Mission Mode Collaborative Projects - A Way for Self- Reliance in a Defence Market Where Size Matters

Abstract:India aspires to be an international player, where India can project its might through indigenous military capability. This requires fundamental alteration of the existing Military Industrial complex. The Defence Market in India, although at all-time high, is a fraction compared to markets in USA/ China. Thus, whether the same market principles, as evident in a consumer market can be applied in totality is a big question. Scale of the investment required for creation of disruptive next generation solutions requires wider market. However, with the current level of exports and IPRs, the same appears as a distant mirage. However, there are silver linings in the cloud.  India’s success with Arihant, nuclear powered submarine speaks of a collaborative venture. Future requirement of Armed Forces will demand one generic platform with many variants. Thus, it will be preferable to have a lead system integrator with various players. Thus, if the ‘Make in India’ has to succeed for Defence, the goal would be to make India self-reliant by undertaking mission-mode collaborative projects, not only involving public and private companies, but with friendly nations that are ready to share the know-how and know-why.

A Nation aspiring to be Superpower must be backed up by the strength of its Arms and Armament Industry. How good is our Military Industrial Complex? India is a country that is ranked as the largest importer in the world; a country that has spent around $ 60 billion in the past decade and plans to spend around $130billion in next 7-8 years for defence acquisition; a country that has embarked an ambitious ‘Make in India’ Programme; a Government that believes that market-based reforms may be the answer to the Puzzle. Our ambitions may be right. But are our assumptions and business model right?

The principle of the business states that for a business to happen, there has to be a need for a product / solution, there has to be a customer who is willing to pay for the same (hinting existence of a sizeable market) and there has to be an organisation which can offer value to the customers better than the competition. The need for products exists since the time human civilisation has flourished. History is a spectator to the fact that there is peace for an intersession of war. There will always be a group of people who will come together as a nation-state and fight in the name of sovereignty. Jingoism & Nationalism will always prevail, so will conflict. Given this background, the first two factors for business i.e. need for a product and market always exist. If that be so for each country, why is the Armament Industry so highly skewed and an oligarchy? When do we address the issue of ‘Make in India for Defence’; there is a need to go back to the basics and answer these fundamental questions on Business and Market, if the context for such a market exists; only then can we decide upon a strategy to make it happen as we would like to see.

The question that follows is, what is this Market in Defence? The Defence market is different from the conventional market. If the defence market is to be analyzed consistently, it is necessary to distinguish between the demands of people on the market and demands originated by the government. The demand created by the government is not private demand. The privatisation of defence industries may lead to the emergence of a marketplace, but not a genuine market with its essential attributes. The defence hardware industry is unique, as private demand on the market is substituted with a centrally dictated order by Ministry of Defence (MOD). The defence equipment industry thus represents a genuine domain of the state, a domain based on government orders as to what to produce, what resources to use, what prices to charge, and even to whom to sell and to whom not to sell. Even if some fragments of a market are present, they do not constitute an order. Thus, whether the market principles can be applied in totality is a big question. Every country has to find its own solution in consonance with it culture, legacy and ambition.

Let us look at the Global Market structure. Compared toa $ 610billion market in the USA (No 1), $ 216billion market in China (No 2), $ 84.5 billion in Russia (No 3),aSaudi Arabian market of $ 80.8 billion, India appears at No 7 with a $50 billion military spending as per SIPRI 2014 data.  This data has to be handled with caution, as it does not bring out how much of that market is open. Only 40%  of this Indian Armed Force budget is consumed for Capital expenditure. This is around $16 billion, a relatively small market. However, as India is likely to spend around $130 billion on defence modernisation in the coming seven-to-eight years, this makes India one of the largest emerging defence markets in the world.  Yearly, this figure comes to $16billion. Unfortunately, this market is not uniform and comprises of many products. A closer examination is required for the market size of Land System, Naval System, Aero System and with the further break up in them. Thus, the euphoria of large market size needs to be looked at the product markets, which unfortunately is not so attractive. Size of the total market is one thing. Size of the product market is yet another thing. It is the latter that counts more than anything else. This is the reason despite a lot of hype in the defence sector,new licenses have not led to emergence of new strong players with 13 years behind us.

