and mountains, matching the wide variety of environments found in India.
January 28/16: The Indian government has released a new policy paper outlining a revision to its current procurement structures. The Defence Procurement Policy 2016 (DPP-2016) aims to make the country’s defence industry more lucrative and reduce delays by eliminating repetitive procedures to the process. A new category that has been given the highest priority in how India gains its weapons has also been created named the Indigenous Design, Development and Manufacturing (IDDM). At present, the categories designated from highest to lowest priority are Make India, Buy and Make (India), Buy and Make Global, and Buy Global. However some commentators have said that the new category may confuse matters further as it seems to be a hybrid category of the Make and Buy categories, resulting in different interpretations of under which category a prototype will be developed.
August 6/15: With Indian defense exports slowly climbing, Tata Motors has delivered 585 military logistics vehicles to the UN mission in Mali, MINUSMA. The Indian firm also won a contract with the Indian government in July to supply over 1,200 6×6 trucks to the Indian Army. The delivery to MINUSMA took approximately five months and will equip Mali’s neighbors.
Additional Readings
Global Programs
* DID – India Selects Airbus A330 MRTT in Aerial Tanker Competition.
* DID – India Refurbishing its AN-32 Transport Fleet. In Ukraine.
* DID FOCUS – Surya’s Chariots: India’s AWACS Programs.
* DID – India & Israel’s Barak-8 SAM Development Project(s).
* DID – C-17s for India: 10 Aircraft by 2015.
* DID – India Buys C-130J-30 Hercules for Special Forces.
* DID FOCUS – Procurement Nadir: India’s Murky, Messed-Up Howitzer Competitions.
* DID FOCUS – India’s Light Helicopter Contract Hits Turbulence, Stalls. Again.
* DID – India’s Light Transport Competition: Follow Avros to Exit.
* DID – India’s Mid-Tier Maritime Patrol Aircraft Competitions.
* DID – An MRAP for India. BAE joint venture with Mahindra didn’t work, folded, but Mahindra can sell Casspir derivative.
* DID – P-8i: India’s Navy Picks Its Future High-End Maritime Patrol Aircraft.
* DID – India’s Fighter Upgrades: Mirage 2000s Finally Get a Deal.
* DID FOCUS – India’s M-MRCA Fighter Competition.
* DID FOCUS – India’s Project 75 SSKs: Too Late to Save the Submarine Force?
* DID – Upgrades At Last: Keeping India’s U209 Subs Afloat.
* DID FOCUS – LCA Tejas: An Indian Fighter – With Foreign Help.
* DID – May day: India’s New Basic & Intermediate Flight Trainers.
* DID – Hawks Fly Away With India’s Jet Trainer v2 Competition.
* DID – Israel Sells Heron UAVs to India.
* DID – India Buys GPS-Guided “Cans of Whup-Ass”. WCMD cluster bombs for its Jaguars.
Overarching Issues
* DID – India’s DRDO Rethinking the Way it Does Business. Updated in 2010, some readings updated to 2012.
* DID – Anti-Submarine Weakness: India Has a Problem.
* DID – Indian Naval Air Defenses: Another Avoidable Crisis.
Russian Cooperation
* DID – India Moves to Boost Anti-Tank Capabilities. Shells, laser-guided weapons, and missiles.
* DID FOCUS – PAK-FA/FGFA/T50: India, Russia Cooperate on 5th-Gen Fighter.
* DID – India’s Fighter Modernization: Add MiG-29s to the List.
* DID – MTA: HAL and Irkut’s Joint Tactical Transport Project.
* DID – India Ordering, Modernizing SU-30MKIs.
* DID FOCUS – India’s Nuclear Submarine Projects. Including a Russian lease.
* DID FOCUS – INS Vikramaditya: India’s New Carrier.
