‘Defence manufacturing, buying processes take time to fructify’

Though India continues to be a difficult market for global defence companies, it is still an attractive one to do business in, says Rahul Gangal, Partner (Aerospace and Defence), Roland Berger, who advises clients from a range of industries, including aerospace, defence, engineering products, automotive, homeland Security and infrastructure.

He also advises the public sector firms on policy formation and implementation.

In an interview with BusinessLine , Gangal said with depleting Air Force squadrons, placing additional orders for the French Rafale jets will be logical step. Excerpts:

What are the main challenges in the defence aerospace business in India?

The main challenges are building a robust industrial base that can create reliable solutions for the Indian armed forces. The core issues are building capability to provide platform solutions and volume manufacturing capacity to have adequate throughput to meet existing demand. These issues are present for both private and the public sector, although it is more acute for the private sector. There is an additional challenge on modernisation of ordnance factories.

Why are we not seeing large-scale orders being placed?

We are seeing more movement under the present regime than in the past. The industry globally is characterised by large value contracts that take time to fructify. It is a well-established practice and norm for OEMs to factor this lumpiness in their revenue line and any anticipated protraction in programme award in their product pricing and bids. India is one of the very few global markets that has expanding defence spends and is open to import-based supplies for global OEMs. Hence, India continues to be a tough but attractive market for OEMs.

We are also not seeing any visible progress of ‘Make in India’ in the defence sector…

Establishing defence manufacturing guidelines and processes are time consuming everywhere in the world. India is also pursuing an active indigenisation agenda and trying to create local platform champions. The policy nuances are expectedly being worked out and it is a matter of time before the first programme awards under the Strategic Partner concept are made. Thereafter you will see substantial on-ground activity.

Do you think India should place more orders for the twin-engine Rafale to address the issue of depleting squadrons of the Indian Air Force?

India needs more platforms urgently to address the depletion. The composition of the squadron is a strategic outlook issue. On a pragmatic note, having a larger base of one type of platform is always better in terms of overall platform availability, management of life-cycle costs and planning for sustenance. A larger volume for Rafale is a fair step considering the relative simplicity of additional procurement through an ‘option clause’ order versus uncertainty of a new procurement process and the rationality of having a greater platform volume base, leading to greater operational and logistical ease.

Why are firms like Tatas or Adani taking pre-emptive steps and tying up with Lockheed Martin or SAAB even when the Strategic Partnership Policy is expected to shortlist the names?

It is only natural for large groups to identify and forge partnerships as pre-emptive steps. Also, these partnerships are expected to be wider. If they are platform-specific, even then, this is a positive trend that Indian companies are proactively planning to build expensive competencies upfront. These arrangements will also help Indian groups pitch their competencies much better to the government.

Do you believe the FDI policy on defence should be further relaxed by allowing 100 per cent under auto route?

My belief is that while there is a clear understanding that the country welcomes investments, and a higher automatic FDI ceiling will go some way in this direction, there has to be a measure that also controls inbound investment in strategic assets.

Additionally, what India also needs is an approach on how to secure specialised assets in countries outside India.

This is critical because India will need to identify and secure critical material sources, for aerospace, defence and other industries as well, and some of these sources are extremely rare and singular across the world.

How do you view India’s approach to diversify its defence procurement basket?

While Russia was the dominant supplier of equipment in the past, as India’s geopolitical alignment has become multi-polar and new friendships have emerged, so has the defence spend kept pace with it. It should also be understood that the overall defence spend pie has also increased.

I feel this trend of diversification of the revenue base will sustain because India will need to have many more active friendships, and consequently trade relationships, to strengthen its overall stature on the world stage.

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