India's R&D in Defence DRDO, PSUs and Private Sector

[somnath]

How many Chinese cars (i.e cars from Chinese companies) were exported?

Indian companies or foreign companies operating in India ?

Neshant, both - but largely foreign companies with subs in India..

here goes..

http://www.bloomberg.com/apps/news?pid= ... 9LxvSmKTzE

Unless foreign entrants an given an exceptional leeway, their Indian ventures would be treated as an Indian company and the GoI would retain a veto over the export/sale of any component manufactured in the country

Viv, exactly my point..Imagine if India is the sole supplier of a critical component in LM's F16 global supply chain, during a conflict we can easily ban all "exports" from the India plant -screws every operator of F16s barring India!

[Sanku]

Wouldn't it be much better to try a 25% FDI route and then see how it goes.

The present cap on FDI is 26% and the total FDI it has attracted over the last ten years is around Rs 70 lakh.

Obviously, the FDI will come in either by free ride like 100% or by forcing through offset programs.

No nation would want to build Indian capabilities in Defence out of their own choice is it.

[Sanku]

I had decided to ignore your rants,

Ah no, it was actually because directed specific questions were getting in the way of flights of fancy. Which is very visible in your personal attack borne of frustration of not having any thing meaty to say

as your lack of knowledge is only rivalled by your lack of education (the two are not the same, quoting among other Oscar Wilde!)..

Considering you have NO knowledge of my education what so ever, isnt it a little presumptive to assume about it? I would personally expect that folks will be circumspect in making such as confident assertion without fully knowing what they were talking of.

But hey what am I talking off, you have never let minor issues as facts and being in possession of them get in the way of your assertions. What would be different now?

But I am afraid you have caught on to me after all finally, even if it was a lucky guess. I am NOT a PhD in strategy management, apparently the needed level education to debate with you at your level.

.But one last time to point out some more of the inanities that you spout (in the same league as implying that retail is a "strategic" sector)..

Tcchhh putting words in other mouth are we? Such lack of points?

Meanwhile the rest of your post is full of unconnected gibberish. Tata sold more cars, 100% FDI, this is not 50s, there was opening up in 90s. yada yada..

Yes and the earth is round and goes around the sun too.

Mere bhai, what parts of "logical casualty" is so difficult for you to fathom, Now you will say Musharaff is indeed Musharraf and there fore India grew by 6%.

Hain jee?

a bunch of statements can be all true without having any connection with each other.

Because if they dont this is the BRILLIANT wisdom we get.

Viv, exactly my point..Imagine if India is the sole supplier of a critical component in LM's F16 global supply chain, during a conflict we can easily ban all "exports" from the India plant -screws every operator of F16s barring India!

Imagine, yes indeed, why not

Imagine there's no countries
It isn't hard to do
Nothing to kill or die for
And no religion too
Imagine all the people
Living life in peace


Meanwhile please let show continue. It may not be adding value, but I am sure, this is next best discussion since BJ Cutie explained her version of Shanghai statistics on the forum.

[somnath]

Proof of the pudding is always in the eating..

After more than eight years of opening up of the industry to FDI, the total FDI received till date is 0.15 million!!!!

http://www.idsa.in/idsacomments/Mahindr ... era_221209

And thats the same reason why the offsets, even as they have gone up, have been to source low tech, low value-added stuff from India (or to set up data processing outsourcing centres)..

http://www.business-standard.com/india/ ... re/377140/

Quoting from the above:

So far, the investment into Indian R&D has been negligible. And in choosing Indian partners, foreign arms vendors have preferred private companies to the public sector. So far, 40 per cent of all offsets have gone to defence ministry-owned entities: factories of the Ordnance Factory Board and the eight defence PSUs. Thirty-three per cent of the offsets have gone to large private companies and a healthy 27 per cent have gone to small- and medium-sized manufacturers.

There is little we are going to gain by HAL exporting increasing numbers of doors to Boeing, or some unit in Tirupur exporting tons of curtains and uniforms to LM...

This policy is conceivably going to act against Indian interests in another way as well..In a few years, a number of Indian firms would be in a position to take over large foreign OEMs..But given that defence is not an area covered under either bilateral or multilateral trade/investment treaties, the "mother countries" of of the target companies would refuse permission as India does not have the same terms for their companies to set up shop in India...Therefore if we do not allow EADS to set up a 100% (or majority owned) sub here, the German govt can well deny Tatas the permission to take over a Renk or a Thyssen Krupp, if it came to that...

[Sanku]

Is there no limit to spin?

1) What major deals have exercised the offset clause so far and not resulted in ToT? We have decided that the offset clause does not work before using it?

2) Why is the basic question unaddressed?

Obviously, the FDI will come in either by free ride like 100% or by forcing through offset programs.

No nation would want to build Indian capabilities in Defence out of their own choice is it.

3) Fine HAL making a full aircraft is better than making door (now who would have thunk it, huh? truly revolutionary thought) The question is whether buying a full a/c from HAL or Taneja is better than buying a full a/c from LM?

That is the question -- and all else is diverting the Indian mind from the real issue. Not something which can be said to be in Indian interests.

The question is how do you create Indian companies which have enough technical skills to execute a end to end production. The goal is NOT to allow foreign companies to make money on Indian cost.

And obviously when the need is to obfuscate the real issues, ignore these statements when quoting

In 2007, a mere Rs 243 crore worth of offsets were firmed up. The figure rose tenfold to Rs 2,598 crore in 2008. In 2009, DOFA has already cleared Rs 4,870 crore worth of offsets and counting.

The potential value of offsets business is enormous. India currently buys foreign weaponry worth about Rs 50,000 crore annually, a figure that is rising. Taking the minimum offsets liability of 30 per cent, about Rs 15,000 crore worth of offsets must be discharged annually. In fact the figure is higher; the medium fighter tender specifies an offsets liability of 50 per cent.

And miss the HEADLINE totally

IDSA COMMENT
Mahindra’s Giant Leap into Defence Production: The Need for Further Policy Initiatives to Promote Private Sector

Great example of poor policy making I am sure.


What a different conclusion from a given data, DDM would be proud.

