Aviotech_ASSOCHAM_Creating a Domestic Supply Chain in the A&D Sector

5th ASSOCHAM International Conference on

Aerospace and Defense

Creating a Domestic Supply Chain in the A&D Sector

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Foreword

India’s aerospace and defence manufacturing industry stands at thethreshold of substantial expansion. Ever since the opening up of thesector and subsequent policy impetus to it through the variouseditions of the Defence Procurement Procedures, there has been aspurt of activity both in procurement as well as industrial capabilityand capacity creation.

It is the latter which is especially important as it affords for India thepotential to create a globally benchmarked industry supporting notjust supply chains in India but across the world.

There do remain areas of concern ranging from longishprocurement schedules to non-level playing field between DPSUsand private industry to impact of taxation and the nature and formof impending introduction of transfer of technology to undertakeoffsets. However these have over the past few years beenprogressively addressed and continue to do so.

A noticeable impact is the participation of private sector and how ithas shored up what was traditionally a supply base constitutedaround the Defence Public Sector Undertakings (DPSUs) and theOrdnance Factories . Over the past year there has been a consistentuptick seen in private ventures securing global supply orders fromOEMs and thereby creating viable business cases. The next wave ofexpansion is forecast in the coming 1-3 year horizon with a largernumber of these private ventures going for a public listings therebyresulting in a wave of value unlocking.

The DefExpo is always an event to take stock and look back the yeargone by and this year is no different. This year the event comes atthe backdrop of one of the largest procurement programmes beingannounced by the Indian government. India’s defence spend in itsentirety as well as its spend on capital goods being importedremains a robust trend.

ASSOCHAM-Aviotech Report on Defense and Aerospace Manufacturing in India 3

This is also a year when OEMs from across the world are starting topass significant work-share to Indian companies.

We hope this compendium will address some key issues as well asraise key questions, the answers to which will help drive thisindustry forward. Wishing all of you a profitable DEFEXPO 2012.

Rahul GangalDirector – Defence Advisory and Investments, [email protected]


Preface

Introduction

India’s Aerospace and Defense industry is in a unique robustposition, having transformed itself in the global arena. It hasevolved and has been developing capabilities in land, naval and airsystems. The sector has witnessed higher indigenisation andexports which has contributed to the growth.

India continues to enjoy the benefits of a growing economy, largedomestic demand, young population and stable governmentpolicies coupled with a maturing investment structure and a stronglegal system.

India’s Defense and Aerospace manufacturing opportunity isdependant upon its ability to emerge as a cost-efficientmanufacturing and service destination in this segment.

While the journey towards India emerging as a global Defense andAerospace manufacturing base has already commenced in the rightearnest, it will have to be supported in equal measure by thetranslation of the requirements of the OEMs by domestic industryas well as by a supportive government policy. Policy impetus in theform of Offsets and the new Defense Production Policy will supportthe focus on inherent cost and quality parameters that Indianmanufacturing has displayed in other industrial sectors.

Opportunities

India has systematically increased its defense spending. Recently inthe Union Budget for the year 2012-13, the military spending hasbeen increased to almost USD 40 Bn, a 17% increase over last year’sspending which was USD 33.5 Bn. This is being done at a time whenthe country is already engaged in upgrading the ageing militaryhardware. The defense capital expenditure is pegged at USD 15.84Bn, an increase of 14.89% over the last year’s defense capitalexpenditure budget of USD 14.12 Bn. According to the draft Twelfth


Five Year Plan of India, the defense expenditure (as a percentage ofGDP) is projected to hover around 1.83% of GDP in FY12 to 1.56%of GDP in FY17.

However we also noted that defense capital expenditure wouldincrease by 15% in nominal terms compared to defense revenue of7.5%. The capital spend on Defense in FY12 amounted to USD 36Bn (2.6% of GDP) compared to USD 35 Bn in FY11 (2.03% of GDP).We foresee the defense expenditure for the five years planningperiod (FY12 – FY17) to be around USD 30 -35 Bn annually, onnominal basis (given an annual GDP growth rate of 7% for theplanned period).

The budget estimates and revised estimates for modernization ofArmed Forces during the year 2011-12 under various heads are asunder:


Service / Head of budget

Budget Estimates (BE) 2011-12 (INR in Crore)

Revised Estimates (RE) 2011-12 (INR in Crore)

Difference (BE-RE) Increase, (Decrease)

(INR in Crore)

Army 10,740.02 4,950.02 (5,790.00)

Navy 13,149.02 16,040.27 2,891.25

Air Force 28,412.74 26,033.92 (2,378.82)

Joint Staff 696.24 385.24 (311.00)

Coast Guard 1,600.00 1,600.00 0.00

Total 54,598.02 49,009.45 (5,588.57)

The revenue expenditure of the total defence spend is largelyinternal as the functions are largely done internally rather thanbeing outsourced. However, the capital expenditure is importfocused. According to the latest data released by the StockholmInternational Peace Research Institute (SIPRI) India was the world’slargest arms importer between 2007 and 2011 and accounted for10% of global arms imports during the same period. India’s armsimports increased by 38% between 2002-06 and 2007-11. And asan importer, India is demanding offsets and transfers of technologyto boost its own arms industry, and in a bid to secure orders, majorsuppliers are agreeing to such demands. The major beneficiariesinclude the leading Defense Public Sector Undertakings (DPSUs) likeHAL, BEL, BEML, BDL, MDL etc.

Due to the restrictive regimes in the past, the Defense PSUs haveenjoyed monopoly with little or no private participation. Privateparticipation in large segments of Indian industry was opened in itsfirst true sense through the National Industrial Policy of1991, allowing foreign participation in the equity structure ofAerospace and Defense manufacturing companies. Initiatives havebeen taken up by various big private players and in the future, theprivate sector is likely to benefit significantly by the volume ofdefense work being outsourced by the government. This businesspotential will help with the creation of a basic business case whichis augmented by the opportunity provided to integrate into globalsupply chains of OEMs through the offset route.


India as an emerging A&D research and manufacturingdestination

Indigenisation is a critical factor that provides strategic autonomy toa nation, thereby adding exponentially to its national security. Itprovides flexibility by reducing dependency on external sources.

Though India has the potential to become a large sourcing base forcomponents and subsystems in the years to come for the foreignOEMs, this segment is presently relatively under-developed. Thetransfer of technology from foreign partners and collaboratorsseems to be the most plausible solution. In the past year, there hasbeen progress regarding key transfers of technology from theforeign OEMs to their Indian partners, which has significantlyboosted the work share and the near term order book expansion ofthese Indian companies.

Furthermore, the manufacturing segment in India has followed aslightly different path of evolution and market structure fromelsewhere in the world. The Indian experience on this particularaspect is slightly different with historically the DPSUs / PSUs andOFB participating in the entire value chain – commencing from anintegrator level right down to the Tier-3 suppliers / componentmanufacturers level thereby leaving little room for private sectorcapabilities to develop. Simplistically represented, this rather neatstructure provides clear flows of work-share and liabilitydownwards, while allowing for contribution to flow upwards.

ASSOCHAM-Aviotech Report on Defense and Aerospace Manufacturing in India

Industrial Capability Map – SnapshotSignificant Spread but Lack of Depth

Platforms

Engine Assemblies

Gearboxes and Transmissions

Chassis Manufacturing

Wheels and Tracks

Armouring and Protection Solutions

Radio Communication

Ammunition and fuzes

Tyres

Rubber Components

Hydraulics

Heavy Engineering

Seats and Interiors

Lights

Harnesses and Cabling

Composite Structures

Electrical Busses and Controls

Control Electronics

Testing

Prototyping

Simulators

Platforms

Galley Equipment

Engines

Simulators

Boilers

Gear Boxes and Transmissions

Cabling

Piping

Ropes and Pulleys

Communication Systems

Pumps

Winches

Deck Equipment

Platform Management Systems

Heavy Engineering

Navigation Systems

Rigid inflatable boats

Electricals

Defence Manufacturing

(Land Systems)

Aerostructure Manufacturing (Defence and Civil)

Forgings

Cables, Connectors and Assemblies

Castings

Simulators

Composite Structures

Ground Support / Ground Handling Equipment

Precision Engineering

Rubber Components

PCBs and Electronic Assemblies

Fabrication

Hydraulics (Control Surfaces)

Electrical Motors

Fasteners

Sheet Metal Work

Communication Systems

Testing Equipment


(Naval Systems)


(Aerospace)

Significant Engineering Design capability across land, systems, naval systems, air systems and C41 applications

C4I Applications

Command and Control electronics

Data links

Multi-layered PCBs

Embedded systems

Basic communication suites

Avionics components

GIS solutions

Simulators

This has also resulted in a very dispersed presence of DPSUs acrossthe value chain which has been a factor for them not being in aposition to address all the parts of the value chain in terms ofresearch and technological edge.

The existing supply chains of DPSUs and Ordnance factoriescomprises of thousands of suppliers, most of whom are componentlevel suppliers. The worrying perspective on this front is that mostof these suppliers are small enterprises – thereby with limitedcapacities.

It can therefore be argued that such a model of growth has been anoutcome of larger national policies and interests, however, theresult so far is that this model did not allow private Indian industryto play a meaningful role in this sector.

With the increasing cost and technology specialization relatedproduct development pressures, DPSUs and PSUs are now underjustifiable pressure to restrict their role to that of an integratorthereby allowing for larger work-share to private sector, the tier-1and tier 2 space has emerged as a vacant space that privateindustry is trying to fulfill.

This entire process is also supported by the creation of Offset drivendemand for the products which will be produced by private sectorTier-1 and Tier-2 manufacturers.

All of this presents a significant opportunity for Indianmanufacturing capability to emerge in this sector. However, it hasalso resulted in the existing capability of the industry to beconstricted for absorbing demand being created by Offsets and thegovernment impetus on ‘Buy and Make-Indian’ and ‘Make’ projects.


Exports

Export growth is important because of its effect on internal tradeand economic stability. Exports have increased substantially overthe past year. The figures for exports for Aircraft, Spacecraft, andparts thereof is USD 1.46 Bn for the year 2010-11, which is 0.65% ofthe total Indian Exports figure. The same figure for the Q1 FY12 isUSD 750 Mn, which 1.17% of the total exports figure. We also see atrend for Indian PSU shipyards to emerge as an exporter of smallerto medium sized platforms in the south Asian and West Asianregion, a trend signified by GSL’s exploration of markets like Omanand Sri Lanka for Offshore Patrol Vessels.

Official figures for the period 2010-11 show the exports hitting USD 1.46 Bn.

Aircraft exports including component parts have kept pace withlast year’s volumes. Aircraft Exports for FY 11 stood at USD 1.46Bn., a figure 32% higher than the annual exports for FY10 atUSD 1.11 Bn.Key components contributing to this volume continue to be partsand components (contributing approximately 96% of the totalAerospace exports) and not complete platforms. This points tothe development of Indian manufacturing capability inAerospace being oriented towards tier1/2 and 3 suppliers andnot towards aircraft OEMs.

Significant growth seen in the commodity segment of vesselsincluding warships. The figures reported for FY 2011 show atotal export of USD 360 Mn. which is nearly 70 per cent morethan the exports registered in FY 2010 when the correspondingfigure stood at USD 213 Mn.

It is important to note that this sector has also started witnessinglarge public – private JVs coinciding with the completion of majorshipyards which currently carry significant order backlogs. Thesector appears poised to benefit from strong economicindicators as well as a consistently expanding defense sectorcapital procurement outlays for new naval craft.


WARSHIPS AND OTHER VESSELS

Source : DGFT, Ministry of CommerceAll figures in USD Mn

Source : DGFT, Ministry of CommerceAll figures in USD Mn

1112.7

1466.85

0

200

400

600

800

1000

1200

1400

1600

2009-10 2010-11

AIRCRAFT, SPACECRAFT AND PARTS THEREOF

32%32%

213.62

360

0

200

400

600

800

1000

1200

1400

1600

2009-10 2010-11

70%

Joint Ventures

Over the last 2-3 years there have been many collaborations (JVsand MOUs) between Indian and global players. The JVs range frommanufacturing of warships to surveillance systems to MROs andelectronic warfare systems and even for the discharge of offsetobligations of the OEMs. These include the Pipavav – MazagaonDock JV for building warships for the Indian Navy, Dassault – RILMoU for exploring opportunities in the defense and homelandsecurity sector as well as the MAE (Malaysia) - GMR (India) JV in theMRO industry.

