ET Domain Project: Defence Sector

ET Domain Project
Defence sector
Mayank Chaturvedi (PGDM-105-22) Ranjan R Rao (PGDM-105-32)
Report submitted to Prof Preeta George as apart of Business Environment course project work
ET Domain Project - Defence ___________________________________________________________________________________________________
WAR An aberration
We make war that we may live in peace Aristotle 1
Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron Dwight Eisenhower 2
Aristotle had rightly said that war was needed to ensure peace. War was, is and will forever, for time immemorial, be a conflict resolution method and violence as its primary source of inspiration. We know of course that war demolishes the field of aesthetics, but this destruction occurs not without aesthetics of its own. The war machine uses any available means at victory, raiding the icebox of art whenever it is deemed necessary.3 This war machine today is the most sophisticated and largest industry. Its mankinds poignant irony that he spends almost all his resources on developing the most modern, sophisticated and will-never-be-used weapons as aptly articulated by Eisenhower.
Aristotle (Aristotels 384 BC March 7, 322 BC) was an ancient Greek philosopher, student of Plato and teacher of Alexander the Great. He wrote many books about physics, poetry, zoology, logic, rhetoric, government, and biology. 2 Dwight David "Ike" Eisenhower (October 14, 1890 March 28, 1969) was an American soldier and politician. He served as the 34th President of the United States (19531961) as well as Supreme Commander of the Allied forces in Europe during World War II, with the rank of General of the Army. 3 Notes on War Aesthetics Joshua Schuster - http://www.litvert.com/jschuster.html ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 2 of 2
TABLE OF CONTENTS EXECUTIVE SUMMARY.......................................................................................................................5 1.1 INTRODUCTION ..............................................................................................................................7 1.2 PEST(LE) ANALYSIS FOR DEFENCE SECTOR IN INDIA .........................................................7 1.2.1 Political Perspective Where are we?.........................................................................................8 1.2.2 Economic reason ........................................................................................................................10 1.2.3 What constitutes military expenditure?......................................................................................12 1.2.4 Social Impact Defence or Development?................................................................................14 1.2.5 How does India fare Technologically in defence sector? ..........................................................18 1.2.6 DRDO Mechanism.....................................................................................................................19 1.2.7 Some Major R&D Programmes/Projects by DRDO under development..................................20 2.1 DEFENCE INDUSTRY AN ANALYSIS FOR INDIA................................................................23 2.2 ORDER GENERATION - HOW THE DEFENCE INDUSTRY WORKS IN INDIA?..................25 2.3 PRIVATE SECTOR PARTICIPATION IN DEFENCE INDUSTRY.............................................26 2.3.1 Avantel Softech Ltd. ..................................................................................................................30 2.3.2 Premier Explosives Ltd. .............................................................................................................30 2.3.4 Astra Microwave Products Ltd. .................................................................................................31 3.1 ZEN TECHNOLOGIES LTD...........................................................................................................32 3.1.1 Company Profile ........................................................................................................................32 3.1.2 Management profile ...................................................................................................................32 3.1.3 Potential Market for Simulators.................................................................................................33 3.1.4 New Products prospects .............................................................................................................34 3.1.5 Low competitive scenario, high entry barriers to restrict new entries .......................................35 3.1.6 High operating margins..............................................................................................................36 3.1.7 Exports market for Simulators ...................................................................................................36 4.1 SOME CONCERNS RELATED TO THE INDIAN DEFENCE INDUSTRY ...............................40 4.1.1 Lumpiness in orders ...................................................................................................................40 4.1.2 Delay in payments......................................................................................................................40 4.1.3 Considerable government regulations still exist ........................................................................40 4.1.4 Technical Snags in Indias defence progress .............................................................................40
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TABLE OF CONTENTS (cont'd) 5.1 GLOBAL DEFENCE INDUSTRY ..................................................................................................41 5.2. KEY FACTS TO BE REMEMBERED (SEGMENTATION OF INDUSTRY) ...........................41 5.2.1 Non-conventional weapons........................................................................................................41 5.2.2 Aerospace systems .....................................................................................................................41 5.2.3 Naval systems ............................................................................................................................42 5.2.4 Land-based weapons ..................................................................................................................42 5.3 WORLD MILITARY SPENDING...................................................................................................42 5.3.1 Breaking down worldwide numbers ..........................................................................................43 5.3.2 As world trade globalizes, so does the trade in arms .................................................................44 5.4 U.S. MILITARY SPENDING ..........................................................................................................46 5.4.1 U.S. Military Spending Versus Rest of the World.....................................................................46 5.5 RISE OF EUROPES DEFENCE INDUSTRY................................................................................47 5.5.1 The Shift to European Collaboration .........................................................................................48 5.5.2 Why has this shift occurred?......................................................................................................49 5.5.3 Implications for the United States..............................................................................................49 5.6 CAN INDIAN DEFENCE INDUSTRY COMPETE GLOBALLY?...............................................50 ANNEXURE I ........................................................................................................................................52 ANNEXURE II .......................................................................................................................................57 APPENDIX A [ Brief Description about Defense Public sector Undertakings ] ..................................58 APPENDIX B [ Brief Description about Major Global Defence firms ] ..............................................66 REFERENCES........................................................................................................................................73
EXECUTIVE SUMMARY
Post 9/11 concerns regarding the challenges posed by terrorism and the proliferation of weapons of mass destruction remains central to the international security agenda. Apart from the external threats and challenges, India face strong internal threats from communal conflicts, left-wing radicalism and movements from extremists desiring to overthrow the socioeconomic order. Hence, India has to spend significant amount of their budget on defence expenditure.
The defence component of Rs 109,195.10 crores (4.05% of the GDP) forms 21.2% of the union expenditure. However, excessive military expenditure adversely affects economic performance by 'crowding out' other uses of scarce resources, such as social/developmental spending. India has been investing heavily on R&D activities and this high-end technology oriented and fast growing defence industry. Emphasis is being laid on formulation and execution of programs on design and development of weapon systems and equipments. This is evident from the fact that R&D expenditure increased by 118.4% year on year in 2004-05.
The role of the private sector in defence was typically, that of supplying raw materials, semi-finished products and components for systems and equipments. Design, integration and production of the product were considered the forte of defence labs and DPSUs. Although, the participation of the private sector grew over-the-years, yet 70% of the defence capital budget continues to be spent on imports. The Government intention of reducing the import content in defence by 30% may be optimistic but not non-achievable but a realistic target of a 10% reduction in import content too, will result in considerable progress for the sector and savings in valuable foreign exchange. However with high entry barriers for the sector, the main beneficiaries of the Governments decision to indigenize and privatize will be DPSUs and private sector companies, who have already established themselves
The trend shown by the Indian defence industry is not just an aberration; the international defence industry is also growing at an alarming pace. The worlds countries on national defence now spend over a trillion dollars each year, with the U.S. defense budget alone constituting roughly 45% of that figure. Although US is the largest producer of defence equipments, European Unions major military powers are increasingly collaborating to build a more integrated and technologically advanced defense industry. Americas globally dominant defense industry provides a strong rationale for European collaboration to compete globally and avoid dependence on the United States. European states are steadily making a globally-competitive defense industry a reality.
At present, the Indian defense industry produces systems based largely on Soviet-era designs. This puts it in competition with countries like Russia, Ukraine and Belarus. However, these countries, and particularly Russia, have an edge because their ammunition factories have underwent a higher degree of modernization in the postSoviet period. While the conversion process would no doubt be difficult, India does have a significant advantage in labor costs. It could therefore offer similar products at a fraction of the price. Hence, It is not at all inconceivable that, five to ten years from now, Indian arms exports could be an order of magnitude higher than today.
1.1 INTRODUCTION India is connected by land to west, central, continental, and south-east Asia, and by sea, to the littoral states of the Indian Ocean from East Africa to the Indonesian archipelago and is strategically located vis--vis both continental Asia as well as the Indian Ocean Region. The country has a land frontier of 15,200 km, a coastline of 7,516.6 km and an exclusive economic zone of 2.2 million sq. km, island territories, vital offshore installations and airspace. It has a landmass of 3.3 million square kms and is home to over a billion people with varying ethnic, linguistic, religious and cultural backgrounds. For ages India suffered aggression from land and sea and survived to what today is the most diverse and diacritical nation among the 200 odd countries.
India believes in a defence policy that promotes peace and international cooperation. The armed forces, therefore, have to be kept prepared and well equipped to repel any external threat from the repeat the history of aggression. The country's armed forces are well trained, disciplined and free from politics. The accent in defence planning is on increasing indigenous capacity and a reliable mechanism of inter-services, interdepartmental and multi-level coordination and monitoring has been devised to help defence planning. The current strategic and technological scenarios as well as future projections are taken into consideration in preparing the defence plan. Periodic review addresses any unexpected development or threat to security.
1.2 PEST(LE) ANALYSIS FOR DEFENCE SECTOR IN INDIA
1.2.1 Political Perspective Where are we?
The post Cold War, post 9/11 concerns regarding the challenges posed by terrorism and the proliferation of weapons of mass destruction remained central to the international security agenda and at the bottom of Indias primary and most general security concerns. The US retained its position as the pre-eminent world power though the nascent challenge posed by a fast growing and modernizing China was too strong to be ignored. The European Union continued its process of enlargement and consolidation. By the end of the year, there were also signs that new strategic alignments, and a growing appreciation of Indias economic growth and potential, military experience and success as a democracy had induced major powers to begin to redefine their relations with India and opened fresh prospects for India.
Indias immediate security concerns remained basically the same though tempered by positive developments with its two largest neighbours. Internal instability, authoritarian and/or military rule, extremist political or religious movements, weak state structures, and insurgencies and internal or ethnic conflicts continued to characterize many of the countries of the region. Despite the operations against the Al Qaeda4 and Taliban5 elements on the Pakistan-Afghanistan border, the principal threats to peace and stability in the region remains the combination of fundamentalism and terrorism nurtured in madrassas6 and training camps in the area, and the danger of proliferation of weapons of mass destruction and access to them by fundamentalists and terrorists.
While the year ended on a hopeful note on India-Pakistan relations, it could not be said that there was an end to cross-border terrorism in J&K. While there was some decline in the level of infiltration, this was more on account of measures on the part of the Indian Armed Forces than any discernible change of heart, or action, by the Pakistani authorities. There was no evidence of any significant Pakistani effort to dismantle the infrastructure of terrorism, such as communications, launching pads, and training camps on its eastern borders with India comparable to Pakistans operations for the war against terrorism on its western borders with Afghanistan. The acquisition of sophisticated weapons and platforms like the F-16s fighter planes, P3C Orion maritime surveillance aircraft etc. that have nothing to do with the war against terrorism on the other hand, casts doubts on Pakistans real intention in joining the war against terrorism and could complicate prospects for
Al-Qaeda ("the foundation" or "the base") is the name given to an international Islamic fundamentalist terrorist campaign comprised of independent and collaborative cells. [http://en.wikipedia.org/wiki/Al_qaeda] 5 The Taliban, also transliterated as Taleban, is a Wahhabi Islamist and Pashtun nationalist movement, which effectively ruled most of Afghanistan from 1996 until 2001. [http://en.wikipedia.org/wiki/Taliban] 6 The word madrassa in Arabic means, "school." [http://en.wikipedia.org/wiki/Madrasa] ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 8 of 8
lasting peace in the region. India will have to guard against its implications on the balance of military power in the region.
China pursued its rapid modernization, including military modernization, while seeking peaceful relations with its neighbours in order to consolidate itself politically and economically internally and build up its Comprehensive National Strength. India and China continued to maintain peace and tranquility in their border areas and build mutual trust and confidence, including between their armed forces; and stepped up efforts to address differences on the boundary question through discussions between the Special Representatives who are tasked to explore a framework of a boundary settlement from the political perspective of the overall bilateral relationship.
The Gulf region forms part of our strategic neighborhood, an important source of energy, and home to over 3.5 million Indians. It is a major trading partner. Its stability, security and prosperity is important to India. Parts of the region, including Iraq, are affected by Islamic radicalism and terrorism. Efforts are being made by the regions governments to contain it. The elections in Iraq in January 2005 have generated hopes for peace and development and have hopefully set in motion a process that would lead to the Iraqi people taking full control of their destiny. At the regional level, India has purposefully pursued dialogue and confidence building and trust through cooperative security structures like the ASEAN7 Regional Forum (ARF) and the Conference on Interaction and Confidence-Building Measures in Asia (CICA) at Almaty, Kazakhstan in October 2004.
In addition to these external threats and challenges, India also faces internal threats from,
(i)
Insurgency inspired by ethnic and tribal identities and a desire to achieve some kind of autonomy from the Centre;
(ii)
Left-wing radicalism and extremism motivated by a dissatisfaction with the prevailing socioeconomic order which it desires to overthrow through armed revolution and guerrilla activities;
(iii) (iv)
Communal conflict, fomented by religious fundamentalism; and Caste conflicts including attacks against Scheduled Castes and Tribes. These threats posed a grave challenge to the unity and development of India as a nation-state and impinge on our national security.
The Association of Southeast Asian Nations (ASEAN) is a political, economic, and cultural organization of countries located in Southeast Asia. Formed on August 8, 1967, by Thailand, Indonesia, Malaysia, Singapore, and the Philippines, as a non-provocative display of solidarity against communist expansion in Vietnam and insurgency within their own borders. [http://en.wikipedia.org/wiki/ASEAN] ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 9 of 9
Diplomacy remains Indias chosen means of dealing with these challenges, but effective diplomacy has to be backed by credible military power. Indias strategic and security interests require a mix of land-based, maritime and air capabilities, and a minimum credible deterrent to thwart the threat of use of nuclear weapons against it. Its force postures remain defensive in orientation while its nuclear policy is characterized by a commitment to no-first-use, moratorium on nuclear testing, minimum credible nuclear deterrence, and the rejection of an arms race or concepts and postures from the Cold War era. India remains fully committed to maintaining peace with its neighbours and stability in the region through a combination of defence-preparedness, unilateral restraint, confidence building and dialogue, and expanding bilateral interactions Irrespective of the financial position of the country, it has to spend on defence and this is true in case of every country. The defence sector is marked by constant change in technology and therefore, countries need to upgrade their weapons and systems from time to time. India is no exception and incurs high defence expenditure, in spite of improved relations with its neighbors, particularly Pakistan. This is because it wants to emerge as one of the super powers in the years to come.
In spite of the all this (and irrespective of the financial position of the country), India has to spend on defence and this is true in case of every country. The defence sector is marked by constant change in technology and therefore, countries need to upgrade their weapons and systems from time to time. India is no exception and incurs high defence expenditure, in spite of improved relations with its neighbors, particularly Pakistan. This is because it wants to emerge as one of the super powers in the years to come.
1.2.2 Economic reason
The table and chart shown here represent Service/Department-wise break-up of Defence expenditure for the years 2002-2003, 2003-2004, Revised Estimates for 2004-2005 and Budget Estimates for the year 2005- 2006 and Service/ Department-wise expenditure as a percentage of total Defence expenditure.
Table 1 - Service/Department-wise break-up of Defence Expenditure

