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Confederation of Indian Industry
Industry-Defence Linkage
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Message from Chairman, Defence TaskForce, CII Eastern Region
CII Eastern Region has a dedicated Task Force on Defence to identify linkages and explore business opportunities between Industry
and Defence Sector. As a part of this initiative, the Confederation is organizing the third edition of Industry Defence Linkage
which had proved to be an ideal forum in facilitating the Indian industries to engage with the defence sector.
The objective of this conference is to bridge the gap between industry capabilities and defence requirements.
India has emerged as the largest market for the defence products, technologies and services and we are expected to spend
approximately 235 Bn USD on defence systems over the next 10 years. Indias imports increased by 38 percent between 2007 to
2011. India But as it said that No nation can aspire to be a power to reckon with on borrowed strength, Self reliance in Defence
is of vital importance for both strategic and economic reasons. Industrial and technological growth in the past decades has
indicated that it is possible to achieve this self reliance in defence by harnessing the emerging dynamism of the Indian Industry.
Government sector alone can not fulll the requirements of defence forces and therefore, the private sector has to come in a big
way. In countries such as the US, UK, Russia, Australia, etc., it is the private sector that meets key defence requirements. In fact,
as per the global practices, the private sector is consulted for key inputs during policy formulations.In India also, government has taken a slew of policy initiatives including 100% private equity with 26% FDI in the defence sector
and the defence offset policy which mandates that foreign vendors must invest 30 per cent of the contract value in building Indias
defence industry for contracts worth Rs 300 crore or more.
In its ambitious plans to upgrade its defence forces, Government is counting heavily on the private sector. The Government of India
seeks to meet 70 percent of the countrys defence needs internally over the next 5 years or so. With several large equipment and
modernization programmes lined up, it is estimated that the overall expenditure will be in the range of USD 80-100 billion in the
next 5 years. This also means that the local industry doubles in size and approx. 120,000 new jobs are created.
I see this as a multi-billion-dollar opportunity for the industry, and countless new jobs.
The government has recently come out with Defence Procurement Procedure 2013. This will provide the Indian Private sector a
chance to move up the value-chain in the area of defence production in the country. There are still many concerns, but Im sure
they will be addressed soon.
Ideally, the public and private sectors work alongside, combine their skills and develop a partnership to maximize resources.
However, I wish to let it be known that formulation of focused and pragmatic strategies will be critical to enhancing Indias
opportunity to leverage its advantages.
I hope this report on Industry Defence Linkage would go a long way in strengthening the linkages between the industry and
defence sector.
Rear Admiral A K Verma (Retd.)
Chairman, Defence Task Force, CII Eastern Region
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Foreword by CII
The third edition of the Industry-Defense Linkage, billed for 4 July 2013 in Kolkata, is yet another signicant initiative by the
Confederation of Indian Industry (CII) Eastern Region to foster partnership, increase competitiveness and spur growth in the
defense sector. The context is just right.
We all know that in the next 15 years, India will see an investment worth around INR6 lakh crore. This is something that will create
numerous jobs, drive economic growth and ensure prosperity for people.
Signicantly, of the INR6 lakh crore, at least INR80,000 crore will be spent in the eastern region comprising Bihar, Chhattisgarh,
Jharkhand, Odisha and West Bengal. The scale and scope is stupendous, with opportunities bright for sectors such as machineries,
electrical items and hulls.
Furthermore, private players, which are currently engaged in the defense industry sector as sub-contractors and ancillary units
supplying raw materials, semi-nished products, parts and components to Defense PSUs and ordnance factories, would be
stepping up their participation.
By all accounts, it is a win-win opportunity. The challenge, however, is how state governments and the center play their part and
create the right ambience to be able to cash in on the opportunities.
Given that the international defense industry has a complex network of supply chains, there is an urgent need for Indian
companies, especially the 4,000 SMEs that supply metals, clothes, leather and various semi-nished products to ordnance
factories, to integrate themselves into the supply chains of global and domestic defense majors.
CII Eastern Region has undertaken a number of initiatives with a clear focus on creating a conducive atmosphere. We have a
Defense Task Force dedicated to helping MSMEs and the industry cash in on emerging opportunities and catalyze growth of the
defense sector industry in the East. We also organize forums and facilitate interactions to explore more business opportunities,
particularly for MSMEs.
Notably, CII Eastern Region organized a Defense Conclave on 20 December 2012 in Kolkata. The aim was to build a strong
platform for the private sector in the Eastern Region and for defense PSUs, and to explore mutual business opportunities.
This year, too, several programs including the upcoming Industry-Defense Linkage, a series of vendors meets and interactive
sessions have been lined up. Such exercises are necessary to enable the defense sector industry to come up with ideas and
innovation and make the big leap forward.
It is no longer a distant dream to create a technologically feasible and economically viable industry, and become one of the
mightiest military powers in the world.
Thank you.
Sudhir Deoras,
Chairman, CII Eastern Region
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Foreword by Ernst & Young
India is the single-largest importer of defense equipment worldwide. Its history of conict with two of its largest neighbors makes
it imperative that the countrys armed forces have access to state-of-the-art equipment. In times of strife, a large nation such
as India cannot rely on imports and needs to become self-sufcient. On a separate note, the Ministry of Defense (MoD) has long
recognized this need and has stressed on the importance of being self-reliant. Furthermore, it is striving to meet this objective.
The offset policy under the Defence Procurement Procedure (DPP) is an example of this.
The offset policy, after being introduced in 2005 and promulgated through the DPP, has undergone several iterations to ensure
that it is easy to understand and implement. The Indian government introduced the offset provisions to facilitate foreign
investment in the indigenous defense industry, both in terms of foreign direct investment (FDI) and capability building. The banking
of offset credits incentivizes foreign OEMs to make long-term commitments to the Indian economy. It also helps in the building
of an indigenous defense base independent of the obligatory connes of a timeline. While the policy has evolved at a great pace,
certain roadblocks hamper the actual potential to be realized. To address this concern, the MoD and various other government
agencies have begun focusing on compliance and execution, while liberalizing the offset policy with the inclusion of newer
methods, products and services to discharge offsets. This opens up an offsets market worth approximately US$20 billion in the
next decade for the Indian industry. In this backdrop, we have tried to throw some light on the processes governing offsets and the
opportunities arising out of the offset markets in India.
Prior to the opening up of the defense industry to the private sector, Defence Public Sector Undertakings (DPSUs), along with
the Ordnance Factory Board, catered to the armed forces requirements. Majority of the defense infrastructure in the country
is constituted of the 41 Ordnance Factories and 9 DPSUs. The model of production of DPSUs is based on the production of
technologies conceptualized by DRDO, nominated projects of the MoD and licensed production of platforms from foreign OEMs.
Owing to the modernization drive of the armed forces in the last couple of years, DPSUs have had to bear with overowing order
books and stringent project timelines. They have responded by creating innovative models of subcontracting and joint production
with the private sector, with the latter stepping up participation. We have attempted to give a brief overview of the arising
opportunities, and the methods that private companies may employ to engage with DPSUs on these opportunities and contribute
toward nation building.
It has been our endeavor to make this report both relevant and actionable. Hope you nd it useful.