In a move which is expected to streamline the choked order bookposition for DPSUs through increased private sectorparticipation, the Indian Union Cabinet has approved the guidelinesfor establishing Joint Venture Companies by Defence Public SectorUndertakings (DPSUs). Key points include :

Formation of JVs to be undertaken by Board managed DPSUswithin the framework of the JV guidelines

Enhance fairness and transparency while selecting a JV partner Ensure a well defined nature and scope of the JV Exit provisions for the DPSU by providing an “appropriate lock-in

period” on the transfer of securities of the JV partner to ensurethat the technology partner does not exit immediately aftermeeting its offset liability.

Indian laws to apply to all contracts and agreements, anddisputes to be settled under the Arbitration and Conciliation Actof 1996.

Affirmative right of DPSU for prior approval to key JV decisionsretained. The key decisions may include amendments to theArticles of Association of the JV Company, declaration ofdividend, sale of substantial assets, and formation of further JVs/subsidiaries

Streamlined, fair and transparent framework for entering into JVsby DPSUs.

This is expected to launch India onto the global stage for becominga critical part of the supply chain of global players for componentsand sub-assemblies thus driving growth in the long term.


Apart from forming JVs, there has been growing participation bymany companies in the private sector who have been recententrants in the A&D segment. Some of these include:

Rane Group which bought 26% stake in SasMos RIL, Siemens which have a tie up for homeland security to install

CCTVs across traffic junctions in Mumbai India’s Piramal Group is set to enter Homeland Security through

a newly formed company Piramal Systems and Technologies

In fact, United Nations Industrial Development Organization(UNIDO), with funding from the UK government, is launching aninitiative to assist domestic small and medium scale componentmakers in the sector to raise the quality of their products tointernational standards and will also aim to help these supplierswith lightweight composite materials used by global OEMsextensively.


Indian A&D Opportunity: An Investor’s perspective

Over the next decade India plans to spend more than half a trilliondollars on its defence and homeland security needs. Upwards ofhalf this total ($250 billion+) will be spent on domesticallyassembled and manufactured hardware.

Government legislation calls for a switch from direct import todomestic manufacture. By 2018 fully 75% of the Indian armedforces’ hardware needs are required to be domestically sourced.Backed by regulatory and fiscal incentives Indian corporations areturning to the sector

A small number of IPOs and secondary financings are projected tobe based on the private sectors analysis of the growingobsolescence of military hardware, limited indigenousproduction, domination by government backed manufacturers andIndia’s growing defence capital expenditure plan.

The government currently has over 15 large JV proposals betweenforeign OEMS and Indian companies under evaluation.

Institutional and corporate interest in the resulting ECM investmentopportunities is currently constrained due to liquidity but the IPOpipeline is set for growth and an early entrant can be expected tomaintain an industry leading ‘specialist ‘ market share and margin.

Cross selling interest to institutions looking for deeper strategicunderstanding of their sub-continent exposure is expected to besubstantial but has not been included in the figures.


Significant planned spend

Significant obsolescence spend

Outlook for a significant number of new issues

Strong OEM M&A/JV focus

Emerging sectoralECM interest

Lack of existing suitable advisory / research

Key Considerations for A&D Investments in India

Investment appetite for domestic as well as international investorscontinues to remain high for the A&D sector in India. The enhancedreturn potential, lucrative upside, robust exit valuation, strong nearterm visibility on a disproportionately large capital spend by thegovernment and secure realizations in the revenue cycle, furtherenhances the potency of this sector as a niche return drivenpremium generator. However the A&D sector continues to beplagued by challenges which has traditionally stemmed the capitalflow and choked credit access to the sector

Key structural Issues faced by an investor into Indian A&D privateindustry.

Monopsonistic, Regulation Driven market prone tosignificant time-slips in order cycles and order execution.

Fragmented product, niche product Volatile and discontinuous order-book positions Disproportionately high leverage Technopreneur driven organizations with opaque processes

often with very high key-man risk Single vendor dependence

Key India-specific challenges before conclusion of any investmentprocess in the sector

Order-book validation

Technical Diligence : Over-reliance on perceptions oftechnology

Cost validation

Management of liability spill-over

Key-man risk mitigation

Management of exit options


Case study of Investments in A&D: Composite Sector

Though the A&D sector as a whole is driven by high return and highvalue potential, there is significant debate regarding the capabilitiesof incumbent players around their core competencies.

However, as highlighted in the illustration below there have beencases on investment being routed to the low value-add portion ofthe supply chain that is characterized by low-techprocesses, crowded markets with commodity like pricing and verylow entry barriers for restricting competition and new entrants.

Key learning from these investments for the A&D investor has beenmore stringent target filtering based on the company’s presence inthe value chain, ability to extract higher than market return throughseller led pricing and capability to defend the company’s positionfrom existing and new entrants in the near and medium term.


Key Issues in the Indian Aerospace & Defense SectorWhile significant progress has been made the following roadblocksstill exist:

Offsets - Offsets are an opportunity for India to integrate withthe global Aerospace and Defense supply chain. The DefenseProcurement Procedure (DPP 2011) enabled opening up theOffsets spectrum to items in civil aerospace (including rawmaterials and work-in-progress items) and homeland securitywhich has further enabled the Indian industry to create morecompelling business cases for OEMs to source from. There arehowever some issues that require deeper attention –namely, the interlinked issues of Transfer of Technology andMultipliers.

Taxation - Indirect Tax regime currently skewed against Privatesector in A&D vis-à-vis DPSUs and Foreign OEMs

Taxes and Duties Loading in the value chain for L1Evaluation distorts pricing against the Indian equipmentprovider: Though we understand that Statutory levies andTaxes incurred at the point of final sale are excluded in caseof “Global Buy” contracts and paid to the sub-vendors atactuals, Input costs refers to indirect costs incurred beforethe final sale.

However, statutory levies and taxes incurred in “Inputmaterial / services” continue to be loaded on these bids forthe domestic players bidding for “Global Buy Projects”.

OEMs are able to claim exemptions on input tax levies(export driven exemptions) from their respective countryof domicile (as these contracts are classified as validexports). As a result, these costs get automatically negatedfrom the bids.

Deferential Tax treatment: Cost expansion and increasedfinancial commitment on Input taxes for private sector.Exists. The DPSUs are however exempt.

ASSOCHAM-Aviotech Report on Aerospace and Defense 17

Input based Taxes and levies loaded in the value

chain (before the point of sale) are not realizedcontracts. This is due to absence of thetraditional settlement option of claiming creditagainst tax and levies collected on final sale fromthe final customer. This option, in the case ofsale to MOD and other state players (who areexempt from Statutory dues and tax levies) isnegated.

Further, the DPSUs are able to claim exemptionsfrom Input tax and levies for their contractors /sub contractors by issue of Customs and ExciseDuty Exemption Certificates.

The direct tax benefits incurring to the privateA&D sectors under the SEZ Act 2005 on exportsof A&D product, now stand partly withdrawn.The government, in its Budget 2011, imposedMAT to the tune of 18.5% on book profits on theunits operating in SEZs.

Other issues

Depth of capability: With limited existing capacities and fewsuppliers for each specific product/component – the totalavailable Industrial base is rather limited in depth. This createsissues vis-à-vis the ability to absorb relevant work-share eitherfrom the Offsets or from large indigenous projects. Another keyfact discovered in our analysis is the limited progress Indianindustry has made on material sciences. This limitation is seenacross specialty metals and alloys, composites and man-madefibers as well as specific reagents for treatment. A case in pointis elaborated on the composites business where Indiancapability in the private sector has still not evolved in theprecursor and fiber segment.


Industrial capability graduating from a build-to-print to abuild-to-spec levelIndia has always continued to enjoy sustained and significantbusiness interest and work-order translation in Engineeringdesign – a segment where India is recognized as a global player.However, what is becoming clear now is that even for the othersegments of the manufacturing value chain, Indian companiesare no longer limited to lower margin translation of design intomanufacture at a build-to-print level. There is an increasingpush from the Indian Aerospace and Defense industry to moveup the value chain and participate at the level of translation ofthe specifications into design and thereby be in a position tocontribute in a larger and richer manner possible.

Dedicated SEZs for Aerospace and DefenseSpecial Economic Zones dedicated to Aerospace and Defensewill enable export oriented businesses (especially Offsets sinceit is largely export oriented) to leverage significantpolicy, economic, structural and procedural benefits – all ofwhich enable a more cost effective product / service delivery.The integration of the Special Economic Zones (SEZs) with theMinistry of Defense’s relevant policies and procedures has stillnot been completed. If accomplished, this can bring significantadvantage to Indian aerospace and defense manufacturers vis-à-vis global competition.

Availability of skilled manpowerA quantum jump in availability and quality of skilled manpoweris required for this industrial segment to expand in theproportion desired and anticipated. The traditional sources ofengineering talent like the DPSUs and the services are provinginadequate for meeting the challenge. Whilst there has beenan increase in the number of institutions offering specialisedengineering degree programmes, the demand continues to faroutstrip the supply. Quality of talent is also a critical issue. Asustained shortfall in quality entry-level engineering can stallthe growth of this segment. Some OEMs have establishedlinkages with Institutions and are actively contributing inmaking the curriculum relevant while also assuring themselvesof a steady supply of human capital.


Opportunities Overview

This compendium is addresses key opportunities in the Indian A&Dmanufacturing industry, both public and private. The subjects dealtwith range from major acquisition programmes of the MoD tocommentary on the emerging regulatory environment and theirimpact on the industry as a whole.

The first segment in this compendium analyses the impact ofUSD 14 Bn artillery modernization program ($6bn acquisitionprogram & around USD 8 Bn indigenous production) on theIndian Defense manufacturing industry, focusing on 155mm/52 calibre and 155mm/39 calibre artillery guns only.

The segment on Unmanned Vehicles draws its significancefrom a perceptible global shift in A&D development projectsfrom manned to unmanned systems. The subject matter ofthis report encompasses air, naval and land systems andhighlights opportunities in both the Homeland Security andDefense segments of the Indian market.

India’s naval acquisition plan forms the subject of two ofAviotech’s reports separately dealing with ships and the airarm. In each case, major programs are discussed and anassessment offered of anticipated impact on domestic A&Dmanufacturing and potential beneficiaries.

Focused exclusively on land borders, the report on India’sBorder security infrastructure offers an in-depth view intoopportunities within a single segment of the homelandsecurity market.

The segment on Defense Public Sector Undertakingshighlights the growing need for private sectorparticipation, while improving productivity and executionintensity of DPSU’s. This report suggest that while the privatesector clamours for meaningful participation, DPSUs confrontchoked order books, high susceptibility to time over-runs andquestionable ability to absorb transfer of technology.


Synopsis

Indian Army is equipped with field artillery comprising self propelled(tracked) and towed systems.

A major drive (titled - Field Artillery Rationalisation Plan(FARP)) towardsmodernisation and rationalisation of the 14 different calibres that theIndian Army employs and fleet reorganisation around the 155mm/52calibre for field guns commenced in the year 2000. The scope included all220 artillery regiments of the Indian Army to be equipped by 2025 withWheeled, towed, tracked and mounted systems

The anticipated procurement volumes range between 3000-4000 (includingprocurement and subsequent manufacture under licence) artillery gunswith an outlay of about USD 14 Bn making this as one of the largestprocurement opportunities in the world currently underway.

The program is supported by strong intent from the Army. The concernsarising from limited participation in tenders due to lack of suitableplatform, limited numbers of bidders due to large numbers beingblacklisted and waning interest from OEMs due to repeated bids are keyimpediments to a time bound closure of the procurement process.

This report attempts to explore the activity on procurement front of the155 mm / 52 calibre howitzers and its impact on Indian defensemanufacturing industry

Background

The subcontinent remains a region of geopolitical instability. Indiacontinues to address issues of external aggression and internal disturbance.To mitigate the same, the Indian Army has planned for a credible defencemechanism at its borders of which Artillery forms a critical part.

As compared to Artillery force with Pakistan and China, the numbers withIndian Army appear to be mismatched thereby creating a case for urgencyin procurement.

The Indian artillery has witnessed no induction of new guns since 1986.Even then only 410, 155mm/39 calibre Bofors FH-77B howitzers wereinducted of which today only around 300 are operational. (This assessmentdoes not include induction of MBRLs)

Currently, the Indian Army has the Indian 105mm field gun and its lightervariant for the mountains are the basic field guns. The Russian 130mm gunsare the backbone of medium artillery, with the Swedish Bofors 155mmHowitzers, complimenting them

To enable faster deployment at the borders, government has authorisedprocurement of 145 155mm/39 Calibre M777 Ultra Light Howitzers (rapiddeployment possible through airlifting by C-130J Heavy Transport Aircraftand Chinook CH43 Helicopters).

