Private defence companies see failure ahead in first aircraft building

Discussion in 'Defence & Strategic Issues' started by AVERAGE INDIAN, Jun 12, 2013.

  1. AVERAGE INDIAN

    AVERAGE INDIAN EXORCIST Senior Member

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    The 56 aircraft to be supplied under this contract will replace the IAF's aging Hawker Siddeley 748 Avro

    The Ministry of Defence (MoD)'s global tender for supplying the Indian Air Force (IAF) with 56 medium transport aircraft is deeply flawed, say Indian companies that will compete to build 40 aircraft in India in partnership with a foreign vendor who will supply the first 16 ready-built.

    Air Chief Marshal N A K Browne, the IAF boss, has touted this as a game-changing contract that would bring India's private sector into aerospace manufacture. But private company CEOs say the contract is set up to fail, shutting the doors forever in their face and leaving the field clear for public sector monopoly, Hindustan Aeronautics Ltd (HAL).

    The 56 aircraft to be supplied under this contract will replace the IAF's aging Hawker Siddeley 748 Avro aircraft. The MoD tender - termed Request for Proposals (RfP) - has gone to eight global vendors, including Boeing, Ilyushin of Russia, Antonov of Ukraine, Franco-German consortium EADS, Embraer of Brazil and Alenia Aeromacchi of Italy. By October 8, each bidders must select an Indian partner, termed the Indian Production Agency (IPA), and submit their detailed proposals.

    Defence Minister A K Antony told Parliament last August that the contract, worth an estimated Rs 11,897 crore, would see the first aircraft delivered 24 months after signing, and all 56 delivered over the next eight years.

    But this may never come to pass, say three CEOs from the Indian private sector, pointing to what they term "fatal problems" with the proposal. Their greatest apprehension is the enormous cost of establishing a greenfield aircraft production unit, and an airfield and control tower to test and fly out the aircraft that are built. Acquiring hundreds of acres of land and setting up such a facility will be an expensive and time-consuming task that could incur serious delays.

    "It would be hugely uneconomical to establish such a facility just to build 40 aircraft for the IAF. The MoD presumes that, after delivering the IAF aircraft, the facility can build for the global civilian market, amortising the cost over many more aircraft. But why would a foreign vendor establish a line in India that would compete with its home facility?" wonders an Indian defence company CEO.

    Besides the possible loss of jobs in the home country, foreign vendors would calculate that Indian aerospace manufacturing costs are significantly higher than in developed countries.

    Industry bodies have suggested that one of the IAF's base repair depots (BRDs) be used for setting up the production facility. The BRDs, which carry out major repairs and overhaul of aircraft, have vast tracts of land and functional airfields that could be given on lease to the IPA. If the BRD cannot spare land, the industry bodies have proposed that the IAF acquires adjoining land under the national defence clauses. But the MoD has not accepted that suggestion.

    Besides this, Indian CEOs point to another major problem - the certification needed for aircraft built here for the civil market. Furthermore, each individual component built in India would require certification for civilian aerospace use, a rigorous and time-consuming process that would significantly raise the cost.

    "Eventually the foreign vendor will end up supplying all 56 aircraft from abroad. With the Indian partner mired in land acquisition, certification, licences and procedural formalities, the MoD will have no choice but to fall back on import. This is set up to become an MoD case study of how the private sector, given an opportunity, failed to rise to the occasion," says a private defence company CEO.

    Watching from the wings is HAL, which has steadfastly opposed the proposal to build through the private sector. Top HAL officials have lobbied with the MoD to let HAL manufacture the transport aircraft at its Kanpur facility.

    These issues are only emerging now because the MoD has tightly controlled access to the RfP document. While issuing it on May 8th to eight foreign vendors, the prospective IPAs, have been denied a copy. When Indian industry bodies officially requested for a copy of the RfP, the MoD turned them down.

    Business Standard has a copy of the RfP in its possession. The MoD has not responded to an emailed request for comments.

    Private defence companies see failure ahead in first aircraft building project | Business Standard
     
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  3. pmaitra

    pmaitra Moderator Moderator

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    Re: Private defence companies see failure ahead in first aircraft buil

    This is an excellent thread. Than you @AVERAGE INDIAN for sharing.

    So, what are the solutions? Is there any way the government can get at least one non-HAL Indian company to get a kick-start in aircraft building?
     
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  4. arnabmit

    arnabmit Homo Communis Indus Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    Why not NAL atleast?
     
  5. ladder

    ladder Senior Member Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    The CEO's of the three Indian private sector companies are playing safe.
    Though correct that establishing huge infrastructure for 40 odd planes is not economical.
    But many including industry experts know that the final demand for such planes will be over 100 just for India.
    By bringing this issue the Private sector indirectly wants GOI to confirm the addl. requirements which are in the projection phase like whether there will be any repeat orders and how many for IAF.
    Ministry of Home was interested for a fleet of transport aircraft for CAPFs and these CEOs want firm order for the same before committing any resources.

    so, these CEO's want to lower the risk value by having a lots of firm orders before getting into the business and this is just the first step of it.
     
