August 5 2016: Executive summary of the report on Indian Defence Electronics and System Design: Policy recommendations.
The document is authored by IESA, India Electronics and Semiconductor Association (IESA) the National Association of Software and Services Companies (NASSCOM), along with Roland Berger, a leading global strategy consulting firm and was released at the DEFTRONICS conference in Bangalore, on August 4 2016.
India is the 7th largest Aerospace and Defence (A&D) market globally. The budget is sizeable and spread across requirements of Army, Navy and Airforce. India has needs to modernize its A&D capital equipment base by addressing obsolescence as well as build additional capability through new capital acquisition. This requirement is also supplemented by additional budgetary allocations of the Ministry of Home Affairs for paramilitaries and of states on State police force requirements. All of this results in India being substantially attractive as an A&D market.
This however is only one side of the story as there is still substantial reliance on imports to meet capability gaps and capital needs. The indeginous manufacturing base, historically built around DPSUs and Ordnance Factories is only now evolving with private sector players focusing on setting up meaningfully sized and competent facilities.
Aligned with the global trends, It is also evident that as the Aerospace and Defence industry evolves, the key impact is in-terms of greater capability in platforms – a significant portion of the greater capability comes from electronics. Increasingly armed forces across the world, with India being no exception, are seeking not just platforms but delivered capability and competence. Hence electronics in Indian Aerospace and Defence industrial plan is the critical centre-piece that needs addressal. The challenge is compounded by the historically limited industrial base addressing electronics.
The opportunity for electronics in India stems across both stand-alone systems as well as at a subsystem level for other systems. IESA, Nasscom and Roland Berger estimate the total market opportunity for A&D electronics for India to ranges from USD 70-72 bn in next 10-12 years. Of this almost USD 5354 Bn emenates from electronics spend as part of platforms (ie at Tier 1 and Tier 2 levels). Another USD 17-18 Bn of demand emenates from projects which are traditionally called system-of-system projects like Indian Army's Project TCS, BMS etc
While the above market projections provide visibility of next 10-12 years, there could be additional upside with additional programmes being announced in the interim. There could also be on the contrary an expansion of the time-base on which this market opportunity is estimated due to slippages in timelines due to various reasons.
Another set of opportunity that augments this is the potential to integrate into global value chains of OEMs (initially leveraging the Offset route and subsequently based on product quality, service delivery advantages and cost arbitrage).
Hence the market opportunity presented is an indicative marker to a very sizeable opportunity for Indian industry to create capabilities to address and leverage from.
To facilitate the Indian industry to make full use of this opportunity and create world-class companies and capabilities that address not only India opportunities but also leverage from integration into global value chains of OEMs, there is a concrete need for the government to address some issues.
IESA, Nasscom and Roland Berger believe that these issues for which policy recommendations have been made can be broadly grouped into major groups and subgroups.
The first major issue that needs attention is to address lack of visibility, for companies in this segment, in short term as well as long term both from technology as well as procurement perspective. This lack of visibility limits the ability of Indian companies to proactively plan and create competencies knowing that there is a strong government orientation to look at similar segments.
It is evident from experience that one of the best ways to help establish a deep and robust industrial base is through orders placed upon the Industry. Electronics is a level 2 Industry where for most programmes, companies in this segment secure contracts once OEMs are awarded contracts. Delays in award of contracts distorts the abilities of players in industrial segments like electronics which engage on derived demand from OEMs.
Second are some structural issues which must be sorted out in order to streamline the transfer of technology and push manufacturing in India. The Offset policy and 'Make in India' form two main facets of the defence electronics policy. From the manufacturing perspective, DPSUs have traditionally occupied the entire breadth of the supply chain, and limited outsourcing from DPSUs is depriving the Indian industry of considerable opportunities. On the other hand, the private industry has its own set of issues which includes critical shortages of key infrastructure and talent. The recommendations for each of the above issues have been categorized into short term, medium term and long term action plans.
From a policy perspective, to promote exports of Defence Electronics, it is necessary to introduce a multiplier that focuses on creation of an export base of defence electronics around valid technologies. It is also important to create an offset value estimation calculation criteria for ESOs to increase credibility and reduce ambiguity in calculation. In terms of Offset credits, these must be provided on product value and not value-add. Similarly, for financing the defence electronics programmes, it is critical to provide adequate financial support for sustenance of R&D, especially in cases where the developed products are T1 but not L1. This also necessitates the expansion of TDF from its current outlay, which is extremely meagre & only meets the needs of companies with nascent manufacturing and design capabilities.
It should be understood that for creating a robust industry, it will be absolutely a necessity to ensure cost base of Indian suppliers including their profitability expectations are aligned with global needs and norms. Currently that is difficult as the profitability expectations of Indian manufacturers, driven by substantially high cost of capital in India, is much higher than global average. In such a scenario, it is critical to create a structure that subsidises the Indian cost structure. Hence a model similar to ESDM can be leveraged to provide incentives for A&D electronics manufacturing. In case of technology transfer, it is also important for encourage design by Indian OEMs so as to retain full product IP and future commercialization potential in India.
For domestic capability building, in TPCR,, this may require a change the orientation from product as the final desired output to capability (that can address multiple products) as a desired output. This will also require a strong focus on more 'Make' procedure classified products, not only for large developmental projects, but also for smaller projects.
Similarly, for ESOs leading electronics integration programmes, define equitable terms in programmes to create fair grounds of participation. Create separate criteria for smaller companies which have expertise in particular domains to ensure fair opportunity for IT&ES players/ESOs in programme bidding. Ensure outsourcing of workshare by primes to prevent overutilization of large players and underutilization of MSMEs.
From structural and infrastructure perspectives, create a comprehensive definition of Defence Electronics and align the ITC-HS codes with it to streamline the import/export process. For the private industry, incentivize investment in commons infrastructure and allow timely access to testing facilities of DRDO/DPSUs to provide commons facilities for testing for the private sector. Similarly, allow certifying agencies to provide common certification facilities for the private sector. To develop talent in the defence electronics segment, initiate steps to build a talent pipeline for the segment and encourage incubators. To improve the visibility for the private sector, detail the technology roadmap of the TPCR and LTIPP. Focus on the development of domestic capability to sustain (MRO) and upgrade. Also, increase private participation in DPSUs and OFs by building structures that promote both private and public sector participation by outsourcing.
The strategies and recommendations are expected to create and sustain a high-performance ecosystem for defence electronic products.
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