Field Artillery Rationalisation Plan - India

A comparison of artillery capability of India, China and PakistanSource: Indian Defense Yearbook 2011

Type of Artillery Pakistan China India

Towed Artillery 1650 14000 45001

Self Propelled 2802 1350 100

Air Defense Guns 1900 7700 400

1The relative strength in numbers of Indian Towed artillery guns is built by manually operated guns of insufficient calibre(No 155 mm/52 Calibre Guns are present) against Pakistan’s M198 and M114 guns of 155 mm/52 Calibre.2In the self propelled guns regime, India has already started phasing out of its Catapult and Abbot Guns as against Pakistan's induction of state of the art M 109 and M110 Guns.

Issues Driving Procurement

RegionalInstability

New Demand

Increased Range

Increase Battlefield

Intelligence

Rapid Deployment

Increased Automation

Replacement Demand

Defense Advisory & Investments

As part of the Field Artillery Rationalization Plan, India has decided tostandardize its artillery to 155mm/52 calibre barrel across theTowed, Mounted, Tracked and Wheeled platforms.

Towed guns : Will arm about 90 artillery regiments. These may havelimited movement with the help of an Auxiliary Power Unit(Movement at speed of 5-10m/s) to avoid getting caught in counterfire

Tracked guns: Will replace the obsolete 130mm Catapult and 105mmAbbot Guns.

Wheeled guns - Mounted on a 6X6 or 8X8 wheeled platform

Mounted guns - Motorized howitzers to arm 40 regiments

Apart from the above, the acquisition of 145 155mm/39 calibre, M777Ultra Light Howitzers will be followed by acquisition of additional 290pieces to equip the newly created mountainous artillery division.

Current programs for procurement of artillery guns

The upgrade, alongwith an increase in barrel size, may includeaddition/modification of hydraulics, optronics and electronics (withaddition of a ballistic computer):

Upgrade of all systems(hydraulics, optronics Power units etc.) of 130mm/39 calibre M46 Russian guns to 155mm/45 calibre. 180 piecesof the total 500 earmarked have already been upgraded with theordinance and kits supplied by Soltam of Israel. The upgrade hasreceived mixed reviews and no repeat order.

Upgrade of 105mm Indian (Nos. 600+) and Light Field Guns (Nos.700+) being replaced by 130mm M-46 Field Gun to 155mm/45calibre

Upgrade (Barrel and Electronics) of 155mm 39 Calibre FH 77 BO2 to155mm 45 calibre Guns by the OFB

Current programs for upgrade of artillery guns

DRDO’s Self propelled BHIM created by mounting the turret of Denel’sT6 on the chassis of an Arjun Tank. The gun is still in the stage ofprototyping. The program is expected to achieve traction upon closureof on-going investigations into Denel's business practices.

OFB is vying for an order from the Indian Army for making 155mm/45calibre Bofors-type howitzers through Transfer of Technology fromBofors to the Gun Carriage Factory at Jabalpur

DRDO has initiated a process of developing an indigenous base forartillery gun manufacture by forming a consortium of state run andprivate companies. The new entity is anticipated to be a Public-Privatejoint venture between DRDO and Bharat Forge / Larsen & Toubro.ARDE, a Pune based DRDO lab one of the DRDO Laboratory isspearheading the project.

Indigenous programs for manufacture of artillery guns

Standardization of field artillery at 155 mm 52 Calibre

DRDO is forming a consortium of Indian companies to participate in FARP


Artillery Gun Volume Outlay Current Bidders Current Status

M777 Ultra Light

Howitzer145 + 290

USD 667 mn (Only for

Procurement of 145 Guns)

USA BAE Systems

• Plans to procure M777 ULH from USA BAE Systems (through FMS)

• Indian Govt. has given a go ahead to the deal• US Congressional clearance, a mandatory requirement, has

already been given • User trials of the gun have been completed, with

maintainability testing and an evaluation by the Director General of Quality Assurance still to come

155 mm/52 Calibre Towed

Gun

400 Procurement + 1180 Domestic

production


Procurement)

Nexter (Caesar), Elbit(Soltam)

• RFP issued in the first quarter of the year suffered a serious setback as the BAE Systems backed out from the procurement process saying the requirements were far too relaxed and allow inferior guns also to chip in to meet the Qualitative Requirements.

• Technical evaluation is underway

155 mm/52 Calibre Tracked Self Propelled

Gun

100 USD 800 mn

Tata Power with Cenzin, RDM with Mahindra, BEML,

Rosoboronexport, L&T & Samsung, Ashok

Leyland

The RFP was issue in September and responses to RFP were submitted by Dec 2011

155 mm/52 Calibre Wheeled

Self Propelled Gun

180 USD 960 mnGermany’s Rheinmetall Defence and Slovakia’s

Konstrukta Defence

• Defence Ministry received complaint that the Rheinmetall of Germany and Kostrukta of Slovakia had fielded unproven guns in the race

• The anonymous complaint alleged that Korstrukta’s Gun barrel exploded during the trials and that the Army/DGQA tried to cover it up

• Field trials have been completed in the contract and the Defence Ministry had formed a Committee under an Additional Secretary to conduct an inquiry into the matter

• The committee has looked into the complaints and problems have been sorted out. Commercial bids will be opened in the next financial year

155 mm/52 Calibre Mounted

Gun System

200 Procurement + 614 Domestic

production


Procurement)

Sweden’s Archer, French Ceaser, TPSED with Bosnia’s Unis gun

systems and South Africa’s Denel

(presently blacklisted). , L&T, OFB with BELand Bharat Forge

• RFI issued response awaited• RFP awaited next year

Total 3109 USD 5431 mn

A summary of the ongoing Indian artillery guns procurementSource: Aviotech Research


Of the USD 14 bn artillery program (Procurement and Indigenousproduction), workshare to the tune of USD 8 bn is expected to make itsway to the Indian Defense manufacturing industry by 2025. Apart fromthe possibility of participating in an Indigenous gun manufactureprogram, this will include manufacture of 155mm/52 calibre towedguns, 155mm/52 calibre Mounted Guns (through Transfer ofTechnology) and Upgrades of the M-46, FH 077B and the Indian FieldGun.

Ordnance Factory Board will be the major beneficiary of ToT, but it isexpected to assume the role of integrator. Hence a large opportunitywill arise at tier II and component level where private sector may beable to participate effectively. Mid-life upgrades, maintenance, repairsand spare parts will provide constant workflow for the industry year onyear

Until now, the Indian industry has not been able to develop thecapability to manufacture a 155 mm/52 calibre barrel and breechmechanism. Major workshare is expected to be in the areas of:

Networking and Integration equipment including terminalcomputers, rugged displays, cables, wireless routers etc.

Industrial perspective on the procurement program

Other opportunities related to artillery gunsSource: Tender.gov.in

Opportunity Concerned Agency

Gun Parts*Artillery Pointing systems OFBGun Alignment and Positioning System Electronic Theodolites with Laser Range Finder (LRF) for Field Branch Artillery units Indian ArmyAutomated Sound Ranging System capable of providing accurate locations of enemy Artillery fire carrying out adjustment of own Artillery fire

MoD

Inertial Navigation System for artillery MoDDevelopment manufacturing, supply & proving of complete hydraulic system for 155 mm. Gun Gun Carriage Factory JabalpurDevelopment of various sub-systems of 155 mm Artillery Gun Gun Carriage Factory JabalpurSupply of Sheet Metal Fabrication For 155 Mm Artillery Gun Gun Carriage Factory Jabalpur

Gun UpgradesUpgrade one Light Field gun with a proven system with AGAPSUpgrade of air defense Guns Zu-23-2

Air Defense SystemsSelf Propelled Air Defense Gun Missile System with ToT for Missiles (4928)and Gun Ammunition(1722600)

Indian ArmySuccessor to L-70 and ZU-23mm-2B GunsSelf Propelled Air Defence Gun Missile System

Mortars*60mm Mortar System Directorate General of Weapons

and EquipmentCarriers for 81mm Mortars and enhancing the range and lethally of the weapon system Directorate General of Weapons

and EquipmentTraining

Training Aid:(a)Exploded Model of L-70 Gun.(b) Exploded Model of ZU-23MM-2B Gun(C) Sectionised Working Model of L-70 Ammunition

*RFP stands retracted currently. Is awaited next Financial year

• The above numbers apply to towed platforms• For wheeled and tracked the total component of cost of

platform and engine will form at least 45% of the cost of gun• The above numbers may vary according to specifications


Above is the anticipated year by year schedule of the ArtilleryModernization Plan for the next 15 year horizon:

If the “Buy” programs are assumed to start by next financialyear, subsequent “Make” programs should start generatingworkshare by 2015-16.

The upgrade programs are expected to start immediately andconclude by the end of 2015-16.

Gun programs workshare for the Indian industry

Field Artillery Rationalization Plan prospective year wise trend in procurement, manufacturing and upgradesSource: Aviotech Research

Communication including VHF/UHF Radio, Radio BoxAssembly, Intercom, Battery box assembly

Gun Control Computer including Integrated Digital Fire ControlSystem (Ballistic Computer, Displays etc.), Automatic Gun Laying(Accelometers, Laser Gyrometer , GPS and Vehicle MotionSensor), Sensors (Muzzle velocity radar, Multi sensorimager, Chamber Temperature sensor, Recoil meter sensor andEFC round counter), Software etc

Hydraulic Systems including gears, actuators, cylinders and fluids

Undercarriage including cradle and saddle

Sights including direct aiming sights (both day and night) and laserrangefinder

Auxiliary Power Unit including distribution mechanism, gears

Engines for different platforms

Tyres including castor wheels and drive wheels

Mounting platforms including 6x6 and 8x8 trucks and trackedplatforms with light protecting armour


Qualitative Requirement

Success Parameter Solution that may be Offered

Accuracy Failure of .6% at 80% of maximum range Gun Level* -• Automatic Gun Alignment and Positioning System• Digital Fire Control System

Range More than 30 Km with Standard AmmunitionMore than 40 Km with Base Bleed

Gun Level* - Increase in the length of Barrel (Increase in Calibre)

Speed of Deployment Weight/Capability of being transported byhelicopters

Guns manufactured using Aluminum and Titanium Alloys have been ordered from BAE Systems in the US

Transverse and Elevation Traverse : 25o on either sideElevation : -3o to 75o

• Flexible Gun Laying System with increased range

Battlefield intelligence Communication and integration with the command and other artillery deployment

• “SHAKTI” Artillery Combat Command and Control System (ACCCS)

• CIDSS (Command Information and Decision Support System• On board Radio Communication

Safety from counterfire Shoot and Scoot • Auxiliary Power Unit

Low Failure probability Built in redundancies Manual/Hydro mechanical back up for all the systems (FireControl, Gun Laying etc.)

