Do defence PSUs make better JV partners for foreign companies?

Discussion in 'Defence & Strategic Issues' started by AVERAGE INDIAN, Jul 7, 2013.

  1. AVERAGE INDIAN

    AVERAGE INDIAN EXORCIST Senior Member

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    A study by the Indian arm of Munich-based consultant Roland Berger has come up with a provocative conclusion: Indian defence public sector undertakings (DPSUs) make better bedfellows for foreign companies than their private sector counterparts — and the ones with the worst record are the large private companies. While several defence analysts see this report as a "statement of fact" based on historical experience, there is more to "this phenomenon" than meets the eye, they add.

    "[Defence] JVs [joint ventures] with medium-sized Indian groups have survived longer than with larger groups. DPSUs have a good track record of sustaining partnerships," declares the report. Rahul Gangal, defence analyst and principal, Roland Berger Strategy Consultants, says JVs and partnerships between overseas defence companies and DPSUs enjoy a 100% success rate. The report, parts of which have been shared with ET Magazine, also makes another observation: government-to-government defence deals are far more successful than business-to-government ones.

    Sure, the ratio of defence programmes awarded in India is skewed towards government-to-government contracts as opposed to business-to-government ones. Which is perhaps why Russia, Israel and the US often use the government-to-government route to enter into deals. On the other hand, several European companies, which approach the government directly, find the going tougher.

    According to consultants Frost & Sullivan, Russia, Israel and the US are the top three suppliers of defence equipment to India, the world's largest arms importer. The country accounts for 12% of global arms imports, almost twice as much as China, according to the Stockholm International Peace Research Institute (Sipri).

    Ground Reality

    Why are JVs or other partnerships with big local private players mostly short-lived? Washington-based defence analyst Robert Metzger, a specialist in Indo-US defence ties, has watched the Indian defence sector for long. "A principal problem," he says, "is in sustaining the 'business case' for long-term commitments with Indian industrial partners." JVs often face great delays in terms of approvals, he notes, adding that "it is too difficult to obtain necessary organisational licences and business permits".

    A case in point is the much-celebrated joint venture between Mahindra & Mahindra (M&M) and British multinational giant BAE Systems, which joined hands in 2009 to pursue opportunities in the infantry space. M&M owned 74% of the entity, called Defence Land Systems India (DLSI), and the rest was held by BAE Systems. In February this year, the two companies parted ways.

    "It was a well-thought-out, mutually agreed plan," says a BAE Systems official who asked not to be named because he is not authorised to speak to the media. In fact, both companies didn't see any "commercial viability" in keeping the marriage intact, says a Mahindra & Mahindra official who also spoke on condition of anonymity.

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  3. AVERAGE INDIAN

    AVERAGE INDIAN EXORCIST Senior Member

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    Re: Do defence PSUs make better joint venture partners for foreign com

    Bitter Truth

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    Explains Dean McCumiskey, managing director and chief executive, India, BAE Systems: "No tenders or contracts were being placed with commercial entities in DLSI's target market." Which simply means the $12-billion Futuristic Infantry Vehicle (FICV) programme — which envisages building a prototype of a state-of-the-art combat vehicle and then making 2,600 such vehicles (by the winning company) — is in cold storage.

    The proposed project is now expected to be built in the "make India" category and that means local companies alone will be able to take part in the bidding. Besides, the project had already been delayed. In fact, according to a ministry of defence official who spoke on condition of anonymity, Russia successfully lobbied to get New Delhi's go-ahead for an alternative programme for the time being: upgrading some 1,500 of Indian Army's Russian-made BMP-2 infantry combat vehicles for $1.2 billion over the next five years. ET Magazine couldn't independently verify the claim. However, the ministry of defence has already cleared the project.

    "Naturally, in the absence of signs of a return on investment, it is not reasonable for commercial organisations to continue to bear costs and build up a skill base," Mc-Cumiskey points out.