K. Ganesh Raj
National Leader- Aerospace & Defense
EY LLP
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Contents
Part 1 Opportunities with DPSUs in India
Chapter 1: Indian defense industrial base - public sector............................................. 08
DPSUs and OFB ............................................................................................................. 09
Organizational structure ................................................................................................ 09
OFB ....................................................................................................................... 09
DPSUs ....................................................................................................................... 11
Hindustan Aeronautics Limited (HAL)...................................................................... 12
Bharat Electronics Limited (BEL) .............................................................................12
BEML Limited (BEML) ............................................................................................. 12Mazagon Dock Ltd (MDL) ........................................................................................13
Garden Reach Shipbuilders & Engineers Ltd (GRSE) .................................................13
Bharat Dynamics Ltd (BDL) ..................................................................................... 14
Hindustan Shipyard Limited (HSL) ...........................................................................14
Goa Shipyard Limited (GSL) .................................................................................... 14
Mishra Dhatu Nigam Ltd (MIDHANI) .........................................................................15
Financials of the DPSUs ................................................................................................. 15
Supply chain and vendor registration .............................................................................. 15
Modernization of DPSUs and OFs ....................................................................................16
Chapter 2: The Indian defense market and opportunities ............................................. 17
Challenges for Defense Industrial Base ............................................................................19
Opportunity matrix ........................................................................................................ 20
Targeting opportunities .................................................................................................. 22
Driving successful relationships ......................................................................................22
JVs/MoU ............................................................................................................... 22
Way forward for DPSUs and OFs ..................................................................................... 26
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Part 2 - offset policy of the Indian MoD: effects, implications andopportunites
Chapter 1: What is offset? ...........................................................................................30
What is offset? ..............................................................................................................31
Offset policy of the Indian MoD .......................................................................................31
Objectives .............................................................................................................31
Modalities of executing offsets ................................................................................31
Offset process ........................................................................................................33
Submissions ..........................................................................................................34Agencies involved in the offset process ...................................................................34
Comparison with offset policy in other countries ......................................................34
Evolution of the offset policy ...................................................................................36
Chapter 2: Defense offsets in India ..............................................................................37
Beneters ....................................................................................................................38
Focus areas of offsets in India .........................................................................................39
Key trends shaping offset demand in India ......................................................................39
Chapter 3: Offset-related opportunities .......................................................................41
Offset opportunities in the programs of the Indian MoD ...................................................42
Emerging methods of offset discharge ............................................................................43
Innovative models ..................................................................................................43
Key products and services ......................................................................................43
Conclusion ...................................................................................................................44
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Part 1:Opportunities
with DPSUs inIndia
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Chapter
1Indian defense industrial basepublic sector
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Figure 2: DPSU and OFB production gures
OFB & DPSU Production
0
1000
2000
3000
4000
5000
6000
7000
2008-09 2009-10 2010-11 2011-12
AmountinUSD
Million
DPSUs OFB
Source: MoD Annual Report
Organizational structure
DPSUs and OFB fall under the administrative control of
the Department of Defence Production (DDP), Ministry ofDefence. The Department of Defence Production deals with
the indigenization, development and production of defense
equipment, both in the public and private sectors. The DDP
organizational structure is depicted in the gure below.
Figure 3: Organizational Structure of the MoD
Ministry of Defence (MoD)
Dept of Defence
(DoD)
DGOF
Dept of Defence
Production (DDP)
Defence PSUs
Defence Research
& Development
Organization(DRDO)
DGQA
Source: Data compiled by q-tech synergy
OFB
The OFB is the largest and oldest departmentally run
production organization in the country and is engaged
primarily in the manufacture of defense hardware. It was
established 200 years ago as departmental manufacturingunits with the main purpose of meeting the requirements of the
armed forces. The organization functions under the DDP and is
a dedicated facility for manufacturing weapons, ammunitions,
DPSUs and OFB
Indian defense had been a restricted sector under the exclusive
control of the government and dominated by the Department
of Defence Production with 41 defense OFs and 9 DPSUs.
These bodies jointly met the majority of the armed forces
requirement. These units, with an employee base of more than
2 lakh personnel, are under complete
Figure 1: Network of ordnance factories in India
Uttarakhand
Uttar Pradesh
Punjab
Bihar
West
BengalOrissa
Andhra
Pradesh
Madhya Pradesh
Maharashtra
Karnataka
Tamil
Nadu
OFM
OMFC
OEFHZ
OFC
SAF
FGK
OEF
OPF
OFDUN
OLFOCFC
OF Nalanda
OFKAT
VJF
GIF
GCF
OFK
OFI
MPF
OFA
AFK
HEF
OFDR
OFBA
OFCH
OFV
OFBH
OFAJ
HFV
OCFAV
EFA
OFT
HAPP
CFA
OFPM
OFBOL
RFI
MSF
GSF
OFDC
MDL
GSL
BEML
HAL
BEL
BDL
MIDHANI
HSL
GRSE
Ordnance Factories DPSUs
Goa
Source: Data compiled by Q-Tech Synergy
government control. Combined turnover stood at US$5261
million (INR26305 crore) in 200708. Over time, annual
production has seen a sustained growth at 13%, and it now
stands at US$7663 million (INR42145 crore). Products
include combat aircraft, helicopters, unmanned aerial vehicles,
warships, submarines, missiles, defence electronics, small arms
and ammunition, tanks, and heavy earth-moving equipment.
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ve operating divisions based on technology grouping, as given
in the table below, and each is headed by a board member/
additional DGOF. These include:
Table 1: divisions of the OFB
DGOFs operating divisions
Division Number offactories
Ammunition and Explosives (A&E) 11
Weapons, Vehicles and Equipment (WV&E) 10
Materials and Components (M&C) 11
Armoured Vehicles (AV) 3
Clothing, Equipment and General Stores
(OEF)
5
Source: Data compiled by Q-Tech Synergy
Product range
The factories, spread all over India, operate a wide range oftechnologies and product mix. The product range consist of
more than 1,000 principal items, including tanks, infantry
combat vehicles (ICVs), artillery guns and rocket launchers.
The product portfolio focuses on:
Civilian arms and ammunition
Weapons
Ammunition, explosives, propellants and chemicals
Military vehicles
Armoured vehicles
Optical devices
Parachutes
Support equipment
Troop comfort and general stores
Material and components
Financials
IOFs have reported a turnaround in their performance, with a
steady increase displayed on an annual basis. Improvement in
performance is indicated below.
vehicles (armored and transport), clothing, general stores, as
well as equipment for defense services.
Indian OFs are managed by the OFB, which comprises the
Director General functioning as Chairman and nine members
in the rank of additional Director General of Ordnance
Factories (DGOF). The factories are divided into ve operating
divisions based on the type of products and manufacturingtechnology. Four members are responsible for staff functions,
viz, Personnel, nance, planning and material management
and projects, engineering and technical services. The
organizational structure is explained below.
Figure 4: Administrative structure of the OFB
(as on Dec 2011)
Addl DGOF/Members (8)
DGOF and Chairman/OFB
Production
divisions
Weapons,
Vehicles &
Equipment
Ammunition &
Explosives
Materials &
Components
Armoured
vehicles
Ordnance
equipment
Staff division
Planning
& Material
Management
Technicalservices
Personnel
Finance
Source: Data compiled by Q-Tech Synergy
The production lines of OFs are product-specic. The DGOF has
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Table 2: Financial Performance of the Indian Ordnance Factories
Year 200708 200809 200910 201011 201112
In USD million
Value of Issue 1261.45 1314.36 1584.55 2039.09 2127.27
Percentage increase (%) 12.5 4.19 20.56 28.69 4.32
Source: MoD Annual Report
Customers
Indian OFs cater to the Indian armed forces, viz., Indian Army,
Indian Navy, Indian Coast Guard, Indian Air Force besides
the Central Armed Police Forces, State Armed Police Forces,
Paramilitary Forces of India and the Special Forces of India,
Civil Trade, and foreign customers.
Relationship and interdependence with other government
undertakings
DPSUs and OFs, geographically distributed all over the countryand operating with a wide range of products and technological
disciplines, function with a high degree of interdependence.
The OFB/DPSUs has (have) an in-house system of vendor base,
i.e., maximum input derived from sister concerns. Some inputs
are procured from other government agencies as well.
DPSUs
DPSUs have a exible form of operation, decentralized
management and adequate operational autonomy. Nine
undertakings established under DPSUs are:
1. Hindustan Aeronautics (HAL)
2. Bharat Electronic Ltd. (BEL)
3. Bharat Earth Movers Ltd. (BEML)
4. Mazagon Dock Ltd. (MDL)
5. Garden Reach Shipbuilders & Engineers Ltd. (GRSE)
6. Goa Shipyard Ltd. (GSL)7. Bharat Dynamic Ltd. (BDL)
8. Mishra Dhatu Nigam Ltd. (MIDHANI)
9. Hindustan Shipyard Limited (HSL)
Governance
DPSUs come under the governance and administrative control
of the Secretary of DDP, MoD, through the respective JS in the
department. The organizational structure is explained below.
