Self-Reliance in Defence: Widening Scope for Industry Participation

India is at the cusp of transformation from a Buyers’ India to a Makers’ India, that too with a global influence. With India’s growing geopolitical and economic ambitions, the Nation is poised to develop robust indigenous manufacturing capabilities and ecosystem to secure its drive for self-reliance in the Defence and Aerospace industry.

Without delving much into statistics, it suffices to say that India spend 1.8% of its GDP on defence with an import of about 70%. Owing to the dynamic security environment, India’s requirements are likely to increase in the foreseeable future making indigenous development of modern hardware and technology an imperative priority.

With an agenda to reduce import dependence by 35-40%, policy reforms including, allowing 100% Foreign Direct Investment (FDI) and the latest Defence Procurement Policy (DPP) are envisaged to be a game changers by ensuring faster procurement, especially through newly introduced categories under indigenously designed, developed and manufactured (IDDM) provisions. Following the Central Government’s footsteps and ascertaining the huge potential from the sector, several states are also offering incentives and concessions in the form of Aerospace clusters or Special Economic Zones (SEZs) for developing an ecosystem where all core and ancillary activities related to manufacturing can co-exist. OEMs as well as SMEs in the manufacturing sector are now converging on moving from a buyer-seller to a co-developer and co-manufacturer relationship. They have not only come together and formed strategic partnerships to support the development of a sustainable supplier base for the sector, but have also precast themselves quickly to foster a culture of innovation and R&D. So far, they have demonstrated a huge amount of potential and capability to deliver on this promise.

With this as a backdrop, this paper aims at analysing newer ideas and concepts to widen the scope of defence industry participation

Research And Development

Technology is purely an “appliance of science” and the genesis of a weapon system, begins with a piece of theoretical science.  R&D is a mission-oriented activity comprising of basic and applied research for the development, testing and production of new weapon platforms. The term also covers improvement and modernisation of existing weapons. In the prevalent ‘quality or quantity’ dilemma, it is R&D that improves the quality of armed forces’ systems. Nowadays, advanced technologies, coupled with highly trained personnel, are perceived as the sine qua non of the military. While successfully deployed technologies have transformed modern Armed Forces, and changed the ways in which wars are fought and conflicts resolved, their development is a lengthy, risky and expensive process.

Research and Development (R&D) activity in India is primarily driven by Government establishments like Defence Research & Development Organization (DRDO), Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL). Private domestic investment in R&D is very low, primarily for three reasons:

(a)       The private domestic industry is still at a nascent stage as far as R&D is concerned.

(b)       Huge R&D costs with no fixed return on investment due to risks involved

(c)        Orders in terms of volume are particularly insignificant and not very long term.

India has become an attractive destination for foreign companies for R&D due to its inherent advantages of a large number of highly qualified low cost engineers and scientists. Thus, many foreign companies like Airbus, Boeing, Snecma, Textron, Honeywell, Rockwell and GE Aviation have established their global R&D centers in India. Most of these are in Bangalore which is slowly building a reputation as an R&D hub.

India imports almost 70% of its equipment. We have a large budget to modernise our armed forces. Defence and Aerospace are among the most important sectors in the “Make in India” campaign, not just for creating manufacturing jobs but also for enhancing our self-reliance in production. But this cannot be achieved without a strong R&D base in the private sector. The recently released Defence Procurement Procedure (DPP) has focused on indigenization and encouraging private sector participation. It has introduced a new acquisition category called Indigenous Design Development and Manufacturing (IDDM) category in addition to the existing four categories in the Make programme. All these acquisition categories mandate transfer of technology and increasing indigenization. This will be impossible without a strong and deep R&D eco-system whose key components are equipment and physical infrastructure, skilled technicians, qualified researchers (PhDs, engineers), a robust intellectual property (IP) regime, access to long term, low cost capital and comfort on getting orders.

