Indian Defense Market Is The World’s Busiest

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The growth in the Indian defense sector is surging, and the U.S. is jostling with traditional arms suppliers Russia, Israel and France for a prominent space in the South Asian nation’s military modernization plans.

The mad rush to get a piece of the Indian defense pie is evident from the fact that over 600 companies around the world are participating and vying to sell their products at the ninth Aero India show in Bengaluru Feb. 6-10.

Among them, 67 armament and aviation companies are from the U.S., followed by 49 from France and 33 from the U.K., along with 29 manufacturers from Russia and 18 from Israel.

These aerospace and defense companies are taking all possible steps to update their business strategies and operations to seize opportunities in this highly competitive, lucrative and rapidly expanding market.

“With India’s defense budgetary allocation expected to touch $50 billion in the next fiscal year, beginning April 1, 2013, nobody wants to miss the bus,” says a senior Indian defense ministry official.

The major portion of India’s expenditure on new procurement will go to air platforms in the near term, with spending expected to exceed $15 billion in the next couple of years.

In the fight for major aircraft deals for the Indian air force, American companies currently have an edge over the Russians. U.S. aircraft makers, having lost out on the multibillion-dollar Medium Multirole Combat Aircraft (MMRCA), have been trying to convince Indian authorities to replace Russian equipment, and they have been surprisingly successful.

Despite Indian authorities’ hesitance to buy systems from the U.S. due to American dual-use technology export control restrictions, U.S. companies have notched orders worth $8 billion in India in the last few years and deals worth over $10 billion are in the pipeline.

The latest announcement from the Indian air force late last year was the selection of Boeing’s Apache AH-64D to meet its requirement for 22 multirole combat helicopters.

Boeing submitted proposals to offer the latest Block III version of Apache to India in 2009. Russia, which had bid the Mi-28, announced late in 2011 that it was out of the estimated $1.4 billion deal after failing to meet several of the air force’s technical requirements.

Close on the heels of the Apache deal, Boeing got another boost when the air force opted for Chinook CH-47F to fulfill its requirement for 15 heavy-lift helicopters. Boeing emerged as the lowest bidder when life-cycle costs were calculated, edging out a proposal for the Russian Mi-26.

“These deals, estimated at around $2.5 billion [together], are expected to be signed in 2013,” the Indian defense ministry official notes.

Another major Boeing contract is the $4 billion deal to supply 10 C-17 Globemaster III strategic airlift aircraft. “The first C-17 aircraft will be delivered to India in May or June 2013, and by mid-2014 all 10 aircraft are likely to be with the [air force],” says Patrick Druez, head of business development for Boeing Military Aircraft’s Mobility Div. in Northern Europe and India.

India will also receive the first three of its eight contracted P-8Is long-range maritime reconnaissance and anti-submarine warfare aircraft this year. “The program is progressing on schedule as Boeing assembles the fourth and fifth P-8Is,” Dennis Swanson, a vice president at Boeing Defense, Space & Security, tells Aviation Week.

Under a $2 billion contract signed in 2009, Boeing will deliver eight of the long-range maritime reconnaissance and anti-submarine warfare aircraft to India starting in the first half of this year, with an option for four more. India is the launch customer for the P-8I, a variant of the U.S. Navy’s P-8A Poseidon.

“With 7,500 kilometers of coastline and three aircraft carriers, the Indian navy is going to have a tremendous need for . . . maritime and surveillance aircraft,” says Carl Lang, Boeing’s P-8I program manager. “So we expect that once the navy starts using the P-8I, the demand may go up to 30 or more.”

The air force is also planning to exercise its option for another six C-130J Super Hercules transport aircraft from Lockheed Martin, in a bid to complete the full squadron of 12 Hercules in its transport fleet.

As it seeks to reach its sanctioned strength of 42 squadrons by 2022, up from its current 34, the air force is advancing its modernization process. Under its 15-year Long-Term Integrated Perspective Plan 2002-17, the service is buying fighters, transport aircraft, helicopters, radars and missile systems in a phased manner.

“We are on a path of modernizing our assets. In the last five-year plan [2007-12], the [air force] procurements were around $27 billion. We envisage procuring assets worth more than $37 billion over the next two plan periods [by 2022],” says the air force deputy chief, Air Marshal R.K. Sharma.

Several megadeals could reach the signing table this year, including the estimated $20 billion MMRCA project with Dassault to supply 126 Rafales to the air force.

“Termed as one of the largest defense deals in the world, the fighter deal is large enough to change the face of the defense industry in India and France,” says Gurpal Singh, deputy director general of the Confederation of Indian Industry, who heads its defense, aerospace and security group.