Figure 5: Administrative structure of the DDP
GRSE
MDL
GSL
HSL
Joint Secretary
(Naval Systems)
Secretary DDP
BDL
BEL
Supplies
DGQA
Directorate ofStandardization
Joint Secretary
(Electronic Systems)
Addl. Secretary
DDP
OFB
Coordination
Vigilance
Joint Secretary
(Ordnance Factory)
MIDHANI
DGAQA
HAL
Joint Secretary
(Aerospace)
Joint Secretary
(Missile Systems)
Export
Joint Secretary
(Land Systems)
BEML
Source: Data compiled by Q-Tech Synergy
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Aerospace equipment
Aero engines of Russian origin
Aero engines of Western origins
Future product range
Bharat Electronics Limited (BEL)
BEL, a Navratna PSU, was established in Bangalore, India, in1954 to meet the specialized electronic needs of the defense
services. Over the years, BEL has grown into a multi-product,
multi-technology, multi-unit company catering to customers in
diverse elds in India and overseas. The company is engaged
in the design, development and manufacture of sophisticated
state-of-the-art electronic equipment/components for the use
of defense forces, paramilitary organizations and infrastructure
providers in the telecom sector. About 7080% turnover of
the company comes from supplies to the defense sector. BEL
ranks 64th among the top 100 defense companies in terms of
revenues. BEL has 9 production units and 31 manufacturing
divisions spread across 7 states. BEL has a signicant rolein the civilian professional electronics sector, particularly
for the Ministry of Information and Broadcasting. It supplies
the bulk of its infrastructure requirements such as studio
equipment, transmitters, satellite uplinks and OB vans for radio
and TV broadcasting.
BEL is a technology-driven company. All of the units have
their own R&D groups, which are supported by three central
laboratories for developing cutting-edge technologies. BEL
is spending 6% to 7% of its annual turnover, every year, on
R&D. The company offers contract manufacturing services for
both domestic and international customers. It has automated
assembly, inspection and testing facilities, as well as precisionmachining capabilities. It adheres to strict process and
manufacturing standards to make world-class products.
Product range
BEL offers products including communication equipment,
radars, opto-electronics, electronics warfare systems, tank
electronics and simulators. BEL also has presence in the areas
of access control systems, security systems, solar systems and
select non-defense applications.
BEML Limited (BEML)
BEML Limited (BEML) is a Mini-Ratna (Category I) multi-
location, multi-product ISO 9001-2000 public sectorundertaking company under the administrative control of
Ministry of Defence. It is engaged in the design, manufacture,
marketing and provision of after-sales services for a wide range
Hindustan Aeronautics Limited (HAL)
Formed in October 1964 with its corporate ofce in Bangalore,
HAL is a Navratna company and the largest DPSU. HAL has 19
production divisions and 10 R&D centers located in 8 states.
It has positioned itself as a comprehensive solution provider
in the aerospace sector, spanning ghter aircraft, trainer
aircraft,light helicopters and unmanned aerial vehicles. Thecompany conducts in-house, as well as collaborative, R&D to
develop new products and technologies. R&D centers, which
have dedicated facilities for research, design and development,
and prototype activities, are co-located with the respective
manufacturing divisions for effective development and design
support.
This state-owned company maintains high focus on the
aerospace industry, which includes manufacturing and
assembling aircraft, navigation and related communication
equipment, as well as operating airports. HAL has a number
of specialized product divisions catering to the manufacture of
aviation hardware as follows:
Aerospace Division
Aircraft Division Nasik
Avionics Division, Hyderabad
Hindustan Aeronautics Limited Korwa
Engine Division Koraput
Foundry & Forge Division-Bangalore Complex
Helicopter Division Bangalore Complex
Industrial & Marine Gas Turbine Division
Overhaul Division
Transport Aircraft Division
Product range
HALs product range consists of aircraft, helicopters, aero-
engines, accessories, avionics and related services. It has
diversied into the manufacture of structures for aerospace
launch vehicles and satellites, and industrial and marine gas
turbine engines. Products manufactured by the company are:
Aircraft of Russian origin
Aircraft of Western origin
Helicopters
Products in current manufacturing range Advanced communication equipment
Accessories for aircraft, helicopters and aero engines
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The company has embarked on a modernization plan to
upgrade infrastructure and technology, primarily involving
the erection of a 300-ton goliath crane, creation of a modular
workshop and the construction of an additional wet basin
at a total cost of around INR826 crores. These facilities, on
completion, are expected to reduce build periods of warships/
submarines.
Product range
The company is primarily engaged in shipbuilding. Its activities
include manufacture and export of naval ships, submarines,
coast guard ships, merchant vessels, fabrication of offshore
platform, jack-up rigs, transportation and installation of
platform, pipe coating, laying of subsea pipes, diving and vessel
management services, also undertakes construction work of
well head platforms, water injection and process platforms,
jack-up rigs and other offshore structures.
Garden Reach Shipbuilders & Engineers Ltd(GRSE)
Garden Reach Shipbuilders & Engineers Limited (GRSE) was
incorporated on 1 April 1960 as a wholly owned Government
of India enterprise under the administrative control of the
Ministry of Defence. It has its own Engineering and Engine
manufacturing divisions and operates primarily through three
locations in Kolkata, i.e., hull manufacturing unit, tting out
jetty and the design department. It is a multi-unit shipyard-
cum-general engineering company and has been in the Mini
Ratna- Category I since 2006. The shipyard has six units
in and around Kolkata and a diesel engine plant in Ranchi
(Jharkhand). Its corporate ofce is in Kolkata. It builds and
repairs commercial and naval vessels. It is also involved in the
retting of ships belonging to the Indian Navy and the Coast
Guard. The shipyard has produced 80 warships for the Indian
armed forces and 700 other vessels for commercial use.
Presently, GRSE has an order book of 21 ships, which includes
an export order for the Government of Mauritius.
Product range
GRSE builds and repairs a wide range of vessels ranging from
warships to commercial vessels. Its products spectrum includes
shipbuilding and ship repair, deck machinery and shipboard
equipment, engines, deep-well water pumps, portable
bridges, material handling, general engineering and technical
of mining and construction equipment, defense and aerospace
products, and rail and metro products. The company has its
corporate HQ and central marketing division in Bangalore
and four manufacturing complexes with nine production units
located in Bangalore, Mysore, Kolar Gold Fields and Palakkad.
BEML operates in the following three major business verticals
for associated equipment manufacturing:
Mining and construction
Defense and aerospace
Rail and metro
It also has three Strategic Business Units (SBUs):
Technology Division for providing end-to-end engineering
solutions
Trading Division for non-company products
International Business Division for export activities
Product range
On the defense front, BEML manufactures variants of Tatravehicles for all terrain operations including bridge layer, eld
artillery tractor, medium and heavy recovery vehicles, pontoon
main bridge system, mobile mast vehicle, mine plough,
transportation trailer, weapon loading vehicles, armored
recovery vehicles, military rail coaches, wagons, aircraft
weapon loading trolleys, crash re tenders and radar carrying
vehicles.
Mazagon Dock Ltd (MDL)
Mazagon Dock Ltd (MDL) is the premier warship building yard
in India. It falls in the Mini-Ratna CategoryII and is involved
in the manufacturing of warships and submarines, as well as
offshore platforms and associated support vessels for offshore
oil drilling. The company has the capability to build warships,
submarines and merchant ships up to 30,000 DWT, and is
engaged in the fabrication of well head platforms, process and
production platforms and jack up rigs. For outtting work, the
company has a large number of workshops with sophisticated
equipment and machines specic to hull fabrication and ship
construction work. Repair work is also under taken using the
available facilities.
Currently, it is one of the most heavily loaded warship-building
yards in the world. It is the backbone of war shipbuilding in
the country and produces sophisticated world-class stealth
frigates, destroyers and submarines for the Indian Navy.
Mazagon Dock currently accounts for more than 85% of naval
vessels built in the country.
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Hindustan Shipyard Limited (HSL)
The company was founded in 1941 and is based in
Visakhapatnam, India. It established a ship repair unit in 1971.
In 2009, HSL was transferred from the Ministry of Shipping to
the MoD. The yard played a critical role in the development of
nuclear-powered, Arihant class submarine. Hindustan Shipyard
Ltd., a shipbuilding company, is engaged in the design,construction, conversion and repair of ships. It also engages in
submarine retrotting and constructing offshore structures, as
well as provides submarine repair services.
The shipyard is relatively compact at 46.2 hectares (0.462
km2). It is equipped with plasma cutting machines, steel
processing and welding facilities, material handling equipment,
cranes, logistics and storage facilities. It also has testing and
measuring facilities. It has a covered building dock for building
vessels up to 80,000 DWT. There are three slipways and a
550-meter (1,800-ft) tting-out jetty. HSL has a dry dock, wet
basin and repair delphin for ship and submarine repair and
retrotting.