Thus it emerges that the need of the hour is to create many R&D hubs all over the country. From here stems my first idea or proposal. The first Defence Innovation Hub has been sanctioned in Coimbatore, with the second hub coming up in Nashik. Another such hub could also be established in the Defence Industrial Corridor of Uttar Pradesh. Whilst these hubs are supported by the Central Government, and are long term projects, MSMEs, with financial support from the State Government and from the Tier 1 companies, of which they form a part of supply chain, could form smaller Innovation Clusters, which could be mobilized within a matter of a few months. These clusters can then be assigned R&D projects of immediate consequence with profit sharing commensurate to the contribution of individual MSMEs involved. In that manner, these industries can contribute to R&D in addition to their core competence of manufacturing without much fiscal investment. This will also enable them, access to other related R&D in the clusters without reinventing the wheel.

The second proposal also stems from the first. The Armed Forces has a huge captive manpower of Officers and Men, who by virtue of the pyramidical structure of the Forces, choose to retire on being passed over and seek employment in the Private Sector. The immense technical knowledge and experience that this asset possesses collectively and individually could be leveraged by offering them gainful employment post retirement as contributors to these innovation clusters and hubs. In this manner, desirous personnel can continue contributing to the Armed Forces albeit in a different role. To my knowledge, such kind of a lateral absorption is presently possible only in DRDO and PSU Shipyards.   Technology Development Board may pitch in with an autonomous fund to finance MSMEs which are into R&D. The MoD, has partially addressed the issue of funding projects under Make-I category in the new DPP. There are a number of industry-academia linkages e.g. IIT Bombay has tie ups with Boeing and Thales, DRDO works with IITs and other universities.

The Government efforts to leverage our large defence spending to achieve self-reliance in defence production and simultaneously create a domestic defence industry will provide the platform for growth of R&D, which is a critical and high value part of the manufacturing supply chain. Presently, the Government and its undertakings dominate R&D activity in India. But to build a truly robust defence production eco-system, the private sector will have to engage in R&D and the Government must reduce barriers and provide incentives to it.

Sustained High-quality Manufacturing

Prime Ministerurged the industry to manufacture goods in the country with “zero defect” and “zero effect” on the environment. Ensuring competitiveness of India’s MSME is critical as it will contribute to the overall growth of the manufacturing sector and the country’s economy. International companies competing in global markets focus on their competitive strengths of costs acceptable to the market, technology, innovation, service delivery, lean manufacturing, and defect free products. We need to set up market linkages and create intermediaries to develop the capacity of MSMEs to facilitate their technology, marketability and their backward and forward linkages. Worldwide, Micro, Small and Medium Enterprises (MSMEs) have been accepted as the engine of economic growth and equitable development. MSMEs constitute over 70 – 90% of the total number of enterprises in most economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.

Quality Council of India (QCI), has presented a model ZED, (Zero Defect, Zero Effect) where the concept of quality has a holistic change from a tool for compliance to a source of competitiveness. Operationally, it is meant to evolve from a total dependency on inspection of the final product to correct defects, to a proactive process of improving processes like quality planning, product and process designing, optimum processes, efficient resource management, effective outsourcing and breakthrough outcomes. Along with a focus on quality of products and services, there is an equal emphasis on the elimination of impact on the environment through adequate planning at product and process design, pre-production (start-up activities), production and maintenance activities, post production (disposal after use) and outcome of environment performance. Overall, the net result is sustainable development. The ZED scheme is an integrated and holistic certification system that will account for quality, productivity, energy efficiency, pollution mitigation, financial status, human resource and technological depth including design and IPR in both products and processes. The parameters of the scheme cover all aspects of the existing schemes of Ministry of MSME: Quality Management System (QMS) / Quality Technology Tools (QTT), Lean Manufacturing Competitiveness Programme (LMCS), Design Clinic and Technology and Quality Up-gradation (TEQUP), and Building Awareness on Intellectual Property Rights (IPR).