    A top official of a Mumbai-headquartered conglomerate says he agrees "broadly with the Roland Berger report". He goes on to argue that "isolating fact from truth isn't what studies should attempt to do". According to him: "The content of work and outcome should define the relationship between companies, not mere longevity."

    Another senior official of an Indian company with varied business interests and who has been close to negotiations between the Tatas and Boeing — who failed to form a joint venture — notes: "Private companies have their business interests to take care of. They are answerable to shareholders. They have to weigh the pros and cons before they arrive at a decision. Some deals work. Others don't."

    "Let's not forget that Tata Advanced Systems Ltd [TASL, a unit of the Tata Group] has a successful JV with Sikorsky Aircraft Corporation to manufacture the Sikorsky S-92 helicopters in India," he adds. The JV also makes aerospace components for other original equipment manufacturers (OEMs). TASL also has a JV with US defence company Lockheed Martin to make aerostructures for the C-130 Hercules and the C-130J Super Hercules.

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  4. AVERAGE INDIAN

    AVERAGE INDIAN EXORCIST Senior Member

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    Advantage For DPSUs

    PSUs have a historical advantage in India's defence sector. According to Metzger, DPSUs have had other inherent advantages too: they have been comparatively low-risk, in terms of approvals, funding and payment. American military historian and strategist Edward Luttwak is of the view that they (DPSUs) have an edge over others thanks to the system that has been in place for long. They have been a monopoly.

    He adds: "They thrive because they hold the gun to the head of the foreign partner. DPSUs such as Hindustan Aeronautics Ltd [HAL] are deeply hated but in India there used to be hardly any choice —you either work with them or you are out."

    True, companies such as HAL enjoy long partnerships with foreign players such as BAE Systems, Russia's United Aircraft Corporation (UAC, which makes Sukhoi aircraft), Rolls-Royce and so on. UAC and HAL are partnering to make the Multirole Transport Aircraft to replace IAF's ageing fleet of Antonov An-32 transport aircraft. Luttwak can't hide his scorn: "As I have always said, it [HAL] is a fossil of a company famous for not delivering operationally ready Tejas Light Combat Aircraft after 30 years of trying."

    Neelu Khatri, head of defence and security advisory services at KPMG India, feels that times are changing: "HAL is overbooked [with orders]. Private players will have to play a larger role now to meet demand." India faces the daunting task of replacing its obsolete weaponry. Former army general VK Singh had said in an interview last year that 97% of the country's defence equipment is obsolete. Dhiraj Mathur, executive director at PricewaterhouseCoopers (PwC), has no doubts about what he calls "the growing role" in "such a scenario" of the private sector.

    PSUs have a historical advantage in India's defence sector. According to Metzger, DPSUs have had other inherent advantages too: they have been comparatively low-risk, in terms of approvals, funding and payment. American military historian and strategist Edward Luttwak is of the view that they (DPSUs) have an edge over others thanks to the system that has been in place for long. They have been a monopoly.

    He adds: "They thrive because they hold the gun to the head of the foreign partner. DPSUs such as Hindustan Aeronautics Ltd [HAL] are deeply hated but in India there used to be hardly any choice —you either work with them or you are out."

    True, companies such as HAL enjoy long partnerships with foreign players such as BAE Systems, Russia's United Aircraft Corporation (UAC, which makes Sukhoi aircraft), Rolls-Royce and so on. UAC and HAL are partnering to make the Multirole Transport Aircraft to replace IAF's ageing fleet of Antonov An-32 transport aircraft. Luttwak can't hide his scorn: "As I have always said, it [HAL] is a fossil of a company famous for not delivering operationally ready Tejas Light Combat Aircraft after 30 years of trying."