The PSU has three divisions:
Shipbuilding
Ship Repairs
Submarine Retrotting
As of 2009, it had built over 170 vessels and repaired almost
2,000 ships.
Products range
It builds bulk carriers, offshore patrol vessels, survey ships,
drill ships, offshore platforms, and repair and support vessels.
It also conducts major overhauls of Indian Navy submarines. Itis being equipped to construct nuclear-powered submarines.
HSL has an order book of 24 vessels, of which 14 are
under construction. The value of the shipbuilding orders is
INR1108.21 crores.
Goa Shipyard Limited (GSL)
GSL was established in 1957 and is engaged in building
and designing a wide range of vessels for the defense and
commercial sectors, with expertise in building modern patrol
vessels of steel and aluminum hull structure. Services provided
by the company include designing and building of vessels,
repair and modernization of vessels, and technology transfer.
GSL is modernizing its yard to adapt to the latest technology
in shipbuilding. For this purpose, it is negotiating with well-
training. The company has its own engineering and engine
manufacturing divisions.
Shipbuilding
Engineering
Engine
Bharat Dynamics Ltd (BDL)Established in 1970, BDL is primarily engaged in the
manufacture of guided missiles and allied equipment. It has
corporate ofces and units in Hyderabad. The company
provides a range of weapon systems including surface-to-air
missiles, air defense systems, heavyweight torpedoes and
air-to-air missiles. It is the primary production agency for
the manufacture of four new Indian missile systems: Prithvi,
Trishul, Akash and Nag.
The company is working in close coordination with the DRDO
for the technology absorption of other missiles under IGMDP.
The Government of India has nominated BDL as a Mini Ratna
Category-I company. BDL, with its ISSO 9002 certied
manufacturing division and NABL-accredited electronics
laboratory, is the leading manufacturer of guided missiles and
allied defense equipment of international standard.
BDL has three production facilities located in Kanchanbagh,
Hyderabad; Vizag and Bhanur, Medak District. BDL is
headquartered in Hyderabad, Andhra Pradesh, India. Its
production and testing facilities are modern and are tuned to
cater the stringent qualitative requirements of guided weapon
systems. Component production facilities include a precision
shop with CNC machining centers, CNC turn-mill centers,
CNC 4 axes, T&C grinder and precision machines; a generalmachine shop; a tool room; a vacuum fumance and surface
nishing facilities. BDL is setting up additional production units
to expand its capacity. The company is already working on its
third unit in Vishakhapatnam.
Product range
The company manufactures weapon systems such as surface-
to-air missiles, air defense systems, heavyweight torpedoes
and air-to-air missiles. Its products include fagot launcher
adapted for Milan, indigenous launcher for Milan ATGM,
test equipment for Konkurs Missile, and counter measure
dispensing system.
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Table 3: Financial performance of the DPSUs
DPSU Value of sale
201112
Value of
Production
201112
Prot after
Tax 201112
In INR Million
HAL 3040.28 2584.05 461.71BEL 1068.90 1053.38 153.95
BDL 257.89 180.53 42.72
GRSE 241.56 201.60 19.64
HSL 104.49 102.55 -15.63
MIDHANI 94.28 90.18 12.45
BEML 501.87 741.31 10.41
GSL 131.43 122.99 15.05
MDL 558.16 458.85 89.87
Source: Respective DPSUs Annual Reports
Supply chain and vendor registration
PSUs and OFs have, as a policy, been outsourcing many of their
requirements and have developed a wide vendor base, which
includes a large number of mid- and small-scale enterprises,
apart from large-scale industries. Percentage growth in vendor
base is expected to increase by 6% until 201516 Figures on
outsourcing by DPSUs and OFs for the last three years are
given in the table below.
Table 4: Outsourcing snapshot of the DPSUs and OFs
Year PSUs/
Govtagencies
SSI
sector
Non-SSI
sector
Total Annual
turnover
(INR
crores)
%
In USD Million
2008-
09
284.73 378.55 677.45 1340.91 5024.18 27
2009-
10
290.91 467.45 743.27 1501.64 6293.64 24
2010-
11
521.64 352.18 910.73 1784.55 6761.83 25
Source: Report of Working Group on Defense Equipment
known shipbuilders for proposing collaboration. To date, it has
built 167 vessels including barges, tugs, landing craft, offshore
patrol vessels and other vessels for the Indian Navy and Coast
Guard and for export to countries such as Yemen.
Product range
The company manufactures ships and hi-tech components for
the defense and commercial sectors. It also offers servicessuch as the designing and building of variety of vessels, repair
and modernization of vessels and technology transfer.
Mishra Dhatu Nigam Ltd (MIDHANI)
Incorporated in 1973, MIDHANI is as a MINI-RATNA-Category
I PSU under the administrative control of DDP. Set up
primarily for achieving self-reliance in the manufacture of
critical alloys, Midhani is a hi-tech metallurgical facility and has
been supporting programs of national importance in strategic
sectors including space, defence, aeronautics, atomic energy
and general engineering.
The company is located in Hyderabad, Andhra Pradesh. Mostof the products of MIDHANI are import substitution. The
company is planning to foray into the aeronautical and power
sector with supplies of another special nickel and cobalt-based
super alloy for the manufacture of engines and other aircraft
parts. Manufacturing facilities include melting furnaces,
forge presses, conditioning, heat treatment, hot rolling, cold
rolling, tube shop, investment casting, bar and war drawing,
machining, Kanchan Armour Plant, pickling and quality control
lab.
Product range
The product range includes super alloys, titanium alloys,
maraging steels, heat resistance alloys, controlled expansion
alloys, tungsten and molybdenum in a variety of mill forms. The
company also offers technological (testing and evaluation) and
consultancy services to its customers.
Financials of DPSUs
Most of the DPSU cater to units under MoD. An overview of the
nancial performance of the nine DPSUs during 201112 as
follows:
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Table 5: Snapshot of the modernization of DPSUs and
OFs
Investment XIth plan
expenditure
XIIth plan
projection
In USD million
New capital 125.27 1867.46Renewal and
replacement
231.82 452.73
Source: MoD report
The table lists the amount spent on modernization and the
projected amount for some of the DPSUs and OFBs in coming
years.
Table 6: Investment for modernization of OFs and DPSUs
Organizations 2009
2010
2010
2011
2011
12
201213
Projected
201314
Projected
In USD Million
Modernization
of OFs
89.64 127.82 128.18 134.55 141.27
Modernization
of shipyards
58.00 68.55 72.73 80.55 84.55
Modernization
of BDL
1.64 7.64 9.09 10.00 10.73
Modernization
of HAL
67.27 48.18 72.73 81.82 86.00
Modernization
of BEL
22.36 23.64 34.55 36.36 38.18
Modernization
of Midhani
5.09 6.91 8.18 9.09 9.64
Modernization
of BEML
23.09 22.00 18.18 19.09 20.00
Source: MoD Report
DPSUs, along with OFs, outsource 24%27% of their orders to
small- and mid-sized enterprises (SMEs). Requirements and
tender documents are available at their respective websites in
government tenders under respective heads. DPSUs websites
give reference to the purchase manual and sub contracting
registrations of vendors and sub contractors. The Defence
Procurement Manual, 2009 (DPM 2009), which covers all
revenue procurement and procedures for the registration of
rms, follows the Joint Services Guide: 015:13:03:2007 (JSG-
015). This guide provides the methodology of assessment and
registration of vendors, as well as their performance appraisal
on technical and nancial aspects and classication. Interested
rms can download Supplier Registration Form and submit
it duly lled. Along with this, they are required to enclose their
company prole/catalog and details of similar jobs undertaken,
details of staff and operatives, annual reports, CVs of key
ofcers, list of customers and other relevant information to
prove their competence to undertake the job.
Vendors registered with one department of the MoD can beconsidered for procurement by other departments of the
ministry.
Despite a common format, procurement agencies such
as DGOF, DPSU, DRDO and DGOS follow their own vendor
registration process. There is no single source database
available. More than 6,000 vendors are estimated to be
available, of which around 95% are reportedly from the SME
sector.
