Can India's aerospace manufacturers step up?
By Siva Govindasamy
Aerospace companies from Brazil, China, Japan and Russia lead the way in development and production of 21st century aircraft - can Indian companies step up as well?
Overseas companies have been setting up operations in India for several years, taking advantage of the country's pool of highly qualified engineering, science and computing graduates. They have long-established ties with India's IT companies, but now seek engineering and manufacturing partnerships as part of their offset obligations and as India attempts to plug a technology gap with the rest of the world.
While state-owned Hindustan Aeronautics remains the behemoth in Indian aerospace, a number of rivals from the private sector are emerging to take advantage of the offset requirements that come with military contracts, and the growth of India's civil aerospace sector. The government encourages them by giving tax breaks to increase the country's manufacturing base, and foreign companies are happy as they do not want to partner HAL only.
BOEING PARTNERSHIPS
Boeing, which has had a long presence and formed several partnerships in India, says that it is aware of the government's desire to let the private sector play a larger role. "India has an impressive aerospace industrial base and a good network of aeronautical development labs supported by world-class educational institutions," says the company.
It adds: "Boeing's experience in implementing offset programmes around the world suggests Indian industry will benefit greatly from industrial participation. In our experience, benefits will include access to new technologies and processes, opening of new markets through our supplier network, creation of jobs, and increases in revenues and earnings."
One likely beneficiary is Larsen & Toubro, an engineering and construction conglomerate that has signed deals with companies including European defence conglomerate EADS and the USA's Boeing and Raytheon. These firms are keen to tap L&T's expertise, while the Indian company hopes to diversify its revenue streams.
"L&T has worked closely with Indian defence establishments in developing and putting into production a range of advanced systems," said M V Kotwal, the company's senior executive vice-president at its Heavy Engineering division, after signing an agreement with Raytheon.
"Currently we are one of the leading suppliers in Indian defence. This new agreement will help us induct superior technology, and expand our range of high-value offerings in the defence sector."
Others are making plans to move into aircraft manufacturing. Hero Motors, India's largest manufacturer of motorcycles, plans to produce light aircraft at its proposed 120Ha (300 acre) aerospace park in the central Indian state of Madhya Pradesh. This is part of "a vision to diversify the company's product portfolio", says the company, which adds that it plans to join hands with a European manufacturer for the venture.
It hopes to begin work on the facility in the first half of this year if the government gives it permission to set up a special economic zone in Madhya Pradesh. India has been encouraging its companies to set up these zones, which enjoy tax breaks and other incentives, to boost the country's manufacturing base.
Mahindra & Mahindra, which manufactures cars and has an extensive engineering business, has signed deals with Western firms such as BAE Systems as part of their offset obligations. However, it is also jointly developing a five-seat light aircraft with the National Aerospace Laboratories, the state R&D firm, and each will manufacture two prototypes in 2009.
NAL will be responsible for getting Indian certification for the NM5-100, while M&M subsidiary Mahindra Aerospace is responsible for certification outside the country. The aircraft is targeted at India's growing air taxi, training and medical evacuation markets, and NAL and Mahindra could jointly manufacture the type if there are enough orders.
FIRST OF MANY
Managing director Anand Mahindra says that the company plans to be involved from the design to manufacture stage, and that this could just be the first of many civil aviation production projects.
The biggest challenge to HAL could come from Indian conglomerate Tata Group. The company has had a long history in aviation and helped to set up national carrier Air India, and last year sought approval to set up an aerospace manufacturing facility on the outskirts of Hyderabad, capital of the country's southern Andhra Pradesh state. Current chairman Ratan Tata is also an aviation buff and pilot.
A proposed 20Ha facility will anchor a 100Ha special economic zone dedicated to the aerospace industry and Tata Advanced Systems, a division within the Tata Group, will lead the project. Industry sources say that senior company officials are spearheading the initiative, although the global economic crisis could be an obstacle.
Tata is one of India's oldest and most famous business houses with wide-ranging interests including car manufacturing, steel production and IT services. Its entry would shake up the aerospace sector. Tata has signed deals with several Western companies, including one to manufacture components for Boeing and another to produce helicopter cabins for Sikorsky. It has also taken a one-third stake in Italy's Piaggio Aero.
Industry sources say the company is keen to move into full-scale aircraft assembly and production in both the civil and military markets. This would put it in direct competition with HAL, which is now the only Indian company with the facilities to produce aircraft.
"If anyone can break HAL's stranglehold on aerospace production in India, it is Tata. They have the resources, determination and manufacturing capability. The only problem is that the economic situation may make it harder to make the capital investment required to embark on full-scale aircraft production," says a source close to Tata.