Year --> Army Air Force Navy DDP DR&D Total DGOF DGQF Total 2002-03 32127.78 12385.26 8155.32 (-)388.89 374.25 -14.64 3008.11 55661.83 2003-04 33199.98 13187.02 10109.35 (-)210.58 336.85 126.27 3443.18 60065.80 R.E. 2004-05 35888.52 23783.82 13327.50 (-)158.78 411.82 253.04 3747.12 77000.00 R.E. 2005-06 40288.32 21808.76 15253.00 (-)127.94 421.52 293.58 5356.34 83000.00
Department-wise Expenditure as a Percentage of Total Defence Expenditure 2005-06 (BE)

18.38% 0.35% 26.28% DDP Air Force DDR&D Army Navy
6.45% 48.54%
Source: Ministry of Defence Annual Report 2004-05
As is the case, not only has the total spend on defence been rising, but also the amount allocated towards capital expenditure. The capital expenditure on defence increased by 98% year on year to Rs. 334 billion in 2004-05. Although, a large portion of the capital expenditure will go towards procurement through imports, it will still mean adequate sourcing requirements through domestic players. The rising capital expenditure displays the emphasis laid on upgradation and on attaining self-sufficiency. Capital expenditure as a part of the total defence expenditure has been rising over the years. It increased from 26.8% in 2002-03 to 28.1% in 2003-04 to 43.5% in 2004-05. This will translate into substantial order flows for companies catering to defence requirements.
See Annexure I for list of Indias latest defence procurements initiatives/plans
1.2.3 What constitutes military expenditure? Governments tend to split total expenditure under different heads to show lower costs. The Eleventh Finance Commission laid a limit of 3% of the GDP towards the aggregate cost of defence. This limit has been crossed by a full percentage point if we include defence related costs, which currently do not form part of the defence budget. The SIPRI definition8 of military expenditure has been widely accepted including USA, NATO and the European Union. Another aspect of military expenditure not spelt out in the SIPRI definition above, is the cost of strategic or nuclear forces since they form part of the armed forces. All major nuclear powers including China have accepted this as a defence cost. The International Institute of Strategic Studies, London (IISS) also subscribes to the view that nuclear expenditure is a defence cost.
India excludes the cost of defence pensions, para-military forces and the defence ministry from budgeted defence expenditure. Should these costs form part of aggregate defence expenditure (DE) even if paid from other heads? India has excluded Defence pensions from DE since 1985. Defence pensions alone (nearly Rs. 12,500 crores) would hike the cost of defence by 15%. Also, nuclear deterrence and border management in war and peace are vital aspects of national security, but are not reflected in the Indian defence budget.
The Stockholm International Peace Research Institute (SIPRI, www.sipri.org) defines military expenditure to include all current and capital expenditure on the armed forces, including peace keeping forces, defence ministries and other government agencies engaged in defence projects, paramilitary forces when judged to be trained, equipped and available for military operations and military space activities. According to SIPRI, expenditures on current personnel, military and civil, retirement pensions of military personnel, social services for military personnel and their families, operations and maintenance, procurement, military research and development, military construction, military aid (in the expenditures of the donor country), must all be categorized as defence expenditure. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 12 of 12
The non-plan portion of the Expenditure Budget reveals details of security related expenditure that is excluded from the defence budget. Taking those costs into account, the total cost of defence is summarized in the Table below.
Table Indias Defence expenditures (Rupees in Crores) Amount 1. Defence Budget 2005-06 2. Defence Pensions 3. Para-Military forces (in part) (BSF, CRPF, Assam Rifles, ITBP) 4. Defence Ministry 5. Misc. Non-plan capital expenditure (Coast guard, Border Fencing, Accommodation for Para-military) 6. Nuclear defence (excluded from DE, *Estimate) 7. Debt servicing, defence component of rupee debt payable to Russia, *Estimate Total Excluded from DE (items 2 to 7) Grand Total 83,000 12,452 7,500 623 2,120 2,000 1,500 26,195 109,195 4.05% of GDP
Source: Statistical Outline of India 2004-05, Tata Services The total defence expenditure thus amounts to Rs 109,195 crores, the single largest head next to interest payments, Rs 133,945 crores. The total amount not included in the official DE is Rs 26,195.10 crores. This amounts to 31.5% of the budgeted DE.
The entire expenditure of the union government for 2005-06 amounts to Rs 514,344 crores (19.10% of the GDP). The defence component of Rs 109,195.10 crores (4.05% of the GDP), forming 21.2% of this expenditure. The total outlay for the Central Plan (development), which includes central support for state, plans (development) amounts to Rs 143,497 crores (5.33% of the GDP). Aggregate defence expenditure thus forms 76.1% of developmental expenditure. This is a more relevant figure than merely representing defence expenditure as a percentage of the GDP. (The official defence expenditure of Rs 83,000 crores is just over 3% of GDP.)
SIPRI points out that DE should be assessed in purchasing power parity (PPP) values and not market exchange rates (MERs). The international comparisons of military expenditure made by use of MERs tend to understate the purchasing power of the military budgets of developing countries and countries in transition. PPP converted military expenditure figures are the more relevant indicator because they measure the civilian resources foregone by allocating government expenditure to the military sector.
Using MER to count defence spending, India stands at number 11 in the world, just ahead of Russia and behind South Korea. But using PPP and the total cost of defence for 2005-6, India has joined the hundred billion club at $120 billion next only to the US at $450 billion and approaching China at $150 billion. Russia is a poor fourth at $65 billion followed by France at $40 billion and the UK at $35 billion.
Even the Central Government's Rs 83,000 crores level of defence expenditure results in just over a hundred billion dollars in PPP terms. SIPRI says that the higher ranking for China and India "indicates that the amount of non military purchases foregone is greater than MER-converted military expenditure data suggest."
A secure environment is vital for economic and human development. But it is also essential for civil society to get a view of the total costs of defence expenditure, not merely the numbers that the central government is tabulating under current budgetary practices. More accurate figures for the totals costs must inform the debate on the proportions of military expenditure and development spending in our country
1.2.4 Social Impact Defence or Development? Any defence analysis focuses on defence expenditure as reflected in the spending-GDP ratio. This, however, is not the best measure by which to assess the burden of the defence sector on the economy. Since military expenditure is incurred entirely by the government and as governments in developing countries also have to carry out important functions in the social sector, what do matter ultimately are the demands the defence sector places on the resources of governments.
India ranks 11th in the 2002 list of major spenders on defence, spending US $12.9 billion, ahead of Russia at $11.4 billion. India's world ranking in the United Nations Development Program's Human Development Index 9 (HDI) is 124 out of 174. Clearly, military prowess isn't helping the poorest people in the country advance very much economically. Development experts have argued repeatedly that some of the funding now 'wasted' on militarization should instead be spent on development, but the other side has argued that security is a legitimate concern too, and spending on that cannot be scaled back.
The UN Human Development Index (HDI) is a comparative measure of poverty, literacy, education, life expectancy, childbirth, and other factors for countries worldwide. It is a standard means of measuring well-being, especially child welfare. The index was developed in 1990 by the Pakistani economist Mahbub ul Haq, and has been used since 1993 by the United Nations Development Programme in its annual report. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 14 of 14
Can expenditure on defence be evaluated in relation to the expenditure on development, with a view to evolving a model, which can indicate threshold levels for both? If we can do that, planners can use the levels as a guideline to improve the human condition, while at the same time assuring the necessary level of security. The aim of military spending should be to improve the strategic and security environment for the benefit of the citizen and the state, and is therefore not contrary to the aim of social spending.
There are several methods of classifying military expenditure. The standard method is to express the total annual expenditure as a percentage of the GDP for that year. But this isn't always helpful; India spends four times as much as Pakistan on a force level, which is 70% higher and yet in GDP terms, is spending much lesser. Another method is to express expenses as a percentage of government expenditure. This hides more than it reveals, simply because a lot of government expenditure in the third world is on debt servicing. In the case of India, Defence expenditure forms 14% of government Expressing defence spending as a percentage of government expenditure can be misleading. India spends 14% of its budget on defence, but if we exclude the compulsory parts (paying off debts), then 44% of the discretionary spending is on defence.
expenditure but rises to 44% if debt servicing is excluded. Another method used is per-capita cost based on
population levels. Larger countries like India would show much lower and unreal expenditure in this method. What is needed is a classification of military expenditure based on force levels, which are in turn based on threat perceptions.
Now let us define developmental expenditure. When poverty alleviation is a priority, it would be relevant to include any expenditure, which will improve the Human Development Index (as defined by the UNDP10) as expenditure on development. The three major components of the HDI are life expectancy, literacy and income, each of which is measured by several parameters. Therefore, the following could be included. Health and family welfare, Education, Rural and Urban Development, Housing, Water supply, Sanitation, Social justice and Agriculture. Though subsidies may be counterproductive economically, these have been included as they benefit lower income groups. What is not included is Industry, Power, Roads, Railways and other infrastructure like telecommunications. While these are developmental in nature, they also generate revenue for the state.
The United Nations Development Programme (UNDP) is the largest multilateral source of grant technical assistance in the world. Headquartered in New York City and the largest agency within the United Nations, this voluntarily funded organization provides expert advice, training, and limited equipment to developing countries, with increasing emphasis on assistance to the least developed countries. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 15 of 15
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Table below shows the head wise plan expenditure on development in India during 2002-2003 and the amount budgeted for 2003-2004. The consolidated State outlay for these heads has been included separately. Comparisons to defence expenditure are shown in grey colored cell.
Table - Development costs in Indian rupees (Crores) 2002-03 1. Health and Family welfare 5105 2. Education 5713 3. Rural Development 11281 4. Supply and Sanitation 2174 5. Housing and Urban Development 8079 6. Social Justice and Empowerment 2146 7. Sub Total (1-6) 34498 8. Agriculture 3219 9. Central Subsidies (Food, Fertilizer, Oil & Gas) 44618 10. Total Federal Expenditure (7+8+9) 82335 11. States expenditure on social services 120664 12. Total Developmental Expenditure (10+11) 202999 13. Total Defence (including pensions) 66882
2003-04 5964 7022 6470 2631 7577 2620 32284 3865 49907 86056 126697 212753 (+ 4.8% change) 76933 (+ 15% change)
Sources: Statistical Outline for India 2003-2004, Tata Services Limited, www.indiabudget.nic.in
The Rs.213,000 crores spent on a population of 1.05 billion translates to Rs.2,028 per citizen, to put things in per capita terms. Similarly, the Rs.77,000 crores spent on defence translates to Rs.733 per citizen. With these two figures now available, we can look at the Development-to-Defence Ratio (DDR), which tells us how much is being spent on defence vis--vis per citizen on development. The current DDR is about 2.77, approximately. That is, we spend 2.77 times as much on development as we do on defence.
Is that good? Since the great majority of the Indian people live in difficult conditions, it follows that this ratio of development-to-defence spending is too low. To understand this further, let us look at development measures for nations that are a little better developed than India. We could benchmark our DDR to the Human Development Indices of these nations - Argentina, Mexico, Brazil, and Sri Lanka - and use that as a target that can be realized over a period of time. HDI figures for these nations are shown below.
Table - Human Development index for select countries Country Argentina Mexico Brazil Sri Lanka India HDI 0.844 0.796 0.757 0.741 0.577 Rank 34 54 73 89 124
The average HDI value for these countries is 0.784, whereas 124th-ranked India is at 0.577. If we use Argentina, Mexico, Brazil and Sri Lanka as ideal (these are still poor in comparison to development standards in the rich nations, but perhaps these represent a more likely goal from India's grossly low rank), then using their HDI of 0.784 as a benchmark, we can calculate an Ideal Development-to-Defence Ratio (IdealDDR11) for India. I.e. we can ask - how should our DDR be altered, if we are to have the same HDI values as these countries? By a straightforward calculation we see that India's DDR value should be a full point higher, at 3.76, to meet this goal.
This can happen in several ways. We can simply transfer 21% of the money we now spend on defence to development instead, and this would achieve the objective immediately. Alternately, we can grow our development spending faster than defence spending, or cut back defence spending gradually. Which of these options - or other ones - we actually will or should take, is debatable. But this calculation shows that we're at least 21% out of sync, even if we set the limited objective of reaching the standards of these still-developing nations.
An important question to consider is whether expenditure for development must necessarily come from defence, or whether other sources can be tapped. India's fiscal deficit is already very high, so additional borrowing would not be a healthy option, so the money really has to come from within the existing budget through changes in allocation. Defence spending is the largest part of our discretionary expenditure, so it's the most obvious place to look. Most importantly, we have already long passed the minimum threshold level of expenditure needed for defence, but are still well short of a similar threshold for development. Budgeting for development, therefore, really is a trade-off between guns and livelihoods.
IdealDDR = DDR + DDR*(0.784 - HDI)/HDI, Calculation IdealDDR = 2.77 + 2.77 * (0.784-0.577)/0.577 = 3.76 ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 17 of 17
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All governments bear the responsibility for determining spending priorities; India's is no different. This sort of calculation allows us to judge our governments' commitment to developing India, by looking at the resources they actually allocate for various areas. In 2003, India slipped further to 127 in the Human Development Index, at a time when the economy grew in great strides.
There is this much evidence elsewhere also that military expenditure adversely affects economic performance by 'crowding out' other uses of scarce resources, such as social/developmental spending. In India, recent increases in military expenditure are bound to affect prospects for a much-needed expansion of public expenditure on health, education, social security and related matters. Indeed, given that the bulk of money is pre-committed in the form of public sector salaries and interest payments, mobilizing additional resources for the social sectors is a major challenge. Restraining military expenditure is among the few available options (others include wasteful subsidies and expanding the tax base), and in that sense the trade-off between military and social expenditure is quite sharp. This is what economists refer to as the 'Guns versus Butter' argument the choice is between more arms and more butter. More of one means less for the other.
1.2.5 How does India fare Technologically in defence sector? India has been investing heavily on R&D activities and this high-end technology oriented and fast growing defence industry. In this regard, Defence Research and Development Organisation (DRDO) was set up in 1958 by amalgamating the then existing Technical Development Establishments (TDEs) of the Indian Army and the Directorate of Technical Development and Production (DTDP) with the Defence Science Organisation (DSO). The activities of DRDO laboratories encompass R&D in high technology disciplines like aeronautics, armaments, electronics, combat vehicles, engineering systems, instrumentation, missiles, advanced computation and simulation, special materials, naval systems and life sciences. DRDO is dedicated to the formulation and execution of programmes on design & development of the state-of-the-art weapon systems and equipment for the Armed forces.
Apart from the purchasing of modern technological warheads, a large portion through imports though, India has constituted Defence Technology Council (DTC) under the Chairmanship of the Defence Minister to provide guidance and supervision of growth and promotion of research, development and production related to Defence Technologies. DTC will assist the Defence Acquisition Council in taking holistic decisions on specific Defence Projects related to long-term perspective plans and five-year plans.
The fall of Russia and its military infrastructure created lot of problems for procuring the spares and other components for already purchased weapons systems. And with a view to reduce imports of equipment and system and attain self-sufficiency in defence requirements, the Indian Government is looking to indigenize its defence requirements and encourage participation from private sector companies.
