39575 IndustryDefenceLinkage

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Confederation of Indian Industry

Industry-Defence Linkage


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1Industry-Defence Linkage

Message from Chairman, Defence TaskForce, CII Eastern Region

CII Eastern Region has a dedicated Task Force on Defence to identify linkages and explore business opportunities between Industry

and Defence Sector. As a part of this initiative, the Confederation is organizing the third edition of Industry Defence Linkage

which had proved to be an ideal forum in facilitating the Indian industries to engage with the defence sector.

The objective of this conference is to bridge the gap between industry capabilities and defence requirements.

India has emerged as the largest market for the defence products, technologies and services and we are expected to spend

approximately 235 Bn USD on defence systems over the next 10 years. Indias imports increased by 38 percent between 2007 to

2011. India But as it said that No nation can aspire to be a power to reckon with on borrowed strength, Self reliance in Defence

is of vital importance for both strategic and economic reasons. Industrial and technological growth in the past decades has

indicated that it is possible to achieve this self reliance in defence by harnessing the emerging dynamism of the Indian Industry.

Government sector alone can not fulll the requirements of defence forces and therefore, the private sector has to come in a big

way. In countries such as the US, UK, Russia, Australia, etc., it is the private sector that meets key defence requirements. In fact,

as per the global practices, the private sector is consulted for key inputs during policy formulations.In India also, government has taken a slew of policy initiatives including 100% private equity with 26% FDI in the defence sector

and the defence offset policy which mandates that foreign vendors must invest 30 per cent of the contract value in building Indias

defence industry for contracts worth Rs 300 crore or more.

In its ambitious plans to upgrade its defence forces, Government is counting heavily on the private sector. The Government of India

seeks to meet 70 percent of the countrys defence needs internally over the next 5 years or so. With several large equipment and

modernization programmes lined up, it is estimated that the overall expenditure will be in the range of USD 80-100 billion in the

next 5 years. This also means that the local industry doubles in size and approx. 120,000 new jobs are created.

I see this as a multi-billion-dollar opportunity for the industry, and countless new jobs.

The government has recently come out with Defence Procurement Procedure 2013. This will provide the Indian Private sector a

chance to move up the value-chain in the area of defence production in the country. There are still many concerns, but Im sure

they will be addressed soon.

Ideally, the public and private sectors work alongside, combine their skills and develop a partnership to maximize resources.

However, I wish to let it be known that formulation of focused and pragmatic strategies will be critical to enhancing Indias

opportunity to leverage its advantages.

I hope this report on Industry Defence Linkage would go a long way in strengthening the linkages between the industry and

defence sector.

Rear Admiral A K Verma (Retd.)

Chairman, Defence Task Force, CII Eastern Region


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2 Industry-Defence Linkage

Foreword by CII

The third edition of the Industry-Defense Linkage, billed for 4 July 2013 in Kolkata, is yet another signicant initiative by the

Confederation of Indian Industry (CII) Eastern Region to foster partnership, increase competitiveness and spur growth in the

defense sector. The context is just right.

We all know that in the next 15 years, India will see an investment worth around INR6 lakh crore. This is something that will create

numerous jobs, drive economic growth and ensure prosperity for people.

Signicantly, of the INR6 lakh crore, at least INR80,000 crore will be spent in the eastern region comprising Bihar, Chhattisgarh,

Jharkhand, Odisha and West Bengal. The scale and scope is stupendous, with opportunities bright for sectors such as machineries,

electrical items and hulls.

Furthermore, private players, which are currently engaged in the defense industry sector as sub-contractors and ancillary units

supplying raw materials, semi-nished products, parts and components to Defense PSUs and ordnance factories, would be

stepping up their participation.

By all accounts, it is a win-win opportunity. The challenge, however, is how state governments and the center play their part and

create the right ambience to be able to cash in on the opportunities.

Given that the international defense industry has a complex network of supply chains, there is an urgent need for Indian

companies, especially the 4,000 SMEs that supply metals, clothes, leather and various semi-nished products to ordnance

factories, to integrate themselves into the supply chains of global and domestic defense majors.

CII Eastern Region has undertaken a number of initiatives with a clear focus on creating a conducive atmosphere. We have a

Defense Task Force dedicated to helping MSMEs and the industry cash in on emerging opportunities and catalyze growth of the

defense sector industry in the East. We also organize forums and facilitate interactions to explore more business opportunities,

particularly for MSMEs.

Notably, CII Eastern Region organized a Defense Conclave on 20 December 2012 in Kolkata. The aim was to build a strong

platform for the private sector in the Eastern Region and for defense PSUs, and to explore mutual business opportunities.

This year, too, several programs including the upcoming Industry-Defense Linkage, a series of vendors meets and interactive

sessions have been lined up. Such exercises are necessary to enable the defense sector industry to come up with ideas and

innovation and make the big leap forward.

It is no longer a distant dream to create a technologically feasible and economically viable industry, and become one of the

mightiest military powers in the world.

Thank you.

Sudhir Deoras,

Chairman, CII Eastern Region


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Foreword by Ernst & Young

India is the single-largest importer of defense equipment worldwide. Its history of conict with two of its largest neighbors makes

it imperative that the countrys armed forces have access to state-of-the-art equipment. In times of strife, a large nation such

as India cannot rely on imports and needs to become self-sufcient. On a separate note, the Ministry of Defense (MoD) has long

recognized this need and has stressed on the importance of being self-reliant. Furthermore, it is striving to meet this objective.

The offset policy under the Defence Procurement Procedure (DPP) is an example of this.

The offset policy, after being introduced in 2005 and promulgated through the DPP, has undergone several iterations to ensure

that it is easy to understand and implement. The Indian government introduced the offset provisions to facilitate foreign

investment in the indigenous defense industry, both in terms of foreign direct investment (FDI) and capability building. The banking

of offset credits incentivizes foreign OEMs to make long-term commitments to the Indian economy. It also helps in the building

of an indigenous defense base independent of the obligatory connes of a timeline. While the policy has evolved at a great pace,

certain roadblocks hamper the actual potential to be realized. To address this concern, the MoD and various other government

agencies have begun focusing on compliance and execution, while liberalizing the offset policy with the inclusion of newer

methods, products and services to discharge offsets. This opens up an offsets market worth approximately US$20 billion in the

next decade for the Indian industry. In this backdrop, we have tried to throw some light on the processes governing offsets and the

opportunities arising out of the offset markets in India.

Prior to the opening up of the defense industry to the private sector, Defence Public Sector Undertakings (DPSUs), along with

the Ordnance Factory Board, catered to the armed forces requirements. Majority of the defense infrastructure in the country

is constituted of the 41 Ordnance Factories and 9 DPSUs. The model of production of DPSUs is based on the production of

technologies conceptualized by DRDO, nominated projects of the MoD and licensed production of platforms from foreign OEMs.

Owing to the modernization drive of the armed forces in the last couple of years, DPSUs have had to bear with overowing order

books and stringent project timelines. They have responded by creating innovative models of subcontracting and joint production

with the private sector, with the latter stepping up participation. We have attempted to give a brief overview of the arising

opportunities, and the methods that private companies may employ to engage with DPSUs on these opportunities and contribute

toward nation building.

It has been our endeavor to make this report both relevant and actionable. Hope you nd it useful.

