BANGALORE, India — International defense giants and domestic companies that want to do business with India face an overloaded bureaucracy, complex defense procedures and a government with protectionist policies designed to favor state-owned entities.
But they’re still willing to do business.
Executives for both the Indian and foreign defense industries attending last week’s Aero India conference in Bangalore acknowledged slight government reforms in the defense sector, but insist that the problems of the past decade persist.
They say timelines for awarding contracts are unknown, offset guidelines are muddled and extremely complicated trial periods often lead to projects that are canceled without explanation.
Still, industry will put up with the problems because India plans to spend around $100 billion to procure roughly 400 fighters and 200 helicopters in the next 10 years. But whether the Indian government will adhere to the strict timelines and provide clarity for its defense contracts remains a major challenge for everyone who wants a piece of the pie.
Because successive governments in India have spent billions of dollars in the past 50 years to buy defense technologies and create vast state-owned defense enterprises, those entities will remain most likely to grab the largest projects, said a senior Indian Defence Ministry official attending the air show.
He noted that India has opened the defense sector over the past 10 years but felt both private and foreign players are expecting massive rewards for investing peanuts in the country.
The majority of local and foreign defense-sector players agree that India will remain a prime target for industry but caution that companies need patience and must adopt an Indian way of operating to succeed in the long run.
Because of concerns over angering the bureaucracy that controls the country’s purse strings, very few will criticize the government openly.
“How can we make a large investment in defense unless there are steady guarantees of defense contracts in the future?” asked a Tata Group executive. “We want to be a credible systems integrator and build complete [weapon] platforms, but despite opening the sector, the government continues to favor and protect state-owned companies and wants private players to remain as tier-1 suppliers and simply handle small offset contracts.”
Meanwhile, small and medium players complain that large firms are winning contracts by undercutting prices and taking losses merely to make forays into the market.
A senior executive of a small defense company based in Bangalore said all the big-time Indian private players “can afford to lose money and make huge investments, but we’ll be simply wiped out if they start undercutting us.”
He further noted that “the foreign defense companies who award offsets contracts to us leave very little margins and there is no financing support in India to implement defense contracts.”
Foreign Firms Need ‘Patience’
A number of officials from international firms interviewed at Aero India said they were frustrated with India’s acquisitions system but had confidence it will continue to be refined and simplified.
“One thing American companies need to learn really well is patience” for projects in India, said Ram Prasad, managing director for Rockwell Collins India.
While he credits the Indian system for attempting openness and transparency, Prasad believes the slow pace of the acquisition process stems less from the user and more from government inefficacy.
“We have found people in uniform are making very quick decisions,” Prasad said. “But where it gets stuck is when it gets involved in the ministry, it takes a lot of time there. ... I think these bureaucratic delays do take place.”
Prasad thinks the ideal fix would involve moving from India’s current system, which awards bids based on lowest cost, into a value-based system that rewards companies for a superior product even if it costs more.
“Is that the ideal system? Is India getting everything because of [the current system]? I doubt [it],” Prasad said. “I doubt [it] very much.”
Speaking here Feb. 6, U.S. Ambassador to India Nancy Powell pledged to try to remove the “obstacles” facing non-Indian companies.
“We are working with the government of India and the private sector in both India and the U.S. to reduce obstacles, overcome challenges and foster development of the defense and aerospace sectors to the benefit of both nations,” Powell said.
That work has already paid dividends in positive, if small, improvements to the system, officials said.
The acquisitions system has seen incremental improvements over the past six years, said Jim Gribbon, regional president for Lockheed Martin. “It’s a meandering process that is making its way forward.”
A defining characteristic of the Indian market is a government requirement for domestic partners on large projects, which can add to the already complicated industrial mix.
R.K. Mathur, chairman of state-owned Hindustan Aeronautics Ltd. (HAL), said one needs very large investments to build fighters and helicopters in India, and HAL is always partnering with private firms to participate in large defense projects. HAL has already teamed with 157 small- or medium-sized private companies in India to supply 15,000 types of accessories for the production of Su-30 MKI aircraft at Nasik.
Mathur also said HAL has teamed with 70 private defense manufacturers under technology transfer agreements to build key systems for the upcoming Medium Multirole Combat Aircraft (MMRCA) project, whose coordination will be a major challenge. He also admitted that there have already been cost overruns and delays in some projects due to parallel design and development alongside the productions.
Russia, still the largest defense supplier to India, is now finding it difficult to do defense business here.
“The adaptation of defense tenders in India is now a big challenge, and its terms and conditions are increasingly getting more complicated,” said Victor Komardin, deputy director general of Rosoboronexport.
“Russia plans to set up repair, overhaul and manufacture of spares with private companies in India for Russian weapon systems, but Indian bureaucrats are blocking it, and insisted they are now awarding to Americans through government-to-government deals,” Komardin said.
One upcoming major project for India is the Fifth Generation Fighter Aircraft (FGFA), a model of which was proudly displayed outside HAL’s pavilion in Bangalore last week.
But despite claims it was a product co-designed by India, officials for HAL and the Indian Air Force told Defense News that India has no meaningful role in the FGFA and the aircraft is in fact only a Russian design stamped with India’s name.
An Indian Air Force official said the service would like a greater role in FGFA development.
Komardin said the FGFA meant for India will be based on Russia’s T-50 aircraft, and New Delhi has already paid for development of an unspecified number of FGFA prototypes. He claimed no one but Russia will give stealth fighter technology to India, making it the clear choice for a fifth-generation program.
He noted that India wants added requirements and drastic changes to the T-50, which could lead to FGFA price increases. The research and development agreement is expected to be signed in one year, Komardin said, with the Indian government paying for the FGFA prototypes.
Komardin further clarified that Russia will produce the FGFA, with India building some parts under full technology transfer. It will take several years to build the Indian FGFA.
But a HAL official said a number of meetings have been held in the past year with Russian officials, and a work-sharing agreement has been reached on the cockpit display system, reworking of wing and control surfaces, mission computer, navigation system, countermeasure dispenser systems, and compatibility of FGFA with the indigenous Astra beyond-visual-range missile. HAL and the Russians will jointly develop the thrust vector of the aircraft.
If, as with so many projects in the past, the Russian deal were to fall apart, other players would likely jump at the chance to provide a fifth-generation program.
When asked whether Lockheed had approached India about buying F-35 Joint Strike Fighters, Gribbon said the company would be happy to enter the market — if the U.S. government were to open discussions.
“The JSF is a government program run by the joint program office for the three services,” Gribbon said. “We follow their lead.”
While he believes there have been some preliminary discussions on the F-35, “It hasn’t gotten to the point where we are here making presentations or anything like that. ... We’ll go wherever we can sell the JSF,” Gribbon said, adding that he feels it would be a good fit for India.