1.2.6 DRDO Mechanism In order to harness the best available resources in terms of talent, expertise and resources, DRDO interacts with defence public sector undertakings, academic institutions, research laboratories and private entrepreneurs, to execute its projects and programmes. The concurrent engineering approach is followed in technology intensive projects to reduce the time lag between development and productionisation of weapon systems & platforms.
DRDO monitors and reviews programmes and projects on a regular basis through an institutionalised mechanism. There is an in-house apex level body called DRDO Research Council; chaired by Scientific Adviser to Defence Minister, to review progress of major projects of all the laboratories once a year. In addition, a high level committee also carries out corporate reviews covering technomanagerial aspects. The Vice Chief of Army Staff reviews the staff projects for Army, twice a year. For all major The Organisation has made great strides since 1980 towards making our Armed Forces self-reliant. On the one hand this has enabled our Armed Forces to face the arms export control regimes of advanced countries, whereas on the other hand, DRDO has progressively enhanced their combat effectiveness through development of state-of-the-art indigenous defence systems. During last few years, a number of defence systems and equipment has been productionised. (See Annexure II for the complete list)
programmes/projects,
there are multi-tier
programme management boards; having representation from the Services, DRDO laboratories and in some cases, from academic institutions and other national research laboratories. These Programme Management Boards periodically monitor and review the programmes and give mid-course corrective directions.
Emphasis is being laid on formulation and execution of programs on design and development of weapon systems and equipments. This is evident from the fact that R&D expenditure increased by 118.4% year on year in 2004-05 and is expected to increase by 53.3% year on year as per budget estimates for 2005-06 (See Chart below). A host of programs in different areas for the army, navy, and air force are in progress and will pay off in coming years.
1.2.7 Some Major R&D Programmes/Projects by DRDO under development Apart from having completed various projects DRDO has currently on had several projects in the pipeline. The major ones are listed below:
The Limited Series Production (LSP) of Pilot less Target Aircraft (PTA) Lakshya, a reusable aerial target system, remotely operated from ground to provide training to gun and missile crew and to air defence pilots is in progress for all the three Services.
Remotely Piloted Vehicle (RPV) Nishant, has completed 84 development flights. Army has decided to induct Nishant through LSP. These development flights include two shake down sorties and 12 user trial flights in realistic operational conditions at Pokhran.
More than five development flight trials of Surface-to-Air missile system (SAM) - Akash have been undertaken in close participation of the Indian Army and Air force. Consistent performance of propulsion, control & guidance system was demonstrated against simulated targets.
Two technology demonstrators (TD) and two prototype vehicles (PV) of the Light Combat Aircraft (LCA) Tejas are undergoing testing. These aircraft have flown 150 sorties completing 90 hours of testing including supersonic flights.
Kaveri engine (to be used in LCA later models) has undergone development test of more than 1200 hours. K5 engine of Kaveri has successfully completed phase I & II of high altitude testing at M/s CIAM, Russia. The spin-off project ''Kaveri Marinisation has been taken up and detailed design of the sub-systems has been completed. Fabrication and manufacturing works are under progress.
Development and field trials of communication segment of Samyukta (an Integrated EW Programme for Army) have been completed and production orders placed. For the non-communication segment, entity level trials are under progress. Control Centre block-I entities numbering 26 has been presented to the Chief of Army Staff by the President of India on 19th January 2004.
Development of Sangraha (an indigenous EW Programme for Navy) has been completed and various EW Systems developed under this programme are at different stages of production and induction.
The capabilities of third generation anti-tank guided missile Nag with Fire & Forget and Top Attack during Day & Night were established through three consecutive flight tests with Imaging Infra Red (IIR) Seeker in which direct hits were scored on targets. The reconfigured Nag Missile Carrier Namica MK-II was successfully field tested in desert terrain during this summer.
A single frequency Under Water Telephone (UWT) developed by National Physical & Oceanographic Laboratory (NPOL) and M/s Keltron12 has been converted to a dual frequency version for communication with both NATO & Russian standard platforms. Subsequent to the successful trials, the new version is being supplied by Keltron to Navy.
KELTRON is one of the few companies in India based in Trivandrum, Kerala, which manufactures a wide range of electronic products starting from discrete components to sub assemblies to defence equipment and systems. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 21 of 21
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BrahMos 13, a supersonic cruise missile having a range of up to 290 kms and has gone through several successful developmental and operational tests. During recent tests flights were conducted in various modes, meeting all the mission requirements. The ship-launched and land-based missiles have a 200 kg warhead, while the aircraftlaunched variant has a 300 kg one. It has a two-stage propulsion system, with a solid-propellant rocket for initial acceleration and a liquid-fuelled ramjet responsible for sustained supersonic cruise. Air-breathing ramjet propulsion is much more fuel-efficient than rocket propulsion, giving the BrahMos a longer range than a pure rocketpowered missile would achieve.
BrahMos mounted on TEL vehicle
Naval Science & Technological Laboratory has developed Advance Experimental Torpedo (AET), which is a lightweight, anti-submarine torpedo launched from ships and helicopters. AET will enter bulk production phase soon.
The BrahMos is a supersonic cruise missile that can be launched from submarines, ships, aircraft or land. Based on the Russian Yakhont missile, BrahMos is currently one of the few supersonic cruise missiles in the world. The missile is under development as a joint venture between the Defence Research & Development Organization (DRDO) from India and the Federal State Unitary Enterprise NPO Mashinostroyenia (NPOM) (Russia) under BrahMos Aerospace. The missile gets its name from two great rivers: Brahmaputra and Moskva. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 22 of 22
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2.1 DEFENCE INDUSTRY AN ANALYSIS FOR INDIA Analyzing the defence industry is very different from analyzing any other sector or domain. Most of the economic concepts take a back seat because of various reasons - geo-political and security reasons amongst the foremost. A thorough understanding of the way a countrys political structure and its bureaucratic work-mechanism are pertinent to gain the requisite leverage in an industry dominated by high technology, government protocols, secrecy, middlemen and last but not the least kick-offs. India represents a large and increasing market for defense equipment. It is the 12th largest military spender in the world, with the 2nd largest army 4th largest and air force. India's defense expenditure has increased steadily over the years, and this trend is likely to continue. According to industry estimates, India imports $1.5 to $2 billion worth of military hardware annually. To reduce its dependence on foreign suppliers, India has established several defense production units.
Indian defence industry is no different. India has historically continued to procure weapon systems from abroad. However in the aftermath of the war with China (1962), the
Department of Defence Production was set up to create an indigenous defence production base which is selfreliant and self-sufficient. Indias defense industrial capacity lies in three main classes of enterprises:
i. Ordnance Factories (OF), ii. Defense Public Sector Undertakings (DPSU), and, iii. To a much lesser extent, selected civilian public and private sector manufacturing establishments. The OFs, founded in 180114, are departmentally run government units. There are 39 OFs under centralized ordnance factory board, grouped into five areas based on the type of armaments they produce: Ammunition and Explosives, Weapons, Vehicles and Equipment, Armoured Vehicles, and Ordnance Equipment. A new one is being added to the list at Nalanda. Ordinance factory sales witnessed a CAGR of 10.4% from 1997-98 to 200405. The provisional sales for 2004-05 stand at Rs. 61.5 billion and are expected to grow by 17.1% year on year in 2005-06.
Production of modern weapons and ammunition in India dates back to over 200 years when the first Ordnance Factory was set up in 1801 at Cossipore for manufacture of guns and ammunition. Prior to 1950, there were only 19 Ordnance Factories in the country. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 23 of 23
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There are eight publicly owned DPSUs. These are permitted to manufacture defence equipment, weapons and systems for the defence labs or for directly supplying to the armed forces, navy and air force.
i. Hindustan Aeronautics Limited (HAL); ii. Bharat Electronics (BEL); iii. Bharat Earth Movers (BEML); iv. Mazagon Dock Ltd (MDL); v. Garden Reach Shipbuilders and Engineers Ltd (GRSE); vi. Goa Shipyard Ltd (GSL); vii. Bharat Dynamics Ltd (BDL); and viii. Mishra Dhatu Nigam Ltd. (MIDHANI)
Both the OFs and the DPSUs are trying to move toward greater self-reliance. The government is also trying to promote greater civil sector participation in the armament process. The indigenisation of defence equipment is an ongoing process and is achieved by transfer of technology and indigenous research. Indigenisation of spares of defence equipment has been undertaken in aircraft, warships, armament, tanks, vehicles and electronic as well as engineering equipment.
(Rs in Million) DPSUs HAL BEL BEML MDL GRSE GSL BDL MIDHANI Total
Table: Performance of DPSUs 2002-03 2003-04 Production Sales Production Sales 3,478 31,204 3,756 37,998 2,536 25,080 2,808 27,986 1,740 16,812 1,692 17,658 540 5,693 496 1,910 523 1,537 487 3,908 232 3,865 201 2,969 330 2,777 522 5,248 94 915 116 1,251 9,473 87,883 10,078 98,927
2004-05* Production Sales 5,332 44,250 3,305 32,680 1,860 18,622 450 774 460 8,687 152 240 489 4,638 137 1,313 12,186 111,204
Source: Ministry of Defence, * Provisional
2.2 ORDER GENERATION - HOW THE DEFENCE INDUSTRY WORKS IN INDIA? The Weapons Equipment Directorate of the Army, Air Force and Navy draws up India's requirements for defense equipment and services. India has established a Defense Procurement Board, and "fast track" procedures for faster procurement of weapons, diversification of sources of weapons suppliers and establishment of joint production facilities. Based on requirements and need-based allocation of resources, decision is taken whether to import or produce indigenously or go in for transfer of technology.
In case of indigenous production plans the onus is on the premier research and development organization the DRDO. The DRDO conducts the research work and defence labs like Electrical and Radar Development Laboratory (LRDE), Defence Research and Development Laboratory (DRDL), etc design the product. Defence labs decide the parameters, i.e., the input and output. While the defence labs undertake the design and integration, the production is undertaken by the DPSUs. The DPSUs and private sector companies manufacture the sub-blocks, as per the specifications given by the defence labs. When a lot of complexity is involved and defence labs are not clear about the parameters at the sub-block level, they import the entire product. Private sector companies supply the sub-blocks and DPSUs or defence labs will integrate the system.
Requirements of Army/Navy/ Air Force
Supplies Sub-Blocks Private Sector Companies DRDO undertakes research Research & Development stage Supplies Sub-Blocks Technology transfer
DPSU undertakes production Research & Development stage
Supplies to the Army/Navy/Air Force Typical Defence order flow
At the research and development stage, certain private sector companies are selected for supply of sub-blocks. Once the technology is accepted and transferred to DPSUs, the private sector companies, which supply components during the induction stage, are certified as approved vendors for supply of sub-blocks during production stage. Private sector companies are
Future DRDO-DPSU projects expected to generate greater demand New Weapons systems that will be manufactured by DPSU Cost (in mn ) Eight Regiments of Pinaka Multi barreled rocket launcher $625 250 Light Combat Aircraft ( Tejas ) $4,200 Missiles like Agni, Prithvi, Brahmos and other tactical missiles $1,300 Radars and radio equipment $850 200 self propelled guns ( with foreign assistance ) $800
selected for component supplies on a number of criteria. The type of
product to be made, the
complexity involved, track record and expertise of the company are taken into account. Defence labs transfer technology to DPSUs, ordinance factories and private sector companies depending on the secrecy levels to be maintained.
2.3 PRIVATE SECTOR PARTICIPATION IN DEFENCE INDUSTRY The role of the private sector in defence was typically, that of supplying raw materials, semi-finished products and components for systems and equipments. Design, integration and production of the product were considered the forte of defence labs and DPSUs. Although, the participation of the private sector grew over-the-years, yet 70% of the defence capital budget continues to be spent on imports. The Indian armed forces are dependent on imports from Russia, Israel, France and Britain for their requirements. Exports from India too, are low currently at around US$130 million per annum. Idle capacity, low efficiency and high overheads have been a feature of the Indian defence industry in the past. In spite of the fact that indigenous products can be available at a cheaper rate than the imported ones, a high proportion of equipment and systems are imported. The Kelkar15 committee report highlighted the importance of self-reliance and defence preparedness. The report signifies the importance of encouraging cooperation with foreign suppliers and turn India into a significant defence exporter. It stressed on the need to enable a greater participation from the private sector in defence production.
The Kelkar Committee set up by the Indian Government to examine and recommend changes in the acquisition procedures and enabling a greater participation of private sector in defence production submitted the first part of its report on April 5, 2005 to the Defence Minister. Dr. Vijay L Kelkar headed the Committee. The thrust of Part I of the Report of the Committee is Towards strengthening self-reliance in Defence Preparedness. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 26 of 26
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The Government has already allowed private sector participation in the defence industry up to 100% per cent and with foreign direct investment permissible up to 26% per cent both subject to licensing, for manufacture of all types of defence equipment within the country. This is expected to add to the investment already made in the public sector. Guidelines have been issued by the Department of Industrial Policy & Promotion (DIPP) in consultation with the Ministry of Defence regarding the modalities for consideration of applications for grant of licences. The private companies are allowed to apply either individually or by a partnership firm amongst themselves. The Chief Executive of the company/partnership will be a resident Indian. Preference would be given to original equipment manufacturers or design establishments and those having a good track record of supplies. However, there would be a three years lock-in period for transfer of equity from one foreign investor to another foreign investor and such transfer would be subject to prior approval of Foreign Investment Promotion Board (FIPB) and the Government. The Department of Industrial Policy & Promotion (DIPP) in consultation with the Ministry of Defence will consider all applications from the private entrepreneurs and the licenses would be granted by the DIPP. The licensees are required to put in place adequate safety and security procedures, which would be subject to verification by authorized Government agencies. The quality of the product will be assured by the Quality Assurance Agencies of the Ministry of Defence. The exports of manufactured items would be subject to policy and guidelines as applicable to OFs and DPSUs.
Source: India Infoline research
The Government intention of reducing the import content in defence by 30% may be optimistic but not nonachievable but a realistic target of a 10% reduction in import content too, will result in considerable progress for the sector and savings in valuable foreign exchange. However with high entry barriers for the sector, the main beneficiaries of the Governments decision to indigenize and privatize will be DPSUs and private sector companies, who have already established themselves. Companies like L&T, TATA, Mahindra & Mahindra are also looking to grab their share of the defence pie16. These companies will start in a small way in this segment but plan to eventually emerge as big players in defence. TATAs are targeting Rs. 20 billion of revenues from supply to defence by 2008.
The Private sector companies in defence sector can be classified under three different categories based on the business volumes, size of contracts and the complexity of deals (technology wise) as shown in the diagram below.
Level I Business Volumes, Severe competition, Low margins E.g, L&T, BEL, TATA Level II Level III Specialized products involving technological know how and skilled personnel, High returns
Low value added products, Low margins
Recently, the ministry of defence asked L&T and the TATAs to submit a proposal stating their intention of entering commercial production of Pinaka, Indias first indigenous multi-barrel rocket launcher (MBRL). ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 28 of 28
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There are quite a few Level I players who will be able to achieve abnormal growth in the sector such as Zen technologies Ltd., Avantel Softech Ltd., Premier Explosives Ltd., Astra Microwave Products Ltd., to name a few. These companies are going to benefit from high defence spending and are expected to show high operating margins and high RONW17 and ROCE18 as compared to global peers (See table below).
Source: India Infoline research
RONW Return on Net worth ROCE Return on Capital employed ___________________________________________________________________________________________________