SALES GROWTH
HAL is not standing still. The company was ranked 40th in Flight International's list of the top 100 aerospace companies globally last year. For the year ending 31 March 2008, the company reported that its sales grew by 11% to Rp86.25 billion ($1.8 billion) and profits after tax were 42% higher at Rp16.32 billion.
The depreciation of the Indian rupee over the past few months has taken the shine off HAL's proud claim of becoming a company with a $2 billion turnover, but outgoing chairman Ashok Baweja remains confident that turnover will reach $3 billion earlier than the target of 2011.
Partial privatisation remains a possibility for the company, which comes under the defence ministry's purview, but insiders wonder if that is necessary as the Indian government has already granted HAL the prestigious "Navaratna" status. This allows state-owned companies greater autonomy in almost areas of its business, including the freedom to form joint ventures with private companies. Former finance minister P Chidambaram set the benchmark high when he said that HAL's "market is the world, not just India".
Senior HAL officials are similarly optimistic. Director of finance D Shivamurti says: "We expect to continue doing very well over the next few years. HAL is the only company with the ability to handle the military and civil aerospace programmes. We are cash rich and will use that to invest in research and development capabilities, and improve our manufacturing facilities and infrastructure."
Competition does not faze the company, he adds. "We actually helped a lot of companies by giving them subcontracts, and so have been partly responsible for the development of the private sector. If they do well, it is also because of us. Nobody has the capabilities that we have, and we will ensure that we stay ahead of the game."
A big chunk of the company's revenues have come from the licence-production of aircraft such as the BAE Hawk 132 advanced jet trainer, Sepecat Jaguar and Sukhoi Su-30MKIs, and Chetak and Chetan versions of the Aerospatiale Alouette III helicopter. Upgrades for aircraft such as the Dassault Mirage 2000, RSK MiG-21 and MiG-27, and older versions of the Jaguar, are also profitable.
HAL production lines still run at almost full capacity manufacturing for the Hawk, the Su-30s, and the indigenous Dhruv Advanced Light Helicopter and Tejas Light Combat Aircraft. That is expected to continue in the near future.
The company will also manufacture 108 of the fighters India will order as part of its ongoing Medium Multi-Role Combat Aircraft (MMRCA) competition, with the OEMs required to supply only the first 18 in a "fly away" condition. The company has also been asked to design, develop and produce 187 light utility helicopters for India's army and air force, and could work with Eurocopter on this programme.
HAL's biggest impediment to achieving its aim of becoming a truly global company, say analysts, could be that it is still part of the Indian government. Its bosses report to the defence ministry, it has an unwieldy structure with 13 divisions covering most aspects of aerospace, 16 production units and nine research and development centres spread across seven locations in India.
It will also be increasingly difficult to attract and retain talent in a country with so many private sector options.
"The financials may be improving, but HAL is still held back by the bureaucratic features that remain in the Indian civil service. Some divisions can be merged and the operations can be streamlined, and the company must become more attractive as an employer by paying better salaries and promoting staff. The government's mindset about the company's role must change as well," says a Bangalore-based analyst.
TOP-TIER GOAL
HAL will also be judged on whether it can become a top-tier supplier for companies such as Airbus and Boeing, much like its Chinese and Japanese. Its must be successful in indigenous programmes such as the Advanced Light Helicopter, Light Combat Helicopter, Intermediate Jet Trainer and proposed Indian Regional Jet, as well as joint programmes with the Russians to develop a medium transport aircraft and a fifth-generation fighter, where it is expected to take a bigger role at the R&D stage.
The company is attempting to increase its revenues from the civil aviation segment. It has joined hands with Boeing to bring $1 billion of manufacturing work to India over the next 10 years and plans to convert passenger aircraft to cargo use at a proposed maintenance, repair and overhaul joint venture with the company at Nagpur in central India. It also has a contract to manufacture doors for the Airbus A320 series.
The company is investing Rp1 billion in an engine components manufacturing joint venture with Pratt & Whitney, and will supply fuselages for the Gulfstream G150 business jet. The old Bangalore international airport, which HAL owns, has been mooted as a regional passenger aircraft maintenance, repair and overhaul hub and business aviation centre. It will also play a big role in the proposed Indian Regional Jet, if the programme goes ahead.
With Rp500 billion worth of orders over the next few years, there is no doubt that HAL will continue to do well. But if it and the Indian aerospace industry really want to make a mark globally, more needs to be done
"The problem with India's aerospace business, particularly HAL, is government ownership," says Aboulafia.
"National self-sufficiency sounds like a great idea, but it leads to complacency, high costs, poor product development choices, and inferior, expensive products."