Some of the other big-ticket contracts in the offing include the 214 units of fifth-generation fighters to be jointly developed by India and Russia, as well as the Swiss Pilatus PC-7 Mk. II turboprop aircraft.

In addition, the air force has plans to buy around 220 Tejas Light Combat Aircraft (LCA), orders for the initial 20 of which have been placed with an Indian consortium led by Hindustan Aeronautics Ltd.

The air force is progressively introducing BAE Systems Hawk advanced trainers, 123 of which were ordered in two contracts inked in March 2004 and July 2010 totaling 160 billion rupees ($3.2 billion).

India has signed a $2.4 billion contract with Thales and Dassault to upgrade its 51 Mirage 2000 combat jets that were acquired in the 1980s. Plans also are underway to modernize Su-30MKI fighters deployed by the air force with certain so-called fifth-generation aircraft characteristics to convert them into “Super Sukhois.”

And the air force plans to buy an additional 59 Russian-made Mi-17 V5 helicopters; it ordered 80 in 2008.

“Most of these deals are expected to take a final shape in 2013,” says the Indian defense ministry official.

The air force is also likely to take delivery of the two remaining Embraer 145 AEW&C aircraft on order from Brazil’s Embraer Defense and Security toward year-end. India received the first last August under an agreement worth more than $200 million signed in 2008 to jointly integrate the indigenously developed AEW&C systems onto three of the modified regional jets. The aircraft carries the Indian Active Array Antenna Units developed by the Defense Research and Development Organization (DRDO).

The Indian government is expected to choose the winner of a 197-helicopter competition this year. The Eurocopter AS350 Fennec and Russian Kamov Ka-226 Sergei are vying for the contract expected to be worth over $2 billion. The army will take delivery of 133 of the helicopters and the rest would go to the air force.

Moreover, India may sign a final deal with Airbus Military to supply A330 MRTT Multirole Tanker Transport for its new midair refueling tankers. “Detailed negotiations will now begin, which is expected will lead to the award of a final production contract for an envisaged six aircraft in 2013,” an Airbus Military official says.

The twin-engine MRTT was competing with the Russian Ilyushin IL 78 Midas; the air force operates six IL 78 refuelers now. The Airbus Military official estimates the value of the project is about $1.55 billion.

The defense outlay for the current fiscal year, which ends March 31, constitutes 1.9% of the country’s gross domestic product (estimated to be 101.6 trillion rupees), a marginal increase from the 1.83% of the GDP in 2011-12.

As one of the largest defense equipment markets in the world, India is expected to spend about $120 billion on capital acquisition alone during the next five years.

“We are in one of the world’s most dangerous regions, with two nuclear-armed neighbors,” the Indian defense ministry official says. “The rising military might of China and threats from Pakistan, along with an underdeveloped aerospace industry, have by default made us the world’s leading weapons importer.”

Meanwhile, a report by Deloitte Aerospace & Defense on the 2013 outlook says India is poised to become a favorite destination for global defense sector players with total offset opportunity for the commercial segment in the country set to cross the $10 billion mark this year. According to the report, while the global defense industry is expected to shrink, India continues to be one of the promising A&D markets in the world, due to its armed forces’ increasing demand for A&D equipment.

“Due to the huge offset requirement and the Indian government’s objective of building up an indigenous manufacturing base, the global industry has an opportunity to integrate with the Indian industry to set up their manufacturing lines in India,” says Nidhi Goyal, director at Deloitte India. “This could be achieved either through joint ventures or collaborations.”

While the Indian defense market is providing new opportunities for foreign defense companies, the government is well aware of the importance of building up its internal industrial defense base. As a result, it has introduced stringent offset requirements and insists on transfers of technology under the Defense Procurement Procedures. It recently announced a new strategy, “Buy Indian, Make Indian,” in an effort to keep production local.

Offset contracts valued at more than $4.5-5 billion have been signed by Indian and foreign companies since the offset policy came into effect in 2005. However, with the new 2012 guidelines and the assumption of a formal civil policy, the total offset opportunity for the commercial segment is estimated at $10-15 billion.

Current procurement rules require any foreign vendor receiving an Indian defense deal worth more than 3 billion rupees to reinvest 30% of the value into the country’s industry. In 2012, the rules were revised to put a 20% cap on the penalty for foreign companies that fail to fulfill their defense offset requirements within the set time frame.

Indian companies will likely succeed with the help of foreign companies, benefitting both. Once indigenous manufacturing takes root, research and development for the Indian military and civil aircraft sectors is likely to be the government’s next focus area.

The Indian defense ministry official points out that there is “a lot of scope for both public and private sector” players to participate in the air force’s upgrade plans. “The Indian aerospace industry will have to focus on developing in-house infrastructure, training and R&D capabilities to energize this sector,” he says.

Indian Defense Market Is The World