Weekly Defence News Review (WDNR) - November 23-29, 2009

NATIONAL

• Agni-II missile fails in night trial

Reports noted that first ever night trial of the 2000 km plus, nuclear capable Agni-II missile failed to achieve desired results. The missile, fired at around 7.50 PM on November 23, from the Wheeler Island, off the Orissa coast, tumbled into the sea after a snag was developed just before the second stage separation. The lift off and the first stage separation was reportedly smooth. The test was a part of user’s trial and conducted by the Army officials with the DRDO scientists present to provide necessary logistical help. This is the fist time in the history of DRDO’s missile programme that trial was conducted in the night.

• Mahindra Defence Systems to bid for $3.5 bn defence projects

Reports noted that Mahindra Defence System (MDS), a unit of Mahindra and Mahindra (M&M) would bid for defence projects about $3.5 billion over the next seven years. These projects would come mostly from artillery systems and armoured vehicles, said Kutab A Hai, CEO, MDS. He also said that his company, which has formed a joint venture company with UK’s BAE System, will try to generate up to $430 million by 2016. In January 2009 the two companies announced that they have got a clearance from Department of Industrial Policy and Promotion (DIPP) to set up a JV in India, in which the British company would hold 26 per cent equity shares and rest by its Indian partner.

• DRDO to develop unmanned combat aerial vehicle

Reports noted that India’s premier Defence Research and Development Organisation (DRDO) would design and develop an indigenous unmanned combat vehicle (UCAV). Quoting the head of the organisation, Dr V K Saraswat, the report said, the UCAV “will not only do surveillance, but will also help detect the target and destroy the identified object”. The project will be led by its Bengaluru-based Aeronautical Development Establishment (ADE), with private sector participation. In the mean time, ADE is also developing a medium altitude long endurance unmanned aerial vehicle (MALE), codenamed Rustom. Its prototype, developed by Taneja Aerospace and Aviation Ltd, was however crashed in its first ever trial in November 16, 2009.

• Tejas trainer makes successful maiden flight

Reports noted that the first flight of the two-seater trainer version of Light Combat Aircraft, Tejas was successful. The flight test, conducted on November 26th, “covered an altitude of 9 km and a speed of 0.85 Mach,” according to a Defence Research and Development Organisation (DRDO) official. The trainer is likely to replace Indian Air Force’s (IAF’s) HPT-32.

• UK offers India to upgrade Jaguar; discusses HAWK AJT problems

A three-member British delegation led by the Minister for Defence Equipment and Support (DE&S), Mr. Quentin Davies met India’s Minister of State for Defence Shri MM Pallam Raju in New Delhi on November 27th. Mr. Davies told his country was eager to help India in the upgradation of the Jaguar fighter jets and overcome problems related to licensed production of Hawk Advanced Jet Trainer at the Hindustan Aeronautics Ltd (HAL). Both the leaders expressed satisfaction over the ongoing Defence Cooperation between the two countries. Shri Pallam Raju said that all the three Services have been holding Joint Exercises every year alternately on each other’s soil and territorial waters. Mr. Davies said that the UK Forces have participated in Joint Exercises with India despite being overstretched due to commitments in Afghanistan and Iraq while a number of such exercises with other countries were not held. Shri Pallam Raju informed the visiting dignitary that India was ready to sign a General Security Arrangement (GSA) with the UK while an MoU on Host Nation Support (HNS) was under examination of an inter-ministerial committee.

INTERNATIONAL

• Japan considers F-35 Purchase

Reports noted that Japan is considering to buy about 40 F-35 fighter jets as the future mainstay of its air force (see image of F-35; source: Lockheed Martin). Earlier it had proposed to buy F-22 Raptor, considered to be the most advanced with radar-evading capability, to replace its aging F-4EJ fighter fleet, but failed to acquire as America announced a plan to halt its production. Each of the F-35 is likely to cost Japan an estimated $101 million.