Recent policy instruments and market interventions in both public and private spaces starting with the implementation of Public Procurement Policy for MSMEs (which mandates CPSUs to procure 20% of their annual procurement from SMEs), FDI in single and multi-brand retail, interventions in manufacturing sectors like Railways, Defence and e-businesses, emerging strong manufacturing sectors like Defence and Aerospace and finally the opportunity to access global market with globally competitive products are strong drivers to take ZED manufacturing forward and to support fast-changing market scenarios in the country. This will be a win-win situation for all stakeholders involved in the foreseeable future.

It is therefore proposed that, in the times to come, on a turnkey basis, the entire supply chain contributing to the Indian Defence Industry should be ZED certified. There are a number of benefits offered to such certified industries by Banks and State Governments, which are mostly fiscal in nature. However, internal benefits to an enterprise, accrued by a ZED certification are intangible. ZED offers a wide variety of benefits to an organization. The quality standards are applicable to MSMEs who are seeking to improve their internal management and operational system. Additional benefits to MSMEs are as follows:

(a)       Credible & reliable vendor database: ZED will ensure that the companies investing in India have a ready-made & reliable vendor base to support their activities the MSMEs rated under ZED Certification Scheme

(b)       Reducing negative effect on our environment: Enhanced environment consciousness making them “Responsible Manufacturers”

(c)        Awards & Rewards: Department of MSME & Export Promotion may develop an award & reward system for high performing ZED units. They will be recognized nationally which will help them to showcase themselves globally.

(d)       Aligning with best practices: MSMEs will get an opportunity to do benchmark study and learn the best practices across the globe under the ambit of ZED Certification Scheme.

(e)       Global Competitiveness: Enhanced competitiveness of the vendors in the global marketplace so that goods manufactured have no defects and thus leveraging the benefits of quality & cost optimization.

(f)        Visibility & brand recognition: “ZED Mark” to enable an MSME to be seen as a company with a leverage over non-rated MSME units.

Ease Of Access To Production Engineering Products

Foundry – Casting Industry

The foundry industry in India is the third biggest globally, with more than 5,000 foundry units in India, with over 10 million TPA of cast components as per various international standards in ferrous and nonferrous category. The majority (nearly 95%) of the foundry units in India fall under the category of small-scale industry. The foundry industry is an important employment provider and provides direct employment to about half a million people. However, the peculiarity of the foundry industry in India is its geographical clustering. Some of the major foundry clusters in the country are located at Kolhapur, Belagaum, Coimbatore, Batala-Jalandhar and Rajkot. Typically, each foundry cluster is known for catering to some specific or typical end-use markets. For example, the Coimbatore cluster is famous for pump-sets castings, the Kolhapur and the Belagum clusters for automotive castings and the Rajkot cluster for diesel engine castings. The clustering and its catering largely to only specific industries, therefore poses a great challenge for manufacturing units which are geographically far away from these places.

Almost every equipment / assembly or sub assembly used in marine applications have a great number of parts which are ‘casted’. Impetus to establishing more such foundries or foundry clusters along the vast coastline of India will greatly aid ease of access to industries supplying materiel for Indian Shipbuilding and repair.

Forging Industry

Forging is traditionally considered as the backbone of the manufacturing industry. It is a major input to the sectors which support the economic growth of the nation, such as the Defence industry esp special armoured vehicles and shipbuilding, Automobile, Industrial Machinery, Power, Construction & Mining Equipment, Railways and General Engineering. The Indian forging industry is well recognised globally for its technical capabilities. With an installed capacity of around 38.5 lakh MT, Indian forging industry has a capability to forge a variety of raw materials like Carbon steel, alloy steel, stainless steel, super alloys, titanium, aluminium and so forth, as per the requirements of user industry. Over the years, the Indian forging industry has evolved from being a labour-intensive industry to the capital-intensive manufacturing sector. The current investment in the plant and machinery by Indian forging companies is worth ₹27,833 Crore. Based on their installed capacity, the forging units may be classified as very large (capacity above 75,000 MT), large (capacity above 30,000 to 75,000 MT), medium (capacity above 12,500 to 30,000 MT), small (capacity above 5,000 to 12,500 MT) and very small (capacity up to 5,000 MT). Based on this classification it is seen that about 83% of the total number of units are small and very small, while only about 8% can be classified as very large and large units; the balance of about 9% constitute the medium sized units.

