The large scale modernisation of India’s defence forces is on the anvil, and the next decade is likely to see an exponential growth in the strategic electronics sector. The EB editorial team interacted with industry thought leaders to get their inputs about this sector and also collated insights of the speakers at a conference organised by ELCINA — Defcon (Defence Electronics Conclave) at Hyderabad. Read on to learn more about the emerging business opportunities in this exciting field.
By Sudeshna Das
Emerging technologies are going to reshape modern warfare by harnessing the power of electronics. This, in turn, will make the Indian strategic electronics (SE) sector, mainly comprising aerospace and defence, a vibrant industry over the next 10 years.
India is the seventh largest aerospace and defence (A&D) market globally. The country’s defence budget is sizeable and covers the requirements of the army, navy and air force. India needs to modernise its A&D capital equipment base by addressing obsolescence as well as building additional capabilities through new capital acquisition. There have also been additional budgetary allocations from the Ministry of Home Affairs for paramilitary and state police force requirements. All of this has resulted in India becoming quite attractive as an A&D electronics market.
Considering the importance of the industry in the electronic system design and manufacturing (ESDM) ecosystem, the September 2016 issue of Electronics Bazaar published an article titled, ‘Spurring demand in Strategic Electronics’. However, the defence electronics industry ecosystem has evolved significantly in the last couple of months, with respect to the implementation and amendment of government policies related to defence procurement, as well as the foreign direct investment climate. Hence, we decided to take a fresh look at the industry to understand the opportunities and challenges.
Methodology
For this report, we considered inputs from 24 senior professionals involved in the strategic electronics ecosystem. Inputs were collected either directly or based on the recorded version of their speeches delivered at the Defcon conference conducted by the Electronic Industries Association of India (ELCINA) in April 2017. This sample group is a microcosmic representation of India’s strategic electronics ecosystem. These senior professionals shared their insights on:
- The growth of the Indian defence electronics industry
- Demand generating applications for this sector
- Possibility of public private partnerships (PPP) or industry academia partnership in this sector
- The impact of policy amendments on this sector
- Hindrances that impact the growth of this sector
A trend analysis was done on the basis of their inputs. The results of the analysis are presented here.
Market opportunities
The panel of experts that contributed to this report unanimously agreed that the strategic electronics industry is poised for growth in this financial year. Of them, 90 per cent (Figure 1) feel that the industry will see a slow but steady growth. Experts feel large scale modernisation of India’s defence forces is on the anvil, and the next decade is likely to see an exponential growth in combat systems as well as non-platform based programmes that facilitate the smart battalion. Therefore, the opportunities in Indian electronics are in both standalone systems (as part of platforms) as well as at a sub-system level for other systems. According to the experts, the key factors that will influence growth are:
- Modernisation of weapon platforms
- Induction of state-of-art weapons by the three armed forces
- Impact of indigenisation and the Make in India initiative
Electronics is at the heart of each modern warfare system and currently, the country is attempting to reign in its alarming electronics import bill, which is soon expected to surpass India’s oil import bill. This presents vast opportunities to Indian companies. Their prospects for growth will also be driven by the new Defence Procurement Policy (DPP), the offset policies, the Make in India initiative and other key programmes.
According to a report from consultancy firm, Roland Berger, in partnership with two industry associations, the National Association of Software & Services Companies (NASSCOM) and India Electronics and Semiconductor Association (IESA), India’s aerospace and defence industry is expected to consume electronics worth US$ 70-72 billion in the next decade, as the country rapidly modernises its military by embracing new technologies. The same report also indicates that about US$ 53-54 billion will be for electronics acquired as part of platforms (i.e., at the Tier 1 and Tier 2 levels).
Demand for electronics worth US$ 17-18 billion is expected from projects that are traditionally called system-of-systems (non-platform based) applications.
While the above market projections are for the next 10-12 years, there could be additional momentum with other new programmes being announced in the interim. Another growth opportunity is the potential to integrate into global value chains of OEMs (initially leveraging the offset route and, subsequently, based on product quality, service delivery advantages and cost arbitrage).
Demand generating applications
1. Tactical communication systems
2. Battlefield management systems
3. Network-centric warfare systems
4. Future infantry soldiers as systems
5. Tank electronics
6. Air defence systems
7. Avionics, navigation equipment, radar and sonar equipment
8. Night-vision devices
9. A host of associated and embedded electronics
Identifying areas where demand will grow
In spite of huge opportunities, there is a demand-supply gap with respect to the availability of indigenous components, products and solutions, most of which are still imported. Indian companies are not able to cater to requirements that involve low volumes, high technology and high investments.
