Strategies for MNCs to win in the Indian aerospace & defence sector

India is one of the top 10 defence spenders in the world and is dependent on foreign countries for over 70% of its defence platforms / content (Image: Gireesh GV)

The Indian aerospace and defence (A&D) sector has come of age over the last many decades – from complete dependence on platform imports, to the key role played by Defence Public Sector Units. Now, the sector is moving towards the credible inclusion of the Indian private sector companies as partners for A&D manufacturing. While the story of this shift from a very “transactional” approach to defence procurement to “strategic partnerships” will unfold in the coming months, let’s take a look to see what it means for A&D Multi-National Companies (MNCs), (some of which have been active in India for 50-60 years in various capacities) while others aspire to get a foot in the door, given the market opportunity.

India is one of the top 10 defence spenders in the world and is dependent on foreign countries for over 70 percent of its defence platforms / content. This includes most of the critical technology the country uses. Therefore, the asset deficit and demand-supply gap in Indian A&D sector is huge. Coupled with that, the delay in procurement means further compromises in India’s buying capacity due to the depreciating rupee and global inflation. While the government has taken steps:

• To improve ease of doing business
• To move fast on key programmes to bridge the asset gap that exists with the forces
• To drive at least 40-60 percent local content in the procured platforms as per the latest Defence Procurement Policy

Credible steps need to be taken to enhance the industrial capability and train talent to take up specialised jobs in the A&D sector.

While this is good news for MNCs (who have been complaining about the slow movement in defence procurement and the twisted process), this also means that even established companies will need to shift their India strategy to continue to have the right to play in the A&D sector here. The key drivers necessitating this and their implications:

• Globally defence budgets are drying up- Companies need to rely more on countries like India to sustain growth - As not many new platforms are coming up globally due to declining budgets, engineering R&D work of Tier-1 companies (like GE / Rolls-Royce) to improve efficiency in current platforms, is coming to India in a captive or outsourced model
  - Pressure is on OEMs, and Tier-1 players (who tend to contribute over 20 percent of the content of certain OEMs) to outsource to low cost destinations like India to stay competitive globally. India fares better than EU (countries like Poland) or the Americas (countries like Mexico), given the existing industrial base and quantum of trained workforce in India. Additionally,  manufacturing in India improves the probability of success in Indian programmes from a locally designed / manufactured content standpoint
  • Companies are not geared up to address their obligations in India
    - Many companies like Boeing, Lockheed Martin, IAI, etc, have huge offset obligations pending. They were required to plough back 30 percent of the contract value into India, but have been unable to do so credibly and at scale
    - Beyond partnering with some large companies, and some global sourcing arrangements on aerostructures front, not much traction has been gained on the industrial cooperation front, which may have helped MNCs to demonstrate local content in platforms, and in which case offsets would have been a byproduct and not a primary issue

This brings us to the key question – how can A&D MNCs be successful in India given this context? While any MNC which keeps indigenisation core to its India strategy and takes policy as an input and enabler stands to have higher success probability, some ideas come to mind:

• Find a platform which helps align geopolitical incentives – e.g. US-India incentives are well aligned to counter growing Chinese influence in the Indian Ocean Region
• Move away from “export”-oriented thinking to “regionalise”, or better still – attempt to “originate” from India as may be reflected in the operating model
• Forge credible partnerships which are beyond addressing a single programme in future with a fraction of success probability given the competition – pursue other go-to-market scenarios / global sourcing possibilities with focus on capability building which makes the partnership more real
• Invest in building a broader base on industrial partners of a size which allows adequate nimbleness (not too large) and investment appetite to grow (not too small) – this requires a detailed understanding of the Indian companies capabilities, as well as, thought process and aspirations of the Indian promoters
• Move beyond looking at India purely for cost arbitrage, rather leverage inherent strengths in IT and manufacturing for a more value added play like ER&D (on technology side) and Strategic Electronics (on manufacturing side) respectively
• The situation is ripe for consolidation at a base level, with over 200 SMEs having done credible work in A&D sector over the last 20-25 years, but need capital and / or technology push to grow
• Don’t view indigenous programmes as competition – seek to embed yourself in the same as a collaborator for some business, but more to be able to understand and navigate the system on other fronts
• Look at India as a test bed for / development of “emerging market strategies” – develop products / technologies more suited for the needs and budget for emerging markets, which then may not be restricted by export control regulations like ITAR
• Explore taking A&D products and technologies into adjacent applications in non-A&D sectors (e.g. auto, energy, medical, etc), by transporting multiple capabilities horizontally from global firms into India. This will allow overplaying the position in India across sectors, leading with defence applications for higher scale and margins

Implications of these suggestions may vary given the level of maturity of various MNCs in India. However with the major shifts that have been proposed in the Indian A&D sector, the game will go to the one who plays their cards right over the next three years.

-         By Anurag Garg, Director – PwC Strategy & (Aerospace & Defence Lead)

The thoughts and opinions shared here are of the author.