18
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2.3.1 Avantel Softech Ltd. Avantel Softech Ltd (ASL), incorporated in 1990, is promoted by Mr. A. Vidya Sagar, Mr. A. Sarada and Mr. A.V. Rao. The company started as a component designer for the wireless industry and now caters to defence requirements as well. The company has developed the 1st INSAT based mobile satellite services (MSS) reporting terminal in India and also developed four versions of the hi-bit rate digital subscriber like (HSDL) equipment in India. ASL came out with its public issue in 2000 and its operations are based in Hyderabad.
ASL has been catering to the defence market by supplying sub-blocks for various products and systems. It has been producing, not only the components, but also RF and microwave components for defence labs and defence public sector units (DPSU). However, the company earns the bulk of its revenues from the commercial telecom business.
2.3.2 Premier Explosives Ltd. Premier Explosives Ltd (PEL) was started as a SSI unit, for manufacturing industrial explosives. The company was promoted by two technocrats, Mr. A.N. Gupta and Dr. S.V. Kannan in 1980. The company commenced production of detonating fuse in 1984 and for detonators in 1990. After starting production for bulk explosives in 1992, the company diversified into the business of producing mushroom s in 1997. Its plants are located at Chandrapur in Maharashtra, Karimnagar, Medak, Khammam and Nalgonda in Andhra Pradesh. PEL is an ISO 9002 certified company with offices at 10 locations and agents at 12 locations across the country.
PEL has been authorized to produce solid propellants for the Indian defence laboratories. The company is the only private sector company to get an authorization for manufacture and supply of this product. PEL is establishing a bulk explosive unit at Chandrapur in Maharashtra, which will commence production soon, at an investment of Rs10 million.
2.3.4 Astra Microwave Products Ltd. Astra Microwave Products Ltd (AMPL) was established in 1991 for manufacturing communication and broadcasting equipment. This included high value-added microwave components and sub-systems for high frequency and microwave bands. Later, the company diversified into manufacturing surveillance subsystems for radars. AMPL became a publicly listed company in 1993. The company has three units in Hyderabad with employee strength of around 350. The promoters of AMPL, in the past, promoted Kaveri Microwave Components Ltd. located in Andhra Pradesh, for manufacturing various microwave components.
AMPL supplies electronic components for missiles to DRDL and to Research Centre Imarat (RCI) for the Integrated Missile program of the Government. AMPL is involved in the development of the Akash19 and Trishul20 missiles and therefore qualifies as an approved vendor for the components it supplies, i.e. co command guidance unit, radio proximity fuse and radio altimeter. With these two missiles, especially the Akash missile, likely to get inducted within the next 6-9 months, AMPL would get increased orders on a regular basis for components from BDL, who will produce these missiles from technology received from DRDL and RCI.
The company earns maximum revenues from supply of components to radars for surveillance. The company supplies radio frequency (RF) sub-system to the defence sector for Border Field Surveillance Radars (BFSR). The development of the product was undertaken by LRDE and the production is undertaken by BEL. AMPL supplied the components during the development stage and qualified as the approved vendor.
Akash (Sanskrit for sky) is a mobile area defense medium-range medium and high altitude surface-to-air missile with a range of 27 to 30 kilometers. The missile has a height ceiling of 18,000 meters and is capable of detecting and destroying aircraft flying at tree top height. The missile has a solid rocket booster stage, followed by a Ramjet engine, and weighs about 700 kg, with a 60 kg warhead. 20 Trishul (Sanskrit for trident) is the name of a short-range surface-to-air missile developed by India as a part of IGMDP project. It has a range of 9 km and is fitted with a 5.5 kg warhead. Designed to be used against low-level (sea skimming) targets at short range, the system has been developed to defend naval vessels against missiles and also as a short-range surface to air missile on land. The range of the missile is 12 km and is fitted with a 15 kg warhead, weighs 130 kg and is 3.1 m long ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 31 of 31
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3.1 ZEN TECHNOLOGIES LTD. 3.1.1 Company Profile Zen Technologies Ltd (ZTL) was incorporated in 1993 for manufacturing multimedia weapon simulators for training the armed forces, police and paramilitary forces. The company was promoted by Mr. Ashok Atluri, Mr. Satish Atluri and Mr. Ravi Kumar and is based in Hyderabad, operating from two premises there. ZTL started its commercial production in 1996-97 and the Indian Government from 1999 recognizes its R&D unit. The company established a strategic alliance with Bharat Dynamics Ltd (BDL) to market its products to the Indian defence sector. It has a range of simulators customized for the varying needs of defence sector.
3.1.2 Management profile Mr. Ashok Atluri, managing director of ZTL, is a commerce graduate with postgraduate diploma in applied computer science from CMC Ltd. He received the Small Scale Entrepreneur of the Year award in 1998 from the Hyderabad Management Association. Mr. Satish Atluri, director of ZTL, is a post-graduate in computer science from North Carolina A&T State University. He has about 7 years of experience in Information Technology industry in USA. He worked in the SAS Institute as a developer in 1993-94, Automated Analysis Corp. as project manager from 1994 to 1996 and in Object Design as a senior consultant during 1996-97. He is currently working with Mercury Interactive and is an independent director of ZTL. Mr. M. Ravi Kumar, director of ZTL, has over 25 years of experience in the software industry.
3.1.3 Potential Market for Simulators Increase in defence allocations for the armed forces, police and paramilitary forces are leading to higher training requirements for these organizations. With arms and ammunitions getting costlier by the day, the defence sector is looking at cheaper alternatives to train recruits. Simulators are an accepted alternative to the conventional training techniques. Not only are simulators a cheaper option, as they save ammunition and range logistics, but also an effective training aid, with life-like effect. Expenditure for training cadets for the army, navy and paramilitary forces are being given increasing importance. With changing technology, giving access to sophisticated weapons, advanced training methodologies are needed to train the existing personnel as well the new recruits. The expenditure on education, training and research for the police force has been rising too, as can be seen for the chart shown here. Simulators prove to be a cost effective form of training. For instance, in an arms training exercise, the ammunition savings work out to be around Rs. 8 million per annum for a single organization (break-up shown below). Other costs like transportation, helper, etc will add to these costs further. As compared to this, simulators cost anything between Rs0.5mn to Rs8mn, depending upon the application, and have a life typically between 5-7 years.
In case of weapons training in anti-tank missiles, a simulator proves to be extremely cost effective because a missile costs around Rs. 0.8 million. Further, simulators help in tracking and analyzing the performance of every missile pilot better than conventional training procedures. Customized reports can be generated too. Movement of the gun, accuracy, time of fire, etc can be recorded, analyzed, corrected and compared with the prior sessions. The Indian market for small arms training simulators and interactive firearms training simulators is estimated to be over Rs. 500 million and Rs. 4 billion respectively. With the inclusion of the exports market, the size of these product markets would more than double. This spells huge potential for this business, both in the domestic market and abroad. ZTL enjoys a virtual monopoly status in manufacture and supply of its range of simulators in India with main competition from imports. We believe that, with the fast growing requirements of the army, police and paramilitary forces, ZTL will witness enhanced demand for its simulators.
3.1.4 New Products prospects ZTL has developed a host of new products to service the requirements of the police, paramilitary and armed forces. These products have been developed after discussions with end users and customized to their needs. The new ranges of simulators have a good potential and are expected to substantially add to the current turnover.
Tactical engagement simulator (TacSim) is ZTLs first on-field simulator, which trains cadets in field engagement scenarios. Teams are formed and the performance in tracked under various situations. The simulator is customized to the users needs with no modification required. Removable or add-on modules are provided by ZTL as well.
Radar simulators are used to train radar operators, engineers and maintenance engineers. Realistic signals are emitted from these simulators, which help in training for navigation, radar functions, etc.
In the past, when ZTL launched iFATS, 6 units were sold in the first year itself. Similarly, in the first year of DTS launch in 2004, the company received orders for 8 units. This is testimony to ZTLs image and acceptability of its products. We therefore, believe that the new products in the pipeline like TacSim and Radar simulators will be well accepted in the market and will boost top line in the coming years. We also expect the company to generate significant revenues from supply of ATGM simulators in FY06.
3.1.5 Low competitive scenario, high entry barriers to restrict new entries ZTL virtually enjoys a monopoly in the Indian market with no domestic competition. It faces some competition from imports, which is not a real threat. This is because, imported simulators, with similar quality, is costlier than ZTLs products. Some of the products are costlier by 200% as compared to ZTL systems.
Although, the market for simulators is growing, high entry barriers will restrict entry of new players in the near future. The defence market is technology intensive and needs skilled staff with a certain set of expertise. One needs a proven track record in the field for its products to be accepted. It took ZTL, nearly 4 years before its first product was sold. Now, having established itself, this will help ZTL and will mean, long gestation periods for others planning to enter. A company needs to have considerable clout in the government to push its products. ZTL has, over-the-years, developed strong relationships within the Government. With these factors in its favor, ZTL will be the prime beneficiary of the rising demand for simulators in India.
3.1.6 High operating margins ZTL has been enjoying high margins on the operating front. In spite of lower prices compared to its peers abroad, ZTL enjoys around 50% margins since its products are robust, reliable and comparable to the imported ones. The high margins ensured that ZTLs products continued to remain competitive, while maintaining Source: India Infoline Ltd.
profitability of the company.
The defence sector is marked by frequent technology upgradation. Quality workforce and customized solutions, to meet the customers requirements, is a necessity. This results in higher margins earned by companies operating in this segment. Further, companies develop expertise in a particular product over the years, and charge a premium for their products.
ZTL is a monopoly player in the simulators market with good success in the past. It supplies its products, generally within a month of the order, on a turnkey basis. It provides customized solutions and prompt after sales service, as it is close to its end users. ZTL is therefore, expected to maintain its high margins going forward as well.
3.1.7 Exports market for Simulators There is huge potential for simulators overseas with the combined market size for SATS, iFATS, DTS, ATGM and TacSim being over Rs20bn. ZTL, whose products are low priced compared to its foreign peers, is in the process of tapping the market for simulators abroad. It has participated in a number of exhibitions in the past and is in talks with a few governments directly or through its local representatives there. Currently, around 5% of its revenues come from exports. The company recently supplied iFATS to the Royal Malaysian Navy. ZTL foresees high growth in the Middle East, South East Asia, Latin America and Africa in the coming years. It has service representatives in Dubai for its Middle East clients, in London for the European market and in Singapore for the Asian market besides India. It is looking to add to its list of dealers.
The financials for the company for the years 2003,2004,2005 and estimates for 2006 and 2007 are given below.
In years to come, with vast market for Simulators and ZTL being the major supplier in the domestic market, the prospects for the company are positive. ZTL is expected to record a 50.7% year on year and 45.1% year on year growth in turnover in FY06 and FY07 respectively. With high operating margins and a lean cost structure, the companys net profit margin is expected to be more than 37% in FY06 and FY07. The stock trades at P/E of 14.8x and 10.3x FY06E and FY07E earnings respectively.
4.1 SOME CONCERNS RELATED TO THE INDIAN DEFENCE INDUSTRY 4.1.1 Lumpiness in orders Companies catering to defence requirements mainly deal with clients in the government domain. This results in lumpiness in order flow and the quarterly performances of companies are not consistent and therefore, cannot be strictly compared. Generally, the first quarter of companies supplying to defence is mediocre. This is because, the finance budget is announced in February after which, defence allocation and other policy matters are decided on.
4.1.2 Delay in payments Another problem in dealing with Government clients is the delay in payments. In most cases, a 3-6 month delay is usual in case of defence supplies. Zen Technologies Ltd.s debtor days stands at 226 days and Avantel Softech Ltd.s debtor days stand at around 130 days.
4.1.3 Considerable government regulations still exist Although, the Government has opened up the defence sector to the private sector players, there still exists considerable regulation in the sector. This is not totally unjustified, as defence is considered a strategic sector with adequate secrecy levels required to be maintained. Therefore, any change in the Government policy can impact the players supplying to defence.
4.1.4 Technical Snags in Indias defence progress In the past, major projects like main battle tank Arjun (MBT-Arjun), the light combat aircraft (LCA), Prithvi and the Navys nuclear powered submarine have undergone technical setbacks and programming delays, which forced India to continue its reliance on foreign systems. For instance, the delay in the deployment of MBTArjun forced the purchase of 300 Russian T-90 tanks. These systems in spite of being designed indigenously have foreign components. The Prithvi missile has about 15-20% foreign components and materials, about 50% of the MBT-Arjuns components are German and 70% of the LCAs components are imported as well.
5.1 GLOBAL DEFENCE INDUSTRY Three features differentiate the international defense industry from most others. First and foremost is its sheer size. The worlds countries on national defense now spend over a trillion dollars each year, with the U.S. defense budget constituting roughly 45% of that figure. While much of it is used to finance standing military forces, a substantial amount is spent on technology and hardware, particularly in the aerospace sector. Second, while the defense industry is highly globalized, arms trade that crosses borders can be quite controversial for political reasons, if not illegal outright. Finally, the defense industry involves a unique blend of governmental and economic forces. Both private companies and public institutions shape supply and demand in this dynamic market.
5.2. KEY FACTS TO BE REMEMBERED (SEGMENTATION OF INDUSTRY) 5.2.1 Non-conventional weapons Nuclear, biological and chemical weapons represent the three types of weapons of mass destruction. Multinational conventions have banned the development or ownership of biological and chemical arms, but several nations are suspected of illegally possessing them. The legitimate market for nuclear arms is small, given that only five nations (USA, UK, France, Russia and China) lawfully own them, while three others (India, Pakistan and Israel) are unofficial nuclear powers. Nuclear proliferation, defined as the illegal spread of nuclear technology or materials to states that do not currently possess them, remains an issue of great concern. Iran and North Korea are suspected of attempting to acquire nuclear capability. Also worrisome is the prospect of terrorist groups, such as Al Qaeda, acquiring radioactive or toxic materials.