K. Ganesh Raj

National Leader- Aerospace & Defense

EY LLP


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Contents

Part 1 Opportunities with DPSUs in India

Chapter 1: Indian defense industrial base - public sector............................................. 08

DPSUs and OFB ............................................................................................................. 09

Organizational structure ................................................................................................ 09

OFB ....................................................................................................................... 09

DPSUs ....................................................................................................................... 11

Hindustan Aeronautics Limited (HAL)...................................................................... 12

Bharat Electronics Limited (BEL) .............................................................................12

BEML Limited (BEML) ............................................................................................. 12Mazagon Dock Ltd (MDL) ........................................................................................13

Garden Reach Shipbuilders & Engineers Ltd (GRSE) .................................................13

Bharat Dynamics Ltd (BDL) ..................................................................................... 14

Hindustan Shipyard Limited (HSL) ...........................................................................14

Goa Shipyard Limited (GSL) .................................................................................... 14

Mishra Dhatu Nigam Ltd (MIDHANI) .........................................................................15

Financials of the DPSUs ................................................................................................. 15

Supply chain and vendor registration .............................................................................. 15

Modernization of DPSUs and OFs ....................................................................................16

Chapter 2: The Indian defense market and opportunities ............................................. 17

Challenges for Defense Industrial Base ............................................................................19

Opportunity matrix ........................................................................................................ 20

Targeting opportunities .................................................................................................. 22

Driving successful relationships ......................................................................................22

JVs/MoU ............................................................................................................... 22

Way forward for DPSUs and OFs ..................................................................................... 26


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Part 2 - offset policy of the Indian MoD: effects, implications andopportunites

Chapter 1: What is offset? ...........................................................................................30

What is offset? ..............................................................................................................31

Offset policy of the Indian MoD .......................................................................................31

Objectives .............................................................................................................31

Modalities of executing offsets ................................................................................31

Offset process ........................................................................................................33

Submissions ..........................................................................................................34Agencies involved in the offset process ...................................................................34

Comparison with offset policy in other countries ......................................................34

Evolution of the offset policy ...................................................................................36

Chapter 2: Defense offsets in India ..............................................................................37

Beneters ....................................................................................................................38

Focus areas of offsets in India .........................................................................................39

Key trends shaping offset demand in India ......................................................................39

Chapter 3: Offset-related opportunities .......................................................................41

Offset opportunities in the programs of the Indian MoD ...................................................42

Emerging methods of offset discharge ............................................................................43

Innovative models ..................................................................................................43

Key products and services ......................................................................................43

Conclusion ...................................................................................................................44


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Part 1:Opportunities

with DPSUs inIndia


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Chapter

1Indian defense industrial basepublic sector


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Figure 2: DPSU and OFB production gures

OFB & DPSU Production

0

1000

2000

3000

4000

5000

6000

7000

2008-09 2009-10 2010-11 2011-12

AmountinUSD

Million

DPSUs OFB

Source: MoD Annual Report

Organizational structure

DPSUs and OFB fall under the administrative control of

the Department of Defence Production (DDP), Ministry ofDefence. The Department of Defence Production deals with

the indigenization, development and production of defense

equipment, both in the public and private sectors. The DDP

organizational structure is depicted in the gure below.

Figure 3: Organizational Structure of the MoD

Ministry of Defence (MoD)

Dept of Defence

(DoD)

DGOF

Dept of Defence

Production (DDP)

Defence PSUs

Defence Research

& Development

Organization(DRDO)

DGQA

Source: Data compiled by q-tech synergy

OFB

The OFB is the largest and oldest departmentally run

production organization in the country and is engaged

primarily in the manufacture of defense hardware. It was

established 200 years ago as departmental manufacturingunits with the main purpose of meeting the requirements of the

armed forces. The organization functions under the DDP and is

a dedicated facility for manufacturing weapons, ammunitions,

DPSUs and OFB

Indian defense had been a restricted sector under the exclusive

control of the government and dominated by the Department

of Defence Production with 41 defense OFs and 9 DPSUs.

These bodies jointly met the majority of the armed forces

requirement. These units, with an employee base of more than

2 lakh personnel, are under complete

Figure 1: Network of ordnance factories in India

Uttarakhand

Uttar Pradesh

Punjab

Bihar

West

BengalOrissa

Andhra

Pradesh

Madhya Pradesh

Maharashtra

Karnataka

Tamil

Nadu

OFM

OMFC

OEFHZ

OFC

SAF

FGK

OEF

OPF

OFDUN

OLFOCFC

OF Nalanda

OFKAT

VJF

GIF

GCF

OFK

OFI

MPF

OFA

AFK

HEF

OFDR

OFBA

OFCH

OFV

OFBH

OFAJ

HFV

OCFAV

EFA

OFT

HAPP

CFA

OFPM

OFBOL

RFI

MSF

GSF

OFDC

MDL

GSL

BEML

HAL

BEL

BDL

MIDHANI

HSL

GRSE

Ordnance Factories DPSUs

Goa

Source: Data compiled by Q-Tech Synergy

government control. Combined turnover stood at US$5261

million (INR26305 crore) in 200708. Over time, annual

production has seen a sustained growth at 13%, and it now

stands at US$7663 million (INR42145 crore). Products

include combat aircraft, helicopters, unmanned aerial vehicles,

warships, submarines, missiles, defence electronics, small arms

and ammunition, tanks, and heavy earth-moving equipment.


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ve operating divisions based on technology grouping, as given

in the table below, and each is headed by a board member/

additional DGOF. These include:

Table 1: divisions of the OFB

DGOFs operating divisions

Division Number offactories

Ammunition and Explosives (A&E) 11

Weapons, Vehicles and Equipment (WV&E) 10

Materials and Components (M&C) 11

Armoured Vehicles (AV) 3

Clothing, Equipment and General Stores

(OEF)

5


Product range

The factories, spread all over India, operate a wide range oftechnologies and product mix. The product range consist of

more than 1,000 principal items, including tanks, infantry

combat vehicles (ICVs), artillery guns and rocket launchers.

The product portfolio focuses on:

Civilian arms and ammunition

Weapons

Ammunition, explosives, propellants and chemicals

Military vehicles

Armoured vehicles

Optical devices

Parachutes

Support equipment

Troop comfort and general stores

Material and components

Financials

IOFs have reported a turnaround in their performance, with a

steady increase displayed on an annual basis. Improvement in

performance is indicated below.

vehicles (armored and transport), clothing, general stores, as

well as equipment for defense services.

Indian OFs are managed by the OFB, which comprises the

Director General functioning as Chairman and nine members

in the rank of additional Director General of Ordnance

Factories (DGOF). The factories are divided into ve operating

divisions based on the type of products and manufacturingtechnology. Four members are responsible for staff functions,

viz, Personnel, nance, planning and material management

and projects, engineering and technical services. The

organizational structure is explained below.

Figure 4: Administrative structure of the OFB

(as on Dec 2011)

Addl DGOF/Members (8)

DGOF and Chairman/OFB

Production

divisions

Weapons,

Vehicles &

Equipment

Ammunition &

Explosives

Materials &

Components

Armoured

vehicles

Ordnance

equipment

Staff division

Planning

& Material

Management

Technicalservices

Personnel

Finance


The production lines of OFs are product-specic. The DGOF has


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Table 2: Financial Performance of the Indian Ordnance Factories

Year 200708 200809 200910 201011 201112

In USD million

Value of Issue 1261.45 1314.36 1584.55 2039.09 2127.27

Percentage increase (%) 12.5 4.19 20.56 28.69 4.32

Source: MoD Annual Report

Customers

Indian OFs cater to the Indian armed forces, viz., Indian Army,

Indian Navy, Indian Coast Guard, Indian Air Force besides

the Central Armed Police Forces, State Armed Police Forces,

Paramilitary Forces of India and the Special Forces of India,

Civil Trade, and foreign customers.

Relationship and interdependence with other government

undertakings

DPSUs and OFs, geographically distributed all over the countryand operating with a wide range of products and technological

disciplines, function with a high degree of interdependence.

The OFB/DPSUs has (have) an in-house system of vendor base,

i.e., maximum input derived from sister concerns. Some inputs

are procured from other government agencies as well.

DPSUs

DPSUs have a exible form of operation, decentralized

management and adequate operational autonomy. Nine

undertakings established under DPSUs are:

1. Hindustan Aeronautics (HAL)

2. Bharat Electronic Ltd. (BEL)

3. Bharat Earth Movers Ltd. (BEML)

4. Mazagon Dock Ltd. (MDL)

5. Garden Reach Shipbuilders & Engineers Ltd. (GRSE)

6. Goa Shipyard Ltd. (GSL)7. Bharat Dynamic Ltd. (BDL)

8. Mishra Dhatu Nigam Ltd. (MIDHANI)

9. Hindustan Shipyard Limited (HSL)

Governance

DPSUs come under the governance and administrative control

of the Secretary of DDP, MoD, through the respective JS in the

department. The organizational structure is explained below.