The forging industry of India provides direct employment to about 95,000 people. The small and very small units are mainly dependant on manual labour, however medium and large units are more mechanized. Quality standards in the industry have improved significantly and the sector is now well known globally for its high quality. The current share of the auto sector is about 58% of total forging production while the rest is with the non-auto sector. Changes in Indian automobile industry directly impact Indian forging industry, because the forging components form the backbone of the Indian automobile industry. Since the automobile industry is the main customer for forgings the industry’s continuous efforts in upgrading technologies and diversifying product range has enabled it to expand its base of customers to foreign markets. The Indian forgings industry has made rapid strides and currently, not only meets almost all the domestic demand but has also emerged as a large exporter of forgings. The industry is increasingly addressing opportunities arising out of the growing trend among global automotive OEM’s (Original Equipment Manufacturers) to outsource components from manufacturers in low-cost countries. As a result, the industry has been making significant contributions to the country’s growing exports. In order to reduce the impact of cyclicality and dependence on the auto sector, the industry plans to diversify into non-automotive sectors.

Consortium Concept For Shipbuilding

Most of the ship building for the Indian Navy is catered to by MDSL, HSL, GRSE etc. About 60 to 65% of equipment, assemblies and subassemblies required for ship building and repair are supplied to these shipyards by MSMEs, either directly or indirectly.  Majority of the MSMEs are owned and operated by first or second generation technocrats and entrepreneurs. Ergo, these entrepreneurs have a pronounced motivation to ‘make a mark’ by sustained growth, expansion of their venture and creating a niche. They have great willingness to tackle the overwhelming and ever changing requirements of the Indian Navy. Additionally, their response time to such needs, is very prompt. Due to these reasons, they score high on the imperative to develop them on priority and with greater backing from the government. It is pertinent to mention that the Capital : Output ratio of this sector at 1:7.5 is the highest.

Capital funding remains the MSME sector’s biggest hurdle. Typical cyclic problem which an MSME faces is high cost of loans, giving rise to financial constraints. This in turn inhibits infrastructure and technology development. Add to these are low volumes with high Research and Development (R&D) and licensing cost. Also, Indian Navy’s requirements for materiel be it for new production or refits is quite dynamic and thus sourcing materiel is neither constant nor sustained for a particular vendor. Additionally, products are complex and it is difficult to apply the ‘one size fits all’ approach since each acquisition poses different challenges. Therefore, it becomes increasingly difficult for a vendor to stay invested with the Navy. Delayed payments also add to this lack of capital. Even from bankers’ perspective, MSMEs are regarded as high risk borrowers due to insufficient assets and low capitalization. Vulnerability to market factors is another factor impacting cash flow.

Lack of ability to employ and retain skilled manpower also stems from the original hurdle of financial constraints. These are some of the primary factors why many state of the art, materiel manufacturers deliberately stay away from this potent sector of Defence manufacturing.

The Government / MoD through its recently updated DPP, has instituted lot of measures and changes to achieve the national aim of Make in India. MoD in a bid to fix procurement issues has now recognised that these issues are systemic and the whole process of acquisition right from Request for Proposal (RFP) stage to procurement and finally to maintenance and repair (life cycle support) needs to be considered from inception stage itself. 