5.2.2 Aerospace systems Encompassing military aircraft (both land-based and sea-based,) conventional missiles, and satellites, this is the most technologically advanced sector of the market. It is also the least competitive from an economic standpoint, with a handful of companies dominating the entire market. The top clients and major producers are virtually all located in the West, with the United States easily in first place. Prominent aerospace firms include Lockheed Martin, Boeing, and BAE Systems. There are also several multinational consortiums mostly involved in the manufacturing of fighter jets, such as the Eurofighter. The largest military contract in history, signed in October 2001, involved the development of the Joint Strike Fighter.
5.2.3 Naval systems All of the world's major powers maintain substantial maritime forces to provide a forward presence and enhance overall mobility, with the largest nations possessing aircraft carriers, nuclear submarines and advanced anti-air defense systems. The vast majority of military ships are conventionally powered, but some are nuclear-powered. The U.S. Navy is by far the largest in the world, and most of the large contracts in this sector are awarded to American firms, such as Newport News Shipbuilding, a subsidiary of Northrop Grumman. There is also a large global market in second-hand naval vessels, generally purchased by developing countries from Western governments.
5.2.4 Land-based weapons This category includes everything from light arms to heavy artillery, and the majority of producers are small. Many are located in Third World countries. International trade in handguns, machine guns, tanks, armored personal carriers and other relatively inexpensive weapons is substantial. There is relatively little regulation at the international level, and as a result, many legitimately produced weapons fall into the hands of rebel forces, terrorists, or regimes under sanctions.
5.3 WORLD MILITARY SPENDING Global military expenditure and arms trade form the largest spending in the world at over $950 billion in annual expenditure, as noted by the prestigous Stockholm International Peace Research Institute (SPIRI).
For the larger arms-purchasing nations: Arms procurement usually accounts for 20-30% of their military budgets The largest portion is normally spent on operations, maintenance and personnel Some 40 to 50 billion dollars are in actual deliveries (that is, the delivery of sales, which can be many years after the initial contract is signed) Each year, around 30-35 billion dollars are made in actual sales (or signing of contracts).
5.3.1 Breaking down worldwide numbers
Developing countries Industrialized countries
Source: The Grimmett Report, Conventional Arms Transfers to Developing Nations, 1997-2004, Report for Congress, U.S. Congressional Research Service, Library of Congress, August 29, 2005. (Dollar values are constant 2004 dollars)
5.3.2 As world trade globalizes, so does the trade in arms The top ten developing nation recipients of arms sales accounted for almost 70% of the total developing nations arms market between 2001 and 2004, and as the Grimmet Report noted, there is continued concentration of major arms purchases by developing nations within a few countries. These countries were mostly Asian or from the Near East (or Middle East).
The lack of arms controls in developing countries allows some to profit from the misery of others.
While international attention is focused on the need to control weapons of mass destruction, the trade in conventional weapons continues to operate in a legal and moral vacuum.
More and more countries are starting to produce small arms, many with little ability or will to regulate their use.
Permanent UN Security Council members the USA, UK, France, Russia, and China dominate the world trade in arms.
Most national arms controls are riddled with loopholes or barely enforced. Key weaknesses are lax controls on the brokering, licensed production, and 'end use' of arms. Arms get into the wrong hands through weak controls on firearm ownership, weapons management, and misuse by authorised users of weapons.
The third world is often the destination for arms sales as the Control Arms Campaign also highlights graphically (as seen in the chart below)
Source: http://www.controlarms.org/the_issues/movers_shakers.htm
Since US is the most formidible military power in the world, it is worthwhile to consider their spending as compared to other nations. We look into the international defence industry in the following perspectives:
1. U.S. Military Spending 2. U.S. Military Spending Versus Rest of the World 3. Rise of Europes Defence Industry
5.4 U.S. MILITARY SPENDING The United States, being the most formidable military power, it is worth looking at their spending. The U.S. military budget request for Fiscal Year 2006 is $441.6 billion. (This includes the Defense Department budget and funding for nuclear weapons activity of the Department of Energy Budget. It does not include other items such as money for the Afghan and Iraq wars ($49.1 billion for Fiscal Year 2006), or Homeland Security funding ($41.1 billion for Fiscal Year 2006), for example.) Compared to the rest of the world, these numbers are indeed staggering. For Fiscal Year 2005 it was $420.7 billion For Fiscal Year 2004 it was $399.1 billion. For Fiscal Year 2003 it was $396.1 billion. For Fiscal Year 2002 it was $343.2 billion. For Fiscal Year 2001 it was $310.0 billion. For Fiscal Year 2000 it was $288.8 billion.
5.4.1 U.S. Military Spending Versus Rest of the World
Using the data available, a comparison can be made here of the US Fiscal Year 2004 spending against other equivalent data:
The US military budget was almost as much as the rest of the worlds. The US military budget was more than 6 times larger than the Russian budget, the second largest spender.
The US military budget was more than 30 times as large as the combined spending of the seven rogue states (Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria) who spent $13 billion.
It was more than the combined spending of the next fourteen nations. The United States and its close allies accounted for some two thirds to three-quarters of all military spending, depending on who you count as close allies (typically NATO countries, Australia, Canada, Israel, Japan and South Korea)
The seven potential enemies, Russia, and China together spent $134.2 billion, 34% of the U.S. military budget.
A tabulation of top 15 countries in terms of their spending has been produced (see chart below)
Source: U.S. military spending vs. the World, Center for Arms Control and Non-Proliferation, February 7, 2005 (http://www.armscontrolcenter.org/archives/001221.php)
5.5 RISE OF EUROPES DEFENCE INDUSTRY Over the last decade, the European Unions major military powers have increasingly collaborated to build a more integrated and technologically advanced defense industry. In some areas such as missiles, research and development occur almost exclusively at the European level through the transnational European firm MBDA. The European Unions establishment in 2004 of a European Defense Agency to coordinate procurement programs has further increased the prospect of an integrated European defense market.
Many American defense experts roll their eyes at the prospect of European military cooperation and consider it more fiction than fact. While some of this skepticism is justified, a substantial amount of quantitative and qualitative data shows that European defense firms are increasingly collaborating with each other rather than the
United States. This is a striking development. Even more important is to understand why this development is occurring. As the chief executive officers of Europes three largest defense firms - BAE Systems, EADS, and Thales - recently argued: Industry in Europe is under enormous competitive pressure from the United States. With U.S. defense R&D investment running at around eight times that of Europes fragmented total and with substantial growth in the Pentagon's vast procurement budget in a heavily protected national market, American industries are reaching new heights. They continue that intra-European defense consolidation is critical because European governments and industry do not wish to see indigenous defense technology overtaken or dependence on foreign technologies become a necessity.
In other words, Americas globally dominant defense industry provides a strong rationale for European collaboration to compete globally and avoid dependence on the United States. The development of a European defense industry has important implications for the future of transatlantic defense cooperation. It will increase the competition with Europe in the global arms market. That competition in turn may also increase the likelihood that European firms will sell weapons, military-use systems, and technologies to countries such as China, where the United States and Europe have different strategic interests.
5.5.1 The Shift to European Collaboration As the figure below illustrates, there has been a substantial increase in intra-European co-development and coproduction weapons projects in the post-Cold War era. The percentage of intra-European projects increased from 42 percent and 43 percent in the 1970s and 1980s, respectively, to nearly 60 percent in the 1990s. In the post-Cold War era, European defense firms have been almost twice as likely to pursue co-production and codevelopment projects with each other as with U.S. firms, and over three times more likely than with defense firms from other regions.
5.5.2 Why has this shift occurred? The evidence suggests that European governments have been motivated to collaborate as a response to U.S. dominance in the defense industry in the post-Cold War era. Collaboration allows European defense firms to compete more effectively with the United States in terms of arms sales and the spin-offs that defense industries can produce. Political obstacles in the United States to transatlantic collaboration have added to this development. There has been a push in the U.S. for self-sufficiency and a deep reluctance to cooperate with foreign governments for much of American history. The United States has been largely self-sufficient in weapons procurement, relying on American defense firms for weapons procurement. Political obstacles to transatlantic cooperation have included the Buy American Act of 1933 (revised 1988), extensive export and technology-transfer controls, and restrictive regulatory processes regarding foreign investment in U.S. firms. European difficulties in penetrating the U.S. market, with the partial exception of Britains BAE Systems, have encouraged greater collaboration among European defense firms.
5.5.3 Implications for the United States Europe is gradually establishing an integrated and globally competitive defense industry. Will this trend continue in the future? If so, what will be the implications on transatlantic relations? Assuming that the United States retains a globally competitive defense industry, EU states will have a strong impetus to continue collaborating with each other. Indeed, the European defense industry will likely become more integrated over the next decade. For example, European states will likely continue to develop all weather, precision-guided weapons, such as the Storm Shadow/Scalp cruise missile and the Taurus long-range stand-off missile. They will also likely place significant resources into space-based systems and technologies that will provide EU states with military capacitiessuch as monitoring troop movements, facilitating logistics planning, and improving targeting and munitions guidancethat can be performed independently of the United States. Many of these projects are currently in the research and development stage and will provide European states a greater ability to jointly project power over the next decade. One of the biggest questions over the long run is whether European states can collaborate their procurement strategies through a robust and well-resourced European Defense Agency. This would mean that the European Union would have significant power to develop capabilities requirements; determine and promote defense research; and manage land, aerospace, and naval defense programs. The answer is not entirely clear, but recent trends suggest that Europe is moving in this direction.
The dominance of the United States in the defense industry and the European response will likely speed up a drifting apart of the transatlantic relationship. This does not mean the United States and Europe will become enemies, but it does mean that the stronger the EU becomes as a global international political, economic, and defense power, the more likely it will be willing to stand up to the United States when it disagrees. In other words, European states are steadily making a globally-competitive defense industry a reality.
5.6 CAN INDIAN DEFENCE INDUSTRY COMPETE GLOBALLY? As the leading power in South Asia, India has the largest defense industry on the subcontinent. This makes the country's state-owned munitions factories a significant source of arms exports to smaller neighboring nations, such as Nepal, Burma (also known as Myanmar) and the Maldives. However, the Indian government is now seeking a more global scope for arms exports. Earlier this month, an influential parliamentary panel stated that India should base its weapons manufacturing on the designs used by members of the NATO21 alliance.
A report from the parliamentary standing committee on defense noted that Indian arms exports were only 410 million rupees (approximately $9 million) in the 2004-05 fiscal year, down sharply from 930 million rupees ($21 million) in 2003-04. In response, the committee suggested that the domestic defense industry must broaden the number of potential buyers by producing NATO-compatible weapons. This does not imply that India would sell directly to NATO members although, in the long run, this could also be a possibility but rather recognizes that many non-NATO countries, including developing ones, want NATO-quality equipment for their armed forces.
At present, for historical reasons, the Indian defense industry produces systems based largely on Soviet-era designs. This puts it in competition with countries like Russia, Ukraine and Belarus. However, these countries, and particularly Russia, have an edge because their munitions factories have underwent a higher degree of modernization in the post-Soviet period. As a result, some of India's arms exports are now less marketable relative to those offered by Russia. This helps explain why virtually all of these exports go to nearby countries with a much less developed industrial base. On the other hand, Russian exports have a global reach, including China, Indonesia, Kuwait, Cyprus, and India itself, which continues to buy Russian fighter jets.
The North Atlantic Treaty Organisation (NATO), sometimes called North Atlantic Alliance, Atlantic Alliance or the Western Alliance, is an international organisation1 for defence collaboration established in 1949, in support of the North ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 50 of 50
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Within NATO, the United States is, of course, the largest arms producer and exporter. Britain and France are the two runners-up, with other significant defense manufacturers found in Italy, Spain and Germany. Accordingly, if the Indian defense industry were to retrofit itself to making NATO-compatible weapons, it would have to compete with giant multinationals such as Lockheed Martin, BAE Systems and Finmeccanica. While the conversion process would no doubt be difficult, India does have a significant advantage in labor costs. It could therefore offer similar products as those sold by Western companies at a fraction of the price. It is not at all inconceivable that, five to ten years from now, Indian arms exports could be an order of magnitude higher than today.
Atlantic Treaty signed in Washington, D.C., on April 4, 1949. Its headquarters are located in Brussels, Belgium. Its other official name is the French equivalent, l'Organisation du Trait de l'Atlantique du Nord (OTAN). ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 51 of 51