Figure 5: Administrative structure of the DDP

GRSE

MDL

GSL

HSL

Joint Secretary

(Naval Systems)

Secretary DDP

BDL

BEL

Supplies

DGQA

Directorate ofStandardization

Joint Secretary

(Electronic Systems)

Addl. Secretary

DDP

OFB

Coordination

Vigilance

Joint Secretary

(Ordnance Factory)

MIDHANI

DGAQA

HAL

Joint Secretary

(Aerospace)

Joint Secretary

(Missile Systems)

Export

Joint Secretary

(Land Systems)

BEML



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Aerospace equipment

Aero engines of Russian origin

Aero engines of Western origins

Future product range

Bharat Electronics Limited (BEL)

BEL, a Navratna PSU, was established in Bangalore, India, in1954 to meet the specialized electronic needs of the defense

services. Over the years, BEL has grown into a multi-product,

multi-technology, multi-unit company catering to customers in

diverse elds in India and overseas. The company is engaged

in the design, development and manufacture of sophisticated

state-of-the-art electronic equipment/components for the use

of defense forces, paramilitary organizations and infrastructure

providers in the telecom sector. About 7080% turnover of

the company comes from supplies to the defense sector. BEL

ranks 64th among the top 100 defense companies in terms of

revenues. BEL has 9 production units and 31 manufacturing

divisions spread across 7 states. BEL has a signicant rolein the civilian professional electronics sector, particularly

for the Ministry of Information and Broadcasting. It supplies

the bulk of its infrastructure requirements such as studio

equipment, transmitters, satellite uplinks and OB vans for radio

and TV broadcasting.

BEL is a technology-driven company. All of the units have

their own R&D groups, which are supported by three central

laboratories for developing cutting-edge technologies. BEL

is spending 6% to 7% of its annual turnover, every year, on

R&D. The company offers contract manufacturing services for

both domestic and international customers. It has automated

assembly, inspection and testing facilities, as well as precisionmachining capabilities. It adheres to strict process and

manufacturing standards to make world-class products.

Product range

BEL offers products including communication equipment,

radars, opto-electronics, electronics warfare systems, tank

electronics and simulators. BEL also has presence in the areas

of access control systems, security systems, solar systems and

select non-defense applications.

BEML Limited (BEML)

BEML Limited (BEML) is a Mini-Ratna (Category I) multi-

location, multi-product ISO 9001-2000 public sectorundertaking company under the administrative control of

Ministry of Defence. It is engaged in the design, manufacture,

marketing and provision of after-sales services for a wide range

Hindustan Aeronautics Limited (HAL)

Formed in October 1964 with its corporate ofce in Bangalore,

HAL is a Navratna company and the largest DPSU. HAL has 19

production divisions and 10 R&D centers located in 8 states.

It has positioned itself as a comprehensive solution provider

in the aerospace sector, spanning ghter aircraft, trainer

aircraft,light helicopters and unmanned aerial vehicles. Thecompany conducts in-house, as well as collaborative, R&D to

develop new products and technologies. R&D centers, which

have dedicated facilities for research, design and development,

and prototype activities, are co-located with the respective

manufacturing divisions for effective development and design

support.

This state-owned company maintains high focus on the

aerospace industry, which includes manufacturing and

assembling aircraft, navigation and related communication

equipment, as well as operating airports. HAL has a number

of specialized product divisions catering to the manufacture of

aviation hardware as follows:

Aerospace Division

Aircraft Division Nasik

Avionics Division, Hyderabad

Hindustan Aeronautics Limited Korwa

Engine Division Koraput

Foundry & Forge Division-Bangalore Complex

Helicopter Division Bangalore Complex

Industrial & Marine Gas Turbine Division

Overhaul Division

Transport Aircraft Division

Product range

HALs product range consists of aircraft, helicopters, aero-

engines, accessories, avionics and related services. It has

diversied into the manufacture of structures for aerospace

launch vehicles and satellites, and industrial and marine gas

turbine engines. Products manufactured by the company are:

Aircraft of Russian origin

Aircraft of Western origin

Helicopters

Products in current manufacturing range Advanced communication equipment

Accessories for aircraft, helicopters and aero engines


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The company has embarked on a modernization plan to

upgrade infrastructure and technology, primarily involving

the erection of a 300-ton goliath crane, creation of a modular

workshop and the construction of an additional wet basin

at a total cost of around INR826 crores. These facilities, on

completion, are expected to reduce build periods of warships/

submarines.

Product range

The company is primarily engaged in shipbuilding. Its activities

include manufacture and export of naval ships, submarines,

coast guard ships, merchant vessels, fabrication of offshore

platform, jack-up rigs, transportation and installation of

platform, pipe coating, laying of subsea pipes, diving and vessel

management services, also undertakes construction work of

well head platforms, water injection and process platforms,

jack-up rigs and other offshore structures.

Garden Reach Shipbuilders & Engineers Ltd(GRSE)

Garden Reach Shipbuilders & Engineers Limited (GRSE) was

incorporated on 1 April 1960 as a wholly owned Government

of India enterprise under the administrative control of the

Ministry of Defence. It has its own Engineering and Engine

manufacturing divisions and operates primarily through three

locations in Kolkata, i.e., hull manufacturing unit, tting out

jetty and the design department. It is a multi-unit shipyard-

cum-general engineering company and has been in the Mini

Ratna- Category I since 2006. The shipyard has six units

in and around Kolkata and a diesel engine plant in Ranchi

(Jharkhand). Its corporate ofce is in Kolkata. It builds and

repairs commercial and naval vessels. It is also involved in the

retting of ships belonging to the Indian Navy and the Coast

Guard. The shipyard has produced 80 warships for the Indian

armed forces and 700 other vessels for commercial use.

Presently, GRSE has an order book of 21 ships, which includes

an export order for the Government of Mauritius.

Product range

GRSE builds and repairs a wide range of vessels ranging from

warships to commercial vessels. Its products spectrum includes

shipbuilding and ship repair, deck machinery and shipboard

equipment, engines, deep-well water pumps, portable

bridges, material handling, general engineering and technical

of mining and construction equipment, defense and aerospace

products, and rail and metro products. The company has its

corporate HQ and central marketing division in Bangalore

and four manufacturing complexes with nine production units

located in Bangalore, Mysore, Kolar Gold Fields and Palakkad.

BEML operates in the following three major business verticals

for associated equipment manufacturing:

Mining and construction

Defense and aerospace

Rail and metro

It also has three Strategic Business Units (SBUs):

Technology Division for providing end-to-end engineering

solutions

Trading Division for non-company products

International Business Division for export activities

Product range

On the defense front, BEML manufactures variants of Tatravehicles for all terrain operations including bridge layer, eld

artillery tractor, medium and heavy recovery vehicles, pontoon

main bridge system, mobile mast vehicle, mine plough,

transportation trailer, weapon loading vehicles, armored

recovery vehicles, military rail coaches, wagons, aircraft

weapon loading trolleys, crash re tenders and radar carrying

vehicles.

Mazagon Dock Ltd (MDL)

Mazagon Dock Ltd (MDL) is the premier warship building yard

in India. It falls in the Mini-Ratna CategoryII and is involved

in the manufacturing of warships and submarines, as well as

offshore platforms and associated support vessels for offshore

oil drilling. The company has the capability to build warships,

submarines and merchant ships up to 30,000 DWT, and is

engaged in the fabrication of well head platforms, process and

production platforms and jack up rigs. For outtting work, the

company has a large number of workshops with sophisticated

equipment and machines specic to hull fabrication and ship

construction work. Repair work is also under taken using the

available facilities.

Currently, it is one of the most heavily loaded warship-building

yards in the world. It is the backbone of war shipbuilding in

the country and produces sophisticated world-class stealth

frigates, destroyers and submarines for the Indian Navy.

Mazagon Dock currently accounts for more than 85% of naval

vessels built in the country.


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Hindustan Shipyard Limited (HSL)

The company was founded in 1941 and is based in

Visakhapatnam, India. It established a ship repair unit in 1971.

In 2009, HSL was transferred from the Ministry of Shipping to

the MoD. The yard played a critical role in the development of

nuclear-powered, Arihant class submarine. Hindustan Shipyard

Ltd., a shipbuilding company, is engaged in the design,construction, conversion and repair of ships. It also engages in

submarine retrotting and constructing offshore structures, as

well as provides submarine repair services.

The shipyard is relatively compact at 46.2 hectares (0.462

km2). It is equipped with plasma cutting machines, steel

processing and welding facilities, material handling equipment,

cranes, logistics and storage facilities. It also has testing and

measuring facilities. It has a covered building dock for building

vessels up to 80,000 DWT. There are three slipways and a

550-meter (1,800-ft) tting-out jetty. HSL has a dry dock, wet

basin and repair delphin for ship and submarine repair and

retrotting.

