Who will bag the Rs 50,000-crore order for six submarines? It's a four-horse race - The Economic Times
It was a tough afternoon on October 13 at Hindustan Shipyard Ltd (HSL). Cyclone Hudhud had ravaged Visakhapatnam in the morning, damaging the defence ministry shipyard as well as every other industry in the coastal town.
HSL chairman and managing director NK Mishra had prepared a contingency plan — he had retained key people inside the plant overnight and hired portable diesel generator sets. He was fighting to keep his date with Indian Navy — a promise to float INS Sindhukirti, the Navy's submarine, by October 31.
The submarine has been in refit mode for seven years. However, Mishra's contingency plan was not working. Pieces of the roof kept falling and no worker was ready to enter the building dock. Mishra decided to do what he had to do — put on a helmet and walk in first. The workforce fell in line and HSL lost only half a day to Hudhud.
For the Indian Navy, urgency is critical. Today, it has an ageing fleet of 14 submarines manning Indian waters .. The U-boats are key in the Indian Ocean where it is tougher to detect enemy subs because of higher water temperatures, and therefore important to have a large fleet of India's own scouring the deep waters. The Navy had lost the INS Sindhurakshak to a blast in Mumbai in 2013.
Another submarine, INS Sindhuratna, had caught fire in February 2014, killing two. Getting the Sindhukirti back in operation would help the Navy in the near term — especially till it gets new submarines. Mishra's team was finally able to undock Sindhukirti on November 4. Hudhud had deposited silt in the jetty, blocking the way that had to be dredged out.
Meanwhile, between Hudhud and the undocking of Sindhukirti, the world of Indian submarine engineers changed. The defence ministry announced on October 25 its intention to get six new submarines manufactured in India. It had shortlisted seven shipyards that it wanted to evaluate for this job. Naturally, HSL was one of them. But despite its experience in re-fitting subs, it is not the frontrunner.
Public-private One-upmanship
The flavour of the submarine procurement announcement was definitely the Indian defence private sector. Larsen & Toubro (L&T) and Pipavav Defence— the two private sector shipyards — had been listed along with five defence ministry shipyards.
Coming after almost a decadeand-a-half-long engagement in fits and starts by the defence ministry with the Indian private sector and a clamour for more (this NDA government has already opened up 49% Foreign Direct Investment in defence), the announcement seemed to drop broad hints.
Can the private sector deliver on time in an area where the public sector has repeatedly faltered? Mazagon Dock Ltd (MDL), a Government of India undertaking, in Mumbai, for instance, is building six Scorpene attack submarines with French collaboration and all of them are three to four years behind schedule.
Mishra could sense that HSL was starting the race in fourth position; even MDL, in spite of the delays, seems ahead of it, thanks to its experience in building subs. Mishra makes his case forcefully.
"HSL was brought under the defence ministry to manufacture submarines. Today, I am crying for orders with an order book of only Rs 1,500 crore," he says.
Mishra adds that re-fitting of submarines is a much more complicated task than building one and therefore HSL was ready for the task; he then went on to launch into an old-fashioned rant against the private sector and its reliability. The private sector has its own narratives.
Meet Nikhil Gandhi, the entrepreneur who reminds entrepreneur who reminds every interviewer of his paan-wala roots, especially as it somewhat mirrors prime minister Narendra Modi's chai-wala beginnings. Gandhi used to be a small-time Kolkata businessman who ferried the famous Kolkata betel leaves to Mumbai in trains and carried back toys to sell in the City of Joy more than two decades ago.
Today, the Gandhi-promoted Pipavav Defence & Offshore Engineering Company has built the world's second largest dry-dock in India & Offshore Engineering Company has built the world's second largest dry-dock in India and was the first private sector Indian shipyard that got permissions to build warships. That Gandhi built his shipyard in Gujarat's Saurashtra may give him an extra brownie point today.
Gandhi also has a tie-up with Swedish defence and aerospace company SAAB and a joint venture agreement with MDL. "We are negotiating one more joint venture proposalwith a global major with capacity in warships and submarines," Gandhi says and adds that the large facilities he has created are an obvious magnet for global defence majors.
Then there is L&T, led by the feisty AM Naik. It has financial muscle — standalone net profits of just under Rs 5,500 crore in 2013-14 — unlike Gandhi whose company is saddled with Rs 7,000 crore of debt and its request for Rs 1,355 crore of working capital loan is is stuck, pending reworking of its debt.
L&T has already built India's first indigenous nuclear submarine, the Arihant, which is being tested by the Navy. While a lot of the parts were built in L&T's Hazira shipyard (also in Gujarat), the assembly took place in HSL's Visakhapatnam shipyard.