[Surya]

Sanku

There are still arms which we buy in whole - eg Israeli stuff.

so scope for 100% owned units is there

and even if they did not sell a single piece here - just the additional benefits of the skills, supply chain etc are bett

[Viv S]

Is there no limit to spin?

1) What major deals have exercised the offset clause so far and not resulted in ToT? We have decided that the offset clause does not work before using it?

You cannot analyse the policies on deal-to-deal piecemeal basis. The offset clause if I'm not mistaken was introduced in 2005.

And who's advocating the offset clause be scrapped? The contractor will still be required to reinvest 30% of the contract value into domestic producers of miscellaneous components.

2) Why is the basic question unaddressed?

Obviously, the FDI will come in either by free ride like 100% or by forcing through offset programs.

??? The offsets require the company to invest 30% of the money the Indian government is paying it. How is that foreign direct investment?

No nation would want to build Indian capabilities in Defence out of their own choice is it.

No nation would want to outsource car production either but that's the way the free market works. India has many production and development advantages that developed countries don't.

3) Fine HAL making a full aircraft is better than making door (now who would have thunk it, huh? truly revolutionary thought) The question is whether buying a full a/c from HAL or Taneja is better than buying a full a/c from LM?

Production by HAL would be specified in the contract but what would possess LM to transfer production to Taneja, trusted name in ceiling fans since 1972?

The question is how do you create Indian companies which have enough technical skills to execute a end to end production. The goal is NOT to allow foreign companies to make money on Indian cost.

What about question of how do you stem the flow of tens of billions of dollars in valuable foreign exchange from the country. And if Indian suppliers in other sectors have survived, in fact thrived in the open market, there is no reason to assume they wouldn't in the defence sector.

The potential value of offsets business is enormous. India currently buys foreign weaponry worth about Rs 50,000 crore annually, a figure that is rising. Taking the minimum offsets liability of 30 per cent, about Rs 15,000 crore worth of offsets must be discharged annually. In fact the figure is higher; the medium fighter tender specifies an offsets liability of 50 per cent.

What about the enormous value of contracts going out in the first place?

[somnath]

To me, the key take-away from the current offsets programme is this:

So far, the investment into Indian R&D has been negligible. And in choosing Indian partners, foreign arms vendors have preferred private companies to the public sector. So far, 40 per cent of all offsets have gone to defence ministry-owned entities: factories of the Ordnance Factory Board and the eight defence PSUs. Thirty-three per cent of the offsets have gone to large private companies and a healthy 27 per cent have gone to small- and medium-sized manufacturers.

Without equity control, why should anyone transfer (critical) tech? Especially as tech is fungible, and not tied to one transaction...And even the sourcing would be of low/medium tech items, given that bulk of it is happening via the pvt sector (defence is one area where the public sector has an enormous lead over the pvt sector, within the limited capabilities that are there in the country)...

We will continue importing radars from Elta with Astra Microwave making (relatively) rudimentary parts of the radar rather than getting Elta to set up a complete facility here employing Indians that will train a large number of them in critical areas like algorithms, manufacturing and design T/R modules and the like..

Keep getting back to the auto industry for parallels...Suzuki did have a full fledged engine (and gearbox) manufacturing unit in India till 2001 (or 2002), when they got majority control of Maruti..After that however, India makes more contribution to Suzuki's supply chain and tech worldwide today than even the Japanese parent...And thanks to the Suzuki experience, a whole cadre of Indian managers and engineers are today working on critical projects not just for Suzuki, but for tons of other companies...The "ecosystem" advantage at play..

[Sanku]

To me, the key take-away from the current offsets programme is this:

So far, the investment into Indian R&D has been negligible. .

I am not surprised. Since it misses two very critical points

1) So far.
2) The trend that we see going forward.

I can have take away about India based on Nehurvian rate of growth.

Dear Viv S, how does what I wrote

1) What major deals have exercised the offset clause so far and not resulted in ToT? We have decided that the offset clause does not work before using it?

Mean this?

You cannot analyse the policies on deal-to-deal piecemeal basis. The offset clause if I'm not mistaken was introduced in 2005.

The offset policy has you mentioned is new, and is uniformly agreed to be the way to go. If you read the article that Somnath pointed out it also points to the trend of increasing money flows.

The problem that you guys have is that you are laboring under illusion that some FDI will result in anything better than bonded warehouse.

The ToT and FDI/offset (or basically by any name putting money into making establishments within India, also remember how somnath was pontificating on how FDI is also counted as offset so it means FDI is good which means more FDI is better which means 100% FDI is good) will happen only as a result of carrot and stick policy. The stick being that the deal goes to those who provide the ToT and offset and the others can take a hike, with the carrot being the obvious money they stand to make.

Hey if the carrot and stick does not work (according to you guys) the solution is to give away the carrot for free?


Finally the money going out, is really not such a big deal, since
1) most of the budget on Purchases will anyway be spent in India, either by licensed manufacture of the remaining that is actually paid out 30%+ stays back by offsets.
2) The bean counter short term penny pinching approach to money is THE reason for the issues in India. The idea is to kick start the entire Mil-Ind complex, the greatest import is to scale up our ablities, otherwise to save a few pennies today we end up spending massive amounts tomorrow.

The entire story about not funding DRDO etc enough first and then importing helter skelter is THE problem and once India has woken up to the problem. The 100% FDI is just a back door way of business as usual. Its very obvious, and denying it like sticking your head in sand.

Defence is not free market in any case, comparing tanks to cars only goes to show lack of insight, and the effects of free market Nazism are all too visible in US anyway.

The whole problem is "if all you have is hammer the world look like a nail" approach that free-marketeers have to everything in the world.

Please note most of the fact free, fantasies are based on words like "no reason to assume", "we can imagine", "abc must happen" etc etc.

NOT ONE SINGLE DOCUMENT saying how after 100% FDI these XYZ technologies came into India and made their way to Indian companies in turn?

NOT ONE EXAMPLE? Even for something LOW TECH and LOW LEVERAGE?