The PSU has three divisions:

Shipbuilding

Ship Repairs

Submarine Retrotting

As of 2009, it had built over 170 vessels and repaired almost

2,000 ships.

Products range

It builds bulk carriers, offshore patrol vessels, survey ships,

drill ships, offshore platforms, and repair and support vessels.

It also conducts major overhauls of Indian Navy submarines. Itis being equipped to construct nuclear-powered submarines.

HSL has an order book of 24 vessels, of which 14 are

under construction. The value of the shipbuilding orders is

INR1108.21 crores.

Goa Shipyard Limited (GSL)

GSL was established in 1957 and is engaged in building

and designing a wide range of vessels for the defense and

commercial sectors, with expertise in building modern patrol

vessels of steel and aluminum hull structure. Services provided

by the company include designing and building of vessels,

repair and modernization of vessels, and technology transfer.

GSL is modernizing its yard to adapt to the latest technology

in shipbuilding. For this purpose, it is negotiating with well-

training. The company has its own engineering and engine

manufacturing divisions.

Shipbuilding

Engineering

Engine

Bharat Dynamics Ltd (BDL)Established in 1970, BDL is primarily engaged in the

manufacture of guided missiles and allied equipment. It has

corporate ofces and units in Hyderabad. The company

provides a range of weapon systems including surface-to-air

missiles, air defense systems, heavyweight torpedoes and

air-to-air missiles. It is the primary production agency for

the manufacture of four new Indian missile systems: Prithvi,

Trishul, Akash and Nag.

The company is working in close coordination with the DRDO

for the technology absorption of other missiles under IGMDP.

The Government of India has nominated BDL as a Mini Ratna

Category-I company. BDL, with its ISSO 9002 certied

manufacturing division and NABL-accredited electronics

laboratory, is the leading manufacturer of guided missiles and

allied defense equipment of international standard.

BDL has three production facilities located in Kanchanbagh,

Hyderabad; Vizag and Bhanur, Medak District. BDL is

headquartered in Hyderabad, Andhra Pradesh, India. Its

production and testing facilities are modern and are tuned to

cater the stringent qualitative requirements of guided weapon

systems. Component production facilities include a precision

shop with CNC machining centers, CNC turn-mill centers,

CNC 4 axes, T&C grinder and precision machines; a generalmachine shop; a tool room; a vacuum fumance and surface

nishing facilities. BDL is setting up additional production units

to expand its capacity. The company is already working on its

third unit in Vishakhapatnam.

Product range

The company manufactures weapon systems such as surface-

to-air missiles, air defense systems, heavyweight torpedoes

and air-to-air missiles. Its products include fagot launcher

adapted for Milan, indigenous launcher for Milan ATGM,

test equipment for Konkurs Missile, and counter measure

dispensing system.


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Table 3: Financial performance of the DPSUs

DPSU Value of sale

201112

Value of

Production

201112

Prot after

Tax 201112

In INR Million

HAL 3040.28 2584.05 461.71BEL 1068.90 1053.38 153.95

BDL 257.89 180.53 42.72

GRSE 241.56 201.60 19.64

HSL 104.49 102.55 -15.63

MIDHANI 94.28 90.18 12.45

BEML 501.87 741.31 10.41

GSL 131.43 122.99 15.05

MDL 558.16 458.85 89.87

Source: Respective DPSUs Annual Reports

Supply chain and vendor registration

PSUs and OFs have, as a policy, been outsourcing many of their

requirements and have developed a wide vendor base, which

includes a large number of mid- and small-scale enterprises,

apart from large-scale industries. Percentage growth in vendor

base is expected to increase by 6% until 201516 Figures on

outsourcing by DPSUs and OFs for the last three years are

given in the table below.

Table 4: Outsourcing snapshot of the DPSUs and OFs

Year PSUs/

Govtagencies

SSI

sector

Non-SSI

sector

Total Annual

turnover

(INR

crores)

%

In USD Million

2008-

09

284.73 378.55 677.45 1340.91 5024.18 27

2009-

10

290.91 467.45 743.27 1501.64 6293.64 24

2010-

11

521.64 352.18 910.73 1784.55 6761.83 25

Source: Report of Working Group on Defense Equipment

known shipbuilders for proposing collaboration. To date, it has

built 167 vessels including barges, tugs, landing craft, offshore

patrol vessels and other vessels for the Indian Navy and Coast

Guard and for export to countries such as Yemen.

Product range

The company manufactures ships and hi-tech components for

the defense and commercial sectors. It also offers servicessuch as the designing and building of variety of vessels, repair

and modernization of vessels and technology transfer.

Mishra Dhatu Nigam Ltd (MIDHANI)

Incorporated in 1973, MIDHANI is as a MINI-RATNA-Category

I PSU under the administrative control of DDP. Set up

primarily for achieving self-reliance in the manufacture of

critical alloys, Midhani is a hi-tech metallurgical facility and has

been supporting programs of national importance in strategic

sectors including space, defence, aeronautics, atomic energy

and general engineering.

The company is located in Hyderabad, Andhra Pradesh. Mostof the products of MIDHANI are import substitution. The

company is planning to foray into the aeronautical and power

sector with supplies of another special nickel and cobalt-based

super alloy for the manufacture of engines and other aircraft

parts. Manufacturing facilities include melting furnaces,

forge presses, conditioning, heat treatment, hot rolling, cold

rolling, tube shop, investment casting, bar and war drawing,

machining, Kanchan Armour Plant, pickling and quality control

lab.

Product range

The product range includes super alloys, titanium alloys,

maraging steels, heat resistance alloys, controlled expansion

alloys, tungsten and molybdenum in a variety of mill forms. The

company also offers technological (testing and evaluation) and

consultancy services to its customers.

Financials of DPSUs

Most of the DPSU cater to units under MoD. An overview of the

nancial performance of the nine DPSUs during 201112 as

follows:


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Table 5: Snapshot of the modernization of DPSUs and

OFs

Investment XIth plan

expenditure

XIIth plan

projection

In USD million

New capital 125.27 1867.46Renewal and

replacement

231.82 452.73

Source: MoD report

The table lists the amount spent on modernization and the

projected amount for some of the DPSUs and OFBs in coming

years.

Table 6: Investment for modernization of OFs and DPSUs

Organizations 2009

2010

2010

2011

2011

12

201213

Projected

201314

Projected

In USD Million

Modernization

of OFs

89.64 127.82 128.18 134.55 141.27

Modernization

of shipyards

58.00 68.55 72.73 80.55 84.55

Modernization

of BDL

1.64 7.64 9.09 10.00 10.73

Modernization

of HAL

67.27 48.18 72.73 81.82 86.00

Modernization

of BEL

22.36 23.64 34.55 36.36 38.18

Modernization

of Midhani

5.09 6.91 8.18 9.09 9.64

Modernization

of BEML

23.09 22.00 18.18 19.09 20.00

Source: MoD Report

DPSUs, along with OFs, outsource 24%27% of their orders to

small- and mid-sized enterprises (SMEs). Requirements and

tender documents are available at their respective websites in

government tenders under respective heads. DPSUs websites

give reference to the purchase manual and sub contracting

registrations of vendors and sub contractors. The Defence

Procurement Manual, 2009 (DPM 2009), which covers all

revenue procurement and procedures for the registration of

rms, follows the Joint Services Guide: 015:13:03:2007 (JSG-

015). This guide provides the methodology of assessment and

registration of vendors, as well as their performance appraisal

on technical and nancial aspects and classication. Interested

rms can download Supplier Registration Form and submit

it duly lled. Along with this, they are required to enclose their

company prole/catalog and details of similar jobs undertaken,

details of staff and operatives, annual reports, CVs of key

ofcers, list of customers and other relevant information to

prove their competence to undertake the job.

Vendors registered with one department of the MoD can beconsidered for procurement by other departments of the

ministry.

Despite a common format, procurement agencies such

as DGOF, DPSU, DRDO and DGOS follow their own vendor

registration process. There is no single source database

available. More than 6,000 vendors are estimated to be

available, of which around 95% are reportedly from the SME

sector.