Lower lifecycle cost and ease of maintenance

Commonality of platform Standardizing the artillery gun power to 155mm/52 Calibre gun

*Other Solutions like Base Bleed Ammunition to be discussed in a subsequent Report

Indian Army’s requirements

The Army has stated some basic qualitative requirements that need tobe fulfilled by the manufacturers to qualify for the procurementprogram. Any new system that is selected is expected to performsuccessfully on the following parameters:

A Summary

List of solutions is only generic and suggestiveDifferent platforms may have different specifications

Source: Aviotech Research


Key organizations which may be able to participate effectivelyin the Field Artillery Rationalization Program are listed as under

Manufacturing capability snapshot

Key OrganizationsSource: Aviotech Research

Private Sector Entities

Company Segment

Heavy Engineering Corporation Ltd. Ranchi Fabrication, Forging, Casting for carriage, cradle, saddle and traversing system

Tata Steel Growth Shop, Jamshedpur Metallurgy and Fabrication for carriage, cradle and saddle

Walchandnagar Industries Ltd. Pune Fabrication and assembly for carriage, cradle and saddle

Super Auto India Ltd. Faridabad Casting for carriage, cradle and saddle

Simplex Engineering and Foundry Works Ltd. Noida Fabrication for carriage, cradle and saddle

TAL Manufacturing Solutions Ltd. Pune Fabrication for carriage structures, hydraulic structures

HMT Ltd. Bangalore Fabrication and assembly for carriage, cradle and saddle

Mahindra Forging Ltd. Pune Forging for carriage, cradle and saddle structures

Sandhu Forgings, Ludhiana Forging for carriage, cradle and saddle structures

Mayura Steels, Kohlapur Fabrication of carriage structures

MTAR Technologies, Hyderabad Precision Machining for Barrel and Breech assemblies

Apex Hydraulics, Chennai Fabrication for mountings and Hydraulic structures

Dynamatics Technology Ltd. Bangalore Hydraulic structure assemblies

Servo Controls India Ltd. Belgaum Manufacture of Hydraulics Structures

Dantal Hydraulics, Gurgaon Manufacture of Hydraulic structures

Yuken India, Bangalore Manufacture of Hydraulic Valves

VXL Technologies, Mathura Manufacture of Pneumatics and Auto loaders

HVAL (Tata Motors), Jamshedpur Manufacture of Gear trains and its components

Kirloskar Engines, Pune Manufacture and assembly of Auxiliary Power Unit

Kinetic Gears Pvt. Ltd. Nagpur Fabrication and assembly of gearbox and its components

Avantha Group Auxiliary Power Unit and its assemblies

Cummins India, New Delhi Manufacture and assembly of APU/Engine

JMT, Jamshedpur Gearbox and piping assembly

Bharat Forge Ltd. Pune Engine and transmission parts, Manual Traversing systems assemblies

Ashok Leyland, Gurgaon Mounting platforms - Axles

TS Kisan, Faridabad Tracks and armour

Larsen & Toubro, Mumbai Tracks, armour, Electronics laying systems

Starwire India, Faridabad Manufacture of Armour

I COMM Tele, Hyderabad Manufacture and assembly of Communication Apparatus

Precision Electronics Ltd. Hyderabad Manufacture and assembly of Communication Apparatus

Rolta Pvt. Ltd. Gurgaon Manufacture and assembly of Communication Apparatus

Tata Power Company Strategic Electronics Division, Bangalore Electronics Fire Control Systems, Automatic Laying systems and display units

Electronics Corporation of India Ltd. New Delhi Assembly of Automatic Laying systems

MEL Systems and Services Ltd. Chennai Manufacture and assembly of Simulators, Ballistic Computers

Futura Automation, Bangalore Manufacture and assembly of Simulators, Ballistic Computers

Radel Advanced technology Pvt. Ltd. Bangalore Manufacture of Wire Harnesses

Data Patterns India, Hyderabad Software and integration

Tata Consultancy Service Software and integration

VEM Technologies Pvt. Ltd. Hyderabad Electronic Sensors


Public Sector Entities

Company Segment

Mishra Dhatu Nigam Ltd. Hyderabad Metallurgy and Fabrication for carriage, cradle and saddle and armour

Field Gun Factory, Kanpur (OFB) Manufacture and assembly of barrel, breech assembly

Gun Carriage Factory, Jabalpur (OFB) Manufacture and assembly of carriage and hydraulic structures

Ordnance Factory, Dehradun (OFB) Manufacture and assembly of Sights

Bharat Electronics Ltd. Bangalore Sights, Communication apparatus, Sensors

Heavy Vehicle Factory, Avadi (OFB) Fabrication and assembly for cradle saddle and carriage

Bharat Earth Movers Limited, Bangalore Mounting platforms, wheels and tracks

Joint Ventures/Partnerships

Participants

Ashok Leyland of India and KMW

Mahindra & Mahindra of India and BAE Systems of UK

Punj Lloyd of India and Singapore Technologies Kinetics of Singapore

RDM (Rheinmetall Waffe Munition of Germany and Denel Munition of South Africa) with Mahindra & Mahindra of India

Tata Power Company of India with Cenzin Ltd. of Poland

Larsen and Toubro of India with Samsung Heavy Industries of Korea

Synopsis:

Key areas of concern for the Indian A&D industry in reference to DPSUsemerge as follows:

Choked order book for key DPSUs looking to affect deliverytimelines and future A&D order absorption capacity.

Potential of DPSUs as large scale offset discharge vehiclesremains uncertain, especially given the capacity and currentorderbook mismatch.

Key performance parameters like employee efficiency, assetturnover and order book execution intensity remains an area ofconcern.

Public-Private sector partnerships are expected to play a keyrole in the future. Clarity on the recently announced jointventure policy and subsequent policy support is eagerlyawaited.

Lacklustre performance by DPSU integrators/primes constrains thetrickle down effect on the order book and revenue streams of differentteirized vendors and component providers.

Summary of Performance of Unlisted DPSUs for FY11 and FY10:

Hindustan Aeronautics Limited (HAL): HAL’s total turnover for FY11was USD 2.47 Bn in comparison to USD 2.16 Bn for FY10, a year onyear increase of 14.50% on FY10 sales. The turnover figure of FY11constituted chiefly of domestic sales with exports contributing USD0.04 Bn, almost 2% of its sales in FY11. India’s total Aerospace andDefense exports amounted to around USD 1 Bn, out of which HAL’scontribution was 4.21%.

Summary of Performance of Unlisted DPSUs for FY11 and FY10

Defense Advisory & InvestmentsPoints to Note:

With 9M Q3FY11 sales figures touching USD 1.33 Bn, theanticipated annual sales figure for FY11 was expected torange in the vicinity of USD 1.8 Bn, however a significantsurge in activity in the last quarter led to an overall turnoverof USD 2.47 Bn.

HAL currently has an order book of USD 18 Bn with an orderbook to sales ratio of approx 7 for FY11. Its order book toturnover multiple is almost 6-7 years of current turnover.

The comparable order book intensity for other aerospacegiants hovers around 3 years for Embraer and around 1 yearfor Lockheed Martin. Given its large order book, HAL’s abilityto absorb additional orders remains uncertain, given thehistorical structural issues, even after adjusting forcomplexity for the order pipeline, currently faced by HAL.

HAL’s turnover per employee figure as a measure ofefficiency is around USD 70,000-80,000. Comparable figuresfor Embraer of Brazil show HAL's figures to be 1/5th ofEmbraer’s employee T/O multiple (which ranges betweenUSD 0.3-0.5 Mn) and 1/4th to that of Bombardier (whichranges between 0.25-0.3 Mn).

Given the large order pipeline and historically below averageperformance parameters, concerns over HAL’s higher thancomparable costs of execution and lower than comparablereturns per employee remain.

Un-listed Defense Shipyards:

Mazagon Dock Limited (MDL): The total turnover figure was USD0.50 Bn for FY11 and USD 0.55 Bn for FY10.

Points to Note:

MDL currently has a order book of USD 19 Bn. The dip in yearon year revenue performance does not augur well on theexecution timeline on the substantial order book, which ishistorically prone to schedule slippages.

The strained execution timeline on key strategic projectsconstituting the current order book have raised the need foraugmenting the domestic warship and submarine building


capability through Joint ventures and other public privatepartnerships. MDL, in 2011, had announced JV with Pipavavin naval warship manufacturing for the Indian Navy, whichwas later retracted by the Defense Ministry. The future ofsuch JVs remains unclear.

MDL's order book to turnover multiple is as high as 35-40years of current turnover, signifying an improbablecongestion in its order book execution cycle. The comparableorder book intensity for other global shipyards is less than ayear for Guangzhou Shipyard, China and around 5-6 years forprivate Indian shipyards like ABG Shipyard.

The turnover per employee figure as a measure of efficiencyranges between USD 60,000 to 80,000 for MDL, which whencompared to other shipyards such as Guangzhou Shipyard, ina similar developing economy, China, clocks around USD 2-2.5 Mn per employee. Even while comparing with peers inthe Indian private sector, it still lags behind, with the peremployee productivity ranging from USD 1-1.5 Mn for ABGShipyard.

MDL’s existing production lines seem blocked for aconsiderable number of years with domestic as well asforeign OEMs preferring government shipyards such as MDLto discharge their future offset obligation.

Though the order book visibility, both in the near and longterm, seems to be robust, execution rate remains a concern.Bottle-necks plaguing the government shipyard industrysuggest a need for a major structural streamlining in thedomestic defense supply chain with significant investment incapability and access to unutilized naval capacity in theprivate sector.

Garden Reach Shipbuilders and Engineers Ltd. (GRSE): The totalannual turnover was USD 0.20 Bn for FY11 compared to USD 0.16Bn for FY10.

Points to Note:

GRSE’s order book amounts to USD 1.3 Bn. Its order book toturnover multiple is almost 6-7 years of current turnover.The comparable order book intensity for other global


shipyards hover around less than 1 year for GuangzhouShipyard and around 5-6 years for private Indian shipyardslike ABG Shipyard.

The turnover per employee figure as a measure of efficiencyis around USD 40,000 – 50,000, which is lesser than MDL andlags behind when compared to other shipyards such asGuangzhou Shipyard, China, which has a figure of almost USD2-2.5 Mn. Even while comparing with peers in the privatesector, it still lags behind, with the figures ranging from USD1-1.5 Mn for ABG Shipyard.

GRSE’s performance, which has been almost the same asprevious year’s performance, might gain momentum possiblythrough private sector alliances especially in light of its largeorder book for military and naval shipbuilding.

Hindustan Shipyard Limited (HSL): The turnover figures had beenUSD 0.11 Bn for FY11 and USD 0.12 Bn for FY10, reflecting a flatannual revenue growth and an immediate need to augment itsship building capacity and capability.

Points to Note:

HSL’s order book amounts to USD 303 Mn with an orderbook to sales ratio of about 2 for FY11 and order book toturnover multiple is approx 3-4 years of current turnover.The comparable order book intensity for other globalshipyards hover around less than 1 year for GuangzhouShipyard and around 5-6 years for private Indian shipyardslike ABG Shipyard.

The turnover per employee figure as a measure of efficiencyis lowest when compared to MDL and GRSE at around USD30,000 – 40,000 and lags behind significantly whencompared to other shipyards such as GuangzhouShipyard, China, which has a figure of almost USD 2-2.5 Mn.While comparing with peers in the private sector, it faresbelow than ABG Shipyard which has a figure ranging fromUSD 1-1.5 Mn.


Goa Shipyard Limited (GSL): The turnover figures have been USD0.19 Bn for FY11 and USD 0.18 Bn for FY10.

Points to Note:

GSL’s order book amounts to USD 430 Mn with an orderbook to sales ratio of about 4-4.5 for FY11 and order book toturnover multiple of almost 2-3 years of current turnover.The comparable order book intensity for other globalshipyards hover around less than 1 year for GuangzhouShipyard and around 5-6 years for private Indian shipyardslike ABG Shipyard.

The turnover per employee figure as a measure of efficiencyof GSL fares better than other shipyards at around USD 0.1-0.3 Mn. When compared to other global shipyards such asGuangzhou Shipyard, in a similar developingeconomy, China, which has a figure of almost USD 2-2.5Mn, it fares better than other defense shipyards in the publicsector. While comparing with peers in the private sector, itlags behind, with the figures ranging from USD 1-1.5 Mn forABG Shipyard.

However, GSL’s order book is expected to expand throughanticipated tender wins from Royal Navy of Oman, Sri LankanNavy and Nigerian Maritime Administration and SafetyAgency (NIMASA).

Specialised Metals, Alloys and Military Grade Metallurgy:

Mishra Dhatu Nigam Limited (MIDHANI): The turnover figureswere USD 0.08 Bn for FY11 and USD 0.07 Bn for FY10. Thecompany has achieved a CAGR of 24% in the last 5 years for yearending FY10 with revenues increasing from USD 0.03 Bn in FY06to USD 0.07 Bn in FY10.

Points to Note:

MIDHANI is one of the few companies which suppliesspecialised metals, alloys and other military grademetallurgy.

MIDHANI’s order book amounts to USD 2.8 Bn with an orderbook to sales ratio of about 35 for FY11 and order book toturnover multiple is almost 35-36 years of current turnover.


The turnover per employee figure as a measure of efficiencyof MIDHANI is around USD 70,000-80,000.

MIDHANI’s delivery capacity remains a key component forthe industry, which if augmented can lead to significantincrease in its order book capability and if notaugmented, can run the risk of impacting A&D industry’ssupply chain.

Offset opportunities are currently emerging in serviceindustries like forging, overhauling, precisions etc for whichspecialised steel is required. This makes MIDHANI anessential driver for offset crystallisation and the resultantstrengthening of indigenous manufacturing capability.

In light of the near term substantial offset opportunities andexpansion efforts, we foresee a significant increase inMIDHANI’s current revenues.