Weekly Defence News Review (WDNR) - November 16-22, 2009

NATIONAL

• Indian may buy an advanced aircraft carrier from Britain

Reports noted that India has “lodged a firm expression of interest” to buy an advanced 65,000 tonne aircraft carrier worth £2 billion from the UK (see right for an artistic impression of the carrier under construction; source: Guardian). The BAE Systems of the UK, the second largest defence contractor in the world, is presently building two carriers– HMS Queen Elizabeth and HMS Prince of Wales – for the Royal Navy. The £4 billion carrier programme, which has been delayed by two years, is facing threat of government’s cost cutting plans. According to officials, "selling a carrier is one very serious option," although, a formal decision in this regard has so far been not taken by the UK MoD. If India succeeds in buying the aircraft, it is unlikely to handover to its Navy before 2018, when the second carrier is due for launch. The first carrier, as per the current schedule, would join Royal Navy in 2016.

At present India has only one carrier, INS Viraat, against the Navy’s desire of having three carriers so as to enable it to have two operational carriers at any given time. To fill the void India has signed in 2004 a contract with Russia to buy a 44,500 tonne carrier, Gorshkov. Besides, India is constructing a 37,500 tonne carrier, Air Defence Ship (ADS) at Cochin Shipyard Ltd.

• ASSOCHAM reiterates its demand for 49% FDI in defence, finds support in US and IAF Vice Chief

The Associated Chambers of Commerce and Industry of India (ASSOCHAM), has reiterated its demand for enhancing FDI limit in defence production from present 26 per cent to 49 per cent. In a statement the industry representative observed that higher FDI limit would help India’s self-reliance in defence production to grow with “faster adoption of latest technology transfer.” Presently India imports most of its defence equipments (valued over $6 billion in 2008), although the government had a long time ago set a target to produce indigenously 70 per cent of its requirements. To shed the import dependence, it said the government could accelerate the FDI limit which, along with the offset policy, would help Indian industry to develop its technological and manufacturing capabilities. It also said the private companies will be the main catalyst for increasing country’s self-reliance in future.

In the meantime, a top official from the Obama Administration asked India to raise FDI in defence to 49 per cent. Talking to reporters the Assistant Secretary of State for South and Central Asia, Robert Blak said “the Indian government could do would be to lift the cap on foreign equity in Indian defence firms, from 26 per cent to 49 per cent."

In a similar demand, the Indian Air Force’s (IAF’s) Vice Chief Air Marshal P K Barbora also stressed the need for higher FDI in defence industry. Talking in a conference organised by Confederation of Indian Industry (CII), he said "we need to be bold enough to invite Foreign Direct Investment (FDI), more so into defence use."

• Indian Defence Offsets touches Rs. 8,000 crore; Private sector gets upper hand

Reports noted that Indian MoD has so far signed nearly Rs. 8,000 crore worth of offsets, of which 94 per cent are in aerospace sector, and the rest 6 per cent in the naval domain. Between the state-owned defence enterprises – Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs) – and the private sector, the latter has got more offsets, with a total share of 60 per cent. In the private sector, big companies account for 33 per cent of total offsets and the small and medium enterprises 27 per cent.

• Thales wins IAF Radar Contract

Reports noted that French multinational Thales has won a contract from the Indian Air Force to supply 19 low-level transportable radar systems. The radar system is based on Ground Smarter (GS) 100 sensor, which can detect and track targets in the range of 180 km. The contract involves technology transfer, under which Thales will build six radars and the rest 13 by India’s Bharat Electronics Ltd (BEL), a defence public sector undertaking under the MoD.

INTERNATIONAL

• Russia pumps $33.8 billion into its Defence Industry in 2009

To counter the negative fallout on its defence industry, Russia has provided an “unprecedented” $33.8 billion worth of aid to its defence industry in 2009, said the PM Vladimir Putin. The aid, which is in the form of low interest loans, guarantees, and direct subsidies, has helped the industry to grow at 3.8 per cent since the beginning of the year. Russia has ambitious modernisation plan, which is based on equipping its armed forces with nearly 70-80 per cent of ‘modern and promising’ equipments by 2020.