L&T's defence charge is led by MV Kotwal, director and president for heavy engineering. Kotwal explains that L&T's new shipbuild .. L&T's new shipbuilding facility at Kattupalli in Tamil Nadu, its 3D design studio for subs in Mumbai and its experience in building the Arihant make it the natural choice among private sector players.
Kotwal points out to the key facility of a ship-lift in Kattupalli — it allows ships to be lifted out of water and transferred to production or repair bays on rails — which helps L&T operate with speed and flexibility.
L&T also has experience in building missile systems — it has worked with the defence establishment for Dhanush artillery guns, Brahmos supersonic missiles and Pinaka rocket launchers; so it is confident of building the torpedo and missile systems of a submarine too. It has already done the same for the Arihant nuclear submarine.
A Game Changer for Some
Preening before a beauty parade is par for the course. If the entire order goes to one company, it can do wonders for its fortunes. For Pipavav, which has an order book of Rs 7,000 crore as against Rs 1.29 lakh crore for MDL, it can be a game changer.
Gandhi says: "We have two advantages: the world's second largest dry dock and the largest modular construction facilities. We can manufacture 30 ships or submarines simultaneously and take the production up to Rs 24,000 crore a year." On the other hand, for L&T it can be a big booster for its ..On the other hand, for L&T it can be a big booster for its shipbuilding business, allowing it to aim for export orders (L&T's shipbuilding order book is only Rs 2,000 crore).
However, in this parade, no one is sure what the government is looking for: looks, brawn or brain. Amber Dubey, defence expert with KPMG, says: "The order of six submarines should go to one shipyard. It will make sense as each order needs huge investments."
MDL, which clearly scores in the cerebral category with its experience of building subs (in collaboration with DCNS of France), may not be in the fray as the Navy for strategic reasons wants two separate lines of production for submarines in India. Still, the premier naval dock is ready for more — it has built facilities for a second line of submarines at its Alcock yard in Mumbai and will fight for this order, promises a senior MDL official who did ..
While Indian companies are preparing to show off their wares to the government, another set, the global warship manufacturers, are keenly watching the space. Nidhi Goyal, the defence subject expert at Deloitte, says: "World leaders such as Northrop Grumman of Germany, Sembcorp Marine of Singapore, DCNS of France, Finmeccanica of Italy and Komac of Korea will surely be interested in the Indian market."
After all, the Rs 50,000 crore figure — which is what the order for the submarines has been pegged at — is more of a ballpark figure and can go up depending on the specifications.
Pitfalls Along the Way
A foreign shipbuilder will doubtless be required, although how it will be chosen is yet to be decided. As Kotwal of L&T explains, India still has to depend on a foreign company for the basic design of a submarine. "It is a complex vessel that shouldn't crumble under the high pressure it operates in — that's the key design requirement." Whether the government will choose the foreign technology partner or the Indian companies will have to find their own is something yet to be clarified.
Kotwal says, "Either way, we are ready." A key technology that will determine the choice will be air-independent propulsion (AIP). This technology allows non-nuclear submarines to spend longer hours under water.
The longer a sub stays under water, the better are its chances of avoiding detection by the enemy. A submarine that has to burn fuel like diesel will occasionally come over water to take in its share of air for burning the fuel.
There are at least four different alternatives. Three of the Scorpenes being built by MDL, for instance, use DCNS' Module d'Energie Sous-Marine Autonome, or MESMA, in which a steam turbine plant is powered by steam generated from the combustion of ethanol and stored oxygen at a pressure of 60 atmospheres. Another AIP variation uses fuel cells that can split water into hydrogen and oxygen.
Like AIP, a lot of other technologies and parts need to be sourced from abroad. Kotwal estimates that the Scorpenes being built in Mazagon would have 65% or higher foreign technologies and components.
A submarine being built at a cost of between $1 billion and $1.5 billion would have a foreign exchange component of $600-900 million. A sub usually takes five years or more to build, as a result of which foreign exchange fluctuations can wreck havoc with the rupee cost of a submarine.
Kotwal says: "The government must introduce a system of protection against such forex fluctuations. Earlier, it allowed protection to the PSUs. Then, when we protested, the government said no one will have protection. However, a PSU being governmentowned has other ways of getting government support."
A Four-horse Race
Having the ear of the government is key in the defence industry. One person who is likely to play a big role in the submarine orders will be the new defence minister.
