Sandeep Unnithan/India Today
When an Indian Air Force pilot sits in the cockpit of a new Sukhoi Su-30mki, he relies on digital multifunction displays or MFDS for vital flight parameters and digital terrain maps. The MFDS are assembled at Samtel Display Systems' Ghaziabad plant on the outskirts of Delhi. Until recently, India relied entirely on foreign firms for the cockpit displays for its fighter aircraft, with a set of seven costing upwards of several crores.
Visakhapatnam-based Flash Forge is supplying critical valves and pipes for the navy's under-construction fleet of six Scorpene-class stealth submarines. It is fitting special GPS-equipped towed antennae for the navy's current fleet of 14 submarines.
A few years from now, Indian soldiers will use hand-launched spy drones to spot militants in Jammu and Kashmir. The drones, which carry infra-red sensors and can spot intruders even in total darkness from 500 metres away, are being manufactured by Bangalore-based firm Aurora Integrated Systems (AIS).
Firms such as Samtel, Flash Forge and AIS are part of a growing trend of Small and Medium Enterprises (SMES) that are making a mark in India's Government-controlled defence sector. They are niche players who have cornered a key role in indigenising the defence industry by focusing on cutting-edge technology. Their story provides a glimmer of hope in times of heavy import dependence.
Over the next decade, the Indian armed forces will buy over $100 billion (Rs 450,000 crore) worth of fighter aircraft, radars, missiles and warships. Nearly 70 per cent of these will be off-the-shelf imports. The remainder will come from the nine defence public sector undertakings (DPSUS) such as Hindustan Aeronautics Ltd and Bharat Electronics Ltd. DPSUS account for 90 per cent of India's annual domestic defence production of $4 billion (Rs 18,000 crore). The rest of the market is divided among nearly 6,000 firms, ranging from Larsen and Toubro, Tata and Godrej to a host of smaller players. In 2001, the Government threw open the doors to private industry, a full decade after liberalisation. Today, the private sector supplies between 20 and 25 per cent of components and sub-assemblies to DPSUS, ordnance factories, the Defence Research and Development Organisation and the armed forces.
"Successful SMES will be the ones which can innovate, adapt technologies, deliver customised solutions, develop and maintain a global standard in manufacturing quality and specifications while retaining their cost advantage," predicts Dhiraj Mathur, the executive director of PricewaterhouseCoopers, a global professional services firm.
Last year, Gautam Makker, 42, MD of Flash Forge, tied up with a French firm Coyard that makes marine valves that regulate all the fuel, air and gas supply on board warships and submarines. His foresight was rewarded this June when French submarine maker DCNS and Mazagon Docks Limited (MDL) signed a contract of undisclosed value to locally manufacture all the valves, pipes and fittings for the six Scorpene-class submarines being built at the MDL, Mumbai, under a Rs 20,000 crore contract.
Flash Forge will double its Rs 57 crore turnover next year. "There is a vacuum in niche areas as a majority of the firms are not investing in technology," says Makker.
In the next decade, virtually all the MFDS in air force aircraft from helicopter gunships to the 126 Medium Multi-Role Combat Aircraft will be supplied by Samtel. Their turnover is set to increase from Rs 60 crore at present to Rs 500 crore by 2015.
The company has already set its sights higher up the value chain and is looking to import technology to manufacture infra-red search-and-track (IRST) sensors. Unlike radar, IRST sensors spot enemy aircraft 'passively', without alerting them to the presence of another aircraft. "We want to work towards realising the ministry of defence's policy of achieving 70 per cent indigenisation of defence equipment," says Puneet Kaura, executive director, Samtel.
The defence business calls for companies with endurance in the face of red tape and long procurement procedures. It takes between five and seven years for the armed forces to settle on acquiring a system. It also calls for huge investment with little guarantee of return. "The single biggest hurdle to smes in defence is the lack of an effective investment policy; we have no money," says Dhananjay Kamlapurkar of the Pune-based Defence Equipment Manufacturers' Association.
"Five years back, investors would laugh at us when we said we were into defence, but not anymore," says Raman Puri, one of the directors of AIS. Founded by seven Indian Institute of Technology graduates in 2006 with a seed capital infusion of around Rs 5 crore from Tata Industries and the Government, AIS has a few deals with the navy and National Aerospace Laboratories worth Rs 6 crore over the past two years. It is now working on a classified drone project for the navy. AIS is a frontrunner to supply 40 backpackable drones to the army's Northern Command. The business is tough because a majority of the subcomponents are imported. AIS imports the composites that make up its airframe, and vital components like modems and even the tiny integrated circuits that fit into the drones.
A bigger opportunity for the private sector comes from 'defence offsets'. Five years ago, the defence ministry made it mandatory for foreign defence equipment suppliers to source 30 per cent of the value of the equipment from within India.
"Offset requirements can potentially open up significant business opportunities for Indian smes to integrate themselves into the supply chains of national and international defence majors," Mathur predicts. With 41 offset contracts worth over Rs 49,000 crore set to materialise in the next three years, the going has never been better for defence smes.