BrahMos supersonic missile shows the way
After a sustained effort of over two decades, BrahMos Aerospace finally tasted success. And with it, the Indian defence industry had something to cheer about. The Philippines signed an agreement worth USD 374.96 million with BrahMos Aerospace Private Ltd for the supply of shore-based anti-ship missile systems.
The contract was signed by the defence secretary of the Philippines, Delfin N. Lorenzana and Director General of BrahMos Aerospace Pvt. Ltd., Atul Dinkar Rane in a virtual ceremony on January 28. The Hindu reported that the contract included delivery of three missile batteries, training for operators and maintainers as well as Integrated Logistics Support (ILS) package. This export order is in consonance with desperate Indian efforts to ramp-up defence exports. While the challenges remain, first about the BrahMos supersonic missile.
A joint venture between India’s Defence Research Development Organisation (DRDO) and Russia’s NPO Mashinostroyenia, BrahMos Aerospace, was established in India through an Inter-Governmental Agreement in 1998. The JV company started participating in international defence and aerospace shows in 2001. Each year, it participates in at least one national exhibition and about three to four international ones across the globe.
Despite several countries showing interest in the missile, BrahMos had not been able to crack the international market until recently for a number of reasons. In an interview to FORCE, Rane points out that the present order did not come overnight. The Philippines was in contact with BrahMos for over five years. Interestingly, the BrahMos export to the Philippines may not earn the company any profit. As Rane says in the interview, competing against well-known international players, the main aim was to put the foot inside the doorway. According to him, one of the ways to leverage the Indian advantage would be to offer a package of Hindustan Aeronautics Ltd-made Light Combat Aircraft (LCA) fitted with BrahMos NG or air to air missile Astra to potential importers.
After the BrahMos deal fell in place, Hindustan Aeronautics Ltd (HAL) signed a contract with the government of Mauritius (GoM) also to export the advanced version of the Advanced Light Helicopter (ALH Mark-III) for the Mauritius police force. The East-African country already operates HAL-built ALH and Do-228 aircraft, given on lease in 2021 for two years. Mauritius bought the ALH through a line of credit extended to it by the government of India.
Such a Long Journey
While the BrahMos missile is the biggest Indian export order so far, HAL had been in the export business for a while. HAL is one of the few Indian defence companies, albeit in the public sector, which has relentlessly been seeking export opportunities. The aerospace major made its first overseas sale in 2009 to Ecuador worth USD 45.2 million after winning the competitive global tender for ALH Dhruv helicopters. The programme, unfortunately, did not end well.
In 2015, Ecuador terminated the contract unilaterally after four of the seven helicopters crashed. The following year, Ecuador went a step ahead and put the remaining three on sale. Later, when HAL attempted exports again targeting a few South-east Asian countries, it laid emphasis on carrying out the maintenance of these aircraft on its own. Clearly, HAL had learnt the lesson from the Ecuador experience. Even in the recent case of Mauritius, HAL in a statement mentioned that it would ‘ensure technical assistance and product support to the customer to ensure healthy serviceability of the helicopter.’
In its attempts to be seen on the world defence exporters’ map, the ministry of defence (MoD) along with the domestic defence industry have been making efforts for indigenisation which could lead to exports. Attempting to build trust among potential buyers of the LCA Tejas and military helicopters, HAL in 2020 announced that it would set up logistics bases in Malaysia, Vietnam, Indonesia and Sri Lanka.
The government of India, in its Defence Acquisition Procedure (DAP) 2020, has laid emphasis on both make-in-India and defence exports. According to the DAP: ‘R&D and innovation remain important cornerstones of India’s defence production strategy. With the launch of “Start-Up India” programme, India has become the hotspot of start-up activity in the world, having the third-largest start-up ecosystem globally. These strengths need to be leveraged to catapult India to next level of frontier defence technologies, both for domestic use and to foster exports.’ The DAP also seeks to create a favourable environment for global Original Equipment Manufacturers (OEM) to shift manufacturing facilities to India.