Manohar Parrikar, the former chief minister of Goa, was tipped for the post at the time of writing. Ironically, one of the seven shipyards shortlisted for this order, Goa Shipyard Ltd (GSL), isn't quite enthused about this order and almost sees it as a distraction. That may be because GSL has been preparing to build mine countermeasures vessels, or MCMVs, which are ships designed to locate and destroy mines.
GSL chairman Shekhar Mital is clear about his goals when he says: "Since 2005, GSL has been preparing to be a manufacturer of minesweepers. Indian Navy now has only four or five old minesweepers and is in need of new vessels. GSL was nominated for this and Rs 300 crore has been spent for modernization and we are waiting for MCMV orders. For that reason, we will not be able to look at submarines." So far, GSL has specialised in offshore patrol vessels.
In the same vein, the other two large defence shipyards — Cochin Shipyard and Garden Reach Shipbuilders and Engineers (GRSE) of Kolkata — have their own specialisations
Cochin Shipyard is now building the INS Vikrant and is expected to specialize in building more of such aircraft carriers for Indian Navy. GRSE is a riverside shipbuilder in Kolkata with two docks at its main works and another dock at Rajabagan for smaller ships. It is working on 12 ships. It also has an engine division in Ranchi. It specialises in a wide range of frigates.
Since 1961, it has delivered 91 warships to Indian Navy and Coast Guard, the highest among all defence shipyards. Its balance order book stands at Rs 5,000 crore but is expected to land three frigates from the 17-Alpha series, adding Rs 15,000 crore to its book.
GRSE chairman and managing director AK Verma told ET Magazine that while GRSE has not handled submarines before, it is a recently modernised operation. "We are studying the government proposal and our team will make our case when the committee visits GRSE."
It, therefore, all comes down to a fourhorse race, depending on whether MDL may or may not be allowed to build a second line of submarines while it is still grappling with the Scorpenes. The final delivery is scheduled for 2020.
If MDL is ruled out, the final list of three will have two private sector players competing for the prestigious order with one PSU. As Dubey of KPMG points out, Indian Navy has been ahead of the Air Force or even the Army, in indigenization. With the submarine orders, it can once again show the way to privatisation.
There is a need to hasten. On November 7, a torpedo recovery vessel sank off the Visakhapatnam coast, killing one soldier. It was 32 years old and sank not very far from where the INS Sindhukirti is being tested for re-induction. Early guesses suggest that the TRV's hull had cracked letting water in. Death of vessels to old age is a wake-up call — yet another — for the defence ministry.
It was a tough afternoon on October 13 at Hindustan Shipyard Ltd (HSL). Cyclone Hudhud had ravaged Visakhapatnam in the morning, damaging the defence ministry shipyard as well as every other industry in the coastal town.
HSL chairman and managing director NK Mishra had prepared a contingency plan — he had retained key people inside the plant overnight and hired portable diesel generator sets. He was fighting to keep his date with Indian Navy — a promise to float INS Sindhukirti, the Navy's submarine, by October 31.
The submarine has been in refit mode for seven years. However, Mishra's contingency plan was not working. Pieces of the roof kept falling and no worker was ready to enter the building dock. Mishra decided to do what he had to do — put on a helmet and walk in first. The workforce fell in line and HSL lost only half a day to Hudhud.
For the Indian Navy, urgency is critical. Today, it has an ageing fleet of 14 submarines manning Indian waters .. The U-boats are key in the Indian Ocean where it is tougher to detect enemy subs because of higher water temperatures, and therefore important to have a large fleet of India's own scouring the deep waters. The Navy had lost the INS Sindhurakshak to a blast in Mumbai in 2013.
Another submarine, INS Sindhuratna, had caught fire in February 2014, killing two. Getting the Sindhukirti back in operation would help the Navy in the near term — especially till it gets new submarines. Mishra's team was finally able to undock Sindhukirti on November 4. Hudhud had deposited silt in the jetty, blocking the way that had to be dredged out.
Meanwhile, between Hudhud and the undocking of Sindhukirti, the world of Indian submarine engineers changed. The defence ministry announced on October 25 its intention to get six new submarines manufactured in India. It had shortlisted seven shipyards that it wanted to evaluate for this job. Naturally, HSL was one of them. But despite its experience in re-fitting subs, it is not the frontrunner.
Public-private One-upmanship
The flavour of the submarine procurement announcement was definitely the Indian defence private sector. Larsen & Toubro (L&T) and Pipavav Defence— the two private sector shipyards — had been listed along with five defence ministry shipyards.
Coming after almost a decadeand-a-half-long engagement in fits and starts by the defence ministry with the Indian private sector and a clamour for more (this NDA government has already opened up 49% Foreign Direct Investment in defence), the announcement seemed to drop broad hints.