However, the electronic products and solutions required in large volumes will be in the areas of:
- EMS, build to print (which in the context of defence production, includes firmware updates, test-jig development, manufacturing software development, component procurement, systems integration, software upgrades/enhancement, verification and validation, system deployment, HW qualification, ESS (Environmental Stress Screening), maintenance support, etc), line replaceable units for Indian programmes like LCA, LCH, drones, Kamov helicopters, etc.
- Rugged displays, PDAs, laptops, etc, for the BMS (battlefield management system) project.
- Electronic components, products and solutions used in vehicles for projects like the FICV (Futuristic Infantry Combat Vehicle), self-propelled guns, etc.
Electronics forms a major part of any weapon system. Most of the recent upgradations on the military side have huge scope for electronics, as in the case of the Jaguar upgrade, the Ilyushin aircraft upgrade, the MIG 29 upgrade, T-90 tanks upgrade, and many more. In addition, new ventures like the LCA (light combat aircraft) Tejas, AMCA, production of the EADS CASA C-295 twin-turboprop tactical military transport aircraft jointly by Airbus Defence and Space along with Tata Advanced Systems, single engine aircraft production from SAAB (Gripen) with a yet to be chosen Indian OEM, the FICV project, the missile development programme, the new aircraft carrier, submarines, MCMV, and others— all point to an increased focus on electronics. Critical avionics, night vision devices, missile electronics, electronics warfare (ground based and airborne), software defined radios, robotics, radars (all kinds), UAV electronic navigation systems, weapon sensors, air defence systems, etc, are the much publicised favourites. According to the experts, the key demand-generating applications will be:
- Weapons control systems
- Avionics
- Digitalisation of displays
In addition to that, single board computers (new technology), advanced PCB design technology, cables and harnesses to meet aerospace standards, etc, are also in demand.
Security is a key concern for any defence application. Therefore, there is a huge demand for a holistic security network and indigenously developed security devices.
Domestic capabilities are in demand to sustain and upgrade existing systems through innovative maintenance, repair and operational (MRO) solutions.
Offsets to play a key role
Seventy per cent of the experts (Figure 2) feel that offsets will be on the rise. However, in this segment, there is expected to be less emphasis on hardware and a disproportionately larger thrust given to embedded intelligence. Companies in India that are ready to leverage this will grow tremendously. So offsets will have to be defined in terms of service offerings rather than hardware, quite quickly.
The remaining 30 per cent of respondents raised concerns about the increased threshold limit for offsets under DPP 2016. The offset threshold limit has been raised to ₹ 20 billion (around US$ 305 million) from the earlier limit of ₹ 3 billion. This is in contrast to global trends in defence offset thresholds, which are between US$ 5 to US$ 15 million in many countries (including Israel, Malaysia, Turkey and UAE) that have set the offset threshold on the basis of long-term experience.
Moreover, this increased threshold limit may lead to a situation where fewer import contracts will be eligible for offsets. This, in turn, will impact the local industry, particularly manufacturers of parts and components who got a good boost through the existing offset policy to enhance their capabilities.
‘Design in India’ in focus
All experts feel that in spite of the huge opportunities, the Indian strategic electronics sector is still far from achieving self-reliance due to the absence of integration between R&D and manufacturing.
Eighty per cent (Figure 3) of the experts opine that this is the right time to explore the ‘Make in India’opportunities by designing in India for our defence electronics needs.
In the last one year, the defence sector got a policy boost through the amendment of the defence procurement policy (DPP 2016). This includes a special category called ‘Buy (Indian – Indigenously Designed, Developed and Manufactured)’ or ‘Buy (Indian-IDDM)’ that will get the highest priority in the defence procurement process. Buy (Indian-IDDM) ranks higher in the procurement process than the ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Buy (Global)’, in that order. Inclusion of this new procurement category will provide a greater thrust to the ‘Make in India’ initiative in defence production, focusing on products and solutions designed in India.
This would promote in-house design capabilities and higher localisation, strengthening the domestic industry, especially the private sector, in defence production. However, it is to be noted that the responsibility to prove that a design is indigenous rests with the company, while the final approval would come from the government. This in turn offers unique opportunities to companies that are operating or would like to enter the defence industry specifically in the areas of electronic system design, original design manufacturing (ODM), etc.
The government has already launched some programmes and schemes to facilitate R&D activities in this field. The Technology Development Fund (TDF) and the recently opened Army Design Bureau are worth mentioning here.
Partnering for success
All experts unanimously feel that collaboration is the key to achieve self-reliance in the strategic electronics sector. There is a need for high standards in this industry which can be fulfilled if the Indian industries complement each other rather than compete. They also mention the important role that the TDF and the Army Design Bureau can play to ensure success.
The TDF is bound to enable and enhance R&D activities by expanding the scope of industry-academia partnerships. It is going to be a big driver for the Make in India programme in the defence sector.