With the thrust on undertaking exports, in August 2020, the MoD announced preparation of country-wise profiles of defence products and platforms for targeted marketing of equipment. The MoD also announced that the government will stand ‘side by side’ with the domestic industry in this endeavour through diplomatic channels. The announcement came soon after the embargo on import of selected defence items. Defence minister Rajnath Singh reiterated India’s objective of achieving the target of Rs 35,000 crore (5 billion USD) worth of exports by 2024-2025, thereby making India a ‘net exporter instead of a net importer’.
According to media reports, the Modi government has been targeting the ASEAN and countries in the Indo-Pacific, which are defence import-dependent. This move is seen as rivalling Chinese exports. Interestingly, Swedish think tank, Stockholm International Peace Research Institute’s (SIPRI) data from 2021 listed China as the world’s fifth largest arms exporter between 2016-20, accounting for 5.2 per cent of the total global arms exports. The lion’s share of China’s exports, around 75 per cent, went to Asian nations. In March 2020, India figured on SIPRI’s arms exporters’ list for the first time. It stood at number 23rd.
The SIPRI identifies three Indian companies among the top 100 defence companies in its 2020 rankings–HAL, Ordnance Factory Board and Bharat Electronics Ltd. The report released in December 2021, says, ‘Their aggregated arms sales of USD 6.5 billion were 1.7 per cent higher in 2020 than in 2019 and accounted for 1.2 percent of the top 100 total.’
The Indian government also listed 85 kinds of equipment and 47 sub-systems for export to the Indian Ocean and African countries to help increase the defence base to USD 25 billion by 2025. The top items in the list included, BrahMos supersonic cruise missile, the Advanced Towed Artillery Gun System (ATAGS), Pinaka multi-barrel rocket launchers, and Combat Management System. According to government’s own data, the value of India’s exports in 2014-15 was Rs 1,941 crore; it increased to Rs 2,059 crore in 2015-16. The value of exports in 2016-17 was recorded at Rs 1,522 crore while it went up to Rs 4,682 crore in 2017-18 and Rs 10,746 crore in 2018-19. The value of defence exports was Rs 9,116 crore in 2019-20 and Rs 8,434.84 crore in 2020-21.
Currently, India exports defence items to 84 countries. However, the items that have contributed to the growth of Indian defence exports are not full-fledged platforms. They are items like teargas launchers, night vision devices, fire control systems, weapon simulators and lightweight torpedoes among others. As per the government’s reply in Parliament, the bigger items that India had managed to export until recently included personal protective items, Offshore Patrol Vessels (OPVs), Advanced Light Helicopter (ALH) and surveillance systems. India has had some success when it came to naval vessels. Indian shipyards have sold ships to countries such as Mauritius and Sri Lanka. Vietnam is the latest Indian customer to buy ships from India. It is procuring 12 fast attack craft under a USD 100 million credit line extended by the government of India. As per reports, a second line of credit worth USD 500 million is also being mulled over by the government.
Statistically, India’s export efforts over decades have yielded some results. However, this is far from what the government expects to happen. There exist gaps within the Indian defence manufacturing system which needs to be corrected for Indian exports to at least have a clear runway before they take off.
The R&D Gap: With India depending on foreign firms for its high-end design and development of products, coupled with indigenisation largely depending on DPSUs, there is a gap in terms of research and development based on Indian needs. When it comes to exports, the gap is felt even more because this limits customising of weapon systems to the buyer’s needs.
Partner, aerospace and defence, government & public services, KPMG in India, Abhishek Verma says, “Since development of defence technology needs long term investment, its obsolescence is high with low economies of scale. Hence, from a policy perspective, the process of maximising indigenous production without well-supported R&D may not bring tangible results. Towards this, the government is encouraging private participation in defence R&D and has earmarked 25 per cent of R&D budget for private industry, start-ups and academia. From a product point of view, there is a gap with respect to demand and supply. To overcome this challenge, the government has initiated various measures to understand the global market so as to target specific countries with relevant products.”