(actually I can give a few examples, even which you folks haven't managed, but they are insignificant anyway and I have already alluded to that in the past)

[Sanku]

Sanku

There are still arms which we buy in whole - eg Israeli stuff.

so scope for 100% owned units is there

and even if they did not sell a single piece here - just the additional benefits of the skills, supply chain etc are bett

Surya, in my opinion the way should be too
1) Get those here in partnerships
2) Live with those we cant get fully in short term and in long term task Indian companies to develop it internally.

100% FDI is basically old whine in new bottle, short sighted approach. The reason why we are in a soup where we import Bofors worth millions but are not ready to pay Mahindra for axe.

As a matter of operating mission this must be shunned for all that it stands for.

[somnath]

Do you think LM would allow that? Beats me completely, this is like very-very optimistic day dreaming. No offense though !!!

Who knows? Depends on the transaction, and the deal struck...Many many years, back the US did offer to transfer the entire F5 assembly line to India, when they were a contender for the AJT contract (this was in the first days of the AJT!)..So it is a possibility....But F16 is an "outlier" case, there would be more "basic" opportunities in many less glamourous, but critical areas..the key is that by being a critical part of the global supply chain (in a manner a vanilla buyer never is) one build interdependent linkages, which in turn is the best insurance against threats of sanctions, or even exercising influence over decision-making..

Talking about effect of FDI on tech transfers, it is a much studied area in economics and econometrics...For those who cant do their own "research", some pointers:

http://www.atpsnet.org/pubs/specialpaper/SPS%2016.pdf

http://econweb.tamu.edu/aglass/DevHandbook.pdf

Even basic google search will throw up enough instances...

[somnath]

Even before the foreign auto makers entered Indian market, the Tatas and the Mahindras were manufacturing engines. They may not be as refined as the foreign ones, but they did the job. The foreign companies came in and brought their technology is because, irrespective they share their technology or not, it was just a matter of time for Indian companies to catch up.

Really? We continued making Ambys, Padminis and (then much later) basic Maruti800s for how many decades? Tatas and M&Ms did not even venture in the passenger space...when did the Tatas launch Indica? Last decade, a full 10 years after the auto sector was opened up - why? Because there simply wasnt enough expertise within India to build a modern car grounds up - that got built as the Daewoos, the Hyundais, the GMs and of course a "controlling" Suzuki (in Maruti) started investing more money in the sector..

Even we allow them 100% FDI, I am pretty sure that they will just hire indian talent and make money of it and we will still bite the dust. Intel Bangalore designs the latest intel chips here. How many guys working there have come out and formed a startup on mps?

My dear friend, thats the key..Onec the human capital is in place, the rest of it, capital and entrepreneurship, is no problem for India anymore..Why Intel, the Texas Instruments centre, of GE's Jack Welch centre, or a bunch of other IT/R&D setups have created a vast ecosystem in India...And there are tons of startups doing work on chip design now..Why startups, even Infy/Wipro (particularly Wipro) have large chip design practices...

Last,

The moment we have few building blocks and our technology matures, they open up the entire treasure chest for us. Happened with ABMs, Radars etc. etc

FDI has nothing to do with it, it happens regardless...Read Chengappa's Weapons of Peace to read how many times the Russians did (or tried to do) the same thing! And its "easier" to do with simple imports, just sell off your existing lines!!No need to painstakingly setup facilities in India!!?

[somnath]

They can provide the entire assembly line, but do you think that they will not keep any redundancy?

Sirjee, you are looking at it in "digital" forms...There could be redundancies, but we are talking of whether those can be activated that easily for a "third party" (read Pakistan) in a crisis scenario...Global supply chains are very tightly run, and redundancies are not always 100%, especially for large players in the chain (think Delphi for GM as an example)...

Last but not the least,

The benefits of FDI are widely known and accepted, Period !!! But it may not hold true across all fields and all verticals and in certain geo-political scenarios. One has to measure the benefits and shortcomings before taking a decision. At the end I feel, that whether allowing 100% FDI is a good decision or not, wholly depends upon how our Political establishment can exploit it. Looking at the previous record of our babus and netas, I have a strong doubt. I hope you get my point

People said the same things when the economy was being opened up (next East India Company and so on)...The same thing when we signed up on TRIPs/WTO related conventions...the Indian system has a way of gettgn the best deals for ourselves...

[Sanku]

Really? We continued making Ambys, Padminis and (then much later) basic Maruti800s for how many decades? Tatas and M&Ms did not even venture in the passenger space...when did the Tatas launch Indica? Last decade, a full 10 years after the auto sector was opened up - why? Because there simply wasnt enough expertise within India to build a modern car grounds up - that got built as the Daewoos, the Hyundais, the GMs and of course a "controlling" Suzuki (in Maruti) started investing more money in the sector..

No thats a SIMPLE UNTRUTH. It did not happen because the Indian industry was shackled. After it was freed the companies managed to do what was needed.

The rest of the post is equally true.

You are welcome to post a single study outlining the same instead of reiterating a falsification 100000 times.

Cause and effect buddy, cause and effect.

[somnath]

1.) Dis-invest PSUs.
2.) More active involvement of Private Companies.
3.) 100% FDI

The first one is well nigh impossible - we have "privatised" a grand total of three companies in the last 20 years (a bread maker, a hotel and a fertilizer company)..In India, we "disinvest" (India's contribution to the economic literature)..But thats OT...

Actually 2 & 3 make no difference from "India's" pespective...Though they do make a difference from Indian companies' perspective..I had posted sometime back, that Indian companies would prefer 2 & 3 i that chronological order, as that would enable them first setup largish sized companies and then (with 3) sell them at high valuations to the foreigners..But for India, sooner we start setting up the Mil-Industrial eco-system, better for us..

And there lies the crux - the expertise in a range of areas simply does not exist...Just "allowing" the pvt sector (or privatising existing PSUs to Indian pvt sector) therefore is not going to take us to the bleeding edge...We need to attract the guys who do have the tech to set up shop in India...

Actually it had more to do with License Raj. Tata, AL and M&M were all manufacturing commercial Diesel and Petrol engines. I agree they were not upto the mark to manufacture a car, but my point was, it was just matter of time. They had some matured technology, 1st step was already in place, so it was just matter of time.