    Neelu Khatri, head of defence and security advisory services at KPMG India, feels that times are changing: "HAL is overbooked [with orders]. Private players will have to play a larger role now to meet demand." India faces the daunting task of replacing its obsolete weaponry. Former army general VK Singh had said in an interview last year that 97% of the country's defence equipment is obsolete. Dhiraj Mathur, executive director at PricewaterhouseCoopers (PwC), has no doubts about what he calls "the growing role" in "such a scenario" of the private sector.

    India amended its DPP recently to give more room to local private players in the wake of corruption scandals in defence transactions involving foreign players. According to the amended policy, "buy Indian" comes on top in the hierarchy of preferences for purchases. The next is "buy and make Indian" (through joint ventures with foreign vendors); then comes "make Indian" (where local firms design, develop and build systems). "Buy and make" (with transfer of technology) comes next. The last on the list is "buy global" (getting overseas equipment).

    Though Antony has hit out at his ministerial colleagues for lobbying to raise the FDI cap in defence from 26% to 49% as a step to encourage JVs, he offered to consider on a "case-to-case" basis requests for 49% FDI from MNCs. For his part, Kishore Jayaraman, president, Rolls-Royce India and South Asia, says that one reason why many defence JVs are short-lived is "because foreign companies don't treat their Indian partners responsibly". Overseas MNCs have reportedly engaged in "sharp" business practices that exploit rather than promote mutually successful outcomes, he observes. "A trust-based relationship takes time to develop and commitment to sustain," he adds.

    He, however, concedes that MNCs, too, have their set of concerns. They are often unsure of their ability to protect IP and satisfy their national integrity laws when they have 26% or less investment in Indian JVs. "All of these make JVs in India a very long-term proposition, with high costs of pursuit and uncertain return. And that is where the biggest problem resides — namely, JVs do not now have confidence that the government of India will purchase their supplies and services," he argues.

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  5. AVERAGE INDIAN

    AVERAGE INDIAN EXORCIST Senior Member

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    Re: Do defence PSUs make better joint venture partners for foreign com

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    New 'Home' Markets

    Of course, the centre of gravity of arms trade is shifting east. According to Frost & Sullivan, India and China are among the most preferred Asian countries for investments in the aerospace business, including in defence aerospace, thanks to lower costs.

    As a percentage of GDP, India has been maintaining defence expenditure in a range of 2-3% of GDP, in line with major developed nations, signifying a fairly steady focus on defence within the economy to date, says a KPMG report.

    The government, as the sole purchaser of defence equipment, spends heavily with defence expenditure accounting for close to 15% of the central government expenditure, it adds. In fact, India is expected to purchase arms worth $100 billion by 2022 as western countries cut defence budgets.

    That is why, although officials of a few foreign defence companies talk of "the India fatigue," — thanks to numerous delays in orders and the famous India red tape besides corruption — people like McCumiskey of BAE Systems call the country a home market. He says his company is driven in India by its "success in transferring knowledge and skills to domestic industry as evidenced in the Jaguar and Hawk programmes".

    "In the six decades we've been here, we have seen considerable opportunity in the country's determination to modernise its military and develop an indigenous industrial base," he adds.

    Meanwhile, Luttwak says he has no doubts about why western companies are heading eastwards. "These large western general contractors are in a miserable industrial situation: ministries of defence are buying aircraft, armoured vehicles, ships, etc at very, very slow rates. Six to seven aircraft a year itself is a lot. There is a lot of overcapacity," he says emphasising that "nobody needs more general contractors".

    "Sub-system outfits are in better shape — there is more business — and moreover not being huge companies, they welcome co-investment deals. That is how good deals are done," he avers.

    It's Official, Stupid

    Most foreign defence OEMs ET Magazine spoke to prefer government-to-government defence pacts to others. McCumiskey is convinced that it is the right approach. "At the end of the day India needs to be sure that it will be supported by the country of origin of the defence equipment it procures and also that the deal conforms to all of its defence procurement legislation," he says.