Can the private sector deliver on time in an area where the public sector has repeatedly faltered? Mazagon Dock Ltd (MDL), a Government of India undertaking, in Mumbai, for instance, is building six Scorpene attack submarines with French collaboration and all of them are three to four years behind schedule.
Mishra could sense that HSL was starting the race in fourth position; even MDL, in spite of the delays, seems ahead of it, thanks to its experience in building subs. Mishra makes his case forcefully.
"HSL was brought under the defence ministry to manufacture submarines. Today, I am crying for orders with an order book of only Rs 1,500 crore," he says.
Mishra adds that re-fitting of submarines is a much more complicated task than building one and therefore HSL was ready for the task; he then went on to launch into an old-fashioned rant against the private sector and its reliability. The private sector has its own narratives.
Meet Nikhil Gandhi, the entrepreneur who reminds entrepreneur who reminds every interviewer of his paan-wala roots, especially as it somewhat mirrors prime minister Narendra Modi's chai-wala beginnings. Gandhi used to be a small-time Kolkata businessman who ferried the famous Kolkata betel leaves to Mumbai in trains and carried back toys to sell in the City of Joy more than two decades ago.
Today, the Gandhi-promoted Pipavav Defence & Offshore Engineering Company has built the world's second largest dry-dock in India & Offshore Engineering Company has built the world's second largest dry-dock in India and was the first private sector Indian shipyard that got permissions to build warships. That Gandhi built his shipyard in Gujarat's Saurashtra may give him an extra brownie point today.
Gandhi also has a tie-up with Swedish defence and aerospace company SAAB and a joint venture agreement with MDL. "We are negotiating one more joint venture proposalwith a global major with capacity in warships and submarines," Gandhi says and adds that the large facilities he has created are an obvious magnet for global defence majors.
Then there is L&T, led by the feisty AM Naik. It has financial muscle — standalone net profits of just under Rs 5,500 crore in 2013-14 — unlike Gandhi whose company is saddled with Rs 7,000 crore of debt and its request for Rs 1,355 crore of working capital loan is is stuck, pending reworking of its debt.
L&T has already built India's first indigenous nuclear submarine, the Arihant, which is being tested by the Navy. While a lot of the parts were built in L&T's Hazira shipyard (also in Gujarat), the assembly took place in HSL's Visakhapatnam shipyard.
L&T's defence charge is led by MV Kotwal, director and president for heavy engineering. Kotwal explains that L&T's new shipbuild .. L&T's new shipbuilding facility at Kattupalli in Tamil Nadu, its 3D design studio for subs in Mumbai and its experience in building the Arihant make it the natural choice among private sector players.
Kotwal points out to the key facility of a ship-lift in Kattupalli — it allows ships to be lifted out of water and transferred to production or repair bays on rails — which helps L&T operate with speed and flexibility.
L&T also has experience in building missile systems — it has worked with the defence establishment for Dhanush artillery guns, Brahmos supersonic missiles and Pinaka rocket launchers; so it is confident of building the torpedo and missile systems of a submarine too. It has already done the same for the Arihant nuclear submarine.
A Game Changer for Some
Preening before a beauty parade is par for the course. If the entire order goes to one company, it can do wonders for its fortunes. For Pipavav, which has an order book of Rs 7,000 crore as against Rs 1.29 lakh crore for MDL, it can be a game changer.
Gandhi says: "We have two advantages: the world's second largest dry dock and the largest modular construction facilities. We can manufacture 30 ships or submarines simultaneously and take the production up to Rs 24,000 crore a year." On the other hand, for L&T it can be a big booster for its ..On the other hand, for L&T it can be a big booster for its shipbuilding business, allowing it to aim for export orders (L&T's shipbuilding order book is only Rs 2,000 crore).
However, in this parade, no one is sure what the government is looking for: looks, brawn or brain. Amber Dubey, defence expert with KPMG, says: "The order of six submarines should go to one shipyard. It will make sense as each order needs huge investments."
MDL, which clearly scores in the cerebral category with its experience of building subs (in collaboration with DCNS of France), may not be in the fray as the Navy for strategic reasons wants two separate lines of production for submarines in India. Still, the premier naval dock is ready for more — it has built facilities for a second line of submarines at its Alcock yard in Mumbai and will fight for this order, promises a senior MDL official who did ..
While Indian companies are preparing to show off their wares to the government, another set, the global warship manufacturers, are keenly watching the space. Nidhi Goyal, the defence subject expert at Deloitte, says: "World leaders such as Northrop Grumman of Germany, Sembcorp Marine of Singapore, DCNS of France, Finmeccanica of Italy and Komac of Korea will surely be interested in the Indian market."