ANNEXURE I ANNEXURE I - Indias Defence Procurements (Updated up to 15 April 2005) [1] [The list below was compiled from various media reports and press releases and contains the main items being procured, on offer or planned by the Indian Defence Forces, with our comments wherever possible. Although every care has been taken to compile the data as accurately as possible, we take no responsibility for the authenticity of the list.] 1. Scorpene Class (hunter-killer) Submarines -To be built by Mazagon Dock (MDL), Mumbai. The contract is being concluded with the French Government and Thales and subcontracted to DCN, which has signed a transfer of technology agreement with MDL. Awaiting approval from Cabinet Committee on Security. As of now six submarines are to join the Indian Navy while option for more remains open. AirIndependent Propulsion MESMA is an option only. Media reports suggest that Russian Amur Class and German HDW submarines may also be considered. The court case against HDW was closed and they are reported to be making a strong comeback bid offering higher grade boats than the French. 2. Air Defence Ship (Aircraft Carrier) - The 37,500-tons aircraft carrier (Air Defence Ship) is to be built at Cochin Shipyard. The carrier is being designed to operate a mix of twelve MiG-29K, eight Naval-LCA Tejas or Sea Harrier fighters, ten ALH Dhruv and Kamov-31 helicopters. The steel cutting of ADS was scheduled to begin on April 11, 2005. The ship after construction and trials is scheduled for delivery to the Indian Navy in 2012 and will cost the exchequer Rs. 3261 crores. The name Air Defence Ship is a misnomer deliberately adopted to bypass undue criticism from conflicting quarters. Under similar circum- stances even the Soviet and British navies maintained ambiguity. While the Russians projected their Kiev Class initially as anti-submarine cruisers (Protivolodochny Kreyser) the Royal Navy projected their Invincible Class as (through deck) cruisers. 3. Aircraft Carrier INS Vikramaditya (Admiral Gorshkov) - Will be refitted in Russia with provision for helicopters and MiG-29K aircraft at an additional cost of around $675 to $700 million. The deal to acquire the aircraft carrier was signed between Russian Defence Minister Sergei Ivanov and then his Indian counterpart, Defence Minister George Fernandes on 20 January 2004 in New Delhi. The deal in addition also consists of separate contracts for new shipboard weapons and technology. The conversion is reported to be progressing at a swift pace well ahead of the schedule. The Russians have promised to hand over the Capital warship to the Indian Navy in late 2007. 4. MiG-29K Carrier-borne Fighters - Twelve single-seat MiG-29K and four dual-seat MiG-29KUB variants were ordered for operation from the decks of Admiral Gorshkov. Projected to be equipped with Phazatron Zhuk-MEh multi-mode radar. However Bars-29 Barsik (Little Bars) appears to be the likely candidate. Armed with Vympel RVV-AE (AA-12 Adder) medium range, active-radar homing air-to-air missiles; the R-73E (AA-11 Archer) infra-red guided dogfight missiles, Zvesda/Strella Kh31A anti-ship and Kh-31P anti-radar missiles and Kh-35 Uran E anti-ship missiles. Also a strong candidate for the air defence ship (ADS) to be built at Cochin.
ANNEXURE I - Indias Defence Procurements (Updated up to 15 April 2005) - continued [2] 5. Shivalik Class Guided Missile Frigates - Three Type 17, 4900-ton Shivalik class stealth frigates (two already launched) which is an upgraded hybrid home design of the Brahmaputra and Krivak class with BrahMos vertical launch missiles and two ASW helicopters. 6. Bangalore Class Guided Missile Destroyers - Three Type 15A, 6700-ton Bangalore class Destroyers which is an improved version of the Delhi class also with vertical launch BrahMos missiles, aft of the bridge superstructure. DRDO and Larsen & Tubro Ltd had jointly designed the vertical missile launch system. 7. Krivak III Class, Project 1135.6 Guided Missile Frigates - Three warships, INS Talwar, INS Trishul and INS Tabar have joined the Indian Navy. The General Purpose warships however sport robust anti-air warfare sensors & weaponry with Shtil area defence SAM system and Kamov-31 AEW helicopters. Have lower Radar Cross Section (RCS). The Russians are eagerly anticipating a repeat order of three more. 8. Indian Navy Sea Harrier Fleet Upgrade - The Navy Sea Harrier fleet is to acquire Beyond Visual Range (BVR) engagement capability in conjunction of Israeli EL/M 2032 radar and Derby BVR missiles, formidable even in close range. 9. Sukhoi-30MKI Fighter Aircraft - A total of 40 aircraft ordered from IAPO (Russia) and subsequent manufacture of 140 more by HAL in India. 18 Sukhoi-30MK/K variants initially supplied will go back to Russia for upgrading. Deliveries of the 40 Sukhoi-30MKI variants have been completed. Three operational Squadrons, No.20 Lightnings, No.24 Hunting Hawks and No.30 Rhinos are operating the type. First two HAL built versions were handed over to the Indian Air Force on March 21, 2005. HAL initially promised 10 Sukhoi-30 deliveries to the IAF per year. The figure subsequently rose to 14, sharply fell to 6 and now somewhat stabilized at 8. 10. Kamov-31 Airborne Early Warning (AEW) Helicopters - Four plus five Kamov-31 (Kamov29RLD) AEW helicopters, estimated at US $207 million were ordered and joined the Indian Navy fleet. The Kamov-31 is fitted with the E-801M Oko (Eye) AEW radar. Also ordered were six Kamov28 ASW helicopters worth $18 million. 11. Advanced Jet Trainer (AJT) - The IAF had long pressed for procurement of an initial 66 AJTs and later 11 AJTs for the Indian Navy. British Aerospace clinched the deal for the Hawk-115. The Hawk is projected to arrive in India from 2007 onwards. Meanwhile the IAF pilots were undergoing advanced jet training on Royal Air Force Hawk variants in Britain. The aged MiG-21FL variants used as improvised AJT platforms can now retire. 12. Light Combat Aircraft (LCA) Tejas - IAF is all set to order from HAL 20 + 20 LCA Tejas with US GE-404 engines worth almost $1billion, to be delivered beginning 2008. Weapons integration flights are eagerly awaited while the problems relating to the indigenous Kaveri GTX-35VS two-spool low-bypass ratio turbofan engine need to be sorted out fast.
ANNEXURE I - Indias Defence Procurements (Updated up to 15 April 2005) - continued [3] 13. MiG-21 Replacement - The IAF was set to acquire 126 fighters from 2008 onwards to replace the MiG-21s worth $3b and the competition is between the French Mirage 2000-5Mk2, Swedish Grippen, US F 16C Block 70 and the Russian MiG-29 M2. Request For Information (RFI) has been sent to the respective manufacturers. Mirage 2000-5Mk2 appears to be the IAF's preferred choice. Additionally India is keen to buy 12 Mirage 2000-5 from Qatar. Recently USA had offered the F/A-18E/F and some assembly lines. If financial terms are good India may consider it for the technology that comes with these aircraft. It will help the LCA too. 14. HAL HJT-36 Intermediate Jet Trainer (IJT) - Hindustan Aeronautics Limited IJT-36 carried out its first flight on March 7, 2003 with Chief Test Pilot Squadron Leader Baldev Singh (Retd) on controls. The 20 minutes flight was reported to be flawless. Significantly the IJT prototype flew in less than four years after commencing development work, thanks to advanced Computer Aided Design (CAD) techniques. A single French Larzac 04-20 engine presently powers the IJT-36. A higher thrust version of Larzac engine for the production version of the IJT-36 is on cards. 15a. IAF Aircraft Fleet Upgrades - Jaguar - To extend the operational life of Jaguars further improvement of avionics suite is now in progress under project DARIN II. Among others this involves a Sagem Ring-Laser-Gyro INS with integrated Global Positioning System (GPS) and indigenously developed twin mission computers. DARIN II upgrade is incorporated on the 17 twin-seat Jaguars being produced by HAL. In time DARIN II will first replace the NAVWASS on all direct supply strike Jaguars. Later DARIN II upgrade including the autopilot currently under development may be implemented on at least sixty remaining aircraft in service. In addition the Jaguars will acquire formidable night-attack capability in conjunction of Forward-Looking Infra-Red (FLIR) and Precision Guided Munitions (PGM). Twenty more Jaguars are to be manufactured at HAL with the evolving technology. 15b. IAF Aircraft Fleet Upgrades - MiG-27 - At least two squadrons of MiG-27ML are undergoing upgrade with Advanced Pilot/System Interface (APSI), PGM capability and in-flight refueling probe among others. 15c. IAF Aircraft Fleet Upgrades - MiG-21 - Four squadrons of MiG-21Bison are operational with eight more to join as per latest reports. Being equipped with Kopyo (Spear)/Super Kopyo X-band pulse Doppler radars and RVV-AE (AA-12 Adder) beyond visual range missiles and PGMs. 15d. IAF Aircraft Fleet Upgrades - Mil-35 Helicopters - A major upgrade is underway of twentyfive IAF Mil-35 attack helicopters by IAI/Tamam by utilising Helicopter Multi-mission Optronic Stabilized Payload (HMOSP) providing precise navigation and all-weather operations in conjunction of AT-6 Spiral and proposed Rafael Spike antitank missiles. Appropriate countermeasures suites are integrated. 16. Illyushin-78MKI In-flight Refueling Tanker - Six Illyushin-78MKI in-flight refueling tankers have joined the Indian Air Force fleet equipping Squadron No.78 'Battle Cry' have been carrying out in-flight refueling practices with IAF Sukhoi-30, Mirage 2000 and Jaguars often supporting them on long-range missions and in trans-continental ferry to join multi-national air exercises at various parts of the Globe.
ANNEXURE I - Indias Defence Procurements (Updated up to 15 April 2005) - continued [4] 17. Mirage 2000 V Aircraft - India is keen to buy 12 Mirage 2000-5 from Qatar. 18. Mirage 2000H/TH - Ten additional aircraft to replace accident losses and as part of the
War Wastage Reserve had arrived by early 2005. These have more powerful radar capable of enhanced simultaneous track and engagement with beyond visual range missiles.
19. EL/M-2090 Green Pine Radar - India have received two Green Pine L-band, phased array, dualmode detection and fire control radar comprising of 2,000 transmit-receive modules. Green Pine is said to be capable of tracking ballistic missiles from a range of up to 500-km. Integration of Arrow 2 Anti-Tactical Ballistic Missile (ATBM) system in Indian armed forces service depends upon several complex factors including the requisite United States administration permission to the Israeli authorities. In addition another active phased-array radar system, called Sword Fish, was purchased from Israel in early 2004 for $50 million and is undergoing trials at Hasan in Karnataka state. Meanwhile during the second-half of February 2005, a four-member high-level US defence team led by Edward Ross of the Defence Security Cooperation Agency (DSCA), had met officials of the international security division of the Indian External Affairs and Defence ministries and presented "a technical brief" of the Patriot PAC-2. The US administration's clearance for a classified technical presentation of PAC-2 system came as part of the Next Step in Strategic Partnership (NSSP) agreement initiated by the two countries during 2004. 20. Unmanned Aerial Vehicles (UAV) - Several branches of Indian Armed Forces continue to receive IAI Malat built Searcher Mk II and Heron UAVs and their ground control units from Israel. The Searcher MkII has a height ceiling of nearly 30,000-ft. Army, Navy and IAF units are being provided with these UAVs progressively and projected to bolster one of the largest UAV fleets of the world. Navy will get Heron with Maritime radar. The Indian Army has also ordered twelve indigenous Nishant UAV in a limited-series production. India and Israel have also entered into a new partnership under which Tel Aviv will help New Delhi in its development of UAVs. A formal deal was signed at the Aero India 2005 exposition Feb. 9-13, between senior officials of the respective defense ministries. Israel Aircraft Industries will assist state-owned Aeronautical Development Establishment (ADE), India's leading unmanned aerial vehicle (UAV) laboratory, to develop three new UAVs. They are the Rustam Medium-Altitude Long-Endurance (MALE) UAV, the Pawan short-range UAV and the Gagan tactical UAV. 21. Two Type 877-EKM Kilo-class SSK Submarines, plus one Amur-Class SSK have been offered as Indias own Submarine building programme has been slow since the HDW scandal.
ANNEXURE I - Indias Defence Procurements (Updated up to 15 April 2005) - continued [5] 22. Novator 3M54E Klub Anti-Ship Cruise Missiles (ASCM) - Klub equips Kilo Class hunterkiller submarine (SSK) INS Sindhushastra from outset. The missile is also being progressively fitted to five other Kilo Class SSKs those are undergoing or have undergone refits. The ASCM also equips the three Krivak III s, and projected for the Type 17 Shivalik Class guided missile frigates. The Indian Navy is truly excited about this missile and calls it the Russian Tomahawk. Up to 200 systems have been ordered. 23. Barak Anti-Missile SAM systems - Built by IAI ELTA/RAFAEL, the rapid-reaction Israeli SAM system is installed on the Indian Navy's carrier INS Viraat, and Delhi Class guided missile destroyers. The system is also to equip Godavari & Brahmaputra Class frigates. Already installed on INS Ganga. Initially seven systems were procured with more to follow in response to failure of indigenous Trishul SAM. 24. AEROSTATS - The first lot of Israeli Helium filled Airborne Early Warning Aerostats had arrived in India. The Aerostat radars, which basically include sensors mounted on blimp-like large balloons tethered to the ground with long cables, are a long-standing requirement of the IAF. 25. Four plus three Ka-31, air borne early warning helicopters, and six Ka-28 ASW helicopters worth $18 million all of which will be delivered progressively. 26. TU-142 Bear F maritime patrol/ASW aircraft armed with Alfa and Uran-E anti-ship cruise missiles to supplement the eight currently in service with the Indian Navy are on offer. 27. Tupolev-22M3 Backfire-C Tupolev-22M3 Backfire-C strategic bombers and high-speed maritime reconnaissance platforms, produced at the Gorbunov-based plant in Kazan, southern Russia are on offer and ready to be delivered from Russias large excess stock. 28. Synthetic Aperture Radars & Laser Guided Bombs - The ELTA subsidiary of Israel Aircraft Industries is likely to supply pod-mounted EL/M-2060 synthetic aperture radars for IAF Mirage 2000H/TH fighters. The IAF is also expected to procure additional laser-guidance kits for its 1,000 lb bombs from Elbit Computers of Israel.
ANNEXURE II ANNEXURE II DRDO Projects completed and under productionisation 105 mm and 81 mm illuminating ammunition & 125 mm ammunition, Fin stabilized armour piercing discarding Sabot Mk-I&II 3D central acquisition & surveillance radar; Weapon locating radar; Advanced torpedoes / Light weight torpedo AERV - Armoured Engineer Recce Vehicle for crossing water obstacles Bridge layer tank on T-72 chassis Agni-I & Agni-II - Surface-to-surface missile Aircraft arrester barrier & Parachutes for various types of aircrafts Ajeya - Combat improved T-72 tank Arjun - Main Battle Tank Armoured ambulance on BMP II Avalanche victim detector BFSR-SR: Battlefield surveillance radar - short range. Bheema - Aircraft weapon trolley Brahmos - Supersonic cruise missile Catch - Airborne signal intelligence systems Command information decision support system; Combat net radio & Data concentrator De-gaussing and acoustic ranges for measurement of noise and magnetic signature of naval ships Humsa - Hull mounted sonar system & Ushus sonar system INSAS (Indian Small Arms Systems) - 5.56 mm Indian small arms system Lakshya - Pilotless target aircraft (aerial target practice system) Meals-ready-to-eat packets for army developed in conjunction with CFTRI Mihir - Helicopter based dunking sonar Mission computer for Jaguar Mission computer, display processor and RWR for Sukhoi aircraft Nagan - Towed array sonar Nishant - Remotely piloted vehicle (for aerial surveillance) Pinaka - Multibarrel rocket system Prithvi - Surface-to-surface tactical battlefield missile and its variants Processor based moored mine and processor based exercise mine Relocatable balloon barrage system Safari [Mk-I] - Muting system for deactivating remotely controlled explosive device Samvahak - Artillery combat command and control system Samyukta- Integrated EW system for Army Sangraha - Integrated EW system for Navy Sansar - Bulk secrecy equipment with high grade digital secrecy Sarvatra - Bridge assault mechanically launched Mat ground surfacing, a track way expedient for smooth movement in marshy terrain, shallow water and soft soil Mobile decontamination system for decontaminating nuclear, biological and chemical agents and personnel, equipment and terrain Sectel - Speech secrecy telephone Tempest - Radar warning receiver and self protection jammer for MiG aircraft Tranquil - Radar warning receiver for MiG 23 aircraft
APPENDIX A [ Brief Description about Defense Public sector Undertakings ] 1. Hindustan Aeronautics Limited (HAL) - The Hindustan Aeronautics Limited was established in October 1964 by merging Hindustan Aircraft Limited and Aeronautics India Limited. It is engaged in the design, development, manufacture, repair and overhaul of aircraft, helicopters, engines and their accessories. The Company has 12 divisions located in six states. Its registered office is at Bangalore. HAL has evolved into a large Aeronautics Complex and has built up comprehensive skills in Design, Manufacture and overhaul of Fighters, Trainers, Helicopters, Transport Aircraft, Engines, Avionics and System Equipment. Its product tract record consists of 11 types of Aircraft from in- house R&D and 13 types by license production inclusive of 8 types of Aero Engines and over 900 items of Aircraft System Equipment (Avionics, Mechanical, Electrical). The Company has the requisite core competence base with demonstrated potential to become a global player. The Company has exports to more than 20 countries, having demonstrated its quality and price competitiveness. It has also diversified into the field of Industrial & Marine Gas Turbine business and Real-time software business.