Proposed Model

Most of the shipbuilding activities for the Indian Navy are carried out by DPSU shipyards, with each shipyard specialising in certain kinds of ships. These shipyards geographically cover western, southern and eastern coasts of the country. The basic hull construction is almost entirely done by these yards. The material obtained from various sources is then assembled and integrated at the shipyard. This constitutes about 20 to 30% of the work that ensues in delivering an entirely seaworthy Man of War. Therefore, the shipyards can be termed as Integrators. Major equipment like Power Generation and Distribution (PGD), weapons and sensors, Refrigeration and AC plants, variety of compressors and pumps and the control systems for each of these equipment and the Integrated Platform Management System (IPMS) for the ship is sourced from the Original Equipment Manufacturers (OEMs) / big public or private sector units. These can be designated as Level 1 vendors. These OEMs in turn, source some of their supplies / ancillaries from smaller industries say medium / small scale industries, which can be designated as Level 2 vendors.  MSMEs who supply to level 2 or level 1 vendors may be designated Level 3 and so on. These form the base of the whole pyramid and by virtue of being so are the biggest, in terms of numbers as well as the amount of essential materiel they supply.

Due to the ability to invest sufficient funds in R&D and skilled manpower, Level 1 vendors are still dominant and the bottom rungs of the supply chain are relegated as suppliers of commonplace materiel and over a period of time face stagnation. Therefore, advancement / progress of these Level 2, Level 3 vendors (and below) as strategic and development partners with the Integrators and Level 1 vendors is the need of the hour. Therefore making a Consortium of the Integrators, to include the entire supply chain does not remain an option anymore and becomes an imperative.

Let us consider, as an example, MDSL as the Integrator. It manufactures submarines and 3 classes of ships. As an Integrator, for producing, say a submarine, its supply chain includes 50 manufacturers at different levels, designated across the board which are considered best and most suited to manufacture materiel for that particular class of ship. The Integrator should then, identify (preferably), a completely different set of vendors forming another supply chain for the second class of ship that it manufactures. In this manner the Integrator will have a wide supply chain of 200 high quality manufacturers. The members of each supply chain will also be assured that if a particular class of ship is being manufactured at MDL, the order will come their way for manufacture and entire life cycle support of the equipment they produce. Accountability will also be of a very high degree. In this way 4 Sets of the Supply Chain will be developed and these vendors will have an assurance of orders.

As an expanding Navy, having such kind of an arrangement will be of immense benefit to the Navy by way of having a set of competent materiel suppliers, who will be more than willing to supply and give life cycle support because of assured orders and that too at a much lesser cost. The quality of materials used for manufacturing and the cost of inspection will also reduce; timely payments being the overriding factor for continued sustenance. In the bargain the MSMEs will also prosper and in due course of time move up the ladder to give their space to newer MSMEs.

Be the idea as it may, the following points cannot be overlooked:

(a)       Looking at the current situation, where there is a lack any significant increase in the Budget and no ‘big’ new projects have been sanctioned for the Navy, volumes will still remain a primary problem. As it is, commercial shipbuilding in India is almost non-existent, and now Naval projects are on hold. Ship repair is in an even worse situation where most of our own merchant ships go to Dubai / Abudhabi or other foreign ports for docking, because of lack of availability of infrastructure and skills domestically. Foreign ports, though ensure a quick turn round time, causes a drain on our foreign exchange position.

(b)       Even if the above proposal about Consortium as proposed in earlier paras is followed for Naval projects by shipyards, yet the number of orders is low, and unless the MSME has other industrial customers, he will find it difficult to sustain himself by relying solely on Naval orders.

For the issues mentioned at para 27 above, a way ahead could be is to deem shipbuilding as an export industry and give all participants, (shipyards and suppliers) the status of SEZ, thereby lowering tax burden and cost of capital. This will also mean a review of Labour Laws.

However, there is a shortcoming in the proposed model. There would eventually be a chance of such a policy losing its objectivity and being subjective to fallacies of human nature of the ‘Entity’ which decides the composition of the Consortium.  This governing body may in due course, have the ‘tendency to play God’ which will have far fetching ramifications and may not above board. Therefore a clear Governmental policy which shall ensure that the outcome is unbiased needs to be promulgated and has to drive the Industry to fulfil the ultimate intention.