Weekly Defence News Review (WDNR) - November 09-15, 2009

NATIONAL

• India to Purchase Upgraded Barak for $1.1 billion

Reports noted that India has signed a $1.1 billion contract with Israel for an upgraded tactical air defence system, Barak-8 (see image right; Source: Press TV). The system, to be delivered by Israel Aerospace Industries Ltd (IAI) by 2017, is designed to shoot down incoming missiles, drones and planes. Although the system is configured to be used abroad ships, its advanced system can also be deployed on land.

• Antony Reviews Costal Security

Defence Minister A K Antony reviewed the costal security mechanism put in place post-Mumbai terror attacks. Presiding over a high-level meeting, the Minister urged top officials from the Navy and the Coast Guard to meet the acquisition deadlines of Patrol Vessels, Interceptor Boats, Surveillance Aircraft and Radars, for which the government is providing vast amount of money. In the meantime, the Sagar Prahari Bal of the Indian Navy is in process of acquisition 80 Fast Interceptor Crafts at the cost of Rs. 320 crores. In a major capability build up, the Coat Guard is acquiring a number of platforms at the cost of Rs. 6,000 crores, including 70 ships/high speed boats/hovercrafts, seven Advanced Offshore Patrol Vessel (AOPV) and four Dornier aircraft. To boost the costal surveillance, the Bharat Electronics Limited (BEL) is installing 46 radars at the cost of Rs. 300 crores, along the Indian coast.

• Rigid Offset Policy Curbs Samtel-Thales Joint Venture

Reports noted New Delhi’s rigid offset policy could curb the growth of Samtel Thales Avionics, a joint venture (JV) between India’s Samtel Display Systems and French multinational Thlaes. The JV in question has intended to manufacture TopSight-I, a Helmet Mounted Display System (HMD) that enables the pilot “to aim a weapon merely by looking towards the target” for a range of fighter aircrafts. Thales is interested to transfer the necessary technology to the JV, in which it holds 26 per cent stake, provided all the production from the unit is eligible for offset banking. However the MoD’s offset policy mandates that foreign vendors can bank offset credits to the tune of their actual investment.

INTERNATIONAL

• US Starts Construction of Ford Class Aircraft Carrier

In a first design change since 1960s, the US officially started the construction of nuclear powered, Ford Class aircraft carrier. Named after Gerald R. Ford, the 38th president of US, the first ship, numbered CVN 78, is expected to be delivered in 2015, at the cost of $8.7 billion. The new carrier will have a “smaller crew than previous flattops and incorporate new technologies, including an Electro-Magnetic Aircraft Launching System, advanced arresting gear and dual-band radar.” Northrop Grumman is the prime contractor of the ship.

Weekly Defence News Review (WDNR)

Starting from the second week of November2009, Defence Economics will carry a weekly report titled Weekly Defence News Review (WDNR). The report, which would be publisded at the end of every week, is intended to provide the followers of the blog a brief anlaysis of major news happeining around them. Comments from followers regarding the new initiative are most welcome.

Indian Defence Industry Poised to Grow

The major highlight of recent amendments to the Defence Procurement Procedure 2008 (DPP 2008) is that of encouraging the domestic industry to actively participate in defence production. The encouragement assumes greater importance considering the “shameful and dangerous” aspect of India’s self-reliance in defence production. As a matter of fact, despite the 50 year-stated goal of achieving 70 per cent self sufficiency in defence equipment production, less than half of it has so far been achieved, resulting in annual outflow of a significant amount of foreign currency and potential vulnerability in terms of critical dependence on others in crisis situations. It is this undesirable state of affairs that the current modifications in the rules of engagement, as brought out in amended DPP 2008, have tried to reverse and, in turn, make India “truly a world class” defence manufacturing nation. These amendments, which came into effect on November 01, 2009, need careful analysis to see how they would impact on India’s defence industrial base.

