Adjusting Fire: An exhibitor with Finnish firearm manufacturer Sako gives a demonstration of the TRG M10 sniper rifle system to Indian Army officials during Defexpo 2014 in New Delhi on Feb. 6. Overseas defense companies are seeking more joint ventures with domestic firms. (Prakash Singh/AFP/Getty Images)
NEW DELHI — Overseas defense companies have shifted gears in the wake of India’s decision last year to steer military contracts to domestic companies when possible, executives and experts said at last week’s Defexpo exhibition.
The new name of the game: joint ventures between overseas companies and Indian firms.
Yet while joint ventures offer an avenue for defense deals, many overseas and Indian executives said India must increase the level of foreign domestic investment (FDI) from its current limit of 26 percent.
K.V. Kuber, CEO of New Delhi-based Sugosha Consulting, said no core technologies would flow to India unless the FDI limit is increased.
“Global cooperation is the norm in a global village,” Kuber said. “No country in the world can make everything in house. FDI must be increased, from the current levels to 74 percent or more with adequate checks and balances. I believe that the government is not increasing the current FDI limit due to lack of effective checks and balances and an accountable implementation mechanism, which leads to a lack of trust. This can be overcome by incorporating an effective oversight mechanism.”
India changed its procurement rules in June after the adoption of the United Nations Arms Trade Treaty, which defense analysts feared could lead to strict overseas oversight on India’s system for importing weapons.
While the new procurement rules are tilted toward state-run defense companies, private Indian companies are aggressively competing for programs by partnering with overseas firms.
This year’s Defexpo was focused on showcasing indigenous talent. Among the highlights were displays by several medium, small and micro defense companies, said Gokul Pati, India’s permanent secretary for defense production.
Yet overseas firms are quickly reworking their strategies to tap India’s defense market, managers said.
“Our business strategy in India revolves around the building up of an extensive network of local business partners, both in the public and private sectors including [small and medium-size enterprises],” said Loic Piedevache, country manager for French missile-maker MBDA.
Added Kim Kwan-see, global director for South Korea’s LIG Nex1: “We want to work in India as production partners and not merely as sellers.”
Kim disclosed that his company has partnered with state-owned Bharat Dynamics Limited and Ordnance Factories Board to co-produce precision-guided missiles and anti-ship missile programs.
Israel Aircraft Industries and Rafael have tied up with India’s Defence Research and Development Organisation (DRDO) to co-produce a $2 billion medium-range surface-to-air missile program.
“India is a strategic market for Rafael,” said Rafael’s President and CEO Yedidia Yaari. “We are constantly seeking new partnerships and joint ventures with Indian companies for cooperation that will help drive forward our mutual ability to address local needs and operational requirements. We are engaged in joint ventures and partnerships with local Indian industries and are in constant search to expand our activities in the country, in cooperation with the DRDO, in order to better address local needs and requirements.”
BAE Systems, which has already transferred a license to Hindustan Aeronautics Limited to produce the Hawk trainer, is also exploring partnerships with domestic companies, especially for artillery projects.
“We will continue to explore partnerships with a cross-section of public and private sector companies; the forms may vary based on the goals of the collaboration,” said John Brosnan, managing director for Southeast Asia and India for BAE. “As such the preference for [buying Indian] further expands the potential for us to share technology and co-develop and co-produce with domestic industry.”
The procurement changes have largely been welcomed by the domestic defense companies. However, most of the projects have not taken off yet, said Rajinder Bhatia, CEO of Bharat Forge.
Madhukar Vinayak Kotwal, president of the Heavy Engineering division of Larsen & Toubro Limited (L&T), said doing defense business in India is a huge challenge because defense tendering is based on the lowest bidder and not based on the technologically superior bidder.
Kotwal further noted that L&T has the capability to build any weapon and platform in India, yet there are no long-term programs in the defense sector.
While the overseas defense companies are adjusting their strategies, analysts say domestic firms won’t receive any real benefits until the FDI limit is increased to 49 percent. Such a move will help forge major joint ventures on an equity sharing basis, they said.
“We accept the decisions of the Indian government in this respect. Is it working well? That is for the Indian government to answer, to decide whether or not the current level is helping the indigenous defense industry to advance as well as desired,” said MBDA’s Piedevache. “Of course a higher level of FDI would make investing in India a much more attractive proposition as it would provide greater control of the investment involved.”
Peter Gutsmiedl, senior vice president for Airbus Defense & Space India, said: “We respect the Indian government’s stand but we believe that should this cap be raised, it will be easier for us to develop a larger industrial base here and transfer even more cutting-edge technologies. This will secure the self-reliance of India’s armed forces without compromising national security and will also benefit the Indian economy.”
A senior executive with domestic Mahindra defense systems said his firm would support raising the FDI to 9 percent. “It will allow a re-look at whether technologies can come in with the enhanced FDI, because the present 26 percent is not facilitating this.”
However, Shyam Kumar Singh, vice president of Mumbai-based Elcome Integrated Systems, wants only a hand-holding role by the overseas partners.
“FDI will lead to formation of [joint ventures] and investment of funds. However, higher percentages of FDI will also attract larger portions of the technology being implemented by the foreign firms themselves rather than the technology being imbibed by Indian partners. In the long run, the dependency will remain on foreign partners, which is not desirable.”