Another specific initiative towards widening scope of defence industry participation, could be the development materiel required for the life cycle support of new acquisitions, say, the new Scorpene fleet. Many of the items to be renewed during Medium Refits, a few years down the line,  could be developed through MSMEs, provided specs are re – prepared and made available, perhaps jointly with the Industry. The MoD and Industry bodies like CII, FICCI could also consider assisting MSMEs who are contracted for supplying these items, to contact other Navies operating Scorpenes and entering the export market.

Role Of Unicorn Companies

The role of Tier 1 companies in developing MSMEs is of paramount importance. Companies like Boeing, invest a lot of money and their own manpower in bringing up their supply chain by way of imparting training, extending facilities etc towards ensuring that the highest quality product is supplied to them. In a similar manner, like previously mentioned, Ministry of MSMEs and other allied agencies should set up systems to make use of the expertise of retired Armed Forces personnel to help equip MSMEs to measure up to the exacting requirements of defence production.

Companies having a turnover of 1000 Cr and above for the last 03 years and making a profit any 03 years in the past 05 years must also apply for Green Chanel status. The ‘Green Channel’ policy allows waiver in registration and pre-dispatch inspection for supplies through DGS&D rate contract through which the supplied items will be accepted against the firm’s / OEM’s Guaranty / Warranty. However, it is felt that as large and small companies compete in government tenders, the Green Channel policy may provide an unfair advantage to large companies as the latter will save on the cost associated with DGS&D registration and third-party testing often required for pre-dispatch by DGS&D. In order to obviate this fear, it is proposed that a similar green channel status could be accorded to world-class MSMEs at different turnover levels provided these companies pass the test of the extensive scrutiny as is procedurally required to be carried out before Green Chanel Status is accorded. QCI may be tasked with certifying these companies as per the ZED maturity assessment model in order to ensure that only the most proficient MSMEs are selected.

Road Ahead

India offers tremendous opportunities in engineering services, supply chain sourcing and associated maintenance, repair and overhaul-related activities, however to achieve self-reliance we need to create a robust ecosystem that can address the capacity and capability requirements for the industry. While the government is taking numerous measures to bolster defence manufacturing, the pace of modernisation must be balanced with both short and long term initiatives. A strong supply chain is critical for a defence manufacturer looking to optimize costs. Gradually, a handful of Indian SMEs are playing a key role in the global supply chain of OEMs. With the government’s offset policies, procurement policies and regulatory incentives spurring the growth of a domestic defence industry, the SMEs need to play a more active role in developing a robust supply chain.

Lack of adequate infrastructure drives India’s logistics costs upwards thus reducing the country’s cost competitiveness and efficiency. While the government is investing in this area the pace of development needs to pick up considerably and public-private participation can go a long way in hastening this process.

India is uniquely positioned to create a vibrant defence manufacturing ecosystem that can help us achieve self-reliance. With defence remaining within the government’s high priority focus area, the country will soon emerge as a preferred destination for the co-development and co-creation of an indigenous and self-sufficient defence manufacturing ecosystem.

Parting Thought – Youth Dividend

Almost ten million young graduates come into the job market every year. For many years now, Indian industry has complained about un-employable graduates from our academic institutions. That is India’s biggest strategic risks. With modernisation and automation, gainful employment is on the decline. The Government must create institutional mechanisms to strengthen the industry-academia linkage and improve the quality of education and training imparted in colleges and universities.

Having said that, while the Indian Industry maybe growing in SENSEX, NASDAQ and several other matrices, it is not creating as many jobs. Now if this raw energy that is coming into the market is not channelized and if we do not find the right way to leverage it, find them employment, meet their aspirations, this youth dividend is sure to turn into a youth nightmare. If we have to satisfy the ten million young job aspirants, then our GDP has to grow literally at double digits, and we know that is not going to happen. So what do we need? I believe we do not require two or three 5000 Crore Companies, what we need is 5000, two or three crore companies.

Leave a Reply

Your email address will not be published. Required fields are marked *