Modernization of DPSUS and OFs
The infrastructure at OFs and some of the DPSUs is aging and
needs continuous updating. This is plausible through state-of-the-art technologies. To keep pace with the quantitative
and qualitative requirements of the services sector and of
other users and also keeping in view the continuous process
of modernization, the government has prompted investment
through various greeneld and browneld projects, as well as
through new capital, and renewal and replacement of obsolete
plant and machinery. Modernization is carried out with a view
to improve quality and productivity, achieve economy of scale
and acquire new production technologies. The OFB alone has
an ambitious plan of modernization, envisaging investment of
around INR2761 crore) during the 12th plan period (2012
17). Investment on modernization of plant and machinery
during the XIth and XIIth Plan is given in the table.
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Chapter
2The Indian defense market andopportunities
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Figure 7: the growth of the defense market in India
Growing defence market (2010)
21-22%
13-14%
9-10%*
4-5%
8-9%
Russia China India UK US
*India is one of the fastest growing market
Source: Data compiled by Q-Tech Synergy
Figure 8: Amount spent by the Indian MOD on foreign
equipment procurement
Amount Spent on Foreign Procurement (in $ bn)
2.26 2.263
2.98
3.43
2007-08 2008-09 2009-10 2010-11
Source: Data compiled by Q-Tech Synergy
Keeping in mind the state of equipment and the need to
modernize the armed forces, it is clear that there is ample
opportunity for both the indigenous defense industry and
foreign companies. Assuming that nearly 80% of the capital
budget is allocated to platforms capital acquisitions, of which
60%70% is earmarked for committed liabilities and 30%40%
for new schemes, a substantial amount will be available for
capital procurement in coming years. The current capital
budget of the three services, currently pegged at US$15.9
billion (INR79,500 crores), is set to reach US$25.6 billion
(INR1,28,000 crores) by the end of the 12th Five-Year Plan
period. It is set to cross the US$60 billion (INR3,00,000 crores)
mark by 2027. Capital budget of the three armed forces is set
to cross the US$250 billion (INR12,50,000 crores) mark by
India is currently the eighth-largest defense spender in
the world, with an estimated 3% share of global defense
expenditure. India has become one of the fastest-growing
defense markets after Russia and China. Besides, it had
emerged as the worlds largest importer of arms between 2007
and 2011, accounting for 10% of global arms imports. The
share has been increasing over the year.
Figure 6: The state of Indias defense equipment
Defence Equipment State in %
30
30
40
15
50
35
State of the art Obsolescent Matured
Desired
Existing
Source: MoD ofcial data
Over 50 % of equipment of the armed forces is nearing obso-
lescence and needs immediate replacement. This, coupled with
the growing capital budget for fresh defense procurements of
10% year-on-year, clearly outlines a plethora of opportunities.
The country is anticipated to spend over INR5,00,000 crore
(US$100 billion) over the next decade to modernize its armed
forces, particularly entailing spend on the procurement of
weapons and other systems. This indicates a minimum capital
procurement of INR50,000 crore (US$10 billion) every year.
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aims to reverse this balance and manufacture 70% or more of
its defense equipment needs in India. However, it is to be noted
that DPSUs alone will not be able to meet the requirements of
the armed forces with their order books already under pressure
from pending orders. Realizing this fact, the government
has started launching policies to encourage the emerging
dynamic and efcient private industry. Promulgation and ne
tuning of the DPP, recent changes in the Offset Policy and the
Defence Production Policy would go a long way in ensuring the
development of the indigenous defense industry. The recent
case of the replacement of 65 Avro Aircraft for the Indian Air
Force and procurement programs such as FICV, TCS and BMS
for the Indian Army, wherein the private sector has been called
in, are cases in point.
Challenges for Defense Industrial Base
Drivers Challenges
High obsolescence
percentage of existinginventory; demand
for state-of-the-art
technology due to
modernization drive
Attractive low-cost
manufacturing
destination with a large
working population
Large pool of technical
manpower
Private industry
participation: expansion
of industrial base.
Offset policy
Economic slowdown in
other countries
Formalizing of
procurement procedure
and policies
End of technology denial
regime, with countries
looking forward to India
as a strategic partner
Self-reliance being
the stated goal of the
government
Restrictions on foreign
investment impedetechnology transfer
Lack of infrastructure
restricts the capacity to
absorb technology
Need to bring structured
improvements in
supply chain of defense
industry.
Decision making and
spend allocation take
long
Short lead time to
develop/scout for
suitable partners
High R&D cost
High investment
requirement
Uncertainty of orders
Long gestation period
and project delays
Complex and biased
taxes
the 14th Five-Year Plan period (202327), considering a 10%
year-on-year increase during this period. Thus, the cumulative
capital expenditure between 2012 and 2027 would exceed
US$500 billion (INR25,00,000 crores). The likely expenditure
on platform spread is depicted below.
Figure 9: Breakup of anticipated defense expenditure on
the basis of platforms
Anticipated defense expenditure technology/platforms
Air
30%
Land
15%
Naval
15%
R&D
10% C4ISR
5%
Other
25%
Source: Data compiled from SIPRI
Figure 10: Forecast of Indias defense budget
Indian Defence Budget Expenditure Forecast
0
10
20
30
40
50
60
70
2012-1314-15 16-17 18-19 20-21 22-23 24-25 26-27
Committed Expenditure (65%) New Procurements (35%)
Source: Data compiled by Q-Tech Synergy
As stated previously, India currently procures approximately
65%70% of its equipment needs from abroad. The government
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Opportunity matrix
Public sector companies possess huge infrastructure and manufacturing facilities; experience in systems integration with imported
technology; trained engineering and manufacturing manpower; and access to defense research facilities, coupled with strong
nancial backing by the MoD. Also, they enjoy facilities in domains such as taxations, EVR, prioritization in tenders, making them
the preferred choice of global manufacturers.
Some of the near-term projects where these DPSUs have been nominated and awarded/will be awarded comprise the following:
Organization Projects in Hand Nominated Future possibility
HAL Mirage 2000 upgrade FGFA Light Combat Helicopter (LCH) -
Attack Helicopter
Chetak and Cheetal helicopters Multi-Role Transport Aircraft (MTA)
LCA Trainer Aircrafts Indigenous Light Utility Helicopters
(LUH)
Sukhoi-30 MKI Indian Multi Role Helicopter (IMRH) Basic Trainer Aircraft (Follow-On)
Advance Light Helicopter (ALH) Advanced Jet Trainers
Intermediate Jet Trainer (IJT) Mini & Macro UAV
Hawk Light Utility Helicopters
Dornier D0-228 NG Heavy Lift Helicopter
Jaguar DARIN-III Upgrade MMRCA
Jaguar Engine Upgrade
Intermediate Trainer Aircraft
BEL Point to Multi-point Radio Relay Command Information Decision
Support System
Battleeld Management System
Software Dened Radio (SDR) Night Vision Devices for Armed
Forces
Mountain Radar
Tactical Control Radar Walkie Talkie Radio Sets for Army Tactical Communication System
Coastal Surveillance System High Data Rate Multi-band SoftwareDened Radio
Weapon Locating Radar
Akash Weapon System Missile Warning System
Battleeld Surveillance System Passive Night Vision Devices
Passive Night Vision Devices & Low
Intensity Conict EW Systems
Upgradation of Schilika Hand Held Thermal Imager with
Laser range Finder
Coastal Surface Surveillance
Radars
3 D tactical Control radars
Upgraded Weapon Locating Radar Missile Warning Systems
MIDHANI The company received orders
from OFB, DRDO and applications
of Air, Naval, Land Forces; ISRO,
Department of Atomic Energy
(DAE) for Super alloys, Titanium
Alloys and Special Stainless Steels.
T-72 and MBT Arjun ----
Kaveri engines (of LCA)
Advanced Technology Vessels(Indias indigenous nuclear
submarine)
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BEML 204 ARV WZT-3 Tatra Heavy Duty Trucks
(Production has been stopped)
Light Tanks Wheeled and Tracked
Pontoon Mid stream (PMS) Bridge
System and Railway wagons for
transporting trucks and Defense
wagons
Armoured recovery Vehicles (ARVs) Wheeled Armoured Personnel
Carrier (APC)
Ground support equipment
(personnel carrier, rocket launchers,
ammunition, etc) required by
defence forces.
