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According to a recently released report by Nasscom - premier trade body and the chamber of commerce of the IT-BPO industries in India, global spending on engineering research and development surpassed US$1 trillion in 2009 and is expected to touch US$1.4 trillion by 2020. Out of this, the total offshore engineering spend is expected to be around US$150 to 225 billion of which, India can gain ~25 percent or US$45 billion. Aerospace and automotive sectors are amongst the top spenders on engineering R&D globally apart from consumer electronics and telecom industries.
The question is - where will this growth come from and are engineering service providers capable of realizing this potential? Apart from the traditional business acquisition avenue of overseas aerospace and automotive clients, Indian engineering service providers have started preparing themselves for the booming domestic defense market. Ever since the Indian Ministry of Defense revised its defense procurement policy is 2002, this area has gained lot of interest globally.
Why the defense offset policy?
According to a report by the Confederation of Indian Industry (CII), India’s private sector gets just 14% of the defense business while the foreign military equipment manufacturers gain ~70% of the Indian Ministry of Defense (MoD) contracts in value terms. The rest is supplied by the MoD’s businesses that consist of eight defense public sector undertakings (DPSUs) and 40 ordnance factories (OFs).
Any medium to large scale development project in aerospace sector demands enormous economic capability and therefore this industry depends on the government for research and development, infrastructure, etc. Such heavy government expenditure is further subject to political interests and protocols. The government wants to transform this constraint into a benefit via the offset clause, mentioned in the Defense Procurement Procedure (DPP) through private sector involvement.
The Indian defense offset policy or DPP-2008 states that any defense contract worth above US$65 million that MoD enters into with a foreign vendor shall make it mandatory for the vendor to source its equipment or services of a minimum of 30% from any public or private Indian partner. This means huge potential for Indian engineering manufacturers/service providers. The Indian defense expenditure for fiscal 2010-11 is around US$32 billion out of which 40% or US$12.8 billion is allocated for new acquisitions. Industry experts estimate that the defense expenditure is expected to be ~US$100 billion spread over next 5-10 years, which means direct benefit of an offset value of US$30 billion apart from direct contracts that defense ministry might offer to Indian players. With the implementation of the civil offset policy the potential will be much more.
Pouring investments in Indian Aerospace & Defense sector
Based on the advice of the Kelkar Committee, Indian government opened up the aerospace industry to the private sector. Following which, private players are partnering with State governments and foreign partners to set up aerospace special economic zones (SEZs) with a view to establish Aerospace ecosystems within India.
Prime Aerospace SEZ participants within India (operational and planned)
Key Promoters
|
Location
|
Space allocated
(estimate)
|
Investment
(estimate)
|
Details |
QuEST Global
|
Belgaum - Karnataka |
300 acres |
US$30-35 million
|
Develop and manufacture precision engineering products |
| Tata Advanced Systems and Sikorsky Aircraft Corporation (US)- Joint Venture |
Adibhatla - Andhra Pradesh |
50 acres
|
US$200-225 million |
Manufacture fuselage for Sikorsky's S92 helicopter |
NOVA, a JV between Tata Advanced Systems and Israel Air Force Technology
|
Adibhatla - Andhra Pradesh |
50 acres |
NA |
Work closely with organizations such as DRDO, defense PSUs and OFs to design, manufacture and integrate advance defense and aerospace systems |
Samuha, a consortia of companies like MTAR Technologies and others
|
Adibhatla - Andhra Pradesh |
120 acres
|
NA |
Lepakshi Aerospace and Defense Cluster
|
Anantapur - Andhra Pradesh |
1,500 acres |
NA |
Set-up manufacturing, R&D, MRO (maintenance, repair and overhaul) facility, aerospace station, an academy along with logistics park and free trade warehousing zone |
GMR Group aerospace park
|
Hyderabad - Andhra Pradesh |
250 acres |
NA |
Set-up CFM engine maintenance training centre, Airframe MRO (in joint venture with Malaysian Airlines )
|
| Taneja Aerospace and Tidco- Joint Venture |
Hosur - Tamil Nadu |
>300 acres
|
US$60-65 million |
Set-up MRO facility, manufacture aero parts
|
GVK Industries' multi product SEZ
|
Perumbalur - Tamil Nadu |
3,000 acres
|
NA |
Multi-product manufacturing
|
| GVK Industries aerospace SEZ |
Planned to set-up in Perumbalur or Hosur - Tamil Nadu |
2,000 acres |
NA |
Planned for an aerospace project |
Mahindra World City
|
Coimbatore - Tamil Nadu
|
1,000 acres
|
NA |
Source: ValueNotes Research
While companies are making significant investments, we will see the benefits for the industry over the next decade. Local companies will form joint-ventures with foreign companies and derive benefits of technology transfer, shift from licensed production to joint design, development and manufacture. These industry movements indicate that Indian A&D industry is geared up to capitalize on the offset policy benefits and so are the engineering service providers (ESPs) who have graduated from mere service providers to partners in manufacturing.
In conclusion
Indian aerospace and defense industry is at a very nascent stage with only one indigenous helicopter, a two-seater passenger aircraft and a fighter jet and a trainer to its credit. The defense offset policy will foster foreign partnerships with Indian engineering service providers and manufacturers and open up an opportunity for learning from processes, best-practices and technology transfer. From the sheer amount of interest and investment by the public-private partnerships in India to set up aerospace ecosystems and SEZs within India, the industry is certainly poised to grow. While large engineering service providers have already made the move to gain from defense offset policy, mid-size firms will follow suit. If India manages to emulate the success story of Brazil based Embraer Corporation which graduated from gaining through defense offset deals and successfully absorbed foreign aeronautic technologies to becoming world top-10 aerospace company, it will surely produce a couple of world-class aerospace manufacturing companies from India in next few decades. This will in turn open opportunities for companies present in the entire aerospace engineering value-chain.
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