License quota is partly true..But decontrol happened in 1990..Indica came out in 1999 ..Bolero in 2001....Why? Because it took that many years for enough Indians to gain critical mass experience in auto design and assembly...And

http://econweb.tamu.edu/aglass/DevHandbook.pdf
You can read this paper for the impact of FDI on tech diffusion...

[somnath]

personally feel that the government is not taking the co-development seriously. If we start concentrating on it, most of the tech can be developed by this route. Then the remaining left is a minority of tech which can be directly imported. So import would help, by the time our own RnD matures

In fact the govt is taking it very seriously..Look at Brahmos, Maitri, MR/LR-SAM - increasingly large numbers of projects are "co-development"..But the pitfalls are all too apparent even there..We do not get the critical ramjet propulsion tech for Brahmos (despite the Russians having 49% stake!), MBDA is not transferring its seeker tech for Maitri, ditto with IAI-Rafael for LR/MR-SAM...In the business of IP, control is key - no one shares it without control..

Common man, they deserve some credit. Developing a car completely from scratch would take some time. Looking at the situation at that time, 10 years is not bad at all

Oh I give them a lot of credit, what Tatas have done with the Nano (and the less heralded Ace) is nothing short of world beating..But you see they needed that lead time for the Indian ecosystem to develop for them to take the leap...

I am pretty sure that once we have Elta/Thales/Raytheon setting up radar design/manufacturing units in India, in 10 years time a Tata SED (or even a BEL!) will come up with a fully Indian AESA radar...

[Viv S]

1) What major deals have exercised the offset clause so far and not resulted in ToT? We have decided that the offset clause does not work before using it?

Mean this?

You cannot analyse the policies on deal-to-deal piecemeal basis. The offset clause if I'm not mistaken was introduced in 2005.

The offset policy has you mentioned is new, and is uniformly agreed to be the way to go. If you read the article that Somnath pointed out it also points to the trend of increasing money flows.

Its been over five years with no discernible difference. You're argument remains it will somehow happen in the future.

The problem that you guys have is that you are laboring under illusion that some FDI will result in anything better than bonded warehouse.

The ToT and FDI/offset (or basically by any name putting money into making establishments within India, also remember how somnath was pontificating on how FDI is also counted as offset so it means FDI is good which means more FDI is better which means 100% FDI is good) will happen only as a result of carrot and stick policy. The stick being that the deal goes to those who provide the ToT and offset and the others can take a hike, with the carrot being the obvious money they stand to make.

FDI will result in companies shifting production to India wholesale and will lead to growth of a domestic defence industry because of market forces. And there is a precedent in other sectors.

As things stand 70% of the taxpayer's goes abroad and the remaining is invested at the contractor's discretion. And while we may cross our fingers and hope the domestic industry will grow from what the contractor doles out, its very unlikely to pan out that way.

Finally the money going out, is really not such a big deal, since

What's $50 billion between friends huh?

1) most of the budget on Purchases will anyway be spent in India, either by licensed manufacture of the remaining that is actually paid out 30%+ stays back by offsets.

The money does indeed go out. And secondly, licensed manufacturing doesn't develop the local industry. Indian PSUs have been license manufacturing equipment for decades yet when it came to development they had to do it from scratch.

2) The bean counter short term penny pinching approach to money is THE reason for the issues in India. The idea is to kick start the entire Mil-Ind complex, the greatest import is to scale up our ablities, otherwise to save a few pennies today we end up spending massive amounts tomorrow.

The entire story about not funding DRDO etc enough first and then importing helter skelter is THE problem and once India has woken up to the problem. The 100% FDI is just a back door way of business as usual. Its very obvious, and denying it like sticking your head in sand.

Every argument you've made can be used to reject FDI in all sectors of the economy. And yet facts are very different in the real world.

Defence is not free market in any case, comparing tanks to cars only goes to show lack of insight, and the effects of free market Nazism are all too visible in US anyway.

Business models for car companies aren't fundamentally different from tank manufacturing companies (especially on the supply side) except that they have a larger customer base.

NOT ONE SINGLE DOCUMENT saying how after 100% FDI these XYZ technologies came into India and made their way to Indian companies in turn?

NOT ONE EXAMPLE? Even for something LOW TECH and LOW LEVERAGE?

There is a precedent for this. Its nothing unique or revolutionary.
Like I said before had we followed the protectionist approach that you advocate in other sectors, we'd still have a stagnating economy. The Tatas didn't drown when the market was opened up to foreign companies. Fifteen years later they were buying out Jaguar Land Rover from Ford. The current closeted system is hobbling domestic companies rather than protecting them.

[somnath]

From the posted link..

http://econweb.tamu.edu/aglass/DevHandbook.pdf

Some key take-aways:

Studies such as Mansfield and Romeo (1980) and Smarzynska (1999) have found that newer
technologies are transferred through FDI, whereas older technologies are transferred though joint
ventures and technology licensing.

For example, Ramachandran (1993)
has shown that subsidiaries receive greater resources than partially licensor-owned or
independent firm once the incentives for both sides to invest in transferring technology are
considered. Strategic incentives can also reinforce moral hazard and asymmetric information
considerations: Fosfuri (2000) constructs a model with the feature that firms strategically use the
vintage of technology to deter imitation by licensees, so that more recent technology is
transferred to affiliates than to outsiders (see also Saggi, 1999).

In 1995, of all transactions in royalty and
license fees, transactions within the same firm made up in excess of eighty percent, so most
explicit trade in technology takes place within multinational firms (UNCTAD, 1997).

On creation of the "eco-system:

Focusing on vertical technology transfer from a multinational to its suppliers, Pack and Saggi
(2001) have shown that technology diffusion among suppliers can benefit foreign firms sourcing
components. Thus, fully integrated multinational firms would be expected to be more adverse to
technology diffusion than firms involved in arms-length production deals with local firms.
Mexico’s maquiladoras appear to have benefitted from the transfer of sophisticated production
techniques and backward linkages, especially in the automobile industry

And indeed,

Indian PSUs have been license manufacturing equipment for decades yet when it came to development they had to do it from scratch.

After 4 decades of "license manufacturing" Sukhois, Migs, Jaguars, Ajeets, we still struggle to operationalise an LCA, and are literally light years away from manufacturing an engine!

