- Sep 22, 2012
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).
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.