India’s aerospace boom – a rallying cry for entrepreneurism and free enterprise
When Reliance Industries announced it would spend $1bn transforming India into a global aerospace manufacturing hub, the business community sat up and took notice. Julian Turner talks to Balaji Srimoolanathan, principal consultant for aerospace, defence and security at Frost & Sullivan, about India’s private sector revolution, the nation’s aviation boom and changes to the laws governing defence offset agreements.
When Reliance Industries (RIL), India's largest private sector enterprise with annual revenues in excess of $60bn, announced in July that it plans to invest up to $1bn transforming the nation into a global hub for aerospace manufacturing, the business community took notice.
The Mumbai-based behemoth, under the charismatic chairmanship of India's richest man, Mukesh Ambani, plans to spend between $500m and $1bn on its new aerospace division. Headed up by former Boeing India chief and Nasa luminary Vivek Lall, Reliance Aerospace Technologies will employ 1,500 people to research, design, develop and manufacture airframes, engines, radars, avionics and accessories for military and civilian aircraft, helicopters, unmanned airborne vehicles (UAVS) and aerostats.
For Balaji Srimoolanathan, principal consultant for aerospace, defence and security at Frost & Sullivan, the announcement amounts to an emphatic vote of confidence in India's aviation industry and the nation's private sector.
"This investment by RIL is not just significant for India's aerospace segment - it sends out a clear message that there are still companies in India with a significant appetite for risk," he says.
"It also confirms that the private sector is willing to invest in aerospace manufacturing, an industry that traditionally has been characterised by delays and impacted significantly by global economic trends.
"As importantly, it will increase both the confidence and competency of the private sector in India versus state-subsidised, public sector entities that continue to monopolise the market, despite inefficiencies and delays in delivering projects over the last few years."
Sky-high profits: India's commercial aerospace boom
RIL's investment is the latest step in a process of diversification that has seen the Fortune Global 500 company move away from its core markets of energy and textiles. It is also something of a no-brainer, given that India is one of the world's fastest-growing commercial aerospace markets, with a projected domestic air passenger growth rate of 15% year-on-year. On the international front, that figure stands at a more modest ten percent, in defiance of the global economic downturn.
Airbus's newly designed superjumbo, the A380, is the world's first twin-deck, twin-aisle airliner.
"This is not an investment that's come out of nowhere," confirms Srimoolanathan. "At present, the Indian commercial aviation industry has more than 570 aircraft on order and 1,000 are expected to be in operation by 2020. Boeing estimates that India will need a total of 856 aircraft worth $72bn in the next 20 years in order to meet its air travel demands."
Reliance is in advanced talks about potential joint ventures (JVs) with component and platform manufacturers in the US including Raytheon and Airbus, as well as technology providers such as Northrop Grumman, with a view to importing sophisticated aerospace technologies into India.
"RIL will look at tapping into a large number of highly qualified engineers and scientists in India to create an R&D base," says Srimoolanathan. "India as a nation has plenty of engineers that RIL will hire; I don't think there will be a talent drain from the West. However, there could be some expats hired into potential leadership roles."
First defence: the push to modernise India's military
Of equal importance to RIL is the military aerospace market, as the government led by Prime Minister Manmohan Singh presses ahead with its multibillion dollar modernisation programme. India is among the world's largest arms importers, with a number of high-profile purchases in recent years, including aircraft such as the Boeing P-8I and C-17, as well as the Lockheed Martin C-130J.
"India's military aerospace market has been, and will continue to be, characterised by procurement bids in order to satisfy the modernisation of India's military fleet," confirms Srimoolanathan. "Globally, more than $35bn will be earmarked for fleet modernisation over the next 20 years, making India one of the most attractive markets for air platform procurement.
"RIL has a memorandum of understanding (MOU) with Dassault as part of the Indian air force's $18bn medium multirole combat aircraft (MMRCA) deals. In this context, the company's $1bn investment comes as no surprise, as it will allow RIL to better fulfil these offset obligations.
"There has been no explicit mention yet about manufacturing unmanned aerial vehicles (UAVS)," he continues. "In the short term at least, RIL will focus on component manufacturing. Then, once its credibility and capability is established, it will look to move up the supply chain."
Private sector renaissance and defence offset guidelines
Key to this are changes to the laws relating to defence offset agreements announced earlier this month by India's MoD. Currently, contractors must reinvest 30% of a deal's value in India through offsets (although in the case of the MMRCA tender process, the value was 50%).
Crucially, the new policy allows parties to change an offset project following its approval and is a welcome shot in the arm for India's private sector in general, and its small and medium enterprises (SMEs) in particular.
"Lack of support for SMEs is a fundamental issue in India," says Srimoolanathan. "We believe Reliance will leverage a large number of SMEs in order to compete for opportunities on a global scale."
In this context, RIL's corporate tagline - 'You do not need an invitation to make profits' - sounds more and more like a rallying cry for entrepreneurism and free enterprise, and a challenge to the traditional hegemony of state-sponsored entities. Srimoolanathan is more realistic, however.
"RIL's entrance into the market isn't going to change many of the fundamental challenges that Western companies face in India," he says. "These include finding the right kind of partner that can fulfil the bandwidth of the various offset agreements, delays in decision-making and project delivery, as well as capacity and quality issues.
"What it will do, however, given RIL's size and the level of influence it exerts on government and industry, is put further pressure on the Indian Government to change its policies in favour of the private sector. It is never going to be an effective business model for companies to partner with public sector entities alone in India, fundamentally because of capacity and efficiency issues."
BRICs nations, globalisation and the future for Indian aviation
The Legacy is Embraer's super mid-size corporate and executive jet derived from the ERJ-135 and ERJ-145 commercial regional jetliners.
I conclude by reminding Srimoolanathan about RIL's statement of intent regarding India's future status as a global aerospace manufacturing hub and ask him whether this is symptomatic of the more generalised power shift away from West and towards the developing BRICS nations.
"Companies such as Larsen and Toubro, Mahindra and TATA have been trying to transform Indian into a global manufacturing hub for some time, but have had limited success in influencing India's procurement procedure," he notes. "As a consequence, the majority of air frames are still being assembled in Europe and North America.
"However, we have definitely seen a shift towards the globalisation of supply chains. Many Tier 1 and Tier 2 aerospace companies are outsourcing their production operations to Asia-Pacific, not just because the offsets in those regions mandate it, but also because of the availability of low-cost skilled manpower and reduced manufacturing costs.
"BRIC countries are increasingly producing their own aircraft; in Brazil, for example, Embraer, builds its aircraft platforms and so do AVIC and COMAC in China. We've seen Brazil and China step up to the plate and Russia has had the capability to build its own aircraft for some time. India certainly has the potential do the same in the next few years."
C-NM5 is a new civilian aircraft indigenously developed in India by the government-owned Council for Scientific and Industrial Research (CSIR), National Aerospace Laboratories (NAL), Mahindra Aerospace (MAPL) and its Australian subsidiary GippsAero.
The Polar Satellite Launch Vehicle (PSLV) is a third generation rocket launcher designed, manufactured and operated by the Indian Space Research Organisation (ISRO).