Highlights Significant Achievements of HAL are: The Company developed and productionised the Advanced Light Helicopter (ALH), Dhruv, as a multi role multi-mission Helicopter in the 5-ton category to meet the applications of Army, Air Force, Navy, Coast Guard and Civil operators. HAL is the prime contractor in Design & Development of LCA. The Intermediate Jet Trainer (IJT -36) has been developed by HAL as a replacement of Kiran. The IJT completed the 1st flight successfully in March 2003. The company has taken up upgrade of existing Jaguar Air craft, MIG 27 Ms, MIG Bison and Avro Aircraft. HAL has also undertaken manufacture of Jaguar Aircraft. Exports of HAL grew from 58.60 crores in 2000-01 to more than 100 crores in 2003. The company has achieved indigenous content in its sales (though R&D in products and technology) to the extent of 70-75 per cent in manufactured products and 80-85 per cent in repair and overhaul services of major products.
2. Bharat Electronics Limited (BEL) - The Bharat Electronics Limited, established in 1954 with its corporate office at Bangalore, has nine units in the country. It is engaged in the design, development and manufacture of sophisticated state-or-the-art electronics equipment components for the use of the defence services, para-military organizations and other governmental users such as All India Radio, Doordarshan, Department of Telecommunications, Police Wireless Departments, Meteorological Department etc. On line computerization for material management, state-of-the-art test facilities, facilities for carrying out environment and reliability checks, electro-magnetic Interference/Electro-Magnetic Compatibility Testing facility, antenna testing facility, back-up support from standardization technical information and documentation, computer aided design and manufacture have made BEL a modern and professional electronic company.
Highlights Significant achievements of BEL are: Around 72% of BEL's turnover has been for the Defence Services and BEL's contributions to the Services in their various modernization programmes have been very significant. BEL meets a variety of requirements of the Services in the area of Radars, Sonars, Communication Equipment and Systems, SATCOM. Tank Electronics, Electronic Warfare Equipment etc., meeting stringent Defence specifications with the assurance of lifetime product support. BEL is also playing a significant role in the Civilian 'Professional Electronics' sector of the country particularly for the Ministry of Information and Broadcasting by supplying it with bulk of its infrastructural requirements for Radio and TV Broadcasting, like Studio Equipment, Transmitters, Satellite, Uplinks, OB Vans etc. In the field of Telecommunication too, BEL has had an important part to play, particularly in the area of transmission equipment where it had met the significant requirements of the Bharat Sanchar Nigam Limited (BSNL). BEL had important role in the modernization of the Airports through supply of Primary/Secondary Surveillance Radars to Airports Authority of India. BEL pioneered the growth of the Electronic 'Components' industry in the country by setting up the manufacture of electron tubes [TV Picture Tubes for the Consumer Electronics Industry, Transmitting Tubes for AIR/DD and the Industrial needs, Microwave Tubes, X-Ray tubes, Vacuum Interrupters etc.], Semiconductor Devices, Integrated Circuits, Hybrid Micro Circuits, Liquid Crystal Displays, Solar, Cells & Systems, Passive Components like Crystals & Capacitors etc. All the Units of BEL are certified for ISO 9001 / 1994. Action has already been initiated to graduate to ISO 9000: 2000 standards.
3. Bharat Earth Movers Limited (BEML) - The Bharat Earth Movers Limited was established in May 1964 and commenced operations from January 1965. With the disinvestment of shares of BEML, Government of India is still the major shareholder as of end March 2002, holding over 61.23% of equity shares of the company. BEMLs manufacturing units located at Bangalore, Kolar Gold Fields (KGF) and Mysore. All the production units of BEML are fully equipped with necessary general purpose machines and special purpose machines like extra heavy duty machines, Computer Numerically Controlled boring machines (CNC machines), CNC bevel generating system of Gleason design, flexible manufacturing system, heavy and large size fabrication facility, welding robots, etc., to manufacture transmission and axles, Hydraulic control values, cylinders and pumps, diesel engines, railway coaches, rail buses, railway wagons, Alternating Current Electrical Multiple Units (ACEMUs), heavy duty all terrain multi axle trucks, earth moving machinery and Tracked military vehicles like armored recovery vehicles, self propelled gun, tanks and other military vehicles like heavy recovery vehicles, bridge laying tank, truck based mobile bridge system, mounted gun system on truck chassis, rocket launcher system etc.
Significant achievements of BEML during the year are, Continued emphasis is given to R&D activities so that the Company maintains its position of leadership in earthmoving industry. Moving ahead in this direction, the Company has successfully productionised BE1600 Hydraulic Excavator, BG605A Articulated Motor Grader & BL10C Side Discharge Loader. BEMLs R&D wing is presently working on design and development of disaster management equipment with financial assistance from Technology Information, Forecasting and Assessment Council (TIFAC) of the Department of Science and Technology. The project envisages design changes to accommodate special attachments on 30 Ton class Excavators for application in clearance of material in disaster affected areas as well as a radio controlled dozer for deployment in hazardous working environment. BEMLs products are exported to UK, Middle East, Sri Lanka, Bangladesh and African Countries. Value of exports till December 2002 was Rs.10.36 crore. All the manufacturing units of BEML continue to hold accreditation to ISO 9001 certification.
4. Mazgaon Dock Limited (MDL) - The Mazgaon Dock Limited, which was established in 1960, is the premier defence shipyard in the country, has a capacity to build warships up to 6,000 DWT and merchant ship up to 27,000 DWT. Its product range includes submarines, missile boats, destroyers, frigates and corvettes for the Indian Navy and patrol vessels for the Coast Guard. It has diversified products for the oil exploration sector
through production and installation of wellhead platforms and diving services for coating/laying sub-sea pipelines.
Highlights Production of the first Destroyer of P-15A and the third Stealth Frigate P-17 series commenced on 12th and 17th March 2003 respectively. First batch of three Floating Boarder Out Posts (BOPs) was commissioned on 10th February 2003. Production of one Portable Cutter Suction Dredger for Bhakra Beas Management Board commenced on 7th October 2002. Production of three Cutter Suction Dredgers for Inland Waterways Authority of India commenced on 22nd March 2003.
5. Garden Reach Shipbuilders & Engineers Ltd (GRSE) - The Garden Reach Shipbuilders & Engineers Limited was incorporated as a joint stock company in 1934, under the name M/s Garden Reach Workshop Limited (GRW). The Government of India acquired the company in 1960 and was rechristened as Garden Reach Shipbuilders & Engineers Limited (GRSE). Since then, it has grown and diversified its activities and is now a multi-unit shipyard with a Shipbuilding Division and an Engineering and Engine Division. The company builds and repairs warships and auxiliary vessels for the Navy and the Coast Guard. Its product range includes frigate carrier & oil tankers, patrol vessels, attack craft, high technology ship borne equipment, portable Bailey type steel bridges, turbine pumps for the agricultural sector, marine sewage treatment plants, diesel engines etc.
Highlights Its significant achievements during the year have been: Refit/GRDD of four naval ships, INS-Brahmaputra, INS-Tilanchang, INS-Tarmugil and INS-Tarasa was completed. GRDD of four Coast Guard Hovercrafts (H-182 to H-185) was completed. Received new orders from the Indian Navy for 4 Nos. each of FACs and ASW (Corvettes). An export order of Rs.27 lakh (US$ 54,000) was successfully completed for a South East Asian firm.
6. Goa Shipyard Limited (GSL) - The Goa Shipyard Limited was established in the year 1957. After the liberation of Goa, it became a Public Sector Undertaking under the Ministry of Defence in 1967. Goa Shipyard Limited builds a variety of modern, medium sized and special purpose ships for the Defence and Civil sectors.
Highlights Significant achievements of the Goa Shipyard Limited during the year have been as under: One Fast Patrol Vessel was delivered to Indian Coast Guard in November 2002 and another Fast Patrol Vessel in April 2003. The Company has augmented its ship repair facilities by renovating and modernizing two slipways with a view to obtain large repair and shipbuilding orders for marine and naval vessels. The Company has been awarded ISO 9001 Certification for Design, Construction and Repair of various types of ships and crafts. The Company has embarked on an export promotion drive through bidding for global tenders and participating abroad in exhibitions, seminars and presentations relating to shipbuilding capacities of the Company.
7. Bharat Dynamics Limited (BDL) - The Bharat Dynamics Limited was established in 1970 for manufacture of Guided Missiles. Initially the production of the first generation Anti Tank Guided Missile (ATGM) SS11 B1 with collaboration from M/s Aerospatiale of France was taken up. The production of the second generation ATGM, Milan, under collaboration from M/s Euromissile, France was started in 1985. In 1989 the company started manufacturing Konkurs ATGM System under license agreement from the erstwhile USSR. The BDL is the prime production agency for Missiles developed by the DRDO. The Company has a full-fledged Design and Engineering division for developing and updating products required by the Services. Some of the products developed In-house and delivered are the Flame Launcher, ATGM Simulator, JATO Booster etc.
Highlights The Companys achievements during the year are as follows: BDL attaches the utmost importance to customer satisfaction. The company regularly participated in field firings conducted by the users. BDL carried out various improvements in manufacturing process and inspection procedures. Efficiency in the process has increased by way of computerization. These have resulted in increasing value added per employee, steadily. BDL has also started manufacturing the lightweight torpedo developed by DRDO, which can be launched from surface ships to helicopters.
8. Mishra Dhatu Nigam Limited (MIDHANI) - The Mishra Dhatu Nigam Limited, was incorporated as Public Sector Undertaking in 1973 at Hyderabad to achieve self-reliance in the areas of super-alloys, titanium alloys and special purpose steel required for strategic sectors like Aeronautics, Space, Armaments, Atomic Energy, Navy special products like molybdenum wires and plates, titanium and stainless steel tubes, alloys for electrical and electronic application like soft magnetic alloys controlled expansion alloys and resistance alloys.
The achievements during the year have been: MIDHANI successfully demonstrated the technological capability of producing a sophisticated Niobium alloy required for critical space application. Successfully developed complicated shaped forgings of a special stainless steel as a part of Companys strategy to move towards value added products. Successfully completed hot rolling of thick plates of titanium alloy for fabrication of high-pressure Gas Bottles for the first time in the country. Successfully productionised a wide range of high quality bio-medical implants made of Titanium as low-cost import substitutes and attained a stage for launching it on commercial scale. MIDHANI continued to extend special materials support to programmes of national importance such as LCA, PSLV/GSLV, Armaments in the Defence, Aeronautical, Space & Atomic Energy Sectors. Executed an export order for large size plates / slabs of titanium alloy (Ti-6 Al-4V). MIDHANI has successfully developed and characterized the filler wires and subsequently used them to overlay AB2PK forgings as per the requirements. MIDHANI exported goods valued at Rs 64.84 lakhs up to December, 2002, which consisted mainly of Molybdenum and Titanium products to Netherlands, Taiwan, Vietnam, Japan and United States of America. MIDHANI has developed manufacturing process for making titanium alloy hemisphere through super plastic forming, which is a very advanced technology. The specialized Tungsten Inert Gas (TIG) facility for making value added items have been commissioned. Welding and testing of weld coupons is in progress. MIDHANI has obtained quality certification of its products from i. M/s Boeing Aircraft Company, USA for Titanium and titanium alloys for C-17 program and MD series ii. M/s General Electric Aero Engines, USA iii. DGCA, DGAQA, DGQA and customers like VSSC
Other Organizations In Department Of Defence Production Directorate General Of Quality Assurance (DGQA) - The Directorate General of Quality Assurance (DGQA) is an inter-service organization functioning under the Department of Defence Production. It is responsible for Quality Assurance of all defence stores and equipment, both imported and indigenous for the Army, the Navy (excluding Naval Armaments) and all common users items for the Air Force. It has, therefore, a vital role to play in the defence preparedness of the Country.
The Organization is structured into seven Technical Directorates each of which is responsible for a distinct range of equipment. The Technical Directorates are vertically structured in three-tiers for functional purposes, comprising their respective Headquarters, Controllerates, Field Quality Assurances Establishments & Proof Establishments (for Armament discipline only). The tasks performed by them are complimentary and are integrated to achieve maximum efficiency.
Directorate General Of Aeronautical Quality Assurance (DGAQA) - DGAQA has its Headquarters at New Delhi with Resident Inspection Establishments at various production centers in the country. Its main functions inter-alia include quality assurance during design/development, production, overhaul and repair of military aircraft and accessories, technical association with DRDO, establishment of indigenous spares for production of aeronautical stores etc.
DGAQA also actively associated in the QA of various sophisticated indigenous projects and also participated in Integrated Guided Missile Development Programme (IGMDP) and non-IGMDP Projects like Prithvi / Akash / Trishul Missiles, both as the overall Nodal Agency and Quality Assurance Agency for most of the major systems.
Directorate of Standardization - Directorate of Standardization was set-up in 1962 with the objective of controlling items proliferation within Defence Services. Nine standardization cells and six Detachments have been located at nodal stations in the country to give a boost to the Standardization activity. The prime objective of Directorate of Standardization is to establish commonality in equipment and components among the three Services so that the overall inventory of Defence Services is reduced to the minimum. This objective is sought to be achieved through: Preparation of Standardization documents such as Joint Services Specifications, Joint Services Preferred Ranges, Joint Services Rationalized Lists, Joint Services Guides, Joint Services Policy Statements & Joint Services Qualitative requirements.
Codification & Cataloguing of Defence Inventory and Entry Control Standardization activities are done through 13 Standardization Sub Committees, Panels/Working Groups under these Sub Committees and several Specialist Technical Panels (STP).
Its major achievements during the year have been as follows: 555 documents, which had completed 5 years life, have been revised. 965 standard documents were formulated. 450 items were considered for variety reduction under 21 Joint Services Rationalized Lists during 20022003. This quantity was reduced by 110 items, thus bringing about a 23.40% reduction.
Directorate of Planning & Co-ordination - The Directorate of Planning and Coordination was set up in 1964 with the primary objective of preparing the overall plans for production of defence equipment in the country. It acts as a catalyst in the defence production efforts by providing a dynamic link between the production organizations, the users, the Research & Development (R&D) agencies and the quality assurance organizations thereby facilitating Transfer of Technology (ToT) and the modernization plan of Ordinance Factory Board. In furtherance of its role, the Directorate represents the Department of Defence Production in the General Staff Equipment Policy Committee, the R&D panels and Standardization Committees. The Directorate also