Speaking about how to overcome these challenges to export, Verma adds, “We need to identify markets which would be most attractive keeping in mind our current development capabilities. The key to penetrating the export market is to be flexible to tailor our products to suit the customer’s requirements. Recent policy changes announced by the government give a boost to private industry participation which will go a long way in ensuring that India achieves the target of exporting defence products worth INR 35,000 crores by 2025.”
High Cost: Indian platforms have a cost problem. The prices, in comparison with similar platforms abroad, are often higher. One of the key reasons for this is the amount of imported content that these platforms have. This naturally adds to the cost of the product, making indigenously produced goods expensive even for the country’s own forces. The other factor that makes the product expensive is the time it takes to build. With India continuing to rely on imported military hardware, not just the cost of buying it, but also assembling it adds to the price of the product. In a number of cases, weapon systems designed and manufactured by foreign firms in India have proven cheaper than the ones made by Indian companies.
A case in point is HAL’s LCA Tejas Mk1A, single-engine, delta wing, multi-role light fighter designed by the Aeronautical Development Agency (ADA) and Hindustan Aeronautics Limited (HAL) for the Indian Air Force and Indian Navy. Even as the fighter is indigenously designed, developed and produced, the fix here is that a lot of major and minor components that went into its making came off the shelf from suppliers abroad, including the F404 engines, Israeli sensors and electronics at international prices, which are the major and most costly parts of the jet. This jet, as compared to the Russian and the US fighters of this category, is costlier. And from fund-starved Services’ point of view, not worth the value for money.
The other factor that adds to cost is the time it takes to develop indigenous systems. The longer it stays on the production line, the more its costs. The LCA programme development has already cost India over Rs 10,000 crore. While the government may subsidise the price to the Indian military, it cannot do so for export customers. For instance, the IAF signed a deal to procure 83 LCA Tejas Mk1A for USD 80 million apiece. However, it’s export variant is being marketed at USD 200 million each. As a number of reports point out, this makes Tejas costlier than even Lockheed Martin’s F-35A and Russia’s Su-57. Even the Su-30 MKI that is made by HAL in Nashik, is sold at a cost of about Rs 415 crore (USD 55 million). The Swedish Gripen was offered to India at Rs 455 crore (USD 60 million) and F-16 at Rs 380 crore (USD 50 million). Worldwide, indigenous systems cost lesser than the imported ones, unlike in India.
The Private Sector: In almost all seminars, government spokespersons speak about the need for smaller and private industries to participate. With the growth of start-ups in the defence sector, the government will have to trust them enough to give them a level playing field, of course, with some amount of hand holding.
For India to grab opportunities in ‘friendly foreign countries’, the DPSUs will have to share the space with the private sector. For instance, HAL has a monopoly when it comes to manufacturing aircraft within the country. The need to diversify becomes important in order to encourage competition, helping bring down the cost. This will also take some burden off production lines. Hopefully, if India succeeds in gathering trust in the international market and orders come flowing in, this will prove to be crucial. Undermining private players only means restricting ideas. As is known, when it comes to Indian DPSUs, there has not been an absence of quality check/control and productivity. In case of HAL, the DPSU has been setting up several assembly lines with state-of-the-art technology, however, HAL alone in no way can be expected to fulfil the demand of the Indian forces and also take up exports. Diversifying will only help an ecosystem that will support exports.
On a side note, regarding the need for private players to come in, Admiral Arun Prakash wrote in the Economic Times, “It is a sad irony that focus on the public sector has led us to overlook the crucial role played by pioneering private entrepreneurs, epitomised by individuals such as Seth Walchand Hirachand and two Danish engineers, Holck-Larsen and Kristian Toubro, in laying a sound industrial foundation for India. While the former established Walchandnagar Industries in 1908, Hindustan Aircraft in 1939 and the Scindia Shipyard in 1941, the Danish duo set up L&T in 1938. Despite nationalisation and other headwinds, private entrepreneurs such as these have made crucial, early contributions to India’s DIB.”