[Sanku]

Viv S

Its pointless discussing sense with people to whom

What major deals have exercised the offset clause so far and not resulted in ToT

means

Its been over five years with no discernible difference. You're argument remains it will somehow happen in the future.

There is a basic comprehension issues here, to day the least.


Thankfully unlike the nonsense like EUMA, (where the MoD was overruled by the top) at the moment Def Min is holding firm and not letting this BS go unchallenged, as seen by calling this by its correct name.

Bizarre.




The jingo hope is that it stays that way.

[Sanku]

After 4 decades of "license manufacturing" Sukhois, Migs, Jaguars, Ajeets, we still struggle to operationalise an LCA, and are literally light years away from manufacturing an engine!

Yes and the solution is to even give up on license manufacturing and buy directly from outside.

How cute.

----------------

And you could find a single Indian example still? Why post a irrelevant paper? Try and at least quote from Indian experience? From CII say or any other Indian source?

[somnath]

I did a similar exercise for shipyards - to estimate the "value add" of Indian SYs versus pvt sector/global ones...

Ditto exercise for Indian aerospace - comparing HAL and LM (aeronautics division) on a simple metric, their respective Operating Margins (or EBITDA margins) - which is a crude, but reasonable estimate of their value-add..

From HAL's annual report
http://www.hal-india.com/Annual.Report.2008-09.pdf

And LM's annual report
http://www.lockheedmartin.com/data/asse ... report.pdf

HAL has an operating margin of less than 2%, while LM's aeronauticcs division has an operating margin in excess of 13%! This despite the fact that GOI ensures a steady stream of "license manufacture" orders for HAL, without any competition from anyone...But obviously, as most of HAL's topline revenues go in procuring the raw materials and systems from the OEM - the job at HAL is to simply machine them together according to OEM drawings and then test the system out...

The results are not too different from what could be gleaned from the SY data...

I was interested in checking out the same for OFBs, but their accounts are not in public domain it seems! I am pretty sure their "value add" would be negative

So much for all the years of license manufacturing...

[Sanku]

So much for all the years of license manufacturing...

These statistics are meaningless in the command economy model. In fact why does HAL have to have a 2% Value add? It can have a 0% value add and still not care, who buys from HAL? Govt!!

Who owns HAL? Govt!!

Who decides how much money HAL should make? Govt!!

EVEN if a narrow bean counter approach was taken, the value adds in a PSU is the worst possible metric that could be taken.


So not only the casualty and logic are all shot to hell, on this topic, so is basic comprehension and now, evidently, economics.

[tejas]

The GOI does not have infiniyr resources. HAL spends a certain percentage of revenue on R & D just like BEL does. Even given the near monopolies these two rleatively well run PSus have their market cap. and output is pathetically small compared to say LM or Raytheon.

The reason the GOI cannot create and run a software co. to compete with Infosys is the exacttly why the DPSUs are in the papthetic shape they are in. I cannot understand how anyone would deny that the current system needs to be put out of its misery when even small arms are imported. Einstein once said the definition of insanity was repeating the same mistake in hopes of a differen outcome.

[Sanku]

The GOI does not have infiniyr resources. HAL spends a certain percentage of revenue on R & D just like BEL does. Even given the near monopolies these two rleatively well run PSus have their market cap. and output is pathetically small compared to say LM or Raytheon.

Hmm? What is the defence budget of India and US? Is that relevant or can such brilliant gyan be decided without taking that in the account?

The reason the GOI cannot create and run a software co. to compete with Infosys is the exacttly why the DPSUs are in the papthetic shape they are in.

Really? LM does not provide services like Infy does, so by your own standards; that you have used above LM is a failure?

I cannot understand how anyone would deny that the current system needs to be put out of its misery when even small arms are imported.

System needs to be changed? Wow no kidding, really?

Einstein once said the definition of insanity was repeating the same mistake in hopes of a differen outcome.

Which is what the 100% FDI is, barring the BS.

[Surya]

Surya, in my opinion the way should be too
1) Get those here in partnerships

None of them are going to take chances for their IP with 49 % stakeholding.

So what we might get is some drips here and there.



Lets look at an hypothetical example

Lets say instead of buying our UAVs wholesale from Israel, a 100 % owned subsidiary of IAI made them in India.

What problems do you see with this vis a vis importing the whole kit and kaboodle from Israel??

[Sanku]

Surya, in my opinion the way should be too
1) Get those here in partnerships

None of them are going to take chances for their IP with 49 % stakeholding.

But I though IP and ownership were different matters? But if that is the case 50:50, keep the real IP there and dont send it here. If they have 51% control, in any case the IP stays where it is staying, within the external company? So IP wise they *may* not share it at 49%, but at 51%, they DEFINITE are NOT sharing it with us.

Certainly not vs may? Which one?

Meanwhile, if you look at the IDSA article with Somnath posted about Mahindra (probably without reading it)

It is noteworthy that prior to Mahindra’s November announcement of a JV, it was denied permission to bring in 49 per cent FDI into it. Although BAE Systems finally accepted 26 per cent equity share in the JV, not many foreign companies have the same inclination.

Clearly when the push came to shove, BAE quietly tucked its tail and came in with 26% after the drama.

Others who do not have the same inclination will soon have it, or lose out.

In any case if they are *NOT* taking chances with their IP or sharing it with us, then we lose anyway? They HAVE to share IP that is critical. The whole point is to make them give up the IP.

Lets say instead of buying our UAVs wholesale from Israel, a 100 % owned subsidiary of IAI made them in India.

What problems do you see with this vis a vis importing the whole kit and kaboodle from Israel??

First and foremost I see no particular advantages. I have already listed the issues before I will list them again. But note, a POLICY decision, which says the same rule has to be applied for all can not be seen ONLY in context of Israel.

For example I have two neighbors, one very good and very bad, the reason I lock the door is not for the good neighbor but the bad one. The good neighbor you can give keys on a case to case basis, the bad neighbor? well....

