Rafale Revolution in Indian Airspace

The Rafale deal has the potential to either make or break the country's future in aerospace manufacturing

Published: Feb 29, 2012
Rafale Revolution in Indian Airspace
Image: Courtesy: Dassault
LONG FLIGHT The Rafale fighter plane manufactured by French company Dassault Aviation

India’s defence procurement orders are a game for the patient. For over five years, a bunch of companies with ambition to grab a chunk of offsets that would accrue to our fledgling aerospace industry have awaited the decision on the multi-role fighter aircraft. The suspense ended when French aircraft manufacturer Dassault Aviation’s fighter plane Rafale was chosen as the preferred bidder.

A 50 percent offset condition in the contract means that the deal, when signed, will lead to contracts worth between Rs. 30,000 crore and Rs. 40,000 crore, to be shared among state-owned and private companies. Sadly, even large players who have invested in new technology are not confident that the contracts will help then move up the value chain.

Offset contracts have helped nations make a step change in their manufacturing and design capabilities. Offset policies that insist on high-end technology transfer have benefitted companies like Korea’s Samsung Techwin, a small camera-making unit when it began operations, to move on to making jet engines and self-propelled artillery for exports.

“Offsets should bring in real technology not just buildings or facilities—as of now we are not sure this will happen,” says M.V. Kotwal, president of L&T’s heavy engineering division. The Tatas, L&T, Mahindras and Walchandnagar Industries are among the big companies in the Indian private sector that have been lobbying for meatier, high-end contracts from defence deals.

India’s offset policy has been formalised through the DPP (Defence offset Policy and Procedure) directives that are revised every year. So offsets, in the modern sense of giving contracts to Indian aerospaces, have come into effect only in the last two or three years. Almost 90 percent of them have so far gone to the defence public sector units (PSUs), lead by Hindustan Aeronautics, Bharat Electronics and Bharat Dynamics. Some amount of work has trickled down from these companies to smaller vendors in Bangalore and Hyderabad.

L&T executives say that the hard truth is that they have received business worth just a few million dollars. The company has, in the meanwhile, set up facilities to ramp up capabilities for defence work. It has a facility for composites (materials used to replace aluminum in aircraft structures) at Baroda and a new plant at Talegaon, near Pune, that will focus on avionics, radars and electronic surveillance.

To earn its chops in the business, Tata Advanced Systems has joint ventures with global aerospace companies like Sikorsky and Israel Aerospace Industries. Mahindra Aerospace has begun, in a smaller way, exporting components and sub-assemblies to international majors. All of them are hoping to scale up work, both in terms of quality and quantity, from the Rafale offsets.

Dassault Aviation has signed MoUs with over 50 Indian companies in the run-up to the Indian Air Force’s (IAF) Medium Multi Role Combat Aircraft (MMRCA) bid. As of now, the tie-ups mean little because all five bidders went around signing up most eligible companies, attempting to cover all bases in case they were selected. Apart from the majors, many MoUs are also with smaller, IT, engineering and design companies that have over the years been working for Boeing, Airbus and the engine makers.

Hyderabad-based Infotech Enterprises is one such company. “The offset policy has to be implemented in spirit,” says Krishna Bodanapu, president (engineering) of the company. It’s not just transferring the drawings to make the component, but what goes behind the design, testing etc. The Rafale is already designed, but Infotech looks forward to work on Dassault’s other projects, he says. “It is very critical for the government to specify what is counted as offset. In the past, suppliers have got away with taking credits for making buildings or training expenses,” he says.

Companies such as Boeing and Airbus were able to combine offsets on military and civil contracts; this meant if they sold military aircraft, they could claim credit for low-tech contracts given in the civil space. This does little to improve manufacturing capability.  

Over the next six months to a year, negotiations will focus on the deliverables for Dassault Aviation and price. The French major that has supplied the IAF with aircraft since the 1950s is no stranger to this. Some are convinced that the deal will improve the quality of Indian aerospace manufacturing.
Group Captain (retd.) Sanjiv Aggarwal, who heads Offset India Solutions, a Delhi-based advisory firm, says there will also be a trickle down to much smaller companies from the defence PSUs, who have too much on their plate. The latest version of the DPP, expected to be announced later this year, is expected to iron out some ambiguity, he says.

Arms suppliers have also been asking for multiplier (extra) credit for technology transfer and for the foreign investment in joint ventures to go up to 49 percent. Policy announcements on these two fronts could alter the extent of high-end work that comes to Indian companies significantly.

The fighter deal is large enough to change the face of the defence industry in India and France, says Gurpal Singh, deputy director general, Confederation of Indian Industry, who heads the defence, aerospace and security group. The industry group says India will spend over $80 billion in defence buying in the 2010-15 timeframe. A fair part of this should be used to strengthen indigenous industry.

The MMRCA deal has the potential to make or break India’s future in aerospace manufacturing.

(This story appears in the 02 March, 2012 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Jayendra Subramaniam

    It is the best strategic move by India to develop its FGFA...

    on Apr 14, 2012
  • Deepak Sharma

    Despite all the shortcomings, Indian Offset policy is an excellent initiative to make best use of International Arms trade. Two points that are seldom discussed; Why is DRDO (in present format) still around when it has failed miserably on all counts. Ans secondly Offset policy is more of a guidance - it needs alot of deliberations to convert it into an effective ecosystem for deliverance. For all naysayers ...Now how about proposing solutions??

    on Mar 4, 2012
  • Brian

    Good article, Cuckoo!

    on Feb 29, 2012
  • Devasis

    The Offset policy is a disaster. Where is the Indian industry in aerospace that can absorb Rs 40,000 crores worth of offsets. HAL has barely crossed a turnover of Rs 12000 crores. The Offsets policy will again be diluted as no worthwhile Aerospace industry other than HAL exists in India.

    on Feb 29, 2012
    • Cuckoo

      Indian manufacturing has grown by leaps and bounds in the past decade- and some large companies are beginning to build aerospace capabilities. You are right about HAL being the leader by far. Defexpo is round the corner- am hoping that we hear some announcements there.

      on Feb 29, 2012
  • Vishal Narayanaswamy

    Cuckoo, I concur, the $$$$ involved in the deal is high and should keep everyone in business for a while. However, this deal is only a small slice of the large pizza. Even the Indian Navy is looking to splurge in the aviation sector but not anywhere close to $10B. India needs to relax the aviation, space and defense policise ASAP to keep up. The government dragging their feet is only hurting the country more in terms of job creation, etc. People educated in the above mentioned industries have to leave the country to look for work. Please keep all of us posted. Thank you VAAC.AERO

    on Feb 29, 2012
  • Vishal Narayanaswamy

    I don't think the whole future of India's aerospace manufacturing industry depends entirely on the French. There are many more aerospace players out there (America having the most) that would love to do business with India if the Indian government relaxes their policies. I think the future of India's aerospace industry depends on how much the government is willing to relax the policies and how soon. It does not serve a purpose to relax the policies years after the "aerospace boom." However, we all know how much the government loves to drag their feet when it comes to policies like this. vaac.aero

    on Feb 29, 2012
    • Cuckoo

      Obviously its not all dependent on the Rafale deal. Its just that this one is the largest after the offset policy was spelt out. The sheer scale is enough to keep a lot of Indian companies in business for a long time. On your other point on govt. policy. They are expected to announce a new version soon. Will keep you posted on it and hope to hear from you too. Thanks.

      on Feb 29, 2012
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