Arjun Tank
FI CVFMBT
BEML is expected to produce and
supply spare parts for MBT Arjun
required for both OEM and spares
requirement
Light Armoured Multi Purpose
Vehicle (LAM)
Overhaul of T-72 M1 and Infantry
Combat Vehicle BMP-II
BDL Akash SAM for IAF And Army K-15 (submarine launched ballistic
missile, SLBM)
QRSAMs
C-303 Anti Torpedo Decoy Productionisation of several items
such as Advanced Light Weight
Torpedo, Heavy Weight Torpedo
(Varunastra)
Company will be joining a major
joint development programme of
SRSAMs required by IAF and IN
ATGMs Konkurs-M ATGM
Milan-2T ATGM
Invar ATGM
MDL P-17 or the Shivalik class stealth
frigates
Project 15B OPVs for Coast Guard
Project 75 I Project 17 A
OPVs for Coast Guard
Six Scorpene class submarine
(Project 75)
Under t of Shishumar class
submarine
Three P-15A (Kolkata) class
destroyersGRSE Anti Submarine Warfare Corvettes 8 nos. Landing Craft Utilities Project 28 A Corvette
Landing Craft 4 Anti Submarine Warfare Corvettes Hydrographic Survey Vessels
Water-jet FACs 8 nos. Inshore Patrol Vessels for
Coast Guard
Landing Craft Utility (LCUs)
ASW shallow Water Craft
Project 17 A Frigate (Shivalik Class)
GSL Six 105M Offshore Patrol Vessels
for Indian Coast Guard
Offshore Patrol Vessels Project 28 A Corvette
Order for construction of Pontoons
and Service barges for INS
Vikramaditya
Interceptor boats for Coast Guard Hydrographic Survey Vessels
Order from MDL for supply of 3 in
no. 6.5m RIBS and 3 in no. 7.3m
RIBS for P15A
8 Kangam type mine counter
measures vessels
Landing Craft Utility (LCUs)
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Retention of the afrmative right of DPSU for prior approval to key JV decisions such as amendments to the Articles
of Association of the JV Company, declaration of dividend, sale of substantial assets, and formation of further JVs/
subsidiaries
Exit provisions for the DPSU
Regular reporting and monitoring of the functioning of the JV company
The formation of JVs will be undertaken by board-managed DPSUs within the framework of the JV guidelines
The JV guidelines will provide a streamlined, fair and transparent framework for entering into JVs by DPSUs, with the ultimate
objective of better risk management/ greater efciency/ shorter time frames for delivery to meet the increasing demand of our
armed forces, and for enhancing self-reliance in the defense sector as a whole. The guidelines could help foster better and deeper
partnerships between DPSUs and private partners.
Following these guidelines, state-run Mazagon Dock Limited (MDL) has entered into two JVs with private sector giants Larsen &
Toubro and Pipavav Defence and Offshore Engineering. Larsen & Toubro will help MDL construct submarines, while Pipavav will
build surface warships. Both the JVs are based on a 50:50 partnership model.
Following are JVs/MoUs/Agreements signed by DPSUs and the OFB with foreign and Indian private companies in the last few
years.
DPSU Foreign Company Nature Of Tie-Up
Bharat Dynamics
(BDL)
EADS New generation of missile systems.
Whitehead Alenia Sistemi
Subacquei (WASS)
Production of C303, an anti-torpedo countermeasures system.
Lockheed Martin JV for the production of anti-tank guided missiles.
Others BDL in discussions with Israel Aerospace Industries, Israel Military
Industries
Bharat Electronics Ltd
(BEL)
Boeing Integrated Defence
Systems
Develop an analysis and experimentation center in India that will be
equipped with the latest modeling, simulation and analysis tools
General Electric Medical
Systems
Manufacture of CT Max and other state-of-the-art X-Ray Tubes
Rafael Advanced DefenseSystems Ltd, Europes Selex
Galileo and Thales, Boeing
and the Hyderabad-based
Astra Microwave
Technology tie-ups/MoUs in missile electronics, guidance systems,microwave components, electro-optics, homeland security, coastal
surveillance systems and airborne electronic warfare systems
Elbit Systems Electro Optics
ELOP Ltd
Electro-optics and thermal imaging systems
Defence Research and
Development Organization
(DRDO)
Akash Missiles
Israel Aerospace Industries
(IAI)
Developing unmanned aerial vehicle systems (UAVs)
Elisra Airborne electronic warfare programs for Indian defense requirements.
IAI Cooperation on Long Range Surface to Air Missile (LRSAM) Ship-
Defence Systems
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Bharat Electronics Ltd
(BEL)
Multitone Ltd Mobile communication products
Northrop Grumman, and
Dynamatic Technologies
Limited (DTL)
Manufacturing components for the F-16 re control radar
Finmeccanica (SELEX) Terrestrial Trunked Radio (TETRA) Standard Secure Radio Systems and
military ATC radar
Rafael Advanced Defense
Systems Ltd
To develop advanced missile systems
Thales JV to jointly manufacture radar
WASS JV cooperation agreement for torpedoes and autonomous underwater
vehicles (AUVs)
Terma Memorandum of Agreement (MoA) on cooperation in various elds
of defense technology naval radar technology and aircraft self-
protection
BHEL MoU to explore a 250-MW joint manufacturing facility for solar photo
voltaic cells, modules and silicon wafers
Lockheed Martin MoU to explore business opportunities on potential co-productionavenues for domestic aerospace and defense electronic needs
SAAB MoU to manufacture radars
JV to produce and market Sea Giraffe Agile Multi Beam and Arthur
Weapon Locating System radars
Sagem MoU in the eld of Land Navigation and Artillery pointing applications
DHS Systems Agreement for the supply of shelters
Bharat Earth Movers
Ltd. (BEML)
CSM Software Pvt. Ltd Strategic MoU for establishing a framework for the execution of the
engineering services
OBRUM MoU for designing and developing Futuristic Main Battle Tank, the
armoured recovery and repair vehicle on Arjun, overhaul of T-72 and
BMP-II upgradeTanax Agreement with Slovak rm Tanax for armored vehicles
UAC Memorandum of Agreement (MoA) to explore and exploit business
opportunities in production, sales, marketing and maintenance of civil
transport, as well as passenger aircrafts in India.
Alenia Aeronautica MoU to pursue mutual collaboration for designing, manufacturing
and selling a new Primary/Basic Training Aircraft (BTA) and a betting
replacement for the existing HPT-32 Deepaks Trainer Aircrafts
SLOVAKS For 155mm Self Propelled Wheeled Gun
Poland For 155mm SP Tracked Gun System
Bumar To build vehicles for Pechora project
Eurocopter BEML foraying into the aerospace sector by signing the MoU with
Eurocopter of France
WFEL group MoU to produce 46 m of dry support bridges for the Indian Army
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Bharat Earth Movers
Ltd. (BEML)
SAS group Agreement for supply and manufacture of Self Propelled Mine Burrier
General Dynamics Agreement to manufacture four-wheeled armored small arms and
mine protected patrol vehicle
TATRA SIPOX TOT agreement with Britains TATRA SIPOX for Technology transfer,
production and marketing of 20 ton to 25 ton capacity tippers to
Indian metal, mining and coal markets
Garden Reach
Shipbuilders and
Engineers Limited
(GRSE)
Infotech and Direction des
Construction Naval Services
(DCNS)
Three-way JV with French Naval Ship builder DCNS and an Indian IT
company Infotech named as Garden-Vision Design P Ltd for a ship
building facility
DCNS Propulsion system for corvettes; another project for cooperation on
torpedoes
Hindustan
Aeronautics Limited
(HAL)
UAC Joint development and production of Fifth Generation Fighter Aircraft
UAC & Rosoboronexport Co-development and co-production of Multirole Transport Aircraft
(MTA)
BAE For development of aerospace and other dedicated software for
domestic and export markets
SAFRAN Manufacture of precision components of engines for civilian aircraftSnecma Manufacturing of engine spares and components
Sagem Production and maintenance of inertial navigation systems and
automatic ight control systems
Rolls Royce Maintenance of Rolls-Royce Avon, Adour, Gnome and Dart Aero
Engines, as well as Avon and 501 K Industrial Gas Turbines
Local manufacture Adour 871 engines for the new Indian Air Force
Hawks
50:50 partnership for the manufacturing of compressor shroud rings
CAE Inc Helicopter training center (HATSOFF) to offer complete training
solutions for the Bell 412, Eurocopter AS365 Dauphin and both civil
and military variants of the Hal-built Dhruv advanced light helicopterIAI Joint development of an unmanned helicopter
Airbus Agreement for supply doors
National Aeronautics Ltd For 14-seater Saras Aircraft
Boeing Manufacture of aircraft components and assemblies
Rafael Upgrade contract of Jaguar to provide nuclear strike capability with
Rafael Lightening Pod
Elbit Systems JV company HALBIT for the design, development, marketing and
support of simulators and training systems and avionics parts
Timco State-of-the-art airframe MRO facilities at HALs Bangalore airport
and manufacturing complex for narrow body and Airbus & Boeing
commercial aircraft
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Hindustan
Aeronautics Limited
(HAL)
Edgewood Ventures Development and manufacture of high-technology miniature electronic
modules for aerospace applications
Infotech For design services work, viz., Aero-thermo and mechanical design,
structural stress, thermal and rotor dynamic analysis
Incat For design and engineering related airframes and aerostructures
Samtel Display Systems JV in the aerospace segment to co-develop defense productsNasmyth Group Infotech HAL Limited, a 50:50 JV company between HAL and Infotech
Enterprises Limited, has entered into a technological alliance with
Nasmyth Group; both the companies will jointly work on design and
redesign of aerospace components
EADS Signed MoU to expand their cooperation into new market segment and
exploring mid-term and long-term strategies on the key segment of the
aerospace business
TATA Work packages related to engineering design services in aero
structures and also the captive offshore and onsite workload from
OEMs including offset program
Hindustan Shipyard
(HSL)
Larsen and Turbo (L&T) Hindustan Shipyard Ltd (HSL) will soon be forging JV with Larsen &
Toubro (L&T) for shipbuilding
Mazagon Docks Pipavav Defence and Offshore
Engineering Co. Ltd
Building warships and submarines for the Indian Navy.