Now for issues in general
1) Defence industry is definitely not like selling soaps (although probably hard for bean counters to understand, who can only see profit column and loss column in one piece of paper, not being able to look beyond that single sheet), a lot of issues will be involved with the running of the company.
2) Who does the plant/lab supply? India or everyone else? Does the Indian govt have a control in who does it sell to?
3) Is the plant/lab set up after a deal with India or irrespective of it?
4) What is the scope of the plant or lab?
5) What is the effect of such a lab on existing govt initiatives? What are the unintended side effects?

These are just some questions.

More points have already been raised before on this thread (Mrinal and me)
http://forums.bharat-rakshak.com/viewto ... 75#p845075
http://forums.bharat-rakshak.com/viewto ... 92#p845092
http://forums.bharat-rakshak.com/viewto ... 50#p845150
http://forums.bharat-rakshak.com/viewto ... 66#p845366

[Viv S]

Viv S

Its pointless discussing sense with people to whom

What major deals have exercised the offset clause so far and not resulted in ToT

means

Its been over five years with no discernible difference. You're argument remains it will somehow happen in the future.

There is a basic comprehension issues here, to day the least.

You're still plugging for a policy that reinvests only 30% of the capital expenditure into venue decided by a foreign contractor. You're welcome to assume that the company will 'do the right thing' and invest the money so as to help the domestic industry grow.

Thankfully unlike the nonsense like EUMA, (where the MoD was overruled by the top) at the moment Def Min is holding firm and not letting this BS go unchallenged, as seen by calling this by its correct name.

For forty years after Independence the Indian government held firm and rejected all BS about idiotic ideas like liberalization and privatisation. Unfortunately those glory days are behind us.

[Sanku]

You're still plugging for a policy that reinvests only 30% of the capital expenditure into venue decided by a foreign contractor. You're welcome to assume that the company will 'do the right thing' and invest the money so as to help the domestic industry grow.

No I am not assuming anything. That is entirely your prerogative. I rarely assume and when I do I list them.

Meanwhile something you might want after you are done with assumptions (just maybe)

http://www.business-standard.com/india/ ... ne/333350/

At present, under the Defence Offset Policy, a single-window-clearance agency called the Defence Offset Facilitation Agency (DOFA) assists potential vendors in interacting with the Indian defence industry for identifying potential offset products and projects.

http://www.india-defence.com/reports/2262

India's newly introduced defence offsets policy is likely to bring in $10 billion during the 11th five-year plan period (2007-11), Defence Secretary Shekhar Dutt said Thursday.

Thankfully unlike the nonsense like EUMA, (where the MoD was overruled by the top) at the moment Def Min is holding firm and not letting this BS go unchallenged, as seen by calling this by its correct name.

For forty years after Independence the Indian government held firm and rejected all the liberalization and privatisation BS. Unfortunately those glory days are behind us.

It is unfortaunate, that you and somnath can do nothing (no data no examples no case studies) to prove your point other than chant that above mantra.

Unfortunately, the 100% FDI is neither liberalization nor privatization. It is buying a 100% foreign made product, period.

Unfortunately for you guys claiming to be for private industry this is what the CII thinks, so that wraps it up for about Indian industry I think
http://www.ciidefence.com/pressreleases_015.asp?id=3

Offset Policy will leverage India’s buying power to upgrade technology, improve infrastructure and make it part of the global defence supply chain

http://www.thefreelibrary.com/Defence+o ... 0215824968

New Delhi, Jan 5 (ANI): The Confederation of Indian Industry The Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry-led and industry-managed organisation, playing a proactive role in India’s development process. has found that the major stakeholders in defence procurement place a lot of importance on offsets, the latter viewed increasingly as an important means of increasing the production of defence equipment in India. in a recent survey conducted by the CII, the key findings included the fact that with India as one of the largest importers of defence-related products, offsets would leverage purchasing power Purchasing Power

[Rahul M]

sanku ji, what are you doing here hain ?

[Sanku]

sanku ji, what are you doing here hain ?

Hai ram!! I have been found!! Last one promise (actually was researching the web for the next post)

http://www.indiaprwire.com/pressrelease ... 341280.htm

Mumbai, Maharashtra, January 14, 2010 /India PRwire/ -- The defence industry in India is poised at an inflection point in its expansion cycle driven by the modernization plans, the increased focus on homeland security, and India's growing attractiveness as a 'home market' defence sourcing hub. A joint study by CII-KPMG, Opportunities in the Indian Defence Sector: An Overview reveals that Indian Industry is upbeat about the opportunities in defence and aerospace, and eager to grow its industrial capabilities in this space, but is looking to Government to continue its process of developing and fine-tuning the procurement regime and industry drivers that will enable industry to grow a robust and sustainable defence industry in India.

Scheduled entertainment in other thread coming in shortly.

[Katare]

I did a similar exercise for shipyards - to estimate the "value add" of Indian SYs versus pvt sector/global ones...

Ditto exercise for Indian aerospace - comparing HAL and LM (aeronautics division) on a simple metric, their respective Operating Margins (or EBITDA margins) - which is a crude, but reasonable estimate of their value-add..

From HAL's annual report
http://www.hal-india.com/Annual.Report.2008-09.pdf

And LM's annual report
http://www.lockheedmartin.com/data/asse ... report.pdf

HAL has an operating margin of less than 2%, while LM's aeronauticcs division has an operating margin in excess of 13%! This despite the fact that GOI ensures a steady stream of "license manufacture" orders for HAL, without any competition from anyone...But obviously, as most of HAL's topline revenues go in procuring the raw materials and systems from the OEM - the job at HAL is to simply machine them together according to OEM drawings and then test the system out...

The results are not too different from what could be gleaned from the SY data...

I was interested in checking out the same for OFBs, but their accounts are not in public domain it seems! I am pretty sure their "value add" would be negative

So much for all the years of license manufacturing...

Where/how did you get the 2% figure for HAL? It is paying more than 3% of its sales as dividend on net profit margin of 16.7%?

What's the need for calculating "value add" when HAL itself provides that data for the company and also as per employee in its quarterly finance reports?

[tejas]

Sanku, other than deriding others ( particularly Somnath) do you have any idea or opinion on reforming the current broken down system? Or is unending and unrequested sarcasm your only offering.

