It is not just these forgings, there is a lot more to come:
http://www.economist.com/news/busin...ng-themselves-arms-making-opportunity-strikes
India’s defence industry
Opportunity strikes
The country’s conglomerates are throwing themselves into arms-making
This one looks sub standard
VISITORS to the Talegaon plant of Larsen & Toubro (L&T), an Indian engineering company, might confuse it for the props department of a film studio. Half-a-dozen hangars spread over 50 acres near Pune, a city in western India, are filled with enough weaponry to thrill a Bond villain: camouflaged track-mounted howitzers, anti-submarine rocket launchers and, particularly appealing should Blofeld share Indians’ fondness for trains, a contraption to turn a humble carriage into a ballistic-missile-launcher.
The missile itself is a dummy, but the rest of
the kit speaks of India’s ambitions to breed world-class makers of defence equipment. Although India now has the world’s fourth-biggest military budget, it has been the single biggest arms importer for seven of the past ten years, says SIPRI, a research institute (see chart). The government, tired of this unwanted accolade—and convinced indigenous weapons production can provide jobs, budget savings and technological know-how—puts defence at the heart of its drive to boost domestic manufacturing.
Local conglomerates are salivating at an opportunity they expect could be worth $150 billion-200 billion in the coming decade. Tata, Mahindra and Godrej—as well as L&T—are among those that have piled into weapons manufacturing in recent years. But to succeed they will have to take on foreign importers (which snap up about two-thirds of all procurement by value), a crowd of state-owned companies and the country’s bloated defence bureaucracy.
Impatience with familiar suppliers opened the first breach for private contractors over a decade ago. An unconvincing victory in a skirmish with Pakistan, in Kashmir in 1999, exposed the Indian army’s lack of capability. Insiders blamed a plethora of corruption scandals, involving foreign firms as well as flabby state-owned arms-makers, for leaving forces ill-equipped. But private-sector enthusiasm faded when promises of contracts did not materialise.
The latest sally slightly preceded the arrival of Narendra Modi in power in May 2014, and has been reinforced by his team’s energetic drumming of a “Make in India” theme. Mr Modi has spoken of having 70% indigenous weapons procurement by 2020, roughly double today’s figure (the defence ministry is a bit less ambitious), with more of it produced by the private sector. To achieve this, procurement rules overtly favour stuff made locally. Some of the red tape entangling all things industrial has been done away with: for example, foreign groups may now own as much as 49% in Indian ventures, up from 26%.
Bosses at private Indian firms are delighted by the new rhetoric: Tata, India’s largest conglomerate, identifies defence as one of four core growth areas. Groups with a background in cars (Mahindra) or precision engineering (L&T) have recast themselves as arms-makers, often with the help of Western partners such as Airbus, Boeing or Lockheed Martin.
The pipeline for new defence systems looks appealing. The military budget, some $50 billion a year, is expected to track long-term economic-growth rates of around 7% a year. Press reports suggest the armed forces are short of some 300 fighter jets, at least a dozen submarines, over 1,000 combat helicopters, seven frigates and perhaps 3,000 artillery guns. What gear it has is often of cold-war vintage and from Russia, India’s traditional supplier. Even ammunition is in short supply.
Yet in practice the armed forces are lousy customers. Defence bureaucrats are risk-averse. Military spending is growing, but much new money goes towards salaries and pensions. The share of funds for procurement, research, development and testing has slumped from 34% in 2005 to 25% today, says IHS Jane’s, a research outfit.
Worse, a fifth of the capital budget typically goes unspent because, in the run up to year-end, the finance ministry usually begs generals to shelve projects so that overall public-spending targets can be met. That leaves just $11 billion-12 billion for procurement, says IHS. And much of this is committed to existing projects, often in the hands of state-run companies good at lobbying for their share.
So those in charge of India’s putative defence groups are waiting to see if the opportunity is really as big as it appears. Official rhetoric was enough for investment plans to be drawn up, but not quite enough for big amounts to be spent. “We like the policy; we await the execution,” says one firm’s defence-division boss. A bureaucrat who misinterprets a single word in a regulation could stymie a billion-dollar project, he adds.
Foreign firms will also seek a chance to profit. Nearly 500 attended a recent defence jamboree in Goa. Some are still hoping to do deals to deliver equipment outright. Dassault has been in talks to sell its Rafale fighter jets for over 15 years (“We are getting closer...we are in the final phase,” its chairman said last month, redefining optimism). But
if it comes off, this deal would probably be one of many contracts to have the first batch of a weapons system made overseas before shifting manufacturing—and some technology—to India for later orders, assuming the local partner could cope with production demands.
The past year has seen the weaving of a tangled web connecting big Western defence groups and Indian manufacturing counterparts. A recent deal for BAE Systems to supply howitzers uses Mahindra as the local assembler. A track-mounted artillery gun at L&T’s facility (part of which is a joint venture with Airbus Defence) was designed by Samsung. Boeing and Tata have a partnership to produce Apache helicopter fuselages, among other things.
Sceptics wonder whether local groups do much more than give existing foreign weapons systems an Indian veneer just thick enough to get contracts. Systems developed abroad (often some time ago) can be assembled in an Indian plant, with both sides claiming the gear has been extensively adapted for the Indian market.
Assembly work is not the lucrative bit of the weapons industry—just as the iPhone brings more profits to Apple (its designer) than to Foxconn (its contract manufacturer).
For now, India mostly makes the cheaper bits, especially parts that can benefit from lower labour costs. Pricier systems, which require long development lead-times, are hampered by higher capital costs for Indian firms compared with Western rivals.
All that could change if Indian companies develop expertise to design, not just assemble, equipment. Last month the government said it would give priority to weapons designed and made in India. It should also let firms export their wares—which, in the long term, is the only way investments in arms-making pay, says Deba Mohanty of Indicia, a consultancy.
Countries that spend heavily on armed forces typically have successful arms-making companies. India’s ambition, one day, is to stop being an exception to this rule.
From the print edition: Business