Let us look at the Size of the players. In an analysis of Defence Industry by SIPRI ( 100 Top Companies in 2013), it is seen that companies headquartered in North America and Western Europe continued to dominate the global arms industry and comprised 69 of the Top 100 companies for 2013 . They accounted for 84.2 per cent of the total arms sales of the Top 100—a slight drop from 85.3 per cent in 2012. Thus, the industry has got a colour which favours the North America and Europe. The arms sales of the SIPRI Top 100 arms-producing and military services companies in 2013 (outside China) totalled $402 billionworld overs decreasing overall by 2 per cent from the earlier year.. However, rms sales by Top 100 companies from the rest of the world rose by 9.2 per cent in real terms; the share of the total Top 100 held by these companies is now at its highest level ever.The top three players are Lockheed Martin,USA; BAE Systems, UK; Northrop Grumman, USA with Arms Sales of $35.490billion, $26.820billion& $20.200billionrespectively. Thus, the lowest in the rank at serial number 10 (BAE system UK) has got a sales figure of $10 billion, which is more than the combined sales of OFB, HAL and BEL. Thus, bigger the size, better is the profitability by standard marketing principles, as highlighted by Boston Consulting Group. This is precisely the reason that South Korea promoted Chaebols, National Giants who couldcompete with the world’s who is who on scale. They were given state support so that they emerge as big players. The experiment has succeeded with Samsung, LG, Hyundai &SK Group dominating the market.

The Industry is technology intensive, innovation and automation-driven coupled with acomplex supply chain. Majority of defence-related products involve a large number of components, systems and sub-systems. Many OEM’s don’t own the complete product lifecycle. Major mergers&acquisitions have happened over the years leading to consolidation of the defence industry. Thus, smaller size is a bad news and bigger size is good news for defence. Can big size be a reality for India?

Now, let us look at the proposition being tried out. In India, competition is being brought in to fragment the market, the size of which is small compared to global norms. In an acknowledgement of the same, the forthcoming players are being told that the exports regime is being liberalised by easy licensing norms and back of credit. This is a tacit admission of the fact that investments required for Defence R&D and Production need to be recouped from  exports abroad.  Indian exports is restricted tosupply of spare parts and some old third generation products. Currently, India is ranked 28^th in the arms exporters list based on the volume of arms transferred. Another depressing figure often cited is that the average share of Indian arms exports in the total world’s arms exports pie stands at a measly 0.8%. With an import: export ratio of 194:1, as compared to 1.3:1 in the case of Israel, 8.8:1 in the case of South Korea and 19.7:1 in the case of Singapore, India’s status is dismal. Thus, in the short run Exports cannot increase significantly unless Indian Players emerge as OEMs backed with their web of own IPRs by some miracles.

India tasted success, when it followed the collaboration route to make its own nuclear powered submarine.INS Arihant is a 6000-tonne vessel and has 83 Megawatt Indian-designed and built pressurized water reactor. Shrinking and shoe-horning a nuclear reactor into a submarine and getting it to work is something only the US, Britain , Russia, China and France have achieved(Halarnkar, 2013). The story behind the same, built at ship-building center, Visakhapatnam is worth emulating. It required collaboration of public and private sectors with PSU Steel –Kirloskar Pneumaticfor the refrigeration systems, Larsen and Toubro  for the steering mechanism, Elecon Engineering for the gearbox, Walchandar Industries for the drive system &Tata Power for the control systems.It has materialized due to support received from many other nations - Italians for propulsion, Russians for aviation & Israelis weapon systems and electronics.When the outcome of the R&D is not known and the user’s inclination to purchase the same cannot be ensured before the success of the product, it is only the State which can take the risk. The ownership of the project would remain with the users when they are part of the scheme.  This only ensures that appropriate decisions for modifications can be given in real time, without leaving the same to the mesh of bureaucracy. Any collaboration with the foreign players can be better done by the State than by a private player.Thus, the nation needs to undertake Blue Sky R&D projects in mission mode by marshalling all resources under its command with the User in Driver seat.

It has been reported by Indian Defence Research Wing (IDRW) that the Future Ready Combat Vehicle (FRCV), the new generation MBT, will form the base platform for other armoured vehicles, similar to the Russian-made Armata platform. The Indian army wants to use the platform for as many as 11 different tracked vehicles, including light tracked, wheeled, bridge layer and trawl tanks, self-propelled howitzers, air defense guns, artillery observation post and engineering reconnaissance vehicles, and armoured ambulance. If the platform is one and variants are many, there cannot be multiple players logically with all permutations and combinations for the limited size of Indian Market. One lead system integrator has to take the leadership role. That can be none other than the State. It is upto the Dept of Defence production, in what form they would like it to be done by pumping the entrepreneurial catalyst of competition, but using a route of collaboration. While each of the variant can be taken up through a capable Indian player, the onus of delivering the same in time should rest on the State. 

If the Make in India has to succeed for Defence, the goal would be to make India self-reliant by undertaking mission mode projects, not only involving public and private companies, but with friendly nations that are ready to share the know-how and know-why. Lot of buzz in the Government is about the next DPP which will change the rule of the game. Let us watch and see, how things will evolve so that India can garner military might by unleashing its own hidden technological strength.  

Dr J p Dash is currently Senior Director at National Defence Academy of Production. Views expressed here are personal