My reference to Infosys was simply that the GOI like anty other gov't. is incapable of rapid, bold and decisive planning in a busniess setting. And thus any gov't. run software entity would be a money pit as are ( to varying extents) all DPSUs.

India's defense budget dwarfs Israel's and Singapore's. Who is importing from who?

[Viv S]

You're still plugging for a policy that reinvests only 30% of the capital expenditure into venue decided by a foreign contractor. You're welcome to assume that the company will 'do the right thing' and invest the money so as to help the domestic industry grow.

No I am not assuming anything. That is entirely your prerogative. I rarely assume and when I do I list them.

Meanwhile something you might want after you are done with assumptions (just maybe)

http://www.business-standard.com/india/ ... ne/333350/

At present, under the Defence Offset Policy, a single-window-clearance agency called the Defence Offset Facilitation Agency (DOFA) assists potential vendors in interacting with the Indian defence industry for identifying potential offset products and projects.

Its one thing to assist foreign companies in interactions and another thing to ensure the money is put to the most productive use for the domestic industry. You're yet explain or even better list how the latter is put into practice.

http://www.india-defence.com/reports/2262
India's newly introduced defence offsets policy is likely to bring in $10 billion during the 11th five-year plan period (2007-11), Defence Secretary Shekhar Dutt said Thursday.

Wonderful. Atleast we're retaining some of the money in the country.

It is unfortaunate, that you and somnath can do nothing (no data no examples no case studies) to prove your point other than chant that above mantra.

Somnath has posted them at the bottom of the last page. But, while we're on the topic, how about you post any data/report that suggests opening up the defence sector would kill the domestic industry.

Unfortunately, the 100% FDI is neither liberalization nor privatization. It is buying a 100% foreign made product, period.

Foreign made product is what we're buying right now unless a govt. PSU is license building it. Allowing a controlling share in venture will provide foreign companies an incentive to start manufacturing in the country. And that's something that the 30% offset policy doesn't achieve.

Unfortunately for you guys claiming to be for private industry this is what the CII thinks, so that wraps it up for about Indian industry I think
http://www.ciidefence.com/pressreleases_015.asp?id=3

Offset Policy will leverage India’s buying power to upgrade technology, improve infrastructure and make it part of the global defence supply chain

http://www.thefreelibrary.com/Defence+o ... 0215824968

New Delhi, Jan 5 (ANI): The Confederation of Indian Industry The Confederation of Indian Industry (CII) is a non-government, not-for-profit, industry-led and industry-managed organisation, playing a proactive role in India’s development process. has found that the major stakeholders in defence procurement place a lot of importance on offsets, the latter viewed increasingly as an important means of increasing the production of defence equipment in India. in a recent survey conducted by the CII, the key findings included the fact that with India as one of the largest importers of defence-related products, offsets would leverage purchasing power Purchasing Power

For the umpteenth time, nobody's asking for the offset policy to be scrapped. This isn't a either or case.

[tejas]

Hello, Marten. Believe it or not I was about to say whom but there are many here (in the U.S) who say that whom is essentially is a word that no longer need be used ( I am a stickler for grammar).

My reference to software need not be taken so literally. I agree defense is a highly capital intensive business. Let me put it this way. How many gov't. run chip manufacturers are out there topping the likes of Intel or AMD? I can't think of a single one.

I don't think there has to be 100% FDI in defense for the Indian MIC to markedly improve but I think the current 26% is absurdly low and will not attract what we need. 49% foreign ownership should be sufficient to entice the tech. transfers we need. However this has to be in partnership with private Indian companies. The DPSUs must be euthanised.

Cheers

[Surya]

Sanku

some of the points made in the links you give are

1. less inclination to share the tech vs a JV (but there is nothing on horizon where we see that happening )
2. it will be do away with the offsets (as of now nothing meaningful has been seen in that area also)
3. offsets will lead to improvement in manufacturing capabilities and investment across several functional areas (but the 100 % owned venture will need to set the same manufacturing capabilties -it may be more but it cannot be less)

Plus it raises the skill base and the whole eco system yada yada which others talk about

now regarding who it supplies, what happens to PSUs etc - well I have my views

someone like IAI pretty much rules out any of the folks except maybe the chinese and I doubt the chinese would have their supplies from a plant in India. Right now they are pretty much exporting to whoever they want from where they are so again do not see the net diff

Now maybe some initiatives by PSUs might die but flip side employees of the venture may move to start some ventures of their own.

Agreed its unpredictable but presently none of the other alternatives have gone too far and its worth trying this out in select areas

[Neshant]

Apologies for this, but: Who is importing from whom?

IMO the R&D should be removed from the hands of government PSUs and put into the hands of private sector Indian owned companies. They are better able to spin off anything they develop for the govt into other marketable products. This is perhaps the most important thing next to being able to successfully develop what's asked for.

The transfer of technology thing is a scam as its not possible to download the brains of foreign scientists and engineers where the real IP lies. All else is but screw driver technology that's handed over where nothing is learnt except.

One is better off buying the equipment/invention/patent from overseas outright than doing billion dollar defence deals just to learn how something is done. What's worse is once its done, it sits with the public sector rotting away as they have no incentive nor means to parley that into other marketable products.

[somnath]

Where/how did you get the 2% figure for HAL? It is paying more than 3% of its sales as dividend on net profit margin of 16.7%?

What's the need for calculating "value add" when HAL itself provides that data for the company and also as per employee in its quarterly finance reports?

Well, HAL's numbers are inflated by the "Other Income" - in fact almost all their EBITDA (Earnings Before Interest Tax, Depreciaion and Amortisation - for the uninitiated) is just Other Income...And if you see the notes to the accounts, the Other income is primarily interest on Fixed deposits and asset sales..

the key parameter that people (analysts, econimists etc) therefore look for is "operating" margins..Because that is what gives the "efficiency" of the company..And that for HAL, taking their "operating" EBITDA-to-Sales ratio, is less than 2%..You do need to look a little beyond the headlines

For companies like HAL, this does not just reflect the efficiency of operations, it also reflects how much "value add" its doing on the products its assembling - at 2%, its not adding too much, is it?That is because all the "value" is going to the foreign OEM from which we are importing the key materials, raw and finished...