End-User Restrictions: Since India purchases a lot of strategic or sensitive components from different countries, many of its systems come with end-user restrictions, which come in the way of export of the finished product. For example, BrahMos missile needed clearance from both the Russian as well as the Indian government before it could be exported. The list of potential customers had to be cleared by both nations.
A CLAWS report by Sushil Chander published in 2019 states, ‘Export of weapons and equipment also brings with it a tremendous amount of responsibility in terms of end use by the importer. Ensuring adequate control is one of the requirements to fulfil responsibility. The defence exports must pass through extensive scrutiny and well-laid-out detailed procedures need to be in place to monitor exports. The Indian Government has amply demonstrated that it has a policy of responsibly controlling export of sensitive goods.’
In case of sensitive items developed indigenously, the Defence Export Steering Committee (DESC), set up by the present government, takes appropriate decisions regarding exportability of items with/without modification or degradation. The export of sensitive items is considered on a case-to-case basis and no-objection certificate (NOC) issued with the approval of the defence minister based on recommendation of the DESC, the paper informs.
After-Sales Service: A lot of investment and expertise goes into providing through life support to the sold platform. Few companies in the private and the public sector can undertake these. Since the industry is yet to get there and exports have only just begun, this area needs a lot of attention. Building of trust among customers can only be done through assurance of after sales service.
Financing: Identifying one of the key issues in delays, Lead, International Engagements, Society of Indian Defence Manufacturers, Avnish Patnaik says, “Finance is an issue. The policy of financing has to be aligned. To have substantial growth in the next few years, the policy work needs to focus on how financing can be given to Indian exporters. In the defence industry, once you get an order, you go to the bank for financial assistance for production. In the defence orders, there is a strict timeline on execution. Many times, the issue that the Indian exporters face is the delay in processing of finance from our banks. This is one area where work is ongoing. There are elements of EXIM bank and RBI which need to be worked out.”
He adds, “In terms of products, it’s well known that whenever we go to foreign markets, we are competing against foreign firms. It’s not easy to enter into one market and sell your products when there is an established base. In the foreign markets, companies get asked whether their product has been bought by their own armed forces or not, which is why the government has been working on the Certification Policy, where items are certified for exports. The government has also introduced the export promotion scheme which defence attaches are using for undertaking promotional activities. The industry is in a nascent stage, but we are growing quickly. Through the government and our diplomatic mission, we can improve our take in the international market. Second is, when you have to do international transactions, usually foreign governments ask for a bank which is located in their country to work with. The partnering of the Indian bank with the international bank is time consuming. This is one issue that needs to be resolved.”
Offset Threshold Limit: The government has increased the offset threshold limit. Earlier, if a project was Rs 300 crores or above, a certain percentage had to be invested in Indian companies. This threshold has now gone up to Rs 2,000 crores. So now, only if the project is worth the latter, offsets are mandatory. Offsets are considered as exports. Since not many offsets are coming, the Indian companies are finding it hard to underline the export bottom line.
According to some industry insiders, the government of India has also restricted the technology that can be offered to foreign buyers. For instance, in terms of radars or secure communication equipment, the government mandates that the exportable equipment be different from the one supplied to Indian armed forces. Creating these differentials are both time and cost consuming.
Moreover, unlike many other countries, Indian government has put a cap on the commissions that can be paid to defence agents. In a highly competitive defence market, this puts Indian companies at a disadvantage.
Many in the industry feel that the government needs to create an export-focused department within the ministry that could help build on successful exports. This will help Indian industry better identify export opportunities. A June 2020 KPMG report titled ‘Defence Exports: Untapped Potential’ makes the case for such a dedicated department. The department would ‘need to identify existing opportunities, create new horizons, facilitate G2G deals, establish lineages with domestic industry, handhold potential suppliers and establish partnerships’, the report said. The report recommends a first step of setting up an exclusive ‘defence export help desk’. On the basis of inputs from the helpdesk, Indian companies could work with government machinery to realise exports.
While these are all facilitators to defence exports, the key lies in the technology and its competitive pricing. After all, when the packaging is opened, what matters is the product.