represents the Department of Defence Production in the Licensing Committee meetings of the Ministry of Industry to ensure that there is no overlap in the capacities created elsewhere and under the Ministry of Defence. The cases for setting up of Ordnance Factories in the country at the green field sites as well as progressing electronics related projects for the defence forces are processed by the Directorate. The Directorate is also the nodal point in the Department for international co-operation on defence production and defence exports.
APPENDIX B [ Brief Description about Major Global Defence firms ] 1. BAE Systems (US) - BAE Systems is a leader in the design, development and production of combat vehicles, artillery, naval guns, missile launchers and precision munitions used by the U.S. Department of Defense and allies worldwide. The company is a sole-source prime contractor on several programs comprising critical elements of the U.S. military force structure. BAE Systems has produced more than 100,000 combat vehicles and 100,000 weapon systems currently in use by the U.S. Department of Defense and international allies. Its more than 60 years of experience have led to long-standing customer relationships, proprietary technologies, a diversified product portfolio, disciplined program management and a competitive cost structure.
Technological expertise BAE Systems is at the forefront of research, development and design technologies necessary for advanced armored combat vehicles, artillery, naval guns, missile launchers and precision munitions. These technologies have been instrumental in our selection as the sole-source prime developer, system integrator and producer for critical combat systems of the U.S. military, including:
Bradley Fighting Vehicle -- the U.S. Army's primary armored infantry vehicle Mk 45 Gun System -- the world's lightest, most reliable, fully automated 5-inch naval gun system Mk 41 Vertical Launch System -- missile launch canisters and, in conjunction with Lockheed Martin Corporation, missile launchers for the U.S. Navy's surface fleet
Advanced Gun System -- the next generation 155mm naval gun system being developed for the U.S. Navy
BAE Systems has developed expertise in the design and manufacture of technologically advanced combat systems that can acquire, synthesize and utilize battlefield information from multiple sources. This expertise enables the company to:
Increase significantly the effectiveness of combat vehicles and weapons systems. Integrate new technologies into our installed base. Compete effectively to win prime contracts for next-generation combat systems.
Global reach BAE Systems is a global defense contractor. The company has expanded its international presence over the past several years through direct foreign sales, its joint venture in Turkey, and co-production programs. United Defense has further expanded its international operations, gained technology and enhanced its engineering capabilities through the acquisition of Bofors Defence, a leading provider of weapon systems and precision amunitions based in Sweden.
The following companies are wholly or partially owned by BAE Systems: a) United States Marine Repair b) BAE Systems Bofors c) BAE Systems Advanced Ceramics d) FNSS e) BAE Systems Composite Structures
2. SNECMA (France) - Snecma is, within the SAFRAN22 group, dedicated to the production of engines for both air and space. Working alone or in partnership, Snecma designs, develops and produces engines for civil and military aircraft, launch vehicles and satellites.
The company is organized in three divisions:
Commercial Engines: Snecma and GE Transportation team up to produce the best-selling family of CFM56 turbofans. Snecma is also a partner to General Electric on large turbofans, the CF6, GE90 and GP7200. We are developing our presence in the regional aviation market through the SaM146 (along with Russian engine manufacturer NPO Saturn), which confirms our position as the engine manufacturer offering the widest thrust range.
Military Engines: design, development, production, sale and support of jet engines for combat and training aircraft, as well as turboprop engines for military transports. Snecma's engines power over 20 different types of
SAFRAN is an international group led by SAFRAN, a French registered company with a Supervisory Board and an Executive Board, headquartered in Paris, France. SAFRAN is a high-technology group, organized in four branches: Aerospace propulsion, Aicraft equipment, Defense Security, Communications. ___________________________________________________________________________________________________ Ranjan R Rao & Mayank Chaturvedi Page 67 of 67
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military planes in nearly 40 countries. Our flagship products include the M53-P2 for the Mirage 2000, the M882 for the Rafale, and the TP400-D6 for the upcoming Airbus A400M.
Space Engines: Snecma, lead propulsion company for Europes Ariane launcher, develops and produces propulsion systems and equipment for launchers, satellites and space vehicles. Over the years we have built up the skills and resources needed to design products that offer the best combination of performance, reliability and cost.
Group-wide synergies A member of the SAFRAN group, Snecma benefits from the synergies generated by an international hightechnology group with four core businesses: aerospace propulsion, defense and security, aerospace equipment and communications. SAFRAN has 56,000 employees in over 30 countries, and annual revenues exceeding 10 billion euros. The SAFRAN group comprises a number of companies with prestigious brand names, and holds, alone or in partnership, global or European leadership positions in all of its markets.
3. Dassault Aviation (France) - Dassault Aviation is one of the major players in the global aviation industry. A reasonably sized and financially secure private international group, with a presence in more than 70 countries across 5 continents, Dassault Aviation has been profitable ever since its creation in 1936. Structured to adapt its production to market cycles, Dassault Aviation gives business to a rich industrial network of high-tech companies in France, Europe, the US and many countries worldwide.
Through its engineering design departments, production facilities, the skills of its employees and its product lines, Dassault Aviation offers its customers in-depth know-how, ranging from design to operations, based on strong entrepreneurial values. Through technological development, the concept of the aircraft tends to embody the more realistic idea of complex airborne systems in both civil and military markets.
Few companies in the world are now capable of manufacturing these systems which require essential expertise from the design to the production and support stage in terms of coordination, the accounting management of integrated systems and integration. The systems integrator must boast a wide range of skills to take account of all the system's technical and financial components, while knowing how to assess the risks involved in its integration.
Dassault Aviation's expertise is built upon four cornerstones: Global architectures Achieving a balance between performance, technology and cost savings Controlling costs and deadlines Controlling risks.
Dassault Aviation, a true systems integrator, manufactures products presenting the hallmark of quality:
Rafale and Mirage 2000: Developing within systems of systems and resulting from the integration of many functions (propulsion, flight control systems, communications, cockpit environment, fire control, etc.), manufactured by more than seventy French OEMs.
Falcon: Resulting from the integration of more than thirty systems and functions, which are manufactured by around fifty major French and foreign, mostly US OEMs.
4. Sukhoi Company (JSC) (Russia) - Sukhoi Company (JSC) is Russias major aircraft holding company, employing about 31,000 people. Among the holdings members are leading Russian design bureaus and aircraft production plants. The Company supports a complete cycle of work in aircraft engineering: from frontend engineering to comprehensive aftersales support. The holding's products, such as Su- marque combat aircraft, are state-of-the-art weapons systems in the global market, which form the backbone of the frontline aviation of Russia and tactical air forces of many other countries. The Company is Russia's major manufacturer of export aircraft, placed 3rd in the world in terms of the numbers of modern fighters produced. The Company is currently implementing promising programmes in the field of military and civil aircraft engineering.
R&D Activities Priority development and manufacturing of prospective combat aircraft for frontline aviation. Progressive development and large-scale upgrading of multi-role Su-fighters. Diversification of production through promotion of civil aircraft manufacturing in compliance with international standards, and a wide range of aftersales services. Incorporation of cutting-edge technologies into R&D and manufacturing solutions. Adoption of online design procedures, introduction of pioneering manufacturing methods based on CAD technology. Introduction of a single quality and pricing management system. Reduction of time-to-market and costs.
Comprehensive retrofitting and upgrading of the holding's manufacturing facilities.
Sukhois organization structure can be shown as:
Sukhoi Design Bureau is one of the leading companies dealing with the design of combat aircraft, develops a number of projects of commercial aircraft, including supersonic transport, ground effect vehicles and general aviation aircraft. The design bureau founded in 1939 by Pavel Osipovich Sukhoi began its activity by designing the Su-2 strike aircraft. Later the design bureau developed fighters Su-7, Su-9, Su-11, Su-11, Su-15, Su-17, bombers Su-24, attack aircraft Su-25, T-4 ("2100"), long-range supersonic strike reconnaissance complex. At the beginning of 80s air superiority fighter Su-27 was designed, it became the basis for the Su-27UB, Su-30, Su33, Su-27IB, Su-35, Su-37, Su-30Mk, Su-27KUB. The Su-27 has set up 41 world records.
5. Isreal Aircraft Insdustries, IAI (Isreal) - Israel Aircraft Industries, Ltd. is a state-owned company which engages in manufacture for defense system needs, manufacture for export, and construction of long-term infrastructure for domestic and export defense needs. Since 1968 the IAI has been a limited-liability Stateowned enterprise, with the Ministries of Defense, Finance, Transportation, and Industry and Trade represented on its board.
The IAI comprises four divisions. The Aircraft Upkeep Division has four industrial plants: Shaham (overhaul and upgrade of aircraft), Masham (engine overhaul), Matam (aircraft maintenance), and Mashab (accessories overhaul). The Electronics Division has four plants: Mabat (space systems and technologies), Tamam (precision instruments), Malam (integrated systems engineering), and Elta Electronics Industries, Ltd. (a subsidiary). MLM Division, a leading weapons and C3I systems house, is the systems integration house of Israel Aircraft Industries. As a multi-faceted design, development and systems engineering organization, MLM's cutting edge technologies have spearheaded the development of the Arrow AntiTactical Ballistic missile Weapon System and the Shavit LEO Satellite Launcher. The Aircraft Division has six plants: Teshen (engineering and infrastructure development), Lahav (assembly and upgrade of combat aircraft), Kabam (manufacture and assembly of combat aircraft), Malkam (aeronautics manufacture and contracting), Mattan (civilian aircraft), Malat (pilotless aircraft). The Technologies Division has four plants: Ramta (components and systems) in Beersheva, Shahal (hydraulic servo systems) in Lod, Matta (civilian aircraft), and Golan Industries (seats for executive aircraft).
IAI began in 1933 as a small machine shop, later catering to the maintenance and upgrading of the motley collection of aircraft acquired during the War of Independence. It continued to specialize in the overhaul and retrofitting of the whole range of aircraft in the air force inventory. Israel Aircraft Industries was established in 1953 as Bedek Aviation Company, five years after the establishment of the State of Israel. Until the cancellation of the Lavi project in 1987, IAI had been entrusted with the development of the advanced fighter aircraft. Israel Aircraft Industries' scope has expanded to include technologically sophisticated solutions for battle in the air, at sea or on land. Israel Aircraft Industries also produces missile boats such as the "Super Dvora".
IAI's development has paralleled that of the State of Israel and the Company has been privileged to play a substantial role in the industrial, technological and economic progress of the country and its national security.
6. SAAB (Sweden) - Saab is one of the worlds leading high-technology companies, with its main operations in defense, aviation and space. Saab covers a broad spectrum of competencies and capabilities in systems integration. Saab develops manufactures and delivers advanced products and services for the defense market, as well as for commercial markets where its expertise creates business opportunities.
Strategy Saab has been working for many years to develop advanced solutions for the Swedish Army, Navy and Air Force. It has also taken system-wide responsibility for ensuring that various systems and products work together.The last decade has brought with it a revolution in the way militaries organize and operate and a variety of new threats to society. This has created a need for greater cooperation across national borders and better use and coordination of military and civil resources. Moving forward, Saabs operations will be dominated by a continued internationalization, development of new solutions to bolster national security and further efficiency improvements.
Saabs operations are divided into three different business segments where Saab has built up world-leading and in some cases unique competence: Defense and Security Solutions, Systems and Products and Aeronautics. A strategy has been laid down for each segment.
Active in international alliances International cooperations are becoming increasingly important to the development of new systems and products. Saab participates and has participated in a number of development alliances, which demands great flexibility. Saab must be able to serve as a supplier of subsystems in certain situations and assume lead development responsibility in others. Furthermore, it is not unusual that companies that are partners in one project are competitors in another.
Growing through acquisitions Saab is actively participating in the consolidation of the international defense industry and working systematically to identify potential acquisitions that fit its strategic areas. For example, Saab has joined with the French company SNPE Matriaux Energtiques and Finlands Patria to form EURENCO, one of Europes leading propellants and explosives companies. Saab has also acquired the Finnish defense company Elesco, which provides systems integration services to the Finnish defense forces. With its acquisition in Grintek, Saab is also well-established in South Africa.
REFERENCES
1. www.fpa.org 2. www.cia.gov 3. www.defenceindia.com 4. www.mod.nic.in 5. www.indiatogether.org 6. www.indiadaily.com 7. www.indiainfoline.com 8. www.southasianmedia.net 9. www.globalissues.org 10. www.en.wikipedia.org 11. www.brookings.edu 12. www.bharat-rakshak.com 13. www.idc.com 14. www.baesystems.com 15. www.snecma.com/?&lg=en 16. www.dassault-aviation.com 17. www.sukhoi.org/eng/ 18. www.iai.co.il 19. www.saab.se

ET Domain Project: Defence Sector

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ET Domain Project

Mayank Chaturvedi (PGDM-105-22) Ranjan R Rao (PGDM-105-32)

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We make war that we may live in peace Aristotle 1

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1.2 PEST(LE) ANALYSIS FOR DEFENCE SECTOR IN INDIA

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1.2.1 Political Perspective Where are we?

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1.2.2 Economic reason

Table 1 - Service/Department-wise break-up of Defence Expenditure

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Department-wise Expenditure as a Percentage of Total Defence Expenditure 2005-06 (BE)

Source: Ministry of Defence Annual Report 2004-05

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See Annexure I for list of Indias latest defence procurements initiatives/plans

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there are multi-tier

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Source: Ministry of Defence, * Provisional

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Requirements of Army/Navy/ Air Force

DPSU undertakes production Research & Development stage

Supplies to the Army/Navy/Air Force Typical Defence order flow

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selected for component supplies on a number of criteria. The type of

product to be made, the

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Source: India Infoline research

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Low value added products, Low margins

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Source: India Infoline research