Modernization of DPSUS and OFs

The infrastructure at OFs and some of the DPSUs is aging and

needs continuous updating. This is plausible through state-of-the-art technologies. To keep pace with the quantitative

and qualitative requirements of the services sector and of

other users and also keeping in view the continuous process

of modernization, the government has prompted investment

through various greeneld and browneld projects, as well as

through new capital, and renewal and replacement of obsolete

plant and machinery. Modernization is carried out with a view

to improve quality and productivity, achieve economy of scale

and acquire new production technologies. The OFB alone has

an ambitious plan of modernization, envisaging investment of

around INR2761 crore) during the 12th plan period (2012

17). Investment on modernization of plant and machinery

during the XIth and XIIth Plan is given in the table.


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Chapter

2The Indian defense market andopportunities


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Figure 7: the growth of the defense market in India

Growing defence market (2010)

21-22%

13-14%

9-10%*

4-5%

8-9%

Russia China India UK US

*India is one of the fastest growing market


Figure 8: Amount spent by the Indian MOD on foreign

equipment procurement

Amount Spent on Foreign Procurement (in $ bn)

2.26 2.263

2.98

3.43

2007-08 2008-09 2009-10 2010-11


Keeping in mind the state of equipment and the need to

modernize the armed forces, it is clear that there is ample

opportunity for both the indigenous defense industry and

foreign companies. Assuming that nearly 80% of the capital

budget is allocated to platforms capital acquisitions, of which

60%70% is earmarked for committed liabilities and 30%40%

for new schemes, a substantial amount will be available for

capital procurement in coming years. The current capital

budget of the three services, currently pegged at US$15.9

billion (INR79,500 crores), is set to reach US$25.6 billion

(INR1,28,000 crores) by the end of the 12th Five-Year Plan

period. It is set to cross the US$60 billion (INR3,00,000 crores)

mark by 2027. Capital budget of the three armed forces is set

to cross the US$250 billion (INR12,50,000 crores) mark by

India is currently the eighth-largest defense spender in

the world, with an estimated 3% share of global defense

expenditure. India has become one of the fastest-growing

defense markets after Russia and China. Besides, it had

emerged as the worlds largest importer of arms between 2007

and 2011, accounting for 10% of global arms imports. The

share has been increasing over the year.

Figure 6: The state of Indias defense equipment

Defence Equipment State in %

30

30

40

15

50

35

State of the art Obsolescent Matured

Desired

Existing

Source: MoD ofcial data

Over 50 % of equipment of the armed forces is nearing obso-

lescence and needs immediate replacement. This, coupled with

the growing capital budget for fresh defense procurements of

10% year-on-year, clearly outlines a plethora of opportunities.

The country is anticipated to spend over INR5,00,000 crore

(US$100 billion) over the next decade to modernize its armed

forces, particularly entailing spend on the procurement of

weapons and other systems. This indicates a minimum capital

procurement of INR50,000 crore (US$10 billion) every year.


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aims to reverse this balance and manufacture 70% or more of

its defense equipment needs in India. However, it is to be noted

that DPSUs alone will not be able to meet the requirements of

the armed forces with their order books already under pressure

from pending orders. Realizing this fact, the government

has started launching policies to encourage the emerging

dynamic and efcient private industry. Promulgation and ne

tuning of the DPP, recent changes in the Offset Policy and the

Defence Production Policy would go a long way in ensuring the

development of the indigenous defense industry. The recent

case of the replacement of 65 Avro Aircraft for the Indian Air

Force and procurement programs such as FICV, TCS and BMS

for the Indian Army, wherein the private sector has been called

in, are cases in point.

Challenges for Defense Industrial Base

Drivers Challenges

High obsolescence

percentage of existinginventory; demand

for state-of-the-art

technology due to

modernization drive

Attractive low-cost

manufacturing

destination with a large

working population

Large pool of technical

manpower

Private industry

participation: expansion

of industrial base.

Offset policy

Economic slowdown in

other countries

Formalizing of

procurement procedure

and policies

End of technology denial

regime, with countries

looking forward to India

as a strategic partner

Self-reliance being

the stated goal of the

government

Restrictions on foreign

investment impedetechnology transfer

Lack of infrastructure

restricts the capacity to

absorb technology

Need to bring structured

improvements in

supply chain of defense

industry.

Decision making and

spend allocation take

long

Short lead time to

develop/scout for

suitable partners

High R&D cost

High investment

requirement

Uncertainty of orders

Long gestation period

and project delays

Complex and biased

taxes

the 14th Five-Year Plan period (202327), considering a 10%

year-on-year increase during this period. Thus, the cumulative

capital expenditure between 2012 and 2027 would exceed

US$500 billion (INR25,00,000 crores). The likely expenditure

on platform spread is depicted below.

Figure 9: Breakup of anticipated defense expenditure on

the basis of platforms

Anticipated defense expenditure technology/platforms

Air

30%

Land

15%

Naval

15%

R&D

10% C4ISR

5%

Other

25%

Source: Data compiled from SIPRI

Figure 10: Forecast of Indias defense budget

Indian Defence Budget Expenditure Forecast

0

10

20

30

40

50

60

70

2012-1314-15 16-17 18-19 20-21 22-23 24-25 26-27

Committed Expenditure (65%) New Procurements (35%)


As stated previously, India currently procures approximately

65%70% of its equipment needs from abroad. The government


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Opportunity matrix

Public sector companies possess huge infrastructure and manufacturing facilities; experience in systems integration with imported

technology; trained engineering and manufacturing manpower; and access to defense research facilities, coupled with strong

nancial backing by the MoD. Also, they enjoy facilities in domains such as taxations, EVR, prioritization in tenders, making them

the preferred choice of global manufacturers.

Some of the near-term projects where these DPSUs have been nominated and awarded/will be awarded comprise the following:

Organization Projects in Hand Nominated Future possibility

HAL Mirage 2000 upgrade FGFA Light Combat Helicopter (LCH) -

Attack Helicopter

Chetak and Cheetal helicopters Multi-Role Transport Aircraft (MTA)

LCA Trainer Aircrafts Indigenous Light Utility Helicopters

(LUH)

Sukhoi-30 MKI Indian Multi Role Helicopter (IMRH) Basic Trainer Aircraft (Follow-On)

Advance Light Helicopter (ALH) Advanced Jet Trainers

Intermediate Jet Trainer (IJT) Mini & Macro UAV

Hawk Light Utility Helicopters

Dornier D0-228 NG Heavy Lift Helicopter

Jaguar DARIN-III Upgrade MMRCA

Jaguar Engine Upgrade

Intermediate Trainer Aircraft

BEL Point to Multi-point Radio Relay Command Information Decision

Support System

Battleeld Management System

Software Dened Radio (SDR) Night Vision Devices for Armed

Forces

Mountain Radar

Tactical Control Radar Walkie Talkie Radio Sets for Army Tactical Communication System

Coastal Surveillance System High Data Rate Multi-band SoftwareDened Radio

Weapon Locating Radar

Akash Weapon System Missile Warning System

Battleeld Surveillance System Passive Night Vision Devices

Passive Night Vision Devices & Low

Intensity Conict EW Systems

Upgradation of Schilika Hand Held Thermal Imager with

Laser range Finder

Coastal Surface Surveillance

Radars

3 D tactical Control radars

Upgraded Weapon Locating Radar Missile Warning Systems

MIDHANI The company received orders

from OFB, DRDO and applications

of Air, Naval, Land Forces; ISRO,

Department of Atomic Energy

(DAE) for Super alloys, Titanium

Alloys and Special Stainless Steels.

T-72 and MBT Arjun ----

Kaveri engines (of LCA)

Advanced Technology Vessels(Indias indigenous nuclear

submarine)


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BEML 204 ARV WZT-3 Tatra Heavy Duty Trucks

(Production has been stopped)

Light Tanks Wheeled and Tracked

Pontoon Mid stream (PMS) Bridge

System and Railway wagons for

transporting trucks and Defense

wagons

Armoured recovery Vehicles (ARVs) Wheeled Armoured Personnel

Carrier (APC)

Ground support equipment

(personnel carrier, rocket launchers,

ammunition, etc) required by

defence forces.