CompanyTurnoverF11 (USD Bn)

Turnover FY10(USD Bn)

Order book position (USD Bn)

Order book to Turnover Multiple (Years)

Turnover per employee(USD)

HAL 2.47 2.16 18 6-770,000-80,000

MDL 0.50 0.55 19 35-4060,000-80,000

GRSE 0.20 0.16 1.3 6-740,000-50,000

HSL 0.11 0.12 0.30 3-430,000-40,000

GSL 0.19 0.18 0.43 2-3 0.1-0.3 Mn

MIDHANI 0.08 0.07 2.8 35-3670,000-80,000

Source: Aviotech Research

Unmanned Vehicles (including Aerostats)Large Procurement Opportunity

Introduction

Unmanned Vehicles today define situational awareness and in some casespreemptive response capabilities of most militaries across the world.

In the Indian context too, their relevance has expanded beyondconventional warfare to include asymmetric threats arising from challengesto homeland security, resulting in acquisition programs acrossservices, state police forces and intelligence agencies.

This segment promises an overall opportunity greater than USD 500 mn incapital procurement over the next 3-4 years, signifying revenue order bookexpansion at lucrative margins for successful bidders.

While the above do provide a significant order book impacting uptick forsuppliers, most such procurement is currently being addressed by GlobalOEMs. However there has been considerable interest to invest in creating ahomegrown supply capability for this segment.

On the manufacturing and delivery side, some domestic capability is inevidence in the Airframe, Ground Control and Communication and datalinkssegments of the UAV market. Significant scope for industry participationremains in the propulsion, payload and navigation guidance segments.

Key UAV Requirements

The following represents a discussion of key current opportunities in theUnmanned Vehicle and Aerostat segments in India rather than an exhaustivelist of on-going projects.

Micro UAV: The Indian Ministry of Defense’s tender for 530 UAV Systems(comprising 2-3 platforms, ground control station and datalinks) for theIndian Army and a further 150 UAV systems for the Indian Airforce isexpected to be released in Q3/CY12. This tender is expected to contributeto nearly 85 per cent of the total Indian UAV opportunity in the mediumterm. This opportunity has been addressed in greater detail in a latersection.

UAV Rustom: Envisaged as a “Make Indian” program, Rustom’sdevelopment has been heralded by the DRDO’s Aeronautical DevelopmentEstablishment at a cost of USD 225 mn. The platform is characterized by arange of 250-300 kms and a payload capacity of 2 tonnes. Itsdistinguishing feature remains its relatively longer endurance of upto 36hours.

Thought Leadership Series


Introduction

Unmanned Vehicles today define situational awareness and in some casespreemptive response capabilities of most militaries across the world.

In the Indian context too, their relevance has expanded beyondconventional warfare to include asymmetric threats arising from challengesto homeland security, resulting in acquisition programs acrossservices, state police forces and intelligence agencies.

This segment promises an overall opportunity greater than USD 500 mn incapital procurement over the next 3-4 years, signifying revenue order bookexpansion at lucrative margins for successful bidders.

While the above do provide a significant order book impacting uptick forsuppliers, most such procurement is currently being addressed by GlobalOEMs. However there has been considerable interest to invest in creating ahomegrown supply capability for this segment.

On the manufacturing and delivery side, some domestic capability is inevidence in the Airframe, Ground Control and Communication and datalinkssegments of the UAV market. Significant scope for industry participationremains in the propulsion, payload and navigation guidance segments.

Key UAV Requirements

The following represents a discussion of key current opportunities in theUnmanned Vehicle and Aerostat segments in India rather than an exhaustivelist of on-going projects.

Micro UAV: The Indian Ministry of Defense’s tender for 530 UAV Systems(comprising 2-3 platforms, ground control station and datalinks) for theIndian Army and a further 150 UAV systems for the Indian Airforce isexpected to be released in Q3/CY12. This tender is expected to contributeto nearly 85 per cent of the total Indian UAV opportunity in the mediumterm. This opportunity has been addressed in greater detail in a latersection.

UAV Rustom: Envisaged as a “Make Indian” program, Rustom’sdevelopment has been heralded by the DRDO’s Aeronautical DevelopmentEstablishment at a cost of USD 225 mn. The platform is characterized by arange of 250-300 kms and a payload capacity of 2 tonnes. Itsdistinguishing feature remains its relatively longer endurance of upto 36hours.


Discussion within the industry suggests that initially, Tata AdvancedSystems, L&T and Mahindra and Mahindra were likely to be ProductionAgency cum Development Partners (PADP) in this programme. Failing aguarantee for issuance of follow-on orders post developmenthowever, the programme saw participation forthcoming from DPSUsalone. In April 2010 Hindustan Aeronautics Ltd. and Bharat ElectronicsLtd were awarded the contract for building Rustom. The Rustom 1vehicle, successfully test flown in May 2011, has demonstrated anendurance duration of 14 hrs at an altitudinal ceiling of 8000 meters.The project presents a model where lack of order book sustenancevisibility has prevented private participation and downstreaminvestment in capability creation – which appears to be a systemic riskto Indian Aerospace and Defense environment.

Pawan Mini UAV: With an estimated development cost of USD 33million, this joint program between the Indian DRDO and IsraeliAerospace Industries (IAI) commenced in 2006. The platform is expectedto have EO-IR surveillance capability, an endurance of five hours and arange of 150 kilometers (akin to Israel’s Eye View, Hermes 180 and SilverArrow Drones). We anticipate an expansionary impact on IAI’s revenueline from this project.

Nirbhay High-Speed Target System: A ship-launched as well as transport-aircraft launched version of this vehicle is being jointly developed by theAeronautical Development Establishment and Advanced Systems Ltd.This system is chiefly expected to be deployed for simulation of theflight paths of land attack, anti-ship cruise and anti-ship surfaceskimming missiles. ELTA systems of Israel is likely to be the supplier ofthe vehicle’s radar while the IL/&76MD transport aircraft is expected bethe platform of choice for launch.

Naval Rotary Unmanned Air Vehicle: The NRUAV is aimed at enhancingthe Indian Navy’s capabilities for real-time ISR, day and night Over thehorizon targeting, battle and damage assessment, and communicationsrelay. Jointly built by Israel Aerospace Industries’ Malat division andHindustan Aeronautics Ltd., the system will be based on the legacyChetak (old Alouette III) helicopters for ship-borne unmannedsurveillance. The Vehicle’s ELTA EL/M – 2022 multi-mission radar will bedesigned for detection and tracking of multiple targets at an operationalceiling of 15,000 feet. The project is anticipated to generate significantrevenue lines for some Indian contractors operating as Tier1 suppliers toHAL, specifically for engineering design, cabling and harnesses andintegration.

Unmanned Ground Vehicles: The DRDO run ‘DAKSH UGV’ project isaimed at asymmetric warfare including safe handling and removal ofhazardous objects by the Indian Army. The platform is designed for NBCcompliance and operation. The developmental partners for the projectare not known, the future path for commercialisation of this technologyremains unclear.


Other Programs:

Deep Sea Rescue Vessel (DSRV) : In 2010, the Indian Navy issued an RFIfor 2 Deep Sea Rescue Vessel (DSRV) kits, the responses for which had tobe submitted in early 2011. The Indian Navy's attempt to buy two DSRVswas cancelled in 2005 following charges of corruption, though the efforthas finally picked up again. The Indian Navy has a submarine rescueagreement with the US Navy (air-deployed DSRV kit in 48 hours), onwhich it would be wholly dependent if an Indian submarine were ever indistress.

Another Autonomous Under-water Vehicle is being built by the CentralMechanical Engineering Research Institute with technical assistancefrom IIT Kharagpur and technical assistance from the Indian Ministry ofEarth Sciences. In addition to sea-floor mapping, its military applicationsare likely to include coastal surveillance and mine countermeasures. AGum-Mounted Remotely Operated vehicle intended to meet urbaninsurgency and other emergencies is under development by theResearch and Development Establishment, Pune. It is equipped with alight machine gun (7.62 cal) and a grenade launcher (30 cal) with belt-feed ammunition.

Aerostats: India’s Aerostat procurement has largely unfolded as post-event response to security threats. Procurement needs to be bolsteredsoon and meet the needs not only of the Air Force but also those of theNavy, Army and State Police Forces. In this segment, opportunities areforeseen both in terms of new capital acquisition as well as replacementof existing capacity.

The following are the developmental projects underway :

Akashdeep: The Defence Research and DevelopmentOrganisation (DRDO) announced in December 2010 conclusion of

Probable opportunity timeline for key opportunitiesthe market segment

Near Term1-2 Years

Middle Term3-5 Years

Future> 5 Years

Indian Army Tender for Mini UAVs

Indian Air-Force Tender for Mini UAVs

Indian Air-Force Tender for Aerostats

Indian Air Force Tender for additional 4 Units of UAVs

Indian Army tender for different types of UAVs – 12 Nos.


trials for its Akashdeep system. The system has beendesigned, developed and integrated by the Aerial DeliveryResearch & Development Establishment (ADRDE), Agra, andcarries a Electro-optical payload and COMINT payload.

Nakshatra: Development of the large-sized Nakshatraaerostat, with a Surveillance radii track anticipated at 450 Km, isexpected to see completion by 2017. The surveillance system tobe developed by Aerial Delivery Research & DevelopmentEstablishment, Agra, is expected to have a test altitudeof4500m, with a payload capacity of 800kg to 1 tonne and 17,000cubic metre volume.

Chakshu: In the small aerostat category, a joint attempt betweenNAL under the Council of Scientific and Industrial Research andDefence Research and Development Organisation is underway fordevelopment of the Chakshu aerostat.

The year 2010 saw commencement of acquisition of 3 Aerostatsystems for the Indian Air Force under a globally issued RFI/RFPacross Northrop Grumman, Lockheed Martin, Rosoboronexport andRafael Advanced Defense Systems. This is widely believed to be afollow-on order to the 2 TCOM 71m systems procured in early 2000swith Elta sensors. The programme is expected to be awarded inQ3/CY2012 and the value of the programme is expected to be in therange of USD 140-160 Mn. Additionally, an additional requirementfor 5 Aerostats is expected for the Indian Navy.

In mid 2011, the Indian Army was also speculated to be consideringthe issuance of an RFI for 12 Aerostats of different sizes. The biddersfor the programme are expected to be NorthropGrumman, Lockheed Martin, Rosoboronexport of Russia , RafaelAdvanced Defense Systems, BAE, IAI and Thales.

Securing of large temple sites is an emerging yet unaddressedmarket segment for Aerostats. The Tirumala Tirupati DevasthanamTemple is reported to have started discussions with some privateplayers for procurement of a Aerostat addressing situationalawareness and security concerns in the temple vicinity. Aerostats fortemples appears to be a large opportunity as there are around 8-10such religious sites across India handling large numbers of devoteeswhich may require such systems. Additional positives are relativelyquick procurement and long-term service deployments.

The state police forces have also been exploring leasing of Aerostatsfor surveillance purposes. This model of leasing is unique and reflectsan opportunity that is being met currently in the market by fewplayers. Preference appears to be for home-grown solutions in thissegment. This model has to be understood in the context of …


budgetary allocations and procurement time-cycles. Leasing budgetstraditionally do not sit under capital procurement outlays but are apart of recurring expenditure driven revenue budget outlays. Hencethe order cycle time gets shortened considerably and the proceduresimplified. The leasing model also ensures that the OEMs do nothave an associated Offset Obligation (which may be seen as apositive by some OEMs).

The Indian Aerostat business has traditionally constituted a large andsignificant part of the Indo-Israel bilateral defense trade howeverthis status-quo is expected to be challenged soon with theintroduction of new programmes. Another factor in this businessopportunity is the potential revenue contraction per unit that isforseen as the number of units on order increase thereby presentinga significant impact on the overweight profitability projections insupplies made to India on such programmes.


Key Acquisition Opportunity: Mini UAV programme for Indian Army andIndian Air Force

The near-term requirement of UAV systems (comprising 2-3platforms, ground control station, data links) for the Indian Army isanticipated to stand at 530. The corresponding number of systems for theIndian Air Force is expected to be 170 (the Indian Airforce systems areanticipated to have different operational service ceilings and differentmission orientation). Together the programme is anticipated to result inthe procurement of around 700 systems.

The anticipated qualitative requirements include the system to be fuel orbattery powered, operability by one or two persons, minimum enduranceof 30 minutes and hand launch and vertical take-off and landing options.

The Request for Proposal for the above requirement is anticipated to beissued to HALBIT (HAL-Elbit), Bharat Electronics Limited (BEL), TataAdvanced Systems, Vectra, Speck, MKU, Dynamatics, Defsys , BroadcastConsultants, Jubilant Aeronautics, Taneja Aerospace, Zen technologies, IDEAForge, ICOMM Tele, HBL, Bharat Forge, Alpha Design Technologies, AnjaniTechnoplast, Swallow Systems and Aurora Integrated Systems.