Therefore the analysis is not just about the "financial efficiency" of HAL - which should BTW anyways be judged - but importantly its about how much value is being added in India by the license manufacturing process..shows the extent of "expertise" that license production has generated after 40 years..

Those who think that ToT and control are "independent" issues should simply read the two documents I posted above..There are very strong empirical evidence of ITT (international tech transfer) being driven by FDI..The reason? A third of global trade now happens "intra firm" - like Hyundai Europe buying from Hyundai India - hence global firms transfer tech to the "best" location where they have "control"....Unfortunately, a lack of reading and comprehension aptitude cannot be rectified in a blog, but there is enough data and analyses in the two papers...Linking them again..

http://www.atpsnet.org/pubs/specialpaper/SPS%2016.pdf

http://econweb.tamu.edu/aglass/DevHandbook.pdf

Of course the quality of tech diffusion depends on a host of other factors as well, primarily, the capacity of the recepient country to absorb the technology and so on...Fortunately in India, we are blessed with the smartest set of people around, and some really high quality higher education institutions...Plus, there is no longer any dearth of capital and entrepreneurship..All of this together makes India one of the most "FDI propitious" countries...

And making a point once more - the question is NOT what CII, or Indian industry thinks is good..What is good for CII is NOT necessarily good for India...(the jokers in CII started the Bombay Club in the '90s, remember?)..These guys would actually want a restricted FDI (minority stake) initially - as that would force the international OEM to get into JVs with them in case they wanted to set up facilities in India...When these JVs attain critical size, the same jokers from CII will lobby for a higher FDI in order to sell-off their stakes to the same foreigners at high(er) valuation...(exactly the same story as telecom, or media, or a plethora of other sectors played out) In the meantime however, the JVs set up (with minority foreign OEM stake) will be nothing but either "HAL-clone" license manufacturing entities, or producers of relatively non-critical tech..So when BAE systems now does a 26% JV with M&M, it only means that the quality of tech transfer will be concomitantly lesser than in a "majority control" JV..

As Ajai Shukla's report on offset data (which I posted somehwere above) shows, there is a big pickup in offset contracts, but almost nothing has gone into "critical" ares like R&D - precisely for this reason..there is enough "dollar value" in non-critical items in defence, but really with our size there is not point working only at creating more efficient versions of HAL or making nuts and bolts..

For most businessmen (not all though), whether India develops the cutting edge miltech eco-system or a more efficient version of HAL, it really doesnt matter - but it matters for India...


Added later: For all those who fear "decimation" of domestic effort due to FDI, some evidence to chew upon..In the last 20 years, the only major industry to have been completely rid of domestic players is the Cola industry!!!In every other sector - autos, telecoms, IT, electronics - Indian companies have prospered and thrived with foreign competition, even as the older fuddy duddies have disappeared (the Walchandnagars, the Modis, the BPLs)...

[somnath]

someone like IAI pretty much rules out any of the folks except maybe the chinese and I doubt the chinese would have their supplies from a plant in India. Right now they are pretty much exporting to whoever they want from where they are so again do not see the net

Well, ownership and regulation are independent issues - nothing prevents us from mandating that a particular plant, or even the whole industry, will NOT export anything...It wont be a show stopper anyways as the investments are happening primarily because of India's domestic demand..We have such a system for a string of industries anyways...In fact we are supposed to be very very good in our nuclear export controls (part of the case built up in our favour at the NSG during the nuke deal)...Arms export controls work similarly..

[Sanku]

Sanku, other than deriding others ( particularly Somnath) do you have any idea or opinion on reforming the current broken down system? Or is unending and unrequested sarcasm your only offering.

I have an idea? Well yes, and I have written a lot on the preceding pages for that, as well as posted links which discuss that in the CII and other such forums, far more than my solutions.

Unfortunately for that people will have to read and stop making inane statements.

If a specific point is posted it can be discussed, what can not be discussed is

"IF X were to happen Y will certainly happen and therefore Z would". Fine and martians will land and get rid of all ants by eating them.

Frankly deriding Somnath's views is from my PoV being charitable, If was to frankly right what I think of that, I would get be banned from the forum.

[Sanku]

Its one thing to assist foreign companies in interactions and another thing to ensure the money is put to the most productive use for the domestic industry. You're yet explain or even better list how the latter is put into practice.

Wow, so the offset has to be judged by "is it perfect" and 100% FDI by, "whats wrong with it"


No one is saying that the system is "perfect", but since 2005, the offset policy is being continuously refined by a public private enterprise, with updates in 2006, 2008 and 2010. SO CLEALY the govt has a plan and trying to implement it.

But no, people want that 60 years of systematic neglect be replaced by another 60 years of neglect, since they cant be bothered to actually understand or educate themselves on what GoI is REALLY doing TODAY.

[qoute]
Somnath has posted them at the bottom of the last page. But, while we're on the topic, how about you post any data/report that suggests opening up the defence sector would kill the domestic industry.
[/quote]

Somnath has posted some BS without any Indian example. Next he will post data of water on moon in a IWT discussion since they are all about water.

Foreign made product is what we're buying right now unless a govt. PSU is license building it.

Accha, since I am any way doing this, let me introduce you to two new words in the dictionary?
1) Design
2) Develoment?

Allowing a controlling share in venture will provide foreign companies an incentive to start manufacturing in the country. And that's something that the 30% offset policy doesn't achieve.

Uh if a PSU is manufacturing it (which it is irrespective of your shocking ignorance) where does the manufacture get in the picture?

For the umpteenth time, nobody's asking for the offset policy to be scrapped. This isn't a either or case.

Yes it is, the moment you all 100% FDI, offset dies. Period. It is like importing fully made and manufactured products from outside, something which is WORSE than current.

The offset policy is to
1) Broad base the Def manufacturing outside DPSUs in India to private player, i.e. a larger manufacturing base.
2) Keep the money in India
3) Force ToT since manufacturing tech would have to be transferred to Indians pvt players.

Currently the Manufacturing ToT that DSPUs have are IP protected and cant be given to Private players, offset is trying to change that legally (since we are not China)