Business Today

"Do not need full ownership if you have a good partner"

In the din of rapid-fire announcements around defence tie-ups for manufacturing in India, the 17.8-billion BAE Systems has made two very significant breakthroughs
twitter-logoRajeev Dubey | Print Edition: May 21, 2017
Photo: Vivan Mehra

In the din of rapid-fire announcements around defence tie-ups for manufacturing in India, the 17.8-billion BAE Systems has made two very significant breakthroughs that have the potential for multi-year orders from India's defence forces. Lately, it bagged the $542-million order to supply 145 M777 ultra-lightweight howitzers to the Indian Army. Fully-built gun deliveries begin this June at two per month, while a BAE-Mahindra JV readies to assemble and produce the artillery guns in-house. Earlier, it supplied 123 Hawk Mk 132 aircraft to India, 99 of which were built in India by Hindustan Aeronautics under licence from BAE. In February this year, HAL and BAE unveiled the 'Advanced Hawk' at the Aero India Show in Bengaluru, which could be of interest to India and other nations in the region. With that, BAE is among the rare international organisations with firm orders for manufacturing in India. Business Today's Rajeev Dubey met with BAE Systems' Chairman Sir Roger Carr during his India visit. Excerpts:

Defence is a global industry where you make in one place and sell around the world. How will economic nationalism affect it?

There is no doubt that countries now recognise they have a requirement to build within the country, driven by the need to create value in the domestic economy. What we are seeing in India is typical of other parts of the world. It is true in Saudi Arabia and Australia where indigenous manufacturing is becoming the order of the day. That's absolutely fine, because history is built on having not one point of manufacture with an export capability, but having distributed manufacturing globally. Whether it's the US, Saudi, Australia or India, it is about partnerships. So, the way the world is going very much aligns with the way we have built our business over the years.

Many governments seek wholesale technology transfer. How comfortable are you doing that?

We do it here with Hindustan Aeronautics Ltd (HAL) - the Hawk aircraft is built here. The development of the product happens here, although not exclusively. So we have a track record of working with people, and not simply seeing other countries as assemblers but as true manufacturing partners where technology - provided the skills are there - can be transferred and developed. It's something we are comfortable with, provided we have the right partners.

We saw the Advanced Hawk tech demonstrator. What is the future of the Hawk programme?

The product that you have seen is an evolved Hawk. The different wing configuration gives it high lift capability and its ability to carry a wider array of armaments offers more combat capability. The cockpit has a very clever electronic visual display which makes it versatile. It's a piece of very effective and fairly-priced machinery, now made in this country. There are parts of the world that, we think, could be users of this product. And there is work to do here in India to translate the appetite into real orders that turn into production opportunities for HAL.

Will it be made in other parts of the world, too?

It will be made here. You have to be in markets where volumes will warrant production capability. What we have here is a production capability that can take more volume; the more the volume, the lower the unit pricing. That will make it more competitive internationally.

How do you perceive the changes in the government's defence procurement policies?

We are positive about it. It's clear that Prime Minister Modi has a very material impact on the way this segment of the market will operate. The move towards shared ownership, allowance for private manufacturers to be defence suppliers, the encouragement to create partnerships, and the very real engaged nature of senior politicians gives us confidence that this is not just a small adjustment but a fundamental shift in thinking. Hopefully, the momentum will continue to boost job opportunities and wealth-creating opportunities for both India and people like us as partners in India.

Does 100 per cent FDI interest you or would you rather still have a partner?

The opportunity to have partners in this country, who are of very high quality, have real appetite for being a partner, and who can bring skills, capability and local knowledge to the partnership is very appealing. And we have met people of excellent quality who we would be delighted to work with in partnership seriously. So you do not need full ownership if you have a good partner; it can be very effective.

All defence manufacturing nations aim to be net exporters. How long before India can aspire to be one?

I think you can aspire to that anytime. In India, there are a number of private companies who have the capability, interest, appetite and the skills to be real partners in building complicated products. There is a growing list of smaller companies which is important to create a broader supply chain in India. The big companies are getting well-positioned for that and these are the companies we are forming partnerships with. We then need orders to fulfil the ambitions of a country.

So, this is a long process...a decade, two decades?

It depends. If enough orders come in, so that investment is made, capabilities increase, competitiveness improves and the cost base is lowered because of the volume, export opportunities follow.

How much can you crunch the process of making real-time, cutting-edge products if you have a partner?

Based on my understanding and exposure to the companies that we met as partners, we are combining huge talent, capable people, those who understand the investment principles and return on investment, who have developed very effective international businesses here at home. It's something we can do over time; this isn't months...this is years of work.

The government is likely to bring in the key strategic partners initiative. How do you see this? How often does this happen in other parts of the world?

The principle of the key strategic partnership initiative is to suggest some excellent companies to do business with. That is not unique to India. What the government here is doing is breaking with the past...changing the way the country works. I think that's quite a practical and sensible way forward. It's then for the partners to assess themselves if they are good partners, and for the partnerships to deliver goods.

How's been your experience with the gun order? It took a long time..

Yes (laughs). It took a long time because that order was initiated and developed in a different age and certainly in a different political climate. This is an important product that is 'Make in India', and it will be made in India quite rapidly. The initial two or three will come already assembled and made, but very quickly the production process will start...the Mahindras are a very able partner. It will be appealing to the military.

The government has been pushing the ease of doing business. In your experience, how different is it?

Well, it's getting better. There is a mindset change. And it is very visible in the way ownership can be shared, the way that some of the paperwork is eased, the responsiveness that one has as a business operator here to government parties. More change will come through. We've made some small suggestions such as simplifying the terms and conditions. At the moment, the offset capability is specifically limited to the company that sold the particular product. If that company happens to be part of a much bigger group, then there's an opportunity for all other parts of the group to contribute to the offset which in itself will help the SME area. We've suggested removing the traditional restriction of a single company focus and permitting the whole group to deliver the offset capability.

One reason for the success of India's domestic manufacturers is frugal manufacturing processes that Mahindra, Tata, Maruti and others have. Are there learnings for BAE?

These companies do some remarkable things all over the world. We may help them learn how to do a particular defence project, but part of this partnership benefit is that we are hoping to leverage and learn from their methodology, capability and technical edge. If you go to the Land Rover (factory) in the UK, you will see manufacturing and engineering at its finest put in by Tata, and we have exchanges with them. It will be no different here.

Anything you are expecting out of the guns order to be exported from this plant?

This is a domestic order which may be repeated for the domestic market. And that's what it is set up for. It doesn't mean that it could never be anything else.

You have guns, there's Hawk...what else for BAE in India?

There's a strong, cost-effective ship-building capability in this country. In an increasingly demanding world of naval architecture, we may be able to help in design and engineering from a technology point of view. I don't think we'll be building ships for India, but we could add something to the IP which is required to build more sophisticated ships. But this is all very much in the future. If we can capitalise on the Hawk, expand the order book, get the guns in and working, it will make for a very strong foundation on which we can look at more opportunities.

Do you plan to become a part of India's cyber initiative?

Yes, indeed. We have an involvement there already. It's small, but we've made the point that we operate from a very strong military and security base in the UK, which spreads over the Five Eyes (global intelligence alliance) community, and we are capable of offering great capability to people who are approved by our government, who work with us in partnership. And we believe we have opportunities here to do that over time.


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