The Army Design Bureau can work in sync with DRDO and the private sector to achieve modernisation and indigenisation. This, in turn, will enhance opportunities for public-private partnership.
Eighty per cent of the experts (Figure 4) are quite confident about the success of public-private partnerships in the strategic electronics sector. According to the experts, it will be prudent on the part of the government to work on the Public Private Partnership (PPP) model, where the technology, manpower and infrastructure available with the public sector units (PSUs) can be leveraged in partnership with private enterprises to optimise and streamline defence projects towards quick completion.
One of the experts mentioned that this is the best time for the PPP model to take off and be implemented as the OFB (Ordnance Factories Board) which is at the cusp of modernisation. The PPP model will introduce the ordnance factories to a more competitive corporate culture, a mindset that is required in order to pitch for contracts with the private industry. Ordnance factories (OFs) have vast infrastructure but they lack efficiency. Therefore, in the PPP model, the required levels of efficiency can be assured through the proper assimilation of technology by the private sector and efficient utilisation of the huge infra available with OFs. This could lead to a win-win situation for both the private sector that is looking forward to making forays into defence manufacturing, and the public sector that has a strong grip on defence procurements. One of the experts mentions that PSUs like HAL and BEL tend to look for partnerships with global OEMs and forget the private partnership potential within the country. He recommends a private consortium to handle programmes, like the Eurofighter group, which is a success story today.
Industry-academia partnership is another way of collaboration in this sector. The Armed Forces have also been engaging with academia to solve various technical challenges. IIT Bombay was involved in a project to reduce the cost of the artillery shell guidance system, and there are many more such examples. Around 65 per cent of experts (Figure 5) are optimistic about this kind of partnership.
- On the R&D front, a few interesting areas for collaborative work could be:
- Advanced applications of robotics and AI
- Geospatial systems
- System intelligence and surveillance
- Critical technologies for space research
- Live virtual control simulation
- Military Internet of Things
Moreover, the right kind of collaboration can also help to resolve supply chain related issues.
Technology Development Fund
The government has launched the Technology Development Fund (TDF), which aims at funding the development of defence and dual-use technologies that are currently not available with the Indian defence Industry, or have not been developed so far. This will create an ecosystem that will enhance cutting-edge technology capabilities for defence applications. The TDF scheme is being implemented by the Defence Research & Development Organisation (DRDO), and provides for assistance in the form of grants to public and private industries for the design and development of key defence technologies.
The TDF also encourages the participation of public and private industries, especially MSMEs, so as to create an ecosystem that enhances India’s cutting-edge technology capabilities for defence applications.
This fund will, in turn, encourage research in private industries since it will hand-hold them in high-risk development tasks. Under this scheme, industries will be involved in development activities in high-end technical areas to accelerate the production process without carrying any burden of R&D costs. They can get an advance of (for a typical project) Rs 100 million to meet the project’s requirements. Industry may work in collaboration with academia or research institutions to carry out research and development work.
How the policies work
In the last one year, the SE (strategic electronics) sector got a policy boost through the amendment of the defence procurement policy (DPP) and the removal of the 49 per cent Foreign Direct Investment (FDI) limit in the defence sector.
In our last report, we shared a detailed analysis of the key provisions of DPP 2016 as well as collated industry views on DPP and FDI.
This time we delve a little bit deeper to understand the industry’s views on the effectiveness of DPP 2016 and the revamped FDI policy.
Of the experts, 75 per cent feel that DPP 2016 is effective enough, plugging all the loopholes of the previous policy. However, the remaining 25 per cent feel it needs more tweaking (Figure 6) and can be effective only when:
- Tangible benefits are realised by Indian SMEs and MSMEs.
- Global OEMs partner with Indian companies with actual manufacturing capabilities, rather than those with just financial might, to ensure the concept of Make in India succeeds.
- The government gives more importance to Make projects (the Ministry of Defence’s 23 key ‘Make in India’ projects) designed by the Indian PSUs and DRDO rather than allowing foreign OEMs to manufacture their material in India. The manufacture of new light combat aircraft should not be encouraged. Instead, the LCA Air Force Mark 2 should be built in India under the joint projects with a global OEM.
- The policy gets simplified and a penalty is imposed on the defence procurement agencies for delays and cancellations.
Army Design Bureau (ADB)
The Indian Army has set up the Army Design Bureau (ADB) in an attempt to indigenise procurements and reduce import dependence. It has been established as part of the government’s ‘Make in India’ initiative and will integrate various stakeholders in its long-term requirements.
The ADB will help academia, research organisations and the industry to better understand the army’s requirements, in order to develop high tech defence products. It will be the single interface between the Indian Army and all stakeholders, which would help the R&D fraternity in developing indigenous solutions. The ADB has been set up in the wake of rapid changes in technology and consequent changes in combat techniques. It will help the Indian Army to be constantly involved at every stage, from conceptualisation and design to development and production.