The large number of participants expected in the programme gives rise to alarge number of Indian company – Foreign OEM partnerships that areanticipated to be built around successful deployment of such technologyelsewhere in the world. Key global players who are expected to participatewith Indian bidders include – Elta, IAI, Elbit, Aeronautics, MicrodronesGMBH and EADS.

The result may be that while the bidders will be Indian companies (theprogramme is classified as a Buy-Indian category thereby restrictingparticipation only to Indian companies), the platforms bidding will largelybe international and the Indian MoD may end up with indirect reliance onglobal technology rather than the implied objective of developing Indiacentric indigenous capability.

This presents a slight risk exposed but time-bound opportunity for someprivate equity play in this segment for players with a model that looks atthe bidders for the programme as a route to participate in a significantcapital acquisition and thereby top-line linked opportunity. Targets areanticipated to be available at attractive valuations.

This is strengthened by the fact that an analysis of the major sub-systemsreveals large gaps in existing India-based development and deliverycapability on the platform.

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Typical cost contribution for an Indian manufacturer of small / mini UAVs


The following analysis presents an assessment of the aforementioned.

Airframes: Significant presence of Indian players such as TataAdvanced Materials Ltd., Speck, MKU and Valeth in this segment isindicative of growing domestic capability for Airframe manufacture.

Batteries: High Energy Batteries (HEB), HBL India are large Indiansuppliers to the defense segment. In the UAV segment, Dependenceon overseas suppliers, chiefly from South Korea and the UScontinues.

Propulsion: While global suppliers in this segment range fromIsraeli, German to Czech, presence of Indian manufacturers in thissegment is negligible.

Autopilot: Navigation Guidance is another segment lacking domesticcapability with supplies typically sourced from US and Israelicompanies.

Communication and Datalinks: This is one area where Indiancompanies have significant presence within both the public andprivate sector. India's Bharat Electronics Ltd., Tata Power SED andL&T are amongst local suppliers of these components.

Other components: There is some capability in the field ofmanufacture, assembly, testing and ruggedisation of ground controlstations. However payloads continued to be largely imported andany manufacturing of payloads (at system, sub-system or assemblylevel) in India remains contingent on platform requirements.

Conclusion

The Indian Unmanned Vehicle opportunity is dispersed acrossUAVs, UGVs, UUVs and Aerostats.

The UAV opportunity continues to be dominated by one single largegovernment contract which is expected to be greater than 75% of themarket opportunity.

Development projects for UAVs continue to attract insignificant interestfrom private players as lack of order book sustenance visibility seems tobe preventing private participation and downstream investment incapability creation – a systemic risk to Indian Aerospace and Defenseenvironment.

The Aerostat opportunity is expanding and the market today includesthe traditional segments of defense and security as much as state policedriven large capital procurement and other private requirement thatseems to be emanating from places of significant congregation(temples, festivals etc).

The leasing of assets model is emerging as a possible model of choice forservices which face long capital acquisition programmes marred byconsiderable delays.

The largest acquisition opportunities over the near to medium term arelikely emanate from the mini and micro UAV and aerostats procurementprograms of the Indian Ministries of Defense and Home Affairs.


The Mini UAV programme is expected to be a Buy Indian programme.This provides OEMs with significant opportunity to partner with Indianfirms as also to participate in the capital structure of the shortlistedbidders (though sectoral caps of 26% Foreign Direct Investment exist) atattractive valuations and some risk.

India’s Border Security Infrastructure: Land Borders

Introduction

India has land borders extending over 15,107 km and a coastline 7,517 kmin length. A total of Ninety-two Indian districts, spread over 17 states, areclassified as border districts. Large tracts of India’s political borders areeither disputed, poorly demarcated or not demarcated by natural features.In addition to the risk of conventional international disputes, theseuncertain borders also present the challenge of cross-borderinfiltration, illegal migration, smuggling and other forms of criminal activity.Security of land and maritime borders is also critical to safeguarding India’strading interests. Maritime borders are additional vulnerable due toproximity to critical infrastructures such as ports, oil refineries, spacestations, atomic power plans and naval bases.

Better intelligence, force modernization and meeting equipment needs areimmediate priorities in border management. The Indian Ministry of HomeAffairs has in the recent past paid special attention to border fencing andborder road works. Coordination of Central and state-level efforts and theappropriate mix of trade and immigration policies will demand similarattention over the medium term.

Key Initiatives

Road works: The Ministry of Home Affairs’ Annual Action Plan V sets atarget of construction of 450 km of roads along the India-Bangladeshborder and 70 km along the Gujarat sector of the India-Pakistan border.This includes spillovers from Action Plan IV. In addition construction ofGadhauli-Hazipir-Santalpur road over a length of about 255 Km (130 Kmnew road and 125 Km road to be upgraded) is reported to havecommenced in April 2011. Approval of Government of India has alsobeen secured for construction / upgradation of 1377 Km (173 Km inUttrakhand, 640 Km in Uttar Pradesh and 564 Km in Bihar) of borderroads along Indo-Nepal border construction of 313 Km of border roadsin Assam along Indo-Bhutan border.

Fencing: The table below suggest that 800 and 100 kilometers offencing remains pending along the India-Bangladesh and India-Pakistanborders respectively. This represents an opportunity of USD 151 mnalong the border with Bangladesh to meet the target of 150 km set forMay 2012. This is in addition to the opportunity for replacement ofdamaged fencing also valued in excess of USD 150 mn.

Border / Distance in Km

Sanctioned Completed

India-Bangladesh

3437 2735

India-Pakistan

2044 1926

Border Fencing Works (Source: Ministry of Home Affairs)


Introduction

India has land borders extending over 15,107 km and a coastline 7,517 kmin length. A total of Ninety-two Indian districts, spread over 17 states, areclassified as border districts. Large tracts of India’s political borders areeither disputed, poorly demarcated or not demarcated by natural features.In addition to the risk of conventional international disputes, theseuncertain borders also present the challenge of cross-borderinfiltration, illegal migration, smuggling and other forms of criminal activity.Security of land and maritime borders is also critical to safeguarding India’strading interests. Maritime borders are additional vulnerable due toproximity to critical infrastructures such as ports, oil refineries, spacestations, atomic power plans and naval bases.

Better intelligence, force modernization and meeting equipment needs areimmediate priorities in border management. The Indian Ministry of HomeAffairs has in the recent past paid special attention to border fencing andborder road works. Coordination of Central and state-level efforts and theappropriate mix of trade and immigration policies will demand similarattention over the medium term.

Key Initiatives

Road works: The Ministry of Home Affairs’ Annual Action Plan V sets atarget of construction of 450 km of roads along the India-Bangladeshborder and 70 km along the Gujarat sector of the India-Pakistan border.This includes spillovers from Action Plan IV. In addition construction ofGadhauli-Hazipir-Santalpur road over a length of about 255 Km (130 Kmnew road and 125 Km road to be upgraded) is reported to havecommenced in April 2011. Approval of Government of India has alsobeen secured for construction / upgradation of 1377 Km (173 Km inUttrakhand, 640 Km in Uttar Pradesh and 564 Km in Bihar) of borderroads along Indo-Nepal border construction of 313 Km of border roadsin Assam along Indo-Bhutan border.

Fencing: The table below suggest that 800 and 100 kilometers offencing remains pending along the India-Bangladesh and India-Pakistanborders respectively. This represents an opportunity of USD 151 mnalong the border with Bangladesh to meet the target of 150 km set forMay 2012. This is in addition to the opportunity for replacement ofdamaged fencing also valued in excess of USD 150 mn.


Floodlighting: The targeted distance for floodlighting along India'sborder with Bangladesh for 2011-12 is 825 km. This is in addition tospillovers from Action Plan IV which include poles (295 km), cables (515km), fixtures (745 km) and energization (875 km). Along the India-Pakistan border the floodlighting target to be achieved for 2011-12 is121 km including spillovers.

A number of tenders for fencing and floodlighting work are currentlyinvited by the Ministry of Home Affairs and the Border Security Force.These tenders may be accessed at http://tenders.gov.in/.

Border Out Posts: Government of India has approved construction of anadditional 383 border outposts along the Indo-Bangladesh border andan additional 126 along the Indo-Pakistan border. Construction of theseadditional BOPs will provide all necessary infrastructures for theaccommodation, logistic support and the combat functions of theBorder Security Force troops.

The work of construction of all 509 border outposts has been awardedto Engineering Project India Limited, National Project ConstructionCorporation and Central Public Works Department at an estimatedbudget of USD 344mn.

Air Support: Both the Border Security Force and the Border Roadsorganization require air support services, chiefly in the form ofhelicopters, for reconnaissance and rescue sorties as well as transportlogistics.

The Border Security Force has been deploying MI-17 helicopters forcounter-insurgency operations. A tender has been issued for supply ofground support equipment for the MI-17 1V through originalequipment manufacturer or its sale or service.

Pawan Hans Helicopters Ltd. has been the supplier of helicopter supportservices to the Border Roads Organization in the North East of India. ItsMI172 helicopters have supported the Border Roads Organizationthrough transfer of machinery, equipment, manpower and materials.

Opportunity Assessment

Budgets

Border Infrastructure accounts for a significant proportion of theGovernment of India's anticipated military expenditure of USD 97 bnover the next 5 years.

USD 11 bn is expected to be spent on for development of militaryinfrastructure and capabilities.

Capability development along northern borders is expected to cost anadditional USD 4.5 Bn.


Opportunity segments

Since 2009, many private companies – Indian and foreign - haveparticipated in and won tenders for procurement of border surveillanceequipment.

Communication Equipment: Under this head, the Border Security Forceand the Indo-Tibetan Border Police have acquired Digital VHF mobileradio sets, UHF hand-held radio sets, equipment for integration of voiceand data on strategic communication network, fieldtelephones, monitoring receivers, unit-level switch boards and videoconferencing systems. Beneficiaries in awarded contracts in thissegment have been Globus Infocom Ltd., ACE Business Solutions, PANCommunications Ltd., Bharat Electronics Ltd., KAPTEL Overseas Ltd., NIITTechnologies, Adino Telecom Ltd., Realtime System Ltd., ITI Ltd., MobileCommunication Pvt. Ltd., Indian Ordnance Factory (Chandigarh), ITL Ltd.

Surveillance Equipment: In this category of equipment significant recentprocurements have been made of Search Mirrors, Passive Night Visionfor INSAS Rifles, Hand-held Search Lights, Video CameraRecorder, Global Positioning System, Global Information SystemSoftware and Hardware, Passive Night Vision Binocular and MonocularModels, Handheld Thermal Imager, Battle Field Surveillance Radar bythe Border Security Force, Indo-Tibetan Border Police, Sashastra SeemaBal and the National Security Guard. Companies who have beenawarded contracts include Bharat Electronics Ltd., NIIT GIS Ltd., Alpha-ITL, RSI Softech India Ltd., GPS India Network PvtLtd., Videology, Security Instruments, Static Systems ElectronicsLtd., Point Blank Defense Systems, Rolta, Zen Technologies Ltd., HBL.

Weapons, Bullet-proof and Bomb-disposal: In this cluster of equipmentcontracts have been awarded for AGL & Grenade, Grenade.90, Automatic Mortar Fire Data Controller, Bomb Suit, ExplosiveDetector, Deep Search Metal/Mine Detector, Machine Pistol Model5, Commando Dagger, Door Buster, Hand Grenade TrainingSimulator, Infantry Weapon Effect Simulator, Non Linear JunctionDetector, Bullet Proof Helmet. Among beneficiary companies are AnjaniTechnoplast Ltd., Laggar Industries Ltd., Bharat Electronics Ltd., ZenTechnologies Ltd., Security Shoppe India, Eskay Enterprises, Heckler andKoch GmbH, Rotax Electronics Ltd., Digital Integrator Ltd., StandardFireworks Ltd., FSUE Rosoboronexport, Beretta, Colt and Sig Saur.

Vehicles: Key procurements in the vehicles segment have been those ofAll terrain Vehicles, Field Artillery Tractor and Light Recovery Vehicle.Major suppliers in this segment include Tata Motors, AshokLeyland, Scania, Ineco, BAE, MAN and BEML-Tatra.

In other systems tenders for Driving Training Simulators are likely to seeparticipation from Zen Technologies, APPLICAZIONI RielaborazioniImpianti Speciali S.P.A., MEL Systems, Tata Advanced Systems, Mahindra& Mahindra and Ashok Leyland.