L&T Construction of submarines
Ordnance Factory
Board (OFB)
Israeli Military Industries OFB has entered a 50:50 MoU with Israeli Military Industries for
sharing technology and equipment including charges of 155 guns
Rosoboronexport and M/s
Splav SPA
MoU to manufacture ve versions of Smerch Rockets, based on the
technology received from Russia
Source: Data compiled by Q-Tech Synergy
Way forward for DPSUs and OFs
The Armed Forces are undertaking major modernization programs. Over the next decade or more, all of the three services would
be undertaking signicant procurements.
The amount spent on capital acquisition from indigenous sources during the last ve years was approximately 48% of the capital
budget, as per government gures. A similar percentage spend this year would put the domestic market at US$7.6 billion
(INR38,000 crores). These gures, however, include a signicant amount spent on sub systems/components procured by the
DPSUs/OF/Defence Industry ex-import. Thus, even if we consider a conservative ratio of 30% as expenditure on indigenous
production, the current domestic market size is of approximately US$ 4.77 billion (INR23,850 crores). The government is keen
to achieve 70% indigenization by 2020. However, the percentage may be capped at 50%, considering that DPSUs and OFs will
continue to be major players, especially in the case of high-security projects. Even if this percentage reaches 50% by 2022 (end
of the next ve-year Defense Plan), the share of the domestic market would increase to US$15.7 billion and to US$30 billion by
2027.
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Figure 11: Size of the Indian defense market
Indian domestic market size
2012
$4.77 billion
2022
$15.7 billion
2027
$30 billion
Source: Data compiled by Q-Tech Synergy
The growing domestic market offers greater opportunities,
both to foreign and Indian players. Furthermore, theintroduction of a new category of acquisition Buy & Make
(Indian) in DPP-2011 would enable Indian industries to acquire
technology from foreign OEMs and manufacture the product in
India.
Figure 12: A comparison Indigenous defense production
with imports
Imports vs Domestic Opportunity
0
5
10
15
20
25
30
35
FY12
-13
FY13
-14
FY14
-15
FY15
-16
FY16
-17
FY17
-18
FY18
-19
FY19
-20
FY20
-21
FY21
-22
FY22
-23
FY23
-24
FY24
-25
FY25
-26
FY26
-27
Amountin$billion
Imports Indigenous Production (Domestic Opportunity)
Source: Data compiled by Q-Tech Synergy
Figure 13: Break of indigenous defense production
Domestic Market Share Public vs Private
0
5
10
15
20
25
30
35
FY12
-13
FY13
-14
FY14
-15
FY15
-16
FY16
-17
FY17
-18
FY18
-19
FY19
-20
FY20
-21
FY21
-22
FY22
-23
FY23
-24
FY24
-25
FY25
-26
FY26
-27
Domestic Production Public Sector Value Private Sector Value
Amountin$Bn
Source: Data compiled by Q-Tech Synergy
In terms of the value of production, DPSUs account for
more than 65% of the total industrial output of all defense
public sector entities in India. During 201011, the value of
production by DPSUs totaled nearly US$ 3.9 billion. During
201112, OFs and DPSUs outsourced 20%25% of their orders
to SMEs.
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Part 2:Offset policyof the IndianMoD
effects,implicationsand
opportunities
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Chapter
1 What is offset?
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These procurement reforms resulted in the introduction of the
Defence Procurement Procedures (DPP) in 2002. These have
since undergone evolution through revisions in 2005, 2007,
2008, 2009,2011and 2013 to achieve greater transparency
and speedier processing of procurement cases
Offset provisions were added to the DPP in 2005 and came
into effect on 1 July 2005. Accordingly, the Services CapitalAcquisition Plan (SCAP) Categorization Committee was
authorized to recommend the inclusion of an offset clause
amounting to 30% of the indicative cost in the request for
proposals in cases where the indicative cost was INR300 crores
(equivalent to about US$60 million) or more, though changes
could be suggested in the offset amount if believed necessary.
The regulatory framework and procedural details were laid
out in 2006 (became effective on 1 September 2006) by
the Department of Industrial Participation and Promotion, in
consultation with the MoD (Defence Acquisition Committee).
India adopted the middle path of quasi direct offsets, where
a foreign OEM could discharge offsets using products/services directly related to the platform and those that are
not directly related to the platform. The move was meant to
provide exibility to foreign OEMs, while ensuring broad-based
development of the Indian defense sector.
Objectives
The objectives of the offset policy have always been implicitly
asserted by the MoD in their decision pertaining to the
treatment of offsets. They were formalized and promulgated
for the rst time through the revised offset guidelines,
applicable from 1 August 2012 onward. The objectives
articulated in the revised offset guidelines are threefold:
fostering an internationally competitive domestic industry;
enhancing indigenous defense R&D capability; and fostering
a dual-use industrial base. The offset policy intends to help
achieve greater self reliance in defense production through the
infusion of DFI.
The government intends to utilize the current procurement
cycle to help Indian companies integrate themselves into
the global supply chains of foreign OEMs and attract both
investment and technology into the nascent Indian defense
manufacturing base.
Modalities of executing offsets
The offset clause is applicable for projects categorized as
Buy and Buy and Make by the Defence Acquisition Council.
The council, under the Raksha Mantri, decides the quantum
What is offset?
An offsetis a counter trade arrangement in which a foreign
purchaser, usually a government, requires the contractor
to agree to purchase a predetermined level of components/
services from subcontractors located within the purchasing
nation or to assist that nation in selling its unrelated products
to third parties. An organization wanting to sell equipment toa foreign nation must invest back a portion of the expected
revenue into the foreign nations economy
Offsets are utilized by countries to use their purchasing
power to develop local capacities and channelize investments
and technology to favored domestic sectors. As per the
Government Procurement Agreement under the World Trade
Organization (WTO), offsets are dened as measures used
to improve local development or improve the balance of-
payments accounts by means of domestic content, licensing of
technology, investment requirements, countertrade, or similar
requirements
Offset arrangements may be practiced in three forms:
Direct: In a direct offset transaction, the specic
components or services sourced by the supplier from the
importing country are directly related to the supplies
envisaged under the principal contract,
Indirect:An indirect offset transaction is where the
supplier agrees to assist the importing country in the
development of its export or in investment requirements
unrelated to the principal contract.
Semi-direct offsets:These are offsets relative to
equipment and/or services that are very similar to items
covered by the main purchase contract.
Offset policy of the Indian MoD
Indian defense procurement was governed by general
accounting and nancial rules as other civil procurement
agencies of the government until 1992. The procedure for
the procurement of defense equipment was differentiated
and separated in 1992. This was further reviewed by the
Group of Ministers in 2001, the group submitted a report on
reforming the National Security System in 2002, after which
clear structures and guidelines were laid out for defense
procurement by the MoD. This was necessary, as India was
entering one of its most sustained and signicant cycles ofdefense equipment procurement to modernize its forces.