Arjun Tank

FI CVFMBT

BEML is expected to produce and

supply spare parts for MBT Arjun

required for both OEM and spares

requirement

Light Armoured Multi Purpose

Vehicle (LAM)

Overhaul of T-72 M1 and Infantry

Combat Vehicle BMP-II

BDL Akash SAM for IAF And Army K-15 (submarine launched ballistic

missile, SLBM)

QRSAMs

C-303 Anti Torpedo Decoy Productionisation of several items

such as Advanced Light Weight

Torpedo, Heavy Weight Torpedo

(Varunastra)

Company will be joining a major

joint development programme of

SRSAMs required by IAF and IN

ATGMs Konkurs-M ATGM

Milan-2T ATGM

Invar ATGM

MDL P-17 or the Shivalik class stealth

frigates

Project 15B OPVs for Coast Guard

Project 75 I Project 17 A

OPVs for Coast Guard

Six Scorpene class submarine

(Project 75)

Under t of Shishumar class

submarine

Three P-15A (Kolkata) class

destroyersGRSE Anti Submarine Warfare Corvettes 8 nos. Landing Craft Utilities Project 28 A Corvette

Landing Craft 4 Anti Submarine Warfare Corvettes Hydrographic Survey Vessels

Water-jet FACs 8 nos. Inshore Patrol Vessels for

Coast Guard

Landing Craft Utility (LCUs)

ASW shallow Water Craft

Project 17 A Frigate (Shivalik Class)

GSL Six 105M Offshore Patrol Vessels

for Indian Coast Guard

Offshore Patrol Vessels Project 28 A Corvette

Order for construction of Pontoons

and Service barges for INS

Vikramaditya

Interceptor boats for Coast Guard Hydrographic Survey Vessels

Order from MDL for supply of 3 in

no. 6.5m RIBS and 3 in no. 7.3m

RIBS for P15A

8 Kangam type mine counter

measures vessels

Landing Craft Utility (LCUs)


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Retention of the afrmative right of DPSU for prior approval to key JV decisions such as amendments to the Articles

of Association of the JV Company, declaration of dividend, sale of substantial assets, and formation of further JVs/

subsidiaries

Exit provisions for the DPSU

Regular reporting and monitoring of the functioning of the JV company

The formation of JVs will be undertaken by board-managed DPSUs within the framework of the JV guidelines

The JV guidelines will provide a streamlined, fair and transparent framework for entering into JVs by DPSUs, with the ultimate

objective of better risk management/ greater efciency/ shorter time frames for delivery to meet the increasing demand of our

armed forces, and for enhancing self-reliance in the defense sector as a whole. The guidelines could help foster better and deeper

partnerships between DPSUs and private partners.

Following these guidelines, state-run Mazagon Dock Limited (MDL) has entered into two JVs with private sector giants Larsen &

Toubro and Pipavav Defence and Offshore Engineering. Larsen & Toubro will help MDL construct submarines, while Pipavav will

build surface warships. Both the JVs are based on a 50:50 partnership model.

Following are JVs/MoUs/Agreements signed by DPSUs and the OFB with foreign and Indian private companies in the last few

years.

DPSU Foreign Company Nature Of Tie-Up

Bharat Dynamics

(BDL)

EADS New generation of missile systems.

Whitehead Alenia Sistemi

Subacquei (WASS)

Production of C303, an anti-torpedo countermeasures system.

Lockheed Martin JV for the production of anti-tank guided missiles.

Others BDL in discussions with Israel Aerospace Industries, Israel Military

Industries

Bharat Electronics Ltd

(BEL)

Boeing Integrated Defence

Systems

Develop an analysis and experimentation center in India that will be

equipped with the latest modeling, simulation and analysis tools

General Electric Medical

Systems

Manufacture of CT Max and other state-of-the-art X-Ray Tubes

Rafael Advanced DefenseSystems Ltd, Europes Selex

Galileo and Thales, Boeing

and the Hyderabad-based

Astra Microwave

Technology tie-ups/MoUs in missile electronics, guidance systems,microwave components, electro-optics, homeland security, coastal

surveillance systems and airborne electronic warfare systems

Elbit Systems Electro Optics

ELOP Ltd

Electro-optics and thermal imaging systems

Defence Research and

Development Organization

(DRDO)

Akash Missiles

Israel Aerospace Industries

(IAI)

Developing unmanned aerial vehicle systems (UAVs)

Elisra Airborne electronic warfare programs for Indian defense requirements.

IAI Cooperation on Long Range Surface to Air Missile (LRSAM) Ship-

Defence Systems


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Bharat Electronics Ltd

(BEL)

Multitone Ltd Mobile communication products

Northrop Grumman, and

Dynamatic Technologies

Limited (DTL)

Manufacturing components for the F-16 re control radar

Finmeccanica (SELEX) Terrestrial Trunked Radio (TETRA) Standard Secure Radio Systems and

military ATC radar

Rafael Advanced Defense

Systems Ltd

To develop advanced missile systems

Thales JV to jointly manufacture radar

WASS JV cooperation agreement for torpedoes and autonomous underwater

vehicles (AUVs)

Terma Memorandum of Agreement (MoA) on cooperation in various elds

of defense technology naval radar technology and aircraft self-

protection

BHEL MoU to explore a 250-MW joint manufacturing facility for solar photo

voltaic cells, modules and silicon wafers

Lockheed Martin MoU to explore business opportunities on potential co-productionavenues for domestic aerospace and defense electronic needs

SAAB MoU to manufacture radars

JV to produce and market Sea Giraffe Agile Multi Beam and Arthur

Weapon Locating System radars

Sagem MoU in the eld of Land Navigation and Artillery pointing applications

DHS Systems Agreement for the supply of shelters

Bharat Earth Movers

Ltd. (BEML)

CSM Software Pvt. Ltd Strategic MoU for establishing a framework for the execution of the

engineering services

OBRUM MoU for designing and developing Futuristic Main Battle Tank, the

armoured recovery and repair vehicle on Arjun, overhaul of T-72 and

BMP-II upgradeTanax Agreement with Slovak rm Tanax for armored vehicles

UAC Memorandum of Agreement (MoA) to explore and exploit business

opportunities in production, sales, marketing and maintenance of civil

transport, as well as passenger aircrafts in India.

Alenia Aeronautica MoU to pursue mutual collaboration for designing, manufacturing

and selling a new Primary/Basic Training Aircraft (BTA) and a betting

replacement for the existing HPT-32 Deepaks Trainer Aircrafts

SLOVAKS For 155mm Self Propelled Wheeled Gun

Poland For 155mm SP Tracked Gun System

Bumar To build vehicles for Pechora project

Eurocopter BEML foraying into the aerospace sector by signing the MoU with

Eurocopter of France

WFEL group MoU to produce 46 m of dry support bridges for the Indian Army


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Bharat Earth Movers

Ltd. (BEML)

SAS group Agreement for supply and manufacture of Self Propelled Mine Burrier

General Dynamics Agreement to manufacture four-wheeled armored small arms and

mine protected patrol vehicle

TATRA SIPOX TOT agreement with Britains TATRA SIPOX for Technology transfer,

production and marketing of 20 ton to 25 ton capacity tippers to

Indian metal, mining and coal markets

Garden Reach

Shipbuilders and

Engineers Limited

(GRSE)

Infotech and Direction des

Construction Naval Services

(DCNS)

Three-way JV with French Naval Ship builder DCNS and an Indian IT

company Infotech named as Garden-Vision Design P Ltd for a ship

building facility

DCNS Propulsion system for corvettes; another project for cooperation on

torpedoes

Hindustan

Aeronautics Limited

(HAL)

UAC Joint development and production of Fifth Generation Fighter Aircraft

UAC & Rosoboronexport Co-development and co-production of Multirole Transport Aircraft

(MTA)

BAE For development of aerospace and other dedicated software for

domestic and export markets

SAFRAN Manufacture of precision components of engines for civilian aircraftSnecma Manufacturing of engine spares and components

Sagem Production and maintenance of inertial navigation systems and

automatic ight control systems

Rolls Royce Maintenance of Rolls-Royce Avon, Adour, Gnome and Dart Aero

Engines, as well as Avon and 501 K Industrial Gas Turbines

Local manufacture Adour 871 engines for the new Indian Air Force

Hawks

50:50 partnership for the manufacturing of compressor shroud rings

CAE Inc Helicopter training center (HATSOFF) to offer complete training

solutions for the Bell 412, Eurocopter AS365 Dauphin and both civil

and military variants of the Hal-built Dhruv advanced light helicopterIAI Joint development of an unmanned helicopter