The Army Design Bureau will also identify and guide DRDO, the defence PSUs, academia and the private sector on the right research thrust areas for the Indian Army’s requirements. Headed by a major-general, the ADB has been organised into two major verticals—‘Simulator Innovation & Design (SID)’ and ‘Technology Resources Centre’.
Sixty-five per cent of our panel of experts believe that the removal of the 49 per cent FDI limit in the defence sector has opened up avenues for significant investments, and has given the much required impetus for many SMEs to have access to finance and technology (Figure 7).
The liberalised FDI regime permits up to 100 per cent (up to 49 per cent through the automatic route and beyond that through the Foreign Investment Promotion Board or FIPB route) foreign equity in the defence sector.
However, the remaining 35 per cent feel:
- The FDI policy cannot become the only instrument to attract investment.
- The FDI policy will be successful only if the foreign OEMs can derive the necessary confidence in the local ecosystem from an operational point of view.
- Foreign OEMs are less likely to create IP in India. Therefore, the ‘design in India’ concept will not be promoted through JVs with higher FDI.
Key provisions of DPP 2016
- Inclusion of the ‘Buy (Indian-IDDM)’ procurement category
- Rules for higher (though flexible) indigenous content requirements
- Revamped procedures for ‘Make’ projects
- Institutionalisation of the RFP (Request for Proposal) process
- Introduction of the L1-T1(selection process based on both the lowest bid or L1 and the best technical solution or T1) methodology for selecting the final bidder
- Increased threshold limit for offsets
What to expect next
We asked the survey participants to suggest possible challenges that could derail the growth of this industry. Here is a collation of their opinions:
- Complex buying process.
- Delay in completing the tendering process.
- Inadequate government funding for R&D projects.
- Inadequate provision for technical superiority to score over the lowest bidder
- Absence of a level playing field for the Indian private sector players, especially for SMEs with respect to the PSUs and the overseas vendors.
- No self-reliance in critical technologies.
- Absence of indigenous product development capabilities.
The above issues can be successfully resolved by the Transfer of Technology (ToT) route for niche equipment, a proper understanding of offset obligations and a methodology to handle the same, and understanding and executing international collaborations and JV models along with a proper emphasis on the IPR and patents.
In addition, availability of proper screening and approval systems is the need of the hour in the SE sector as the components used require a high degree of reliability in extreme working environments. Considering the importance of this aspect, ELCINA has taken up a project to develop a high-tech test facility for the defence electronics sector with the objective of providing MSMEs and SMEs easy and cost-effective access to such facilities. The facility will be open to all defence electronics manufacturers and excess capacity will be offered to manufacturers in the electronics industry.
Major contributors to this report
- Atul D. Rane, scientist, G category – Technology Development Fund, DRDO
- Dr S. Guruprasad, DG – PC & SI, DRDO HQs
- Subhash Goyal, MD, Digital Circuits Private Limited
- Sreeram Srinivasan, CEO, Syrma Technologies
- Col (Retd) K.V. Kuber
- Air Commodore Krishna Iyengar Ravi, AVSM, VSM (Retd), VP (strategic business), Kaynes Technology
- N. Ramachandran, MD, Mel Systems
- Lt Gen A.R. Prasad, VSM, ADC, signal officer in chief and senior colonel commandant
- Lt Gen K. K. Aggarwal, SM, VSM, Comdt., MCEME
- Nikhil Kumar Jain, Addl. GM (AFS), BEL-Hyderabad
- Utpal Sen, head – strategic electronics division, ECIL
- Ramesh Avala, manager (design), Strategic Electronic Research Design Centre (SLRDC)-HAL, Hyderabad
- Maheshkumar P. Jagtap, scientist G category, ANURAG (Advanced NUmerical Research and Analysis Group, a lab under DRDO).
- Lakshmi Tiwari, scientist, F category, DLRL
- V.S.N. Murthy, scientist, G category, project director, Brahmos Aerospace
- Ravindra Kumar, scientist, F category, DLRL
- K. Rambabu, scientist, H category, Space System & Tech, RCI
- T.V. Prakash Rao, ex-director-ECS, DRDO
- V.V.R. Sastry, ex-CMD, BEL and ED, C-DOT
- P. Sudhakar, OSD to DAE and ex-CMD, ECIL
- M.M. Sreeram, ED, Samuha Aerospace
- Wg Cdr (Retd.) P.R.L. Prakash, GM, Avantel Limited
- Rudra Kumar Jadeja, CEO, Bharat Forge Limited. (Hyd.)
- Sanjoy Sarma, head-products and solutions, Tata Power SED