The first and foremost amendment with respect to development of an advanced indigenous defence industry relates to the way the Ministry of Defence (MoD) procures defence capital equipments/platforms, worth billons of dollars each year (approximately $8.5 billion in 2008-09). Until now, all the procurements were categorised under three broad headings: ‘Buy’, ‘Buy and Make’ and ‘Make’. The first one has little to contribute towards indigenous industrial efforts, as most of the advanced items under this category are in the form of direct import without any involvement of the domestic industry. The latter two have however direct bearings, with the last being the harbinger of India’s progress towards the manufacture of high technology complex weapons systems, albeit through a rigorous and expensive research and development (R&D) efforts. Under the ‘Buy & Make’ category, the government imports some numbers and the remainder is manufactured within India, with the MoD negotiating with foreign vendors for transfer of technology to an approved Indian agency for production. The middle path not only saves time in terms of doing away with time-consuming and costly R&D efforts but also ensures self-reliance through indigenous production of foreign technology. It also provides opportunities for Indian companies to form partnerships with foreign companies.

Good intentions notwithstanding, the ‘Buy & Make’ has procedure proved to be a very difficult proposition. It is primarily because of greater involvement of the MoD in finalising technology transfer agreements with foreign companies, which should have ideally been left to the domestic production agencies to negotiate based on the merit of their technical, financial and other bargaining strengths. As experience shows, technology transfers were mostly in the form of transfer of engineering skills for production of non-critical items, with foreign vendors not parting with critical components. Besides, as foreign companies were more interested in supplying items directly from their own domestic production centres, they were not compelled to form partnerships with Indian companies.

Acknowledging the above deficiency in the procurement procedure, the amendment has rightly introduced a new category called ‘Buy & Make (Indian)’. Under this new category, a supply order will be placed only on capable Indian companies who in turn will have to negotiate with interested foreign companies for technical and other production arrangement. This will give Indian companies an opportunity to explore a combination of alternatives, the best of which will be selected by the MoD. At the same time, foreign companies, which would play an indirect role under the new provision, would be compelled to set up joint venture with Indian companies, for a simple reason that it is only through the JV that they can sell their products. To obviate the possibility of Indian companies becoming a trading centre for foreign companies, the MoD has rightly mandated that the indigenous content, in value terms, of the product supplied under the new category should be at least 50 per cent. This would ensure that only serious Indian players with a long term vision of becoming true defence manufactures come into the business.

The second amendment vis-à-vis enhancing domestic defence production relates to information sharing with Indian industry. Earlier, Indian companies, especially private players, were constrained in terms of not having their advance R&D, production, financial and managerial plans, given the absence of information contained in the long term requirement plans of the armed forces. Now with the Indian government deciding to ‘widely publicise’ a public version of the Long Term Perspective Plan covering a 15 year technology perspective and capability roadmap of the defence forces, the Indian companies can have advance planning in their requisite strength areas. At the same time a window of interaction, opened via the amended DPP, will provide Indian companies and industry associations an opportunity to interact with and convince the acquisition functionaries that their products are superior compared to imported ones.

If the above amendments incentivise domestic companies to enter defence production, the government has also made it clear that it wants a competitive environment in defence industry. This has also been partly reflected in the amended Offset Policy which has been in force since 2005. The inclusion of an ‘Option Clause’ in the offset policy would henceforth allow foreign vendors to change offset partners – though not the offset component and value – midway through the contractual period in “exceptional cases”. The cases would however most likely arise when an Indian partner faults in its contractual promises. The clause would ensure that the company cannot take it for granted once it is selected as an offset partner. The fear of being replaced by another company in case of failure would not only put a question mark on its credibility, but will motivate it to improve its competitiveness to avoid eventual embarrassment.

The amendments to DPP 2008 augur well for the Indian defence industry. Considering that India’s cumulative defence procurement budget would be over $50 billion in the next five to six years, it provides tremendous opportunity for the industry. The industry now needs to have a firm plan, in terms of collaboration with foreign partners, investment in key areas of strength and also a strong resolve to make India truly self-reliant in defence production.

Amendments to DPP-2008

The Indian Ministry of Defence (MoD) has recently announced certain amendments to the Defence Procurement Procedures 2008 (DPP 2008). The amendments which come into force from 1st November 2009, are intended to further promote the domestic industry to participate in defence production; streamline formulation of qualitative requirements; ensure greater transparency and accountability in defence procurement; and facilitate offset transactions.

There is a clear attempt to promote indigenous industry, a demand which is steadily being raised by the captains of both the public and private sector now.

For complete article see India Strategic, November 2009, http://www.indiastrategic.in/topstories411.htm