Airbus Agreement for supply doors

National Aeronautics Ltd For 14-seater Saras Aircraft

Boeing Manufacture of aircraft components and assemblies

Rafael Upgrade contract of Jaguar to provide nuclear strike capability with

Rafael Lightening Pod

Elbit Systems JV company HALBIT for the design, development, marketing and

support of simulators and training systems and avionics parts

Timco State-of-the-art airframe MRO facilities at HALs Bangalore airport

and manufacturing complex for narrow body and Airbus & Boeing

commercial aircraft


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Hindustan

Aeronautics Limited

(HAL)

Edgewood Ventures Development and manufacture of high-technology miniature electronic

modules for aerospace applications

Infotech For design services work, viz., Aero-thermo and mechanical design,

structural stress, thermal and rotor dynamic analysis

Incat For design and engineering related airframes and aerostructures

Samtel Display Systems JV in the aerospace segment to co-develop defense productsNasmyth Group Infotech HAL Limited, a 50:50 JV company between HAL and Infotech

Enterprises Limited, has entered into a technological alliance with

Nasmyth Group; both the companies will jointly work on design and

redesign of aerospace components

EADS Signed MoU to expand their cooperation into new market segment and

exploring mid-term and long-term strategies on the key segment of the

aerospace business

TATA Work packages related to engineering design services in aero

structures and also the captive offshore and onsite workload from

OEMs including offset program

Hindustan Shipyard

(HSL)

Larsen and Turbo (L&T) Hindustan Shipyard Ltd (HSL) will soon be forging JV with Larsen &

Toubro (L&T) for shipbuilding

Mazagon Docks Pipavav Defence and Offshore

Engineering Co. Ltd

Building warships and submarines for the Indian Navy.

L&T Construction of submarines

Ordnance Factory

Board (OFB)

Israeli Military Industries OFB has entered a 50:50 MoU with Israeli Military Industries for

sharing technology and equipment including charges of 155 guns

Rosoboronexport and M/s

Splav SPA

MoU to manufacture ve versions of Smerch Rockets, based on the

technology received from Russia


Way forward for DPSUs and OFs

The Armed Forces are undertaking major modernization programs. Over the next decade or more, all of the three services would

be undertaking signicant procurements.

The amount spent on capital acquisition from indigenous sources during the last ve years was approximately 48% of the capital

budget, as per government gures. A similar percentage spend this year would put the domestic market at US$7.6 billion

(INR38,000 crores). These gures, however, include a signicant amount spent on sub systems/components procured by the

DPSUs/OF/Defence Industry ex-import. Thus, even if we consider a conservative ratio of 30% as expenditure on indigenous

production, the current domestic market size is of approximately US$ 4.77 billion (INR23,850 crores). The government is keen

to achieve 70% indigenization by 2020. However, the percentage may be capped at 50%, considering that DPSUs and OFs will

continue to be major players, especially in the case of high-security projects. Even if this percentage reaches 50% by 2022 (end

of the next ve-year Defense Plan), the share of the domestic market would increase to US$15.7 billion and to US$30 billion by

2027.


29/52


Figure 11: Size of the Indian defense market

Indian domestic market size

2012

$4.77 billion

2022

$15.7 billion

2027

$30 billion


The growing domestic market offers greater opportunities,

both to foreign and Indian players. Furthermore, theintroduction of a new category of acquisition Buy & Make

(Indian) in DPP-2011 would enable Indian industries to acquire

technology from foreign OEMs and manufacture the product in

India.

Figure 12: A comparison Indigenous defense production

with imports

Imports vs Domestic Opportunity

0

5

10

15

20

25

30

35

FY12

-13

FY13

-14

FY14

-15

FY15

-16

FY16

-17

FY17

-18

FY18

-19

FY19

-20

FY20

-21

FY21

-22

FY22

-23

FY23

-24

FY24

-25

FY25

-26

FY26

-27

Amountin$billion

Imports Indigenous Production (Domestic Opportunity)


Figure 13: Break of indigenous defense production

Domestic Market Share Public vs Private

0

5

10

15

20

25

30

35

FY12

-13

FY13

-14

FY14

-15

FY15

-16

FY16

-17

FY17

-18

FY18

-19

FY19

-20

FY20

-21

FY21

-22

FY22

-23

FY23

-24

FY24

-25

FY25

-26

FY26

-27

Domestic Production Public Sector Value Private Sector Value

Amountin$Bn


In terms of the value of production, DPSUs account for

more than 65% of the total industrial output of all defense

public sector entities in India. During 201011, the value of

production by DPSUs totaled nearly US$ 3.9 billion. During

201112, OFs and DPSUs outsourced 20%25% of their orders

to SMEs.


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31/52


Part 2:Offset policyof the IndianMoD

effects,implicationsand

opportunities


32/52


Chapter

1 What is offset?


33/52


These procurement reforms resulted in the introduction of the

Defence Procurement Procedures (DPP) in 2002. These have

since undergone evolution through revisions in 2005, 2007,

2008, 2009,2011and 2013 to achieve greater transparency

and speedier processing of procurement cases

Offset provisions were added to the DPP in 2005 and came

into effect on 1 July 2005. Accordingly, the Services CapitalAcquisition Plan (SCAP) Categorization Committee was

authorized to recommend the inclusion of an offset clause

amounting to 30% of the indicative cost in the request for

proposals in cases where the indicative cost was INR300 crores

(equivalent to about US$60 million) or more, though changes

could be suggested in the offset amount if believed necessary.

The regulatory framework and procedural details were laid

out in 2006 (became effective on 1 September 2006) by

the Department of Industrial Participation and Promotion, in

consultation with the MoD (Defence Acquisition Committee).

India adopted the middle path of quasi direct offsets, where

a foreign OEM could discharge offsets using products/services directly related to the platform and those that are

not directly related to the platform. The move was meant to

provide exibility to foreign OEMs, while ensuring broad-based

development of the Indian defense sector.

Objectives

The objectives of the offset policy have always been implicitly

asserted by the MoD in their decision pertaining to the

treatment of offsets. They were formalized and promulgated

for the rst time through the revised offset guidelines,

applicable from 1 August 2012 onward. The objectives

articulated in the revised offset guidelines are threefold:

fostering an internationally competitive domestic industry;

enhancing indigenous defense R&D capability; and fostering

a dual-use industrial base. The offset policy intends to help

achieve greater self reliance in defense production through the

infusion of DFI.

The government intends to utilize the current procurement

cycle to help Indian companies integrate themselves into

the global supply chains of foreign OEMs and attract both

investment and technology into the nascent Indian defense

manufacturing base.

Modalities of executing offsets

The offset clause is applicable for projects categorized as

Buy and Buy and Make by the Defence Acquisition Council.

The council, under the Raksha Mantri, decides the quantum

What is offset?

An offsetis a counter trade arrangement in which a foreign

purchaser, usually a government, requires the contractor

to agree to purchase a predetermined level of components/

services from subcontractors located within the purchasing

nation or to assist that nation in selling its unrelated products

to third parties. An organization wanting to sell equipment toa foreign nation must invest back a portion of the expected

revenue into the foreign nations economy

Offsets are utilized by countries to use their purchasing

power to develop local capacities and channelize investments

and technology to favored domestic sectors. As per the

Government Procurement Agreement under the World Trade

Organization (WTO), offsets are dened as measures used

to improve local development or improve the balance of-

payments accounts by means of domestic content, licensing of

technology, investment requirements, countertrade, or similar

requirements

Offset arrangements may be practiced in three forms:

Direct: In a direct offset transaction, the specic

components or services sourced by the supplier from the

importing country are directly related to the supplies

envisaged under the principal contract,

Indirect:An indirect offset transaction is where the

supplier agrees to assist the importing country in the

development of its export or in investment requirements

unrelated to the principal contract.

Semi-direct offsets:These are offsets relative to

equipment and/or services that are very similar to items

covered by the main purchase contract.

Offset policy of the Indian MoD

Indian defense procurement was governed by general

accounting and nancial rules as other civil procurement

agencies of the government until 1992. The procedure for

the procurement of defense equipment was differentiated

and separated in 1992. This was further reviewed by the

Group of Ministers in 2001, the group submitted a report on

reforming the National Security System in 2002, after which

clear structures and guidelines were laid out for defense

procurement by the MoD. This was necessary, as India was

entering one of its most sustained and signicant cycles ofdefense equipment procurement to modernize its forces.