India’s Naval Acquisitions I: Defense Ship-building in India

Summary

By the year 2015, it is expected that the Government of India will havespent USD 80 bn in capital outlays for military modernization. Of the totalspend, 16% will have been dedicated to acquisitions for the Indian Navy.A major naval modernization program has been underway since2002, aimed at promoting the Indian Navy from fifth to third largest fleet inthe world. While aircraft carriers and submarines receive significantattention in the program, capabilities for sea lift and amphibious assaultclearly emerge as priorities.This report studies major on-going ship and submarine building programs inthe context of the Indian Navy’s indigenization plan and presents anassessment of key emerging trends in India’s defense ship-building sector.The Naval air-arm, while also significant to the Indian Navy’s modernizationeffort, will be the subject of a forthcoming Aviotech publication.

Indigenization: Broad Outlook

The Indian Navy’s indigenization plan until 2022 is envisaged under thefollowing major heads.

Marine Engineering which refers to main propulsionequipment, prime movers for power generationequipment, machinery control systems and auxiliaryequipment.

Electrical Engineering or Electronic Systems which includeGlobal Positioning Systems, Air Circuit Breakers, StaticFrequency Convertors, New Generation Batteries, Flat PanelDisplays, Automated Power Management Systems, Commandand Control System, Multi-function Consoles and Navy Radarsamong others.

Weapons and sensors where indigenization is already underwayin transformers, electro-mechanical relays, mechanicalcomponents of guns and connectors.

Submarine Equipment and systems where private industry isalready participating in fuel flow meters, systemfilters, pumps, cables, submarine batteries and system coolers.


Summary

By the year 2015, it is expected that the Government of India will havespent USD 80 bn in capital outlays for military modernization. Of the totalspend, 16% will have been dedicated to acquisitions for the Indian Navy.A major naval modernization program has been underway since2002, aimed at promoting the Indian Navy from fifth to third largest fleet inthe world. While aircraft carriers and submarines receive significantattention in the program, capabilities for sea lift and amphibious assaultclearly emerge as priorities.This report studies major on-going ship and submarine building programs inthe context of the Indian Navy’s indigenization plan and presents anassessment of key emerging trends in India’s defense ship-building sector.The Naval air-arm, while also significant to the Indian Navy’s modernizationeffort, will be the subject of a forthcoming Aviotech publication.

Indigenization: Broad Outlook

The Indian Navy’s indigenization plan until 2022 is envisaged under thefollowing major heads.

Marine Engineering which refers to main propulsionequipment, prime movers for power generationequipment, machinery control systems and auxiliaryequipment.

Electrical Engineering or Electronic Systems which includeGlobal Positioning Systems, Air Circuit Breakers, StaticFrequency Convertors, New Generation Batteries, Flat PanelDisplays, Automated Power Management Systems, Commandand Control System, Multi-function Consoles and Navy Radarsamong others.

Weapons and sensors where indigenization is already underwayin transformers, electro-mechanical relays, mechanicalcomponents of guns and connectors.

Submarine Equipment and systems where private industry isalready participating in fuel flow meters, systemfilters, pumps, cables, submarine batteries and system coolers.


Domestic Capacity Overview

Defense Shipyards: Mazagon Docks Ltd. (Mumbai), Garden ReachShipbuilders and Engineers, Kolkata, Goa Shipyard Ltd. andHindustan Shipyard Ltd. (Vishakhapatanam) are owned andcontrolled by the Ministry of Defense.

Public Sector Shipyards: Public sector shipyards primarily buidmerchant class ships and naval vessels and include CochinShipyard, Hooghly Dock and Port Engineers Ltd. And central InlandWater Transport Corporation Ltd.

Private Shipyards: The four major private shipbuilding companies arePipavav Shipyard, Bharati Shipyard, ABG Shipyard and L&T.

Joint Ventures: With an anticipated USD 25Bn order book at stakeand increased short term uptick in orders from the upcoming USD12Bn Project 75 (India) order for submarine manufacturing inIndia, Indian Naval Ship Building Industry is seeing significant interestin Joint ventures between government owned shipyards and privateplayers. Recent interest in this sector has been driven by the PipavavDefense and Offshore Engineering Company and Mazagaon Dock tieup and the on-the-anvil tie up between Larsen & Toubro andHindustan Shipyard.

Major Programs

Project 15 A and 15 B Guided Missile Destroyer: Mazagaon DocksLtd., the only shipyard in India large enough to build destroyers, isthe site for construction of 3 Kolkata-class vessels at a cost of USD622 mn each.

The follow-on project 15B gives the Navy the option of placingorders for 4 more vessels in the same class. Termed as guided missiledestroyers, the vessels under this program will have stealthcapabilities and will be armed with BrahMos-2 missiles.

Project 17 and 17A: Under project 17, 3 Shivalik-class multi-rolefrigates with stealth features were planned for construction byMazagaon Docks Ltd. of which one has been commissioned. Thesuccessor of these frigates is planned under project 17A involving atotal of seven vessels at a cost of USD 578 mn each. The modularconstruction method will be employed by Mazagaon Docks Ltd. andGarden Reach Ship-builders and Engineers who will deliver 3 and 4vessels respectively.


Project 28 Anti Submarine Warfare Corvette: The corvette being builtunder Project 28 was envisaged as the Indian Navy's Anti-submarineWarfare vessel for the 21st century as well as being aimed atencouraging private participation in ship-building. Following major timeand cost over-runs, 2 corvettes are now being built by Garden ReachShip-builders and Engineers and the revised budget stands at USD 1,555mn. Delivery to the Indian Navy is scheduled one vessel each for June2012 and March 2013.

Project 71 Air Defense Ships: This Vikrant class aircraft carrier wasmeant to be the first of Indian Navy's aircraft carriers to be designed andbuilt in India. The design collaboration was between Directorate of navaldesign (70%), Italian Fincantieri (propulsion system) and Russian NDB(aviation technology). The first of two planned carriers is currently underconstruction at Cochin Shipyard.

Project 75 Scorpene Submarine: The Scorpene Project originallyenvisaged building of 6 submarines in India with purchase of crucialparts from Aramis and technology transfer from DCNS, France. Time andcost over-runs sustained by the program have meant that total budgethas now escalated to USD 3,500 mn and no delivery is forseen until2015.

The technology transfer agreement has been concluded andconstruction is underway at Alok Shipyard of Mazagaon Docks Ltd. Thereis renewed possibilty of orders being placed for a further 6 submarines.This proposal is aimed at maximizing existing capabilities by saving costsassociated with prolonged transfer of technology negotiations for thesubsequent leg of the project. This is likely to limit scope forparticipation from private players such as Pipavav Shipyards and L&T. Onthe flipside, it may also entail enhanced participation prospects at theTier 1 and component supply level.

Project 11356 Russian Krivak III Class Frigates: India and Russia signed a$1.6 billion contract for the construction of three Project 11356 KrivakIII-class guided missile frigates for the Indian Navy in July, 2006 at theYantar shipyard of Kaliningrad. These ships will be armed each with eightBrahMos supersonic anti-ship cruise missiles instead of the Club-N/3M54TE missiles, which were installed on previous frigates. Therevised delivery schedule of the ships is reported as follows: INS Teg inApril 2012 (12 month delay), INS Tarkash in September 2012 (11 monthdelay) and INS Trikand in June 2013 (14 month delay).


Advanced Technology Vessel – INS Arihant: Arihant was positioned asIndia’s breakthrough in the Miniature Heavy Water Nuclear reactorsegment. The hull for the vessel was built by L&T's Hazira shipbuildingfacility. Tata Power built the control systems for the submarine. Thesystems for the steam turbine integrated with the reactor are suppliedby Walchandnagar Industries. The vessel was slated to join the IndianNavy in 2011 but trials are still underway.

The program consists of a total of 5 nuclear submarines similar in modelto the Russian Charlie-III class.

Fleet Replenishment Tankers: An initial order of 2 tankers was placedon Fincantieri, Italy. Delivery of the first of these, INS Deepak, was madein early 2011 within just 27 months. The second, INS Shakti, wascommissioned in October 2011.

The Fleet tankers will be the mainstay support ships of the Indian Navyin the first half of the 21st century. They have the capacity to carry morethan 500 tonnes of weapons that can be used to resupply combatants inthe high seas and are fitted with indigenous Anti-Missile Defense chaffsystem.

The indigenous project for construction of a fleet tanker at GardenReach Shipbuilders and Engineers Ltd. had resulted in commissioning ofINS Aditya in early 2000.

Mine Countermeasure Vessel: At an initial budget of USD 1 bn, thisprogram includes a total of 8 vessels to replace the Pondicherry class ofMCMVs. Of these 2 were proposed to be bought off the shelf with theremainder built in India at Goa Shipyard Ltd.

Italy's Intermarine and South Korean Kangnam shipyards are reported tohave gone through the technical evaluation process. At the end ofcontract negotiations, Kangnam Corporation will have to deliver the firsttwo MCMVs by 2016 for user trials and acceptance. GSL will completedelivery of the remaining six license-produced ships by 2018.

Naval Supply Chain in India

Of the three defense forces, the Indian Navy has witnessed the highest degree of indigenization of the supply chain. The expanded orderbookof key shipyards augurs well for downstream suppliers.

The existing vendor base in India includes WalchandnagarIndustries, Larsen & Tubro, Tata Power Strategic Electronics Division, Tata Advanced Systems Ltd., Bharat Forge, Heavy Engineering Corporation Ltd., Bharat Electronics Ltd., Bharat Heavy Electronics Ltd., Bharat Dynamics Ltd., BE Pumps, Kirloskar Brothers, Servo Controls, Radiall Cables, Mahindra Naval Systems Ltd., Meridian Inflatables, Statcon, ISGEC Heavy Engineering Ltd., Shanthi, Mukand and Crompton Greaves.


Conclusion

Its first indigenous aircraft carrier, eight stealth frigates, six dieselsubmarines and thirty other warships currently under construction inshipyards constitute definitive steps towards the Indian Navy's quest forbecoming a blue water force.

Reorientation to deeper waters away from India's shores will placedemands on the Indian Navy for undertaking counter-piracy andemergency rescue missions. This will reflect in the medium termacquisition plan.

In the face of this contextual scenario, public sector shipyards likeMDL, GRSB, HSL, GSL demonstrate slow pace of order book execution (interms of units delivered) along with low investments in further capacitybuilding and bottle neck de-clogging.

A parallel development anticipated is greater public-private initiativesfrom Pipavav, L&T, ABG, Bharti, SESA Goa and emerging shipyards likeRajapur Shipyards etc. This trend has been further highlighted by therecent Pipavav- Mazagaon joint venture. Difficulties encountered withidentification of a private shipyard for the second (post transfer oftechnology) leg of Project 75 reinforce the greater possibility ofharnessing private sector potential through the joint venture route.

We also see a trend for Indian PSU shipyards to emerge as an exporterof smaller to medium sixed platforms in the south Asian and West Asianregion, a trend signified by GSL’s exploration of markets like Oman andSri Lanka for Offshore Patrol Vessels. Capacity constraints in leadingglobal manufacturers Japan and Korea have gradually redirected ordersto emerging locations such as India. Out of a 199 ships currently on theorder books on Indian shipyards, 124 are reported to be meant forexport.

FDI in Defense and Aerospace

Foreign participation in the equity structure of Indian Aerospace andDefense companies has been relaxed over time but is still to reach aposition, where unfettered inflows as Foreign Direct Investment (FDI) inIndian Aerospace and Defense sector can take place.(http://eaindustry.nic.in/handbk/chap002.pdf)

Private participation in large segments of Indian industry were opened in itsfirst true sense through the National Industrial Policy of 1991. Foreignparticipation in the equity structure of Aerospace and Defensemanufacturing companies was allowed through Press note 4 of 2001 series.(http://siadipp.nic.in/policy/changes/press4_01.htm)

The Press Note 2 of 2002 further amended the press note 4 of 2001 series(http://siadipp.nic.in/policy/changes/press2_02.htm)

The Press Note 4 of 2006 further amplified the Press Note 2 of 2002(http://siadipp.nic.in/policy/changes/pn4_2006.pdf), Line item 13 whichspecified defense industry and the requirement of licensing.

The press note 4 of 2006 was elaborated in 2009 through press notes 3http://siadipp.nic.in/policy/changes/pn3_2009.pdf and press note 4http://siadipp.nic.in/policy/changes/pn4_2009.pdf.

