Defence offset business ‘no big deal' for India Inc

It is a myth that the Indian industry does not have the technical capability and physical manufacturing capacity to take the business opportunities that arise out of Defence offsets, says Mr Rajinder Singh Bhatia, Executive Vice-President & CEO (Defence & Aerospace), Bharat Forge Ltd. ‘Offset' basically refers to mandatory purchase of components from the domestic industry of a country that imports equipment by the exporter of the equipment.

Speaking at a conference on ‘Indigenisation and Offset Opportunities' organised here by the Confederation of Indian Industry (CII), Mr Bhatia noted that the annual offset opportunities arising out of the ‘Dassault Rafale order' would work out to around $200 million annually over a ten-year period, which is “no big deal for the Indian industry.”

Dassault Rafale of France has emerged the lowest bidder for the supply of 126 Medium Multi-Role Combat Aircraft. The $10.6 billion contract, said to be India's largest Defence purchase, is expected to be signed in a year. The aircraft would be supplied over a ten-year period. The deal envisages a 50 per cent ‘offset', which means that half the value of the contract would have to be sourced from the Indian industry.

Some have expressed doubts over the ability and capacity of the Indian industry to take such a chunky business opportunity. For instance, experts from McKinsey & Company, USA, Mr John Dowdy and Mr Jerrold Lundquist, had told Business Line in October 2010 that the Indian industry would not be able to take even a $1 billion offset opportunity.

But Mr Bhatia on Saturday stressed that the industry has both the technical capability and manufacturing capacity. The industry has done it (at least) in two other industries — nuclear and space. In both these instances, however, there had been clear indication from the Government that technology and products would need to be developed within the country and the industry rose to the challenge.

“I can assure you that making rocket motors for ISRO is far more complex than making them for BrahMos or Aakash missiles. Trust me, I have made both,” Mr Bhatia said.

Mr Bhatia was also unhappy that the ‘Defence Offset Facilitation Agency (DOFA)' was both a regulator as well as a facilitator. “The two roles cannot co-exist,” he said. He said that DOFA should also not be a part of the Department of Defence Production.

Mr Bhatia further noted that the private sector industry was kept out of DOFA. “Why? Because the private industry would not allow the nomination (of business orders) to the defence public sector companies,” he said.

Speaking at the seminar, Wing Commander D. K. Sharma said that it reflected very poorly on the Indian industry that there should be only 178 companies registered with DOFA.

Even the 178 has many repeats – for example, companies like Tata Power, BHEL and L&T have multiple mentions. There are many notable absentees too — for instance, there is no mention of Ashok Leyland, which supplies armoured vehicles.

“If (say) Dassault wanted to check-out the DOFA Web site, what would it think?” Mr Sharma asked.

Dr Vinod Surana, Partner, Surana & Surana, a law firm, noted that valuation of technology was a very ticklish area which often gives rise to many disputes in offset-related business agreements. He suggested that dispute resolution experts be involved right at the time of forming the agreement.

mramesh@thehindu.co.in

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Big opportunities for SMEs in defence sector - CIOL Network

BANGALORE, INDIA: The recently concluded defence expo in Bangalore gave some good news for country's small and medium businesses (SMBs/SMEs). During the expo, minister of state for Defence Pallam Raju said that the central government is looking at introducing the R&D fund for SMEs to encourage their participation in the defence sector.

For instance, Bangalore generates nearly 65 per cent of the country's aerospace business. As the minister said, if the new scheme for setting up R&D fund for SMEs comes up during the 12th Five Year plan, it will boost SMEs' presence around Bangalore to make it a hub for defence sector.

Meanwhile, Hindustan Aeronautics Limited (HAL), which mainly makes combat aircraft for India's defence sector, has said that it would increase its aircraft component buying from SMEs. HAL mainly outsources its component requirement to SMEs around Bangalore, Hyderabad and Nashik.

CII's report on defence estimates that the Indian defence sector currently comprises over 6,000 SMEs, which supply around 20-25per cent of components and sub-assemblies to the Defence Public Sector Undertakings (DPSUs), ordnance factories, Defence Research and Development Organisation (DRDO) and the armed forces.

The increase in spending on defence procurements will open up significant business opportunities for Indian SMEs for integrating themselves into supply chains of national and international defence majors. The defence sector is thus emerging as a lucrative market for SMEs.

Though the opportunities arising from the defence industry for the Indian SMEs are huge, there are some challenges. SMEs that can be successful are the ones which can innovate, adopt cutting edge technologies, deliver customised solutions, develop and maintain global standard in manufacturing qualities and specifications while maintaining their cost advantages. The challenge, therefore, for the Indian SMEs is to proactively respond to changing customer expectations.

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