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of offsets applicable to a project. It may prescribe a quantum of offset of above 30% or waive off offset obligation, depending on
factors such as the strategic importance of the program and the capability of the Indian industry to absorb offsets. After the offset
clause becomes a part of the Request For Proposal (RFP), it cannot be done away with. The applicability of the offset clause is
summarized in the table below.
Figure 1: categories of procurement in defense acquisition (as in DPP 2011)
Categorization
Buy
Buy and Make
MakeMake (High
Tech)
Indigenous development of high-tech complex systems with min 30%
indigenous content in prototypeOffset not applicable
Make (DRDO)Indigenous development of strategic,
complex and security sensitive systemsby DRDO
Offset not applicable
Buy andMake
(Global)
Import partial requirement and producebalance in India by foreign or Indian
vendor
Offset applicable on thequantum of payment to be
made in foreign exchange
Buy and
Make
(Indian)
Import partial requirement and producebalance in India only by Indian vendor.Equipment should have minimum 50%
indigenous content
Offset applicable on
foreign content above the
prescribed 50%
Buy GlobalOutright purchase of equipment from
foreign and Indian vendorsOffset applicable
Buy IndianOutright purchase of equipment fromIndian vendors only. Equipment should
have minimum 30% indigenous content
Offset applicable on theforeign content above the
prescribed 70%
Make (Low
Tech)
Indigenous development of low-tech
mature systems with min 50% local
content
Offset not applicable
The Indian offset policy is an ever-evolving, exible one that allows for multiple modes of offset discharge through both direct
(products and services directly related to the platform being acquired) and indirect (products and services not directly related to
the platform) methods. A summary of the methods of offset discharge as per the latest offset guidelines is given below.
Figure 2: Methods of offset discharge
A. Export Direct purchase or executing export orders for manufacture of eligible products or
provision of eligible services
B. FDI FDI in Indian enterprises for manufacture/maintenance of eligible product or provision of
eligible services
C. ToT to Indian Enterprise Investment in kind in terms of ToT (without license fee, restriction of domestic
manufacture or export) to Indian enterprises for the manufacture and or maintenance of
eligible products and provision of eligible services
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D. Transfer of Equipment
to Indian Enterprise
Investment in kind in Indian enterprises in terms of provision of equipment through the
non equity route for the manufacture /maintenance of eligible products and provision of
eligible services
E. ToT and for Transfer
of Equipment to
Government institution
Provision of equipment and /or ToT to government institution and establishments
engaged in manufacture /maintenance of eligible products and provision of eligible
services including DRDO
F. Technology Acquisition
by DRDO
Provision of high end critical technology to DRDO (list of identied critical provided by
DRDO)
G. Offset Banking Foreign vendors could consider creation of offset programs in anticipation of future
obligations
All methods of offset discharge are only applicable for a list of
eligible products and services. The Indian offset policy allows
for the discharge of offsets through products and services from
not only the defense sector, but also the synergistic sectors of
civil aerospace, internal security and coastal security. A list of
these products and services is given under appendix D in the
Revised Offset Guidelines 2012.
Dual-use products, components and raw materials with
end-use in defense products, mentioned in the list of eligible
products, may also be used for discharging offset obligations.
However, the nal decision on the eligibility of these products
is taken by the monitoring agency in the MoD (Technical Offset
Evaluation Agency). Also, the revised offset guidelines clearly
state that only value addition done in India will count toward
the discharge of offset obligations. This is determined through
purchase orders and other documentation that the OEM
furnishes to claim offset credits.
Offset process
The process from submission to the signing of offset contract
takes (should) 74 to 137 weeks. This includes the preparation
and submission of the offset offer, which consists of the
technical and commercial offset offer. The entire process must
be approached with diligence, and professional help may be
sought, wherever necessary, to ensure minimal delays.Figure 3: offset process
Evaluation of Commercial Offset
Offer by CNC- only for L-1
Signing of Main contract & Offset
Contract
Execution of Main & Offset
Contracts.
Submission of Offset Compliance
Commitment (annex 1 to appendix
D) - With RFP submission
Acceptance by DG Acquisition
Technical & Commercial Offset
offers in Separate Envelopes-
Within 12 weeks
Evaluation by TOEC & Revised
Submission- If required
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Directorate Of Industrial Policy & Promotion (DIPP):It
is a government body that is responsible for evaluating
cases for industrial licensing in consultation with other
ministries.
Comparison with offset policy in othercountries
The Indian offset policy is as easy to execute as it is to monitor
and implement. It is considered to be quite exible in terms
of the quantum of offsets applicable, methods of discharge,
eligible products and services, and execution timelines as
compared to the offset policies of some of the other nations.
Presented below is a comparison of the Indian offset policy with
those of other nations on the basis of some key parameters:
Submissions
As part of their offset plan, OEMs have to submit a technical
and a commercial offset offer in separate sealed envelopes.
The only difference between the two documents will be that
the quantum of offsets in currency terms is only declared in the
commercial offset offer that is opened post the declaration of
L1.
The technical offset offer has to declare the OEMs Indian
Offset Partners (IOPs), the offset projects being undertaken
and the phasing of the offset project. The OEM also has to
attach information on its IOPs and MoUs that it has entered
into with the IOPs. The technical offer is checked by the TOEC
for the eligibility of IOPs and their proposed projects. The
MoD may reach out to the OEM from time to time to obtain
clarications. IOPs, phasing of projects and project scope may
be changed at the commercial negotiation stage within the
stipulated time.
Agencies involved in the offset processThe offset process is guided and monitored by several
committees of the MoD with clear mandates and area of
responsibility. Pre-contract monitoring of the offset process is
the responsibility of the acquisition wing, while all post-contract
work related to offsets is monitored by the Department of
Defence Production (DOMW). The following committees and
agencies are noteworthy in this regard:
DOMW, under the DDP, is responsible for the formulation
of defense offset guidelines and all matters relating to
post contract management.
Contract Negotiation Committeeis responsible forscrutinizing the commercial offset offer and negotiating
its contents.
Acquisition Wingis responsible for all pre-contract
work. Its members are drawn from the respective
service. It also comprises the Technical Offset Evaluation
Committee.
Technical Offset Evaluation Committee:It is responsible
for evaluating the technical offset proposal for the
eligibility of IOPs and offset projects proposed by them.
Foreign Investment Promotion Board (FIPB):It is
responsible for approving cases for foreign investment
into Indian defense companies for JV purposes. It doesso in consultation with other ministries.
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Figure 4: comparison of the Indian offset policy with that of other countries
Country Poland Saudi Arabia South Korea Turkey South Africa India
Minimum Value
of the contract
EUR 5.000.000 USD 107 Million 10 million USD US $10m >USD 2 Mn USD 62.5 Mn
Minimum Offset
required
100%, direct
must accountfor 50%
35% 30 to 70 % 50% 50% 30%
Term Min 3 years &
Max 10 years
Within 10 years Contract length,
exible
Max 2 years 7 years Contract
length+2 years
Nature of Offset Both direct &
indirect
Civil & Military Mostly direct
but indirect also
prevalent
Only
direct(indirect
removed)
Defence
industry
Defence, Civil
Aerospace
& Internal
Security
Multipliers 1,0 and 2,0
(Direct)
0,5 & 1,5
(Indirect)
Subject to
approval of
offset authority
1-6 1-5, as
mentioned in
the directive
5 1.5-3
Source: EY analysis
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Evolution of the offset policy
The offset policy, in its endevour to be transparent, easy to implement and to incorporate global best practices, has undergone ve
iterations ever since it was rst introduced in 2005. A majority of the procurement projects that are currently underway fall under
DPP 2006 and 2008.Only the very recent programs come under DPP 2011. The DPP has progressively liberalized the policy
through various amendments. Thus, a careful study of DPP 2006 and 2008 is necessary for companies participating/willing to
participate in ongoing programs.
Figure 5: evolution of the offset policy over the years
Building of an indigenous defence base by
leveraging on the current cycle of procurement
Encourage investments
Monitoring body for offsets to measure impact &
provide facilitation.
Year Changes Desired Effects
2006
Offset was made mandatory in defence
contracts of the size and nature as
prescribed in the 2005 policy
Foreign rms were allowed the exibility of
forming JVs
DOFA was established
Long term development of the industry
Simplify procedure for acquisition of critical
equipment
2008
Offset Banking introduced
Exemption from offsets for acquisitions
under the fast track pro
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