    A senior official of a US-based company says "deals such as the VVIP helicopter one with AgustaWestland" could have been managed in a better fashion had it been a "government-to-government deal". A few months ago, Italian prosecutors found the former chief of AgustaWestland, Italian firm Finmeccanica's helicopter business, guilty on charges of bribing Indian officials in return for altering the terms of the contract in the 2010 sale of 12 VVIP choppers to the Indian Air Force.

    The ministry of defence official told ET Magazine that the Centre is ready to step up its role in dealing directly with governments in defence buys. He added that the government is ready to spend as much as Rs 15,000 crore as an initial sum for a "technology transfer pact" with France as part of the deal for MMRCA (medium multirole combat aircraft) won by French company Dassault, which two years ago secured the order to supply IAF with 126 Rafael aircraft.

    The fiercely fought contest saw Dassault outbid the likes of Boeing, Eurofighter, Saab and Lockheed Martin amongst others. "The government is taking a keen interest. The finance ministry is ready to give the money if the ministry of defence asks for it," the official had said without elaborating. According to the Roland Berger report, of $90 billion worth of deals India has inked so far in the government-to-government route, deals worth $75 billion were made by Russian OEMS and $12 billion by Americans.

    Antony himself favours such "official" deals, says a person close to the matter. The defence minister, he says, refuses to meet CXOs of either local or overseas defence companies. Antony is known to follow zero-tolerance towards corruption and has blacklisted six companies since he took over in 2006: Singapore Technologies, Israeli Military Industries, Germany's Rheinmetall Air Defence, Corporation Defence of Russia, Delhi-based TS Kisan and RK Machine Tools of Ludhiana. He hasn't blacklisted Finmeccanica yet.

    Metzger, too, sees an advantage for "both India and the seller" in such "official" transactions. He adds that the premise that DPSUs have accomplished much must be questioned. Their gains, in terms of design and development, and promotion of truly indigenous capability, are open to question, he states. He finds it heartening to see more local private players entering the defence/aerospace segment, including the biggest Indian private company, Reliance Industries Ltd.

    The defence ministry official forecasts that there will be "a waterfall effect" in JVs between local and overseas defence companies. "Changes are in the offing if they have not already begun," he says without elaborating.

    LINK

    Do defence PSUs make better joint venture partners for foreign companies? - The Economic Times
     
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  6. Kunal Biswas

    Kunal Biswas Member of the Year 2011 Moderator

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    Re: Do defence PSUs make better joint venture partners for foreign com

    Thanks for sharing..

    A Very good read..
     
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  7. drkrn

    drkrn Senior Member Senior Member

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    you cant compare a giant tree with a budding one.many factors play a role in sustenance of jv's with such companies like diplomatic pressures on both sides.our psu's work for better products to country while pvt players need money as they do not have govt back up
    as a matter of fact recently boeing announced that it will move c-130j production to india in a jv with tata if orders are increased
     
  8. Dinesh_Kumar

    Dinesh_Kumar Regular Member

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    Defence PSUs have very different priorities compared to their Indian Counterparts.

    Indian pvt sector groups like Tata and Mahindra operate along the lines of " Transfer technology to us, our people will get government contracts, profit sharing between us will be in the following ratio." Curt, no nonsense stuff everyone understands. Less room for flexibility.

    Indian PSUs may operate like " Our Chairman and MD, Shri ABC Saar, will come to your country to first tour the facilities before signing contract. He will be part of a high level delegation . We have assured order for 200 nos. initially from Army/AF/Navy, and need kits for the same. But before that, Factory production line is coming up, and we need Chairman of your company, along with important officials, and Minister from your country, to come for Inauguration and Ribbon Cutting.It will be a part of a high level delegation. Also, kits supplied to us are coming in SKD route. We need support for indigenisation, so in future kits will come in CKD route instead. It will help us achieve our targets, and save us 5 % of the amount from Government of India. Follow on order for 300 nos. may be signed in future, if our stringent and exacting quality standards are met."

    Now you tell me, who would make a better long term partner for a foreign arms maker?
     
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