aerospace and defence in india: an opportunity …info.tcs.com/rs/tcs/images/a&d opportunity...

Aerospace and defence in India: an opportunity about to be missed?

in partnership with TCS

2 © Source Information Services Ltd 2013


© Source Information Services Ltd 2011

ForewordTCS and Tata have been investing in the UK for many years and this report represents a natural extension of our efforts to support UK businesses as they expand into new geographies. The idea that UK business accounts for just four per cent of Indian defence spend should, we believe, be a wake-up call for everyone in the sector, and we want to play our part by helping to foster the partnerships and relationships that will lead to an increase in that share.

More specifically we recognise that offsetting creates problems for big businesses and SMEs alike; it’s something for which we have a solution and it’s the reason we’re publishing a report designed to help business get to grips with what offsetting means for them. We hope you find it useful and would be delighted to hear from you if you’d like to discuss anything you’ve read.

Paul Ferguson

Aerospace and Defence Business Development Manager

Email: [email protected]

Tata Consultancy Services

3© Source Information Services Ltd 2013


Aerospace and defence in India: an opportunity about to be missed?India’s aerospace and defence budget for the past five years adds up to a staggering $146 billion1, and the budget for 2012-13 alone is $38 billion. But how much of this $146 billion has been spent in the UK – a country that speaks the same language, shares similar laws and has a long history with India? The answer, according to all the experts we spoke to, appears to be ‘not a lot’.

Industry experts will immediately point out that it’s not just a case of turning up with a great product at a good price: India’s offsetting rules and in particular its 26% cap on foreign direct investment (FDI) create a significant challenge. But this is a challenge that companies based in other countries have managed to overcome.

UK companies, in contrast, have tended to sit on the sidelines, adopting what could be described as a ‘wait and see’ attitude. According to Brinley Salzman at ADS, “Many UK companies, in particular SMEs, think it looks too difficult. They decide to go for what they perceive as low-hanging fruit elsewhere.” But by not getting involved, UK companies are missing out on both today’s revenues and tomorrow’s potential; they aren’t cementing relationships with Indian companies and government, they aren’t building a presence in India, and they aren’t learning about what it takes to be successful in this market.

So is it too late? Well, no – but, according to experts it could be soon. “All the initial offsets have been taken up by the public sector,” warns TCS defence expert Dinesh Singh. “The medium multi-role combat aircraft (MMRCA) deal that will be signed in autumn 2013 has a $5 billion offset commitment that will saturate the public sector. UK companies need to be talking to private sector companies in India right now as they will garner the next wave of offsets. Otherwise it will be too late to work with the best.”

Make a move before it’s too lateWe interviewed six thought leaders (see below). Our interviewees come from industry, industry advisory groups and TCS, and all are experts in offsetting. We questioned each about what UK aerospace and defence companies ought to be doing right now to make the most of the Indian opportunity.

Interviewees

Brinley Salzman Director, Overseas & Exports ADS

Graham Gabb Vice President Industrial BAE Systems Collaboration, India

Roger Bulgin CEO Offsets 2000

Dinesh Singh General Manager Defence Projects Tata Consultancy Services

Peter Dickinson Consulting Partner Tata Consultancy Services

Pradeep Bhargav Manager, Strategy & Business Tata Consultancy Services Development, Aerospace & Defence

1 Frost & Sullivan, 25 April 2012: http://www.frost.com/sublib/display-market-insight.do?id=258927316

Many UK companies, in particular SMEs, think it looks too difficult. They decide to go for what they perceive as low-hanging fruit elsewhere.

Brinley Salzman, ADS



Think strategicallyWhilst most companies will nod their heads sagely at this statement, how many senior teams have actually committed enough time to deciding their approach to India? How best to approach the Indian market is not a question to be debated in isolation but as part of the company’s long-term strategy. “UK companies need to be talking about India as a key part of their growth strategy,” highlights Roger Bulgin at Offsets 2000. And it’s not just about taking an existing business model abroad; a company’s approach to India is inherently linked to deep questions about the company’s core capability and its role in the ecosystem.

Yet the consensus appears to be that many companies aren’t giving India the time it deserves. TCS defence expert Peter Dickinson commented that, “We see companies where not enough time and resources are devoted to really thinking through the long-term interests of the company with respect to India. Rather than taking a strategic position, some senior managers have allowed a more internally emergent view to develop. The problem with this is that this view is motivated by – and developed from – the sum of the businesses history; i.e., it is developed from a largely rearward-looking position.”

Understand the rulesWhilst debate about rules and regulations should not take precedent over strategic imperatives, UK companies do need to understand offsetting requirements. According to Roger Bulgin at Offsets 2000, many UK companies (even those already exporting abroad) often fail to understand the detail: “I see companies engaging in an export programme without really understanding the offsetting requirements. They need to fully understand, for example, what is eligible and what is not in terms of joint ventures and acceptable purchases.”

