K.R. Balasubramanyam June 22, 2010
Until 2006, aerospace remained a barelynoticed business in the Tata Group fold. By February 2008, the conglomerate was giving finishing touches to a plan for a manufacturing plant at Hyderabad for helicopter cabins. The spur was a deal it had signed with Sikorsky, a Connecticut, US-based helicopter maker. That contract helped the Tatas step into the specialised market for aero-structures.
In the last two years, the Mumbai group has forged tie-ups with Boeing, Augusta Westland and SAAB, all global aerospace biggies. The tipping point for such partnerships and exports, which stood at just Rs 350 crore in fiscal 2007, says Rahul Gangal, Senior Vice President, Religare Strategic Advisory, was the change in defence procurement rules the Indian government announced in 2006. The Defence Procurement Procedure Rules require foreign companies to sourceproducts or services from Indian vendors worth 30-50 per cent of the deal value in defence and aviation contracts for capital purchases exceeding Rs 300 crore.
The benefits of the offset purchase policy, as it is commonly referred to, accrue not just to government-owned defence production units but also "to private Indian industry engaged in the manufacture of defence systems and equipment", Defence Minister A.K. Antony told Lok Sabha in December 2009. Offset deals worth nearly Rs 9,000 crore have already been signed by the likes of Rosoboronexport Russia, MiG, Lockheed Martin, Boeing, and Israel Aerospace Industries, according to the minister.
With India stepping up military hardware and software buying, that opportunity will top $10 billion by 2012, trade body Assocham estimates. Yes, this covers non-aviation purchases as well, but the big action is indeed in aviation. Consultancy and audit firm Pricewaterhouse Coopers recently ranked India second only to China as a worldwide destination for aerospace manufacturing investments.
A $2.1-billion order by the Indian Navy to buy eight P-81 reconnaissance planes from Boeing, for instance, resulted in offset deals to purchase aviation electronics and aerospace structures from Larsen & Toubro, Wipro and HCL Technologies, and government-owned units Hindustan Aeronautics Ltd. (HAL) and Bharat Electronics-worth $600 million.
The Indian Air Force's plan to buy 126 advanced fighters worth some $10 billion, which has attracted suppliers like MiG, Boeing, Lockheed Martin and EADS, also holds lucrative offset opportunities. Aircraft orders worth some $ 3.5 billion by stateowned Air India and Indian Airlines (the two have since merged) to Boeing and Airbus Industrie have resulted in technology, manufacturing and software offset contracts for Tata Consultancy Services to HAL. Landing the aviation offset deals, however, is not going to be easy just because a policy is in place.
Indian firms need to invent or borrow technologies and build on their capabilities if they want to climb the value chain and bag deals for high-end components. One instance illustrates this well: In November 2008, Bell Helicopter said it was withdrawing from bidding for a $1 billion contract to supply 197 light helicopters to the Indian Army because it was unsure if Indian industry would be able to supply the offset volume. Bell found that except for HAL, the local industry was still in its infancy and might struggle to supply goods or services of nearly half a billion dollars in the contract tenure.
Perhaps, it was in recognition of such instances that the government is a little flexible when it comes to inking offset deals in the civil aviation sector. Industry insiders say there is not much clarity on how Boeing and Airbus have gone about their offset procurements in the Air India contract but they have been met through a combination of aerospace and non-aerospace purchases, because there were not enough vendors to place aviation contracts on.
That could change in future. Boeing India said in February that it saw $80 billion worth of business from India in the defence and civil aviation sectors over the next 10 years. Of this, civil aviation - besides Air India, it counts Jet Airways and SpiceJet as customers- alone would make up $50 billion. Boeing has already outsourced gun bay doors and wire harness system for its F-18 Super Hornet fighter jets to HAL, and its Head for Integrated Defense Systems in India Vivek Lall said he expects his company's offset liabilities in India to be between $7 billion and $12 billion in the next decade.
Airbus, meanwhile, has almost exhausted its offset commitments worth $1 billion from the Air India contract. HAL began building doors for Airbus A320 planes as part of the Airbus offset deal, but has progressed beyond that. Airbus India President Kiran Rao said in September 2008 that his company would continue to do business with HAL regardless of offset status. "Because it was based on sound commercial principles, it then becomes something that goes beyond the offsets," he said.
As aerospace and defence supply chains globalise, there is a gradual shift of work to locations that have the maximum competitive advantage in terms of cost. "There are some segments that are either booming or will soon boom," predicts Religare's Gangal. "Some examples could be engineering design, composites, electronics and avionics components, sheet metal work, precision machining, special alloy castings, cable harnesses and connectors, and surface treatment."
In anticipation of such manufacturing capabilities developing, production clusters are already coming up at Nagpur, Bangalore, Hyderabad, and Sadashivpet in Andhra Pradesh. To be sure, these places are many years, perhaps decades, away from morphing into a Seattle or Toulouse, homes to manufacturing by Boeing and Airbus/ATR, respectively-or even Tianjin, which has an Airbus factory-but it is a beginning. A start towards aviation factories in India.