After all, the Rs 50,000 crore figure — which is what the order for the submarines has been pegged at — is more of a ballpark figure and can go up depending on the specifications.
Pitfalls Along the Way
A foreign shipbuilder will doubtless be required, although how it will be chosen is yet to be decided. As Kotwal of L&T explains, India still has to depend on a foreign company for the basic design of a submarine. "It is a complex vessel that shouldn't crumble under the high pressure it operates in — that's the key design requirement." Whether the government will choose the foreign technology partner or the Indian companies will have to find their own is something yet to be clarified.
Kotwal says, "Either way, we are ready." A key technology that will determine the choice will be air-independent propulsion (AIP). This technology allows non-nuclear submarines to spend longer hours under water.
The longer a sub stays under water, the better are its chances of avoiding detection by the enemy. A submarine that has to burn fuel like diesel will occasionally come over water to take in its share of air for burning the fuel.
There are at least four different alternatives. Three of the Scorpenes being built by MDL, for instance, use DCNS' Module d'Energie Sous-Marine Autonome, or MESMA, in which a steam turbine plant is powered by steam generated from the combustion of ethanol and stored oxygen at a pressure of 60 atmospheres. Another AIP variation uses fuel cells that can split water into hydrogen and oxygen.
Like AIP, a lot of other technologies and parts need to be sourced from abroad. Kotwal estimates that the Scorpenes being built in Mazagon would have 65% or higher foreign technologies and components.
A submarine being built at a cost of between $1 billion and $1.5 billion would have a foreign exchange component of $600-900 million. A sub usually takes five years or more to build, as a result of which foreign exchange fluctuations can wreck havoc with the rupee cost of a submarine.
Kotwal says: "The government must introduce a system of protection against such forex fluctuations. Earlier, it allowed protection to the PSUs. Then, when we protested, the government said no one will have protection. However, a PSU being governmentowned has other ways of getting government support."
A Four-horse Race
Having the ear of the government is key in the defence industry. One person who is likely to play a big role in the submarine orders will be the new defence minister.
Manohar Parrikar, the former chief minister of Goa, was tipped for the post at the time of writing. Ironically, one of the seven shipyards shortlisted for this order, Goa Shipyard Ltd (GSL), isn't quite enthused about this order and almost sees it as a distraction. That may be because GSL has been preparing to build mine countermeasures vessels, or MCMVs, which are ships designed to locate and destroy mines.
GSL chairman Shekhar Mital is clear about his goals when he says: "Since 2005, GSL has been preparing to be a manufacturer of minesweepers. Indian Navy now has only four or five old minesweepers and is in need of new vessels. GSL was nominated for this and Rs 300 crore has been spent for modernization and we are waiting for MCMV orders. For that reason, we will not be able to look at submarines." So far, GSL has specialised in offshore patrol vessels.
In the same vein, the other two large defence shipyards — Cochin Shipyard and Garden Reach Shipbuilders and Engineers (GRSE) of Kolkata — have their own specialisations
Cochin Shipyard is now building the INS Vikrant and is expected to specialize in building more of such aircraft carriers for Indian Navy. GRSE is a riverside shipbuilder in Kolkata with two docks at its main works and another dock at Rajabagan for smaller ships. It is working on 12 ships. It also has an engine division in Ranchi. It specialises in a wide range of frigates.
Since 1961, it has delivered 91 warships to Indian Navy and Coast Guard, the highest among all defence shipyards. Its balance order book stands at Rs 5,000 crore but is expected to land three frigates from the 17-Alpha series, adding Rs 15,000 crore to its book.
GRSE chairman and managing director AK Verma told ET Magazine that while GRSE has not handled submarines before, it is a recently modernised operation. "We are studying the government proposal and our team will make our case when the committee visits GRSE."
It, therefore, all comes down to a fourhorse race, depending on whether MDL may or may not be allowed to build a second line of submarines while it is still grappling with the Scorpenes. The final delivery is scheduled for 2020.
If MDL is ruled out, the final list of three will have two private sector players competing for the prestigious order with one PSU. As Dubey of KPMG points out, Indian Navy has been ahead of the Air Force or even the Army, in indigenization. With the submarine orders, it can once again show the way to privatisation.
There is a need to hasten. On November 7, a torpedo recovery vessel sank off the Visakhapatnam coast, killing one soldier. It was 32 years old and sank not very far from where the INS Sindhukirti is being tested for re-induction. Early guesses suggest that the TRV's hull had cracked letting water in. Death of vessels to old age is a wake-up call — yet another — for the defence ministry.
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