UK companies must also ensure that their understanding of the rules is up-to-date. In response to concerns from foreign companies, the rules have already changed quite significantly since their introduction in 2005. “At the start, some of the regulation was very problematic – mainly due to a lack of experience and coordination between departments,” says Dinesh Singh of TCS. “However, the offsetting rules have changed over time in an attempt to make India a more appealing destination for foreign companies. For example, foreign companies were previously forced to work with public-sector organisations only for maintenance, repair and operations (MRO), but amended policy allows them an option to work with private companies as well.” “India has been listening to suggestions from foreign industry to help make the process of offset more likely to lead to a successful outcome,” concurs Roger Bulgin. And it’s not just the rules that UK companies need to keep up-to-date with, it’s also perceptions about India itself. Graham Gabb at BAE Systems makes it very clear: “India has changed massively over the past five years. Everyone has horror stories from the past. But it has changed so much.”

Look at all the optionsIn choosing how best to generate revenue from the Indian market, UK companies will have to decide both where they want to enter the value chain and how they’ll discharge their offsetting obligations. There are a number of options.

UK companies can engage in an outright purchase made by the Indian Ministry of Defence (MoD) through a direct sale, by working with another non-Indian company selling to the MoD, or by selling to an Indian company that hopes to sell to the MoD (see table below). An alternative route into the Indian market is that of ‘buy and make’ where the UK company, either through a direct sale or in partnership with an Indian company, works towards a transfer of technology such that future products can be made in India.

These different options carry different offsetting obligations – obligations that can be discharged through direct or indirect purchase of defence products and services produced by the Indian defence industry or by direct investment in India’s defence infrastructure, including research and development.

UK companies need to be talking about India as a key part of their growth strategy.

Roger Bulgin, Offsets 2000

The offsetting rules have changed over time in an attempt to make India a more appealing destination for foreign companies. For example, foreign companies were previously forced to work with public-sector organisations only for maintenance, repair and operations (MRO), but amended policy allows them an option to work with private companies as well.

Dinesh Singh, TCS



Procurement Meaning Indigenous Opportunity for Offsetting Methods for category requirement UK company requirements discharging offsetting for UK company obligations

Sell direct to MoD Not Sell to global At least 30% of Global applicable company selling contract value to MoD Buy Outright purchase Sell required 30% offset on cost Indian 30% technologies to of foreign content Indian company (if significant) selling to MoD

Import followed by indigenous Increases to 100% Sell product and 30% of value on Global production through as indigenous transfer technology those bought in transfer of production for indigenous “fly away” condition Buy technology (ToT) matures production & Make Indigenous Partner with Indian 30% of value on Indian production with 50% company (max 26% those bought in partnership with ownership for “fly away” condition foreign company UK company)

Do somethingIt’s all too easy in debates about exporting to India to focus on the barriers: a potential lack of capability in offsetting partners, concerns about protection of intellectual property, or fear of stultifying bureaucracy. Yet our interviewees have answers to all of these concerns. They point to the capabilities of Indian multinationals and how the interests of these global companies are aligned with those of UK companies in protecting intellectual property. They also make the compelling argument that companies from other nations – Italy, France and the US amongst them – have made this work.

“UK companies have remained sitting on the sidelines for too long,” argues Dinesh Singh of TCS. “They need to get involved. Why not invest, for example, in a small – say $5 million – partnership in order to engage with the Indian market? Only by doing something will they learn what it takes to be successful in this market.”

Consider outsourcing to India as an initial stepA number of foreign companies have developed relationships and reputation and learnt about the Indian market by first outsourcing to the region. Honeywell, for example, announced in 20094 a $50 million investment in a new research and development facility in Bangalore employing 3,000 people. For Honeywell, this investment has delivered new product development in the local market customised to local needs. Louis Chenevert5

of United Technologies echoes this sentiment when discussing the company’s focus on increasing localisation of its products in India and partnerships with Indian firms: “I truly believe that you can only win in this market if you localise as much as you can.”

“This approach of outsourcing first has worked really well for many companies. It has allowed them to really understand the local market dynamics and build their extended value chain. Outsourcing first has proved much more successful than going straight for a JV,” confirms Pradeep Bhargav at TCS. “Consider the recent RFP released by the Indian Air Force for procurement of military transport aircrafts. This capital acquisition requires 40 aircraft to be manufactured in India by the global contractor through forming a joint venture with an Indian partner. In such a race, a global primes such as EADS or United Technologies who have been sourcing services from Indian companies will be

• Direct2 or indirect3 purchase of defence products and services produced by Indian defence industry (incl. internal security and civil aerospace)

• