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Will Mukesh Ambani's billion-dollar bet on aerospace business work?
There is a talk in India's defence circles that when Reliance Industries Ltd (RIL) chairman Mukesh Ambani hired Vivek Lall from Boeing more than a year ago to launch RIL's aerospace and homeland security businesses, India's richest man had a dream: to build an entity like Boeing.
There are others who say Ambani dreams not just big, but bigger - he wanted to build an aerospace company bigger than the world's best.
Whatever the talk may be, the "quiet aggression" from India's largest private-sector company in forging ahead with its plans in aerospace business is remarkable, says a Mumbai-based consultant who has watched RIL for decades. "They are ready for the long-haul game," he says asking not to be named because he isn't authorised to speak to the media.
ET reported on Saturday that RIL has sought an industrial licence to make aircraft parts and develop aerospace technologies. The company has filed an application with the department of industrial policy and promotion (DIPP), under the ministry of commerce and industry.
As the report says, the objective of the new entity, called Reliance Aerospace Technologies Pvt Ltd, is "to design, develop, manufacture, equipment and components, including airframe, engines, radars, avionics and accessories for military and civilian aircraft, helicopters, unmanned airborne vehicles and aerostats".
The report quoted executives close to the matter as saying that RIL is expected to invest close to $1 billion in its aerospace business in the next few years. The Rs 44,000-crore conglomerate is also looking at hiring more than 1,500 people in the new business, the report said.
Idea of a Hub
Creating a manufacturing hub is at the heart of Mukesh Ambani's ambition in the aerospace business, says the Mumbai consultant. "He seems to be focusing on aircraft parts in the short term and on developing new technologies in the long term," this person said. He also felt RIL, now ranked No. 99 on the Global Fortune 500 Companies list, is likely to emerge as a "predominant player" in the aerospace and defence segments "to the extent that its other businesses might not be as important in a decade from now".
RIL executives refuse to be drawn into making forecasts about the chunk of its revenues that would come from defence projects a decade or so later. However, they have long maintained that aerospace is a "significant segment" for the company - both in the aircraft parts and the aircraft building business. They have also said the highly networked and deep-pocketed company clearly has a natural edge in such cost-intensive segments.
Tough Scenario
Washington-based aerospace consultant Robert Metzger, who has written extensively about India's aerospace and defence markets, says it requires guts on the part of private players to enter India's aerospace business. "India should be encouraged that a company as powerful and accomplished as Reliance is prepared to enter the aerospace business. In my view, this shows vision on the part of that company's leadership and resolve to surmount many challenges," he says.
He adds that continued preferences in favour of public-sector enterprises (such as defence public-sector units, ordinance factories, national laboratories, etc) deprives many private companies within India of the opportunity to enter aerospace markets with realistic chance of business success. "India's Defence Procurement Procedure contains no mechanism for the government to award design and development contracts to national private-sector companies," he says.
He has a word for caution for RIL. For the company to succeed, it must also develop products outside areas of direct government authority. "Even Reliance will find that it is not good business to try to invent anew in India," he says.
RIL seems to know the hazards of being in this new business. In aerospace, the company plans to make products for global players - essentially non-government customers - who find it tough to get high-quality products in the country. "The company is expected to be attractive for such players," says another Mumbai-based analyst who also spoke requesting anonymity. Many companies say they often face huge delays in receiving components.
Monopoly Woes
At least two aircraft majors that ET Magazine spoke to among companies that do business with state-owned Hindustan Aeronautics Ltd (HAL), India's largest aerospace company, say they are disappointed with the way things are. They complain of low-quality products and frequent delays.
The spokespersons of these companies spoke on condition of anonymity. HAL denied the charges of inferior quality products. However, it confirmed in a statement that there have been delays in aerospace projects. "Even the best players in the world run behind schedule. Singling out HAL is therefore not fair," HAL said in response to a query by ET Magazine .
Metzger puts it bluntly: "HAL's relationship with foreign suppliers may be less than ideal. I believe that HAL's 'monopoly' in aircraft and aviation systems is such that no major Indian industrial company sees an opportunity to compete directly. Yet, this is not a 'monopoly' earned by superior market performance so much as one that has been dictated by government policy."
As luck would have it, the aircraft parts and maintenance, repair and overhaul (MRO) industries are growing slowly in India despite the huge growth in aerospace business. While all segments of the Indian aerospace industry grew substantially, the original equipment manufacturing posted maximum growth of 20% CAGR over the past five years.
The MRO segment grew much slower, but is expected to grow faster and reach $1.8 billion by 2016. Analysts say the segment was hurt by a series of factors such as HAL's monopoly and the justifiable reluctance on the part of private players to take huge risks.
Here is a tale that brings to the fore the sad state of affairs of the aircraft components segment in the country: An official at an MNC, again on condition of anonymity, told ET Magazine that some of the aircraft parts his company had received from an Indian vendor a few years ago could be traced to a bicycle shop in Bangalore. "The situation is that hopeless," he says.
Adversity as Opportunity
What is bad for the market is a good opportunity for companies that are ready to take the plunge. There are many other local players who have entered into pacts with foreign aircraft companies to pursue projects at home. But there is a difference between them and RIL, says the first Mumbai analyst.
"Unlike other Indian aerospace players who have tied up with foreign companies ( see table: Key existing foreign-local aerospace & defence partnerships ) to compete for individual projects, RIL has a greater goal. It is not of landing projects but creating a manufacturing hub," he says.
As with partnerships, RIL is looking at creating synergies to begin with, until it develops technologies - and aircraft - on its own. The company is in advanced talks with various global aircraft majors to enter into JVs and strategic collaborations, said executives close to the matter. It already has signed an MoU with Dassault Aviation to make major parts of Rafale in India.
This deal was signed after the Centre announced Rafale as the winner in the $11-billion IAF deal for 126 medium multi-role combat aircraft. According to Dassault Aviation, which makes Rafale combat jets and Falcon business jets, the French company entered into an MoU with the RIL "for pursuing strategic opportunities of collaboration in the area of complex manufacturing and support in India".
More Likely Deals
Other major companies RIL is in parleys with to enter tie-ups - across aerospace and homeland security businesses - include Raytheon, Airbus, Siemens, IBM, Cisco besides Northrop Grumman, said executives close to the matter, adding that the company is most likely to enter into a pact with an international aircraft maker to enter into a mega project to build aircraft and components.
A Delhi-based defence expert says RIL could tap into opportunities in the civil aviation manufacturing segment ahead of entering local military aviation in which HAL has a monopoly. RIL, executives close to the matter said, wants to engage in both: civil as well as military aviation. "But it will take a while...it is only a matter of time," the defence expert said.
According to market research firm Lucintel, the Indian aerospace industry, which has experienced significant growth in the past five years, is expected to reach $24 billion in the next eight years from the current size of less than $2.5 billion.
This is in line with the trends in Asia-Pacific: consulting firm Frost & Sullivan says India and China are among the preferred Asian countries for investments in aerospace business thanks to lower costs. By 2030, Asia-Pacific is expected to account for a 33% share of passenger traffic, followed by Europe at 23% and North America at 20%.
RIL is looking at entering into tie-ups with companies such as Airbus and Honeywell besides Boeing in the offsets business. Thanks to India's defence offset policy -which requires foreign aerospace sellers who get local orders worth Rs 300 crore or more to invest at least 30% of the contract value into local research and development or production- overseas players have entered into joint ventures or strategic partnerships with local players.
Meanwhile, according to documents reviewed by ET Magazine , the Naresh Chandra Task Force on national security has recommended that the benefits of offsets should be primarily directed towards increasing domestic designing, manufacturing and technology acquisition.
RIL also looking at tapping its inherent advantages of a large number of highly qualified engineers and scientists to create an R&D base. "They (RIL) have already made the right moves in the right direction by investing in sectors such as aerospace and homeland security and in the right people," says Rahul Gangal, director of defence advisory and investments at consultancy Aviotech.
Of course, Lall's appointment as CEO and president of the aerospace and home land security businesses was a good decision, says another New Delhi-based defence consultant. "The credit goes to Mukesh Ambani for picking the right people, especially Lall who [having worked previously with Raytheon and Boeing besides Nasa] enjoys a great reputation among overseas companies looking to tie up with Indian companies," he says. This consultant didn't wish to be identified.
Clearly, in aerospace, things are looking much more favourable than ever for private players like RIL, but a few analysts are skeptical. For RIL to be able to do more than what the existing private-sector players are doing in the sector, it has to stretch a bit more than it can, says the Mumbai analyst quoted earlier in this story.
"Key challenges [for new players in aerospace] may include management of pre-operative investments made in an environment where threats of programme slippages and cancellations are real and unquantifiable," notes Gangal. "Given those risks, maybe Reliance alone can tide over odds," the analyst says.
A Very High-stakes Game
Reliance Industries Ltd recently created two new entities: Reliance Aerospace Technologies Pvt Ltd and Reliance Security Solutions Ltd. The creation of these businesses were set in motion more than a year ago when RIL created an entity called "new business" and hired the then Boeing India chief Vivek Lall for launching its aerospace and homeland security divisions. With Lall at the helm, RIL wants to make aircraft of its own.
$500 mn to $1 bn: Size of initial investment by Reliance Industries in its aerospace business
1,500 plus: Employees it plans to hire for its new aerospace venture
Grand Foray
--> Recently RIL applied to the department of industrial policy and promotion (DIPP) for an industrial licence for its aerospace arm
--> It applied for licence to design, develop, manufacture, equipment and components, including airframe, engine, radar, avionics and accessories for military and civilian aircraft, helicopters, unmanned airborne vehicles and aerostats
--> It also seeks to conduct research, design, development, and production of new aerospace technologies,
testing and certification of such technologies, materials, components and equipment
Will Mukesh Ambani's billion-dollar bet on aerospace business work? - Page5 - The Economic Times on Mobile