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of offsets applicable to a project. It may prescribe a quantum of offset of above 30% or waive off offset obligation, depending on

factors such as the strategic importance of the program and the capability of the Indian industry to absorb offsets. After the offset

clause becomes a part of the Request For Proposal (RFP), it cannot be done away with. The applicability of the offset clause is

summarized in the table below.

Figure 1: categories of procurement in defense acquisition (as in DPP 2011)

Categorization

Buy

Buy and Make

MakeMake (High

Tech)

Indigenous development of high-tech complex systems with min 30%

indigenous content in prototypeOffset not applicable

Make (DRDO)Indigenous development of strategic,

complex and security sensitive systemsby DRDO

Offset not applicable

Buy andMake

(Global)

Import partial requirement and producebalance in India by foreign or Indian

vendor

Offset applicable on thequantum of payment to be

made in foreign exchange

Buy and

Make

(Indian)

Import partial requirement and producebalance in India only by Indian vendor.Equipment should have minimum 50%

indigenous content

Offset applicable on

foreign content above the

prescribed 50%

Buy GlobalOutright purchase of equipment from

foreign and Indian vendorsOffset applicable

Buy IndianOutright purchase of equipment fromIndian vendors only. Equipment should

have minimum 30% indigenous content

Offset applicable on theforeign content above the

prescribed 70%

Make (Low

Tech)

Indigenous development of low-tech

mature systems with min 50% local

content

Offset not applicable

The Indian offset policy is an ever-evolving, exible one that allows for multiple modes of offset discharge through both direct

(products and services directly related to the platform being acquired) and indirect (products and services not directly related to

the platform) methods. A summary of the methods of offset discharge as per the latest offset guidelines is given below.

Figure 2: Methods of offset discharge

A. Export Direct purchase or executing export orders for manufacture of eligible products or

provision of eligible services

B. FDI FDI in Indian enterprises for manufacture/maintenance of eligible product or provision of

eligible services

C. ToT to Indian Enterprise Investment in kind in terms of ToT (without license fee, restriction of domestic

manufacture or export) to Indian enterprises for the manufacture and or maintenance of

eligible products and provision of eligible services


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D. Transfer of Equipment

to Indian Enterprise

Investment in kind in Indian enterprises in terms of provision of equipment through the

non equity route for the manufacture /maintenance of eligible products and provision of

eligible services

E. ToT and for Transfer

of Equipment to

Government institution

Provision of equipment and /or ToT to government institution and establishments

engaged in manufacture /maintenance of eligible products and provision of eligible

services including DRDO

F. Technology Acquisition

by DRDO

Provision of high end critical technology to DRDO (list of identied critical provided by

DRDO)

G. Offset Banking Foreign vendors could consider creation of offset programs in anticipation of future

obligations

All methods of offset discharge are only applicable for a list of

eligible products and services. The Indian offset policy allows

for the discharge of offsets through products and services from

not only the defense sector, but also the synergistic sectors of

civil aerospace, internal security and coastal security. A list of

these products and services is given under appendix D in the

Revised Offset Guidelines 2012.

Dual-use products, components and raw materials with

end-use in defense products, mentioned in the list of eligible

products, may also be used for discharging offset obligations.

However, the nal decision on the eligibility of these products

is taken by the monitoring agency in the MoD (Technical Offset

Evaluation Agency). Also, the revised offset guidelines clearly

state that only value addition done in India will count toward

the discharge of offset obligations. This is determined through

purchase orders and other documentation that the OEM

furnishes to claim offset credits.

Offset process

The process from submission to the signing of offset contract

takes (should) 74 to 137 weeks. This includes the preparation

and submission of the offset offer, which consists of the

technical and commercial offset offer. The entire process must

be approached with diligence, and professional help may be

sought, wherever necessary, to ensure minimal delays.Figure 3: offset process

Evaluation of Commercial Offset

Offer by CNC- only for L-1

Signing of Main contract & Offset

Contract

Execution of Main & Offset

Contracts.

Submission of Offset Compliance

Commitment (annex 1 to appendix

D) - With RFP submission

Acceptance by DG Acquisition

Technical & Commercial Offset

offers in Separate Envelopes-

Within 12 weeks

Evaluation by TOEC & Revised

Submission- If required


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Directorate Of Industrial Policy & Promotion (DIPP):It

is a government body that is responsible for evaluating

cases for industrial licensing in consultation with other

ministries.

Comparison with offset policy in othercountries

The Indian offset policy is as easy to execute as it is to monitor

and implement. It is considered to be quite exible in terms

of the quantum of offsets applicable, methods of discharge,

eligible products and services, and execution timelines as

compared to the offset policies of some of the other nations.

Presented below is a comparison of the Indian offset policy with

those of other nations on the basis of some key parameters:

Submissions

As part of their offset plan, OEMs have to submit a technical

and a commercial offset offer in separate sealed envelopes.

The only difference between the two documents will be that

the quantum of offsets in currency terms is only declared in the

commercial offset offer that is opened post the declaration of

L1.

The technical offset offer has to declare the OEMs Indian

Offset Partners (IOPs), the offset projects being undertaken

and the phasing of the offset project. The OEM also has to

attach information on its IOPs and MoUs that it has entered

into with the IOPs. The technical offer is checked by the TOEC

for the eligibility of IOPs and their proposed projects. The

MoD may reach out to the OEM from time to time to obtain

clarications. IOPs, phasing of projects and project scope may

be changed at the commercial negotiation stage within the

stipulated time.

Agencies involved in the offset processThe offset process is guided and monitored by several

committees of the MoD with clear mandates and area of

responsibility. Pre-contract monitoring of the offset process is

the responsibility of the acquisition wing, while all post-contract

work related to offsets is monitored by the Department of

Defence Production (DOMW). The following committees and

agencies are noteworthy in this regard:

DOMW, under the DDP, is responsible for the formulation

of defense offset guidelines and all matters relating to

post contract management.

Contract Negotiation Committeeis responsible forscrutinizing the commercial offset offer and negotiating

its contents.

Acquisition Wingis responsible for all pre-contract

work. Its members are drawn from the respective

service. It also comprises the Technical Offset Evaluation

Committee.

Technical Offset Evaluation Committee:It is responsible

for evaluating the technical offset proposal for the

eligibility of IOPs and offset projects proposed by them.

Foreign Investment Promotion Board (FIPB):It is

responsible for approving cases for foreign investment

into Indian defense companies for JV purposes. It doesso in consultation with other ministries.


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Figure 4: comparison of the Indian offset policy with that of other countries

Country Poland Saudi Arabia South Korea Turkey South Africa India

Minimum Value

of the contract

EUR 5.000.000 USD 107 Million 10 million USD US $10m >USD 2 Mn USD 62.5 Mn

Minimum Offset

required

100%, direct

must accountfor 50%

35% 30 to 70 % 50% 50% 30%

Term Min 3 years &

Max 10 years

Within 10 years Contract length,

exible

Max 2 years 7 years Contract

length+2 years

Nature of Offset Both direct &

indirect

Civil & Military Mostly direct

but indirect also

prevalent

Only

direct(indirect

removed)

Defence

industry

Defence, Civil

Aerospace

& Internal

Security

Multipliers 1,0 and 2,0

(Direct)

0,5 & 1,5

(Indirect)

Subject to

approval of

offset authority

1-6 1-5, as

mentioned in

the directive

5 1.5-3

Source: EY analysis


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Evolution of the offset policy

The offset policy, in its endevour to be transparent, easy to implement and to incorporate global best practices, has undergone ve

iterations ever since it was rst introduced in 2005. A majority of the procurement projects that are currently underway fall under

DPP 2006 and 2008.Only the very recent programs come under DPP 2011. The DPP has progressively liberalized the policy

through various amendments. Thus, a careful study of DPP 2006 and 2008 is necessary for companies participating/willing to

participate in ongoing programs.

Figure 5: evolution of the offset policy over the years

Building of an indigenous defence base by

leveraging on the current cycle of procurement

Encourage investments

Monitoring body for offsets to measure impact &

provide facilitation.

Year Changes Desired Effects

2006

Offset was made mandatory in defence

contracts of the size and nature as

prescribed in the 2005 policy

Foreign rms were allowed the exibility of

forming JVs

DOFA was established

Long term development of the industry

Simplify procedure for acquisition of critical

equipment

2008

Offset Banking introduced

Exemption from offsets for acquisitions

under the fast track pro

Documents

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