In 2010, a Consolidated FDI Policy came into force with effect from April 1, 2010. (http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf). This policy consolidated into one document, the entire policy on foreign direct investment spread over various press notes. The past press notes have now rescinded. Under this note, it is mentioned that FDI is permissible up to 26%, under Government route subject to Industrial license under theIndustries (Development & Regulation) Act 1951 and the following conditions:

• Licence applications will be considered and licences given by theDepartment of Industrial Policy & Promotion, Ministry of Commerce &Industry, in consultation with Ministry of Defense.

• Cases involving FDI will be considered by the FIPB and licences givenby the Department of Industrial Policy & Promotion in consultationwith Ministry of Defense.

• The applicant should be an Indian company / partnership firm.• The management of the applicant company / partnership should be in

Indian hands with majority representation on the Board as well as theChief Executives of the company / partnership firm being residentIndians.

• Full particulars of the Directors and the Chief Executives should befurnished along with the applications.

http://eaindustry.nic.in/handbk/chap002.pdf










http://siadipp.nic.in/policy/changes/press4_01.htm
























http://siadipp.nic.in/policy/changes/pn4_2006.pdf




































http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf


Foreign participation in the equity structure of Indian Aerospace andDefense companies has been relaxed over time but is still to reach aposition, where unfettered inflows as Foreign Direct Investment (FDI) inIndian Aerospace and Defense sector can take place.(http://eaindustry.nic.in/handbk/chap002.pdf)

Private participation in large segments of Indian industry were opened in itsfirst true sense through the National Industrial Policy of 1991. Foreignparticipation in the equity structure of Aerospace and Defensemanufacturing companies was allowed through Press note 4 of 2001 series.(http://siadipp.nic.in/policy/changes/press4_01.htm)

The Press Note 2 of 2002 further amended the press note 4 of 2001 series(http://siadipp.nic.in/policy/changes/press2_02.htm)

The Press Note 4 of 2006 further amplified the Press Note 2 of 2002(http://siadipp.nic.in/policy/changes/pn4_2006.pdf), Line item 13 whichspecified defense industry and the requirement of licensing.

The press note 4 of 2006 was elaborated in 2009 through press notes 3http://siadipp.nic.in/policy/changes/pn3_2009.pdf and press note 4http://siadipp.nic.in/policy/changes/pn4_2009.pdf.

In 2010, a Consolidated FDI Policy came into force with effect from April 1, 2010. (http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf). This policy consolidated into one document, the entire policy on foreign direct investment spread over various press notes. The past press notes have now rescinded. Under this note, it is mentioned that FDI is permissible up to 26%, under Government route subject to Industrial license under theIndustries (Development & Regulation) Act 1951 and the following conditions:

• Licence applications will be considered and licences given by theDepartment of Industrial Policy & Promotion, Ministry of Commerce &Industry, in consultation with Ministry of Defense.

• Cases involving FDI will be considered by the FIPB and licences givenby the Department of Industrial Policy & Promotion in consultationwith Ministry of Defense.

• The applicant should be an Indian company / partnership firm.• The management of the applicant company / partnership should be in

Indian hands with majority representation on the Board as well as theChief Executives of the company / partnership firm being residentIndians.

• Full particulars of the Directors and the Chief Executives should befurnished along with the applications.









































































• The Government reserves the right to verify the antecedents of theforeign collaborators and domestic promoters including theirfinancial standing and credentials in the world market. Preferencewould be given to original equipment manufacturers or designestablishments, and companies having a good track record of pastsupplies to Armed Forces, Space and Atomic energy sections andhaving an established R & D base.

• There would be no minimum capitalization for the FDI. A properassessment, however, needs to be done by the management of theapplicant company depending upon the product and the technology.The licensing authority would satisfy itself about the adequacy of thenet worth of the foreign investor taking into account the category ofweapons and equipment that are proposed to be manufactured.

• There would be a three-year lock-in period for transfer of equityfrom one foreign investor to another foreign investor (including NRIs& erstwhile OCBs with 60% or more NRI stake) and such transferwould be subject to prior approval of the FIPB and the Government.

• The Ministry of Defense is not in a position to give purchaseguarantee for products to be manufactured. However, the plannedacquisition programme for such equipment and overallrequirements would be made available to the extent possible.

• The capacity norms for production will be provided in the licencebased on the application as well as the recommendations of theMinistry of Defense, which will look into existing capacities of similarand allied products.

• Import of equipment for pre-production activity includingdevelopment of prototype by the applicant company would bepermitted.

• Adequate safety and security procedures would need to be put inplace by the licensee once the licence is granted and productioncommences. These would be subject to verification by authorizedGovernment agencies.

• The standards and testing procedures for equipment to be producedunder licence from foreign collaborators or from indigenous R & Dwill have to be provided by the licensee to the Governmentnominated quality assurance agency under appropriateconfidentiality clause. The nominated quality assurance agencywould inspect the finished product and would conduct surveillanceand audit of the Quality Assurance Procedures of the licensee. Self-certification would be permitted by the Ministry of Defense on caseto case basis, which may involve either individual items, or group ofitems manufactured by the licensee. Such permission would be for afixed period and subject to renewals.

• Purchase preference and price preference may be given to thePublic Sector organizations as per guidelines of the Department ofPublic Enterprises.


• Arms and ammunition produced by the private manufacturers willbe primarily sold to the Ministry of Defense. These items may alsobe sold to other Government entities under the control of theMinistry of Home Affairs and State Governments with the priorapproval of the Ministry of Defense. No such item should be soldwithin the country to any other person or entity. The export ofmanufactured items would be subject to policy and guidelines asapplicable to Ordnance Factories and Defense Public SectorUndertakings. Non-lethal items would be permitted for sale topersons / entities other than the Central of State Governments withthe prior approval of the Ministry of Defense. Licensee would alsoneed to institute a verifiable system of removal of all goods out oftheir factories. Violation of these provisions may lead to cancellationof the licence.

• Government decision on applications to FIPB for FDI in Defenseindustry sector will be normally communicated within a time frameof 10 weeks from the date of acknowledgement.

In 2011, as a part of the ongoing efforts of procedure for simplificationand rationalization of FDI, the Consolidated FDI Policy 2010 was furtheramended.(http://dipp.nic.in/Fdi_Circular/FDI_Circular_012011_31March2011.pdf)

Some of the key FDI approvals in the Indian Aerospace and Defense segment are as follows (from Jan’09 till Feb’12)

S.N. Indian Company Foreign CollaboratorForeign Direct Investment(USD Mn)

Approved on

1. Samtel Display Systems Ltd, Delhi M/S Thales Avionics SA, France 0.02 Mar 20, 2009

2. M/S Vyoneesh Technologies Pvt. Ltd, DelhiRosebank Engineering Private Limited, Australia

0.31 Oct 30, 2009

3. M/S Icomm Tele Ltd., Hyderabad 10.11 Jul 30, 2010

4. M/S GMR Airports Holding Ltd., BangaloreMacquarie SBI Infrastructure Investments, Mauritius

194 Nov 3, 2010

5. M/S Tata Advanced Systems Ltd., DelhiELTA Systems, (Aerospace Industries,Israel)

0.86 Dec 3, 2010

6. Larsen & Toubro Ltd. (L&T), MumbaiM/S Eads Deutchland GmbH (EADs), Germany

1.57 Dec 31, 2010

7. M/S Spiral Engineering Pvt. Ltd., Delhi & Haryana Eli Hajaj (Israel) 0.82 Aug 5, 2011

8. M/S Pipavav Defense and Offshore Engineering Co. Ltd. 16.50 Aug 5, 2011

9. M/S AIR Works India Engineering Pvt. Ltd., Gurgaon 3.59 Aug 5, 2011

11. M/s Indian Rotorcraft Ltd., Mumbai 3.48 Sep 2, 2011
















The period from Jan 2009 till August 2011 also saw 13 approvals for FDI.Even though there have been no inflows, the Govt. of India, based onthe recommendations of Foreign Investment Promotion Board(FIPB), took an important step of approving FDI flows for 13 companieswhich is expected to yield results in the future.

Other Approvals without any inflows during Jan 2009-August 2011

S.N Company’s Name Approved on

1. M/S Blue Dart Express Ltd. 22.1.2009

2. M/S Dynamatics Technologies Ltd., Bangalore 23.2.2009

3. M/s Astra Microwave Products Ltd., Hyderabad 23.2.2009

4. M/s MEL Systems and Services Ltd., Chennai 20.4.2009

5. M/S HAL Edgewood Technologies Pvt. Ltd 22.5.2009

7. M/S Taneja Aerospace and Aviation Ltd., Tamil Nadu- 11.9.2009

8. M/S Wipro Ltd. 30.7.2010

9. M/S Lakshmi Machine Works, Tamil Nadu 31.12.2010

10 M/s ABG Shipyard Ltd., Mumbai 15.2.2011

11. M/S Maini Precision Products Pvt. Ltd., Bangalore 20.4.2011

12. M/S Punj Lloyd Ltd., Delhi & Haryana 20.4.2011

13. M/S Centum Electronics Ltd., Bangalore 20.5.2011

14. M/S Precision Electronics Pvt. Ltd. 6.7.2011

15. M/s VTS TF Air Systems Pvt. Ltd.


Conclusion

FDI Inflows have increased with the number of projects approved aswell as the amount of inflow steadily growing year on year.

The amount of FDI inflows in Aerospace and Defense (A&D) into Indiais not in any way reflective of the actual need of the sector.However, the increasingly larger number of approvals provides apositive outlook to the sector.

The inflows, which have happened till date in the recent past, havelargely been to listed entities. However, that trend is now beingchallenged by FDI flows commencing into unlisted A& D niche players.

This can be seen as an outcome of the Indian Ministry of Defenseoffset policy for capital procurement.

About Aviotech

Aviotech has been created with the clear objective of capitalizing onvast untapped niche areas in the rapidly growing corporate aviationand aerospace & defense segments in India.

Aviotech is one of the largest providers of corporate aviationservices in India. It is also one of the largest providers of crewtraining.

Aviotech has an India focused aerospace, defense and securityadvisory & investments practice working through the value chain ofenterprises, ranging from OEMs, componentmanufacturers, private equity / venture capital firms, law firms toresearch and advisory bodies.

Our offerings comprise: Strategic Roadmaps for market & products Manufacturing Advisory Offset and Policy Advisory Offset Project management and coordination support Aerospace & Defense Investment Advisory (buy and sell side) Aerospace & Defense Regulatory insights and compliance Market Assessment, mapping and Evolution insights Sector specific thought leadership research

Our services are delivered by a sector specialist team with extensiveexperience in the Indian Aerospace, Defense and Security sectorand international markets.


Aviotech is now exploring opportunities to leverage Indian costcompetitiveness to create global manufacturing solutions in theaviation & aerospace and defense domain.

To know more about how Aviotech can help you and yourorganisation leverage the opportunity offered by the Indianaviation, aerospace, defense and security opportunity, please visitwww.aviotech.com.


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A v i a t i o n I A & D A d v i s o r y I I n v e s t m e n t s I M a n u f a c t u r i n g I T r a i n i n g

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About ASSOCHAM

ASSOCHAM acknowledged as Knowledge Chamber of India hasemerged as a forceful, pro-active, effective and forward lookinginstitution playing its role as a catalyst between the Governmentand Industry. ASSOCHAM established in 1920 and has beensuccessful in influencing the Government in shaping India’seconomic, trade, fiscal and social policies which will be of benefit tothe trade and industry.

ASSOCHAM renders its service to over 4,00,000 members whichincludes multinational companies, India’s top corporates, mediumand small scale units and Associations representing the interest ofmore than 400 Chambers and Trade Associations from all over Indiaencompassing all sectors.

ASSOCHAM has over 100 National Committees covering the entiregamut of economic activities in India. It has been especiallyacknowledged as a significant voice of Indian industry in the field ofCorporate Social Responsibility, Environment & Safety, CorporateGovernance, Information Technology , Agriculture , Nanotechnology, Biotechnology , Pharmaceuticals, Telecom, Banking &Finance, Company Law, Corporate Finance, Economic andInternational Affairs, Tourism, Civil Aviation, Infrastructure, EnergyPower, Education, Legal Reforms, Real Estate, Rural Developmentetc. the Chamber has its international offices inChina, Sharjah, Moscow, UK and USA. ASSOCHAM has also signedMoU partnership with Business Chambers in more than 75countries.


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The Associated Chambers of Commerce and Industry of IndiaASSOCHAM Corporate Office1, Zamrudpur Community Centre, Kailash Colony, New Delhi - 110048Tel: 011 46550555 (Hunting Line). Fax: 011 46536481/82, 46536497/98

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