    Last edited: Jun 12, 2013
  6. TrueSpirit

    TrueSpirit Senior Member Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    NAL's past record does not inspire much confidence. However, private players with deep pockets like Reliance AeroSpace etc. can still jump in to demonstrate their willingness to Def. Ministry for taking risks & absorbing cost-overruns.

    I read in some interview with Mr.VK Saraswat that, for now, the DRDO & CSIR labs (like NAL) should continue to do the high-end niche R&D work while outsourcing the low-end, high volume to Private players because private players in Indian defence industry do not have the experience, expertise, manpower, domain competency or autonomy against against share-holders, the way a public sector org. like DRDO would have.

    I think he stated a fact. Unless really high-volume orders are given to the private players, they would just continue to showcase prototypes of some or the other vehicle/artillery, in the hope that it would be acquired for armed forces someday. However, that's never going to happen because armed forces' only choice is foreign-maal (as long as they can help it & are not forced by Def. Ministry) & indigenous programs are inevitably too-little, too-late.

    So, the chances of private players ever being able to break the stranglehold of HAL/OFB/HVF/BEML are bleak, at best. Some seroious lobbying effort is needed to be done by CII / ASSOCHAM etc. (like NASSCOM does) to get the private players a pie from the defence plate.
     
  7. Yusuf

    Yusuf GUARDIAN Administrator

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    Re: Private defence companies see failure ahead in first aircraft buil

    While what you say may be true, its the govt which has to encourage the pvt sector by providing favorable terms. Till the time the pvt industry is not able to develop its own world class product that can be exported for economy of scale.
     
  8. TrueSpirit

    TrueSpirit Senior Member Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    That's right, the onus is on GoI to provide a conducive environment for a nascent, fledgling industry which has great transformational potential.
     
  9. ladder

    ladder Senior Member Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    Fair enough Yusuf Sir, The govt. has to provide a favorable atmosphere by providing incubation facility and not guaranteeing profit.
    The incubation facility provided here are technology through tie-up with the winning bidder OEM.
    Tooling and kits will be provided by the winning bidder so Indian partner is not bothered for detailed engineering and production technology.
    By making the winning bidder OEM the lead, the Indian partner inherits the best industrial practices from them.
    By ploughing in a certain amount of bid value the winning bidder cannot off-load and walk-off at the end of this deal.

    And secondly the problems highlighted by CEO's are also about land acquisition, which is a issue where govt. can assure a limited help.
    But, the model proposed by them is not possible where land is acquired near base repair depot and handed over to them.

    The certification issue has no other solution, as every part has to be certified and it cannot be bypassed and even if the number is increased to 100 or more this has to be addressed.
    On the positive side when you are inheriting a proven manufacturing model from a proven company certification should not be a issue.

    On the issues of manufacturing cost being high for aviation components being high in India, I would like to draw attention of members towards a similar kind of deal
    where Pilatus will set up a manufacturing unit in India wherein they will manufacture certain components of 12 seater turbo-prop aircraft and ship them to their parent location for assembly. Secondly RuAg does the same for Do228 and Tata does for another aviation giant. The cost will only come down volume of manufacturing.

    These three Indian company's CEO should conduct a market study for the possible future order and have to take risk but to indirectly ask for more confirm orders from govt. is a tall ask.

    The two models for the offset clause one the Pilatus model and second this is different and is crafted with many things in mind.
    Primarily an uninterrupted supply of spares and man power for repair and overhaul which is free from outside intervention because we had a bitter experience with IL series of transport aircraft.

    But, the Pilatus being a trainer aircraft and we having signed a clause not to arm them have ensured that OEM has no objection in supplying us parts.So, in that case the latter model was applied wherein OEM was free to decide how to honor the offset clause.
     
    Last edited: Jun 12, 2013
  10. TrueSpirit

    TrueSpirit Senior Member Senior Member

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    Re: Private defence companies see failure ahead in first aircraft buil

    @ladder

    That's the issue with Private companies. They do take risks whenever needed, but only "calculated risks", since they have to be responsive & held accountable towards shareholders, every quarter. Defence, & especially defence aerospace is a highly demanding as well as procedurally-murky business, fraught with all possible uncertainties. If we are really serious in providing the necessary impetus to our fledgling aerospace industry, we have to offer them some "low-tech" + "high volume" business, initially.

    Exactly as Dr. Saraswat proposes. Or else, the hegemony of HAL+BEML+OFB could never be challenged.
     
    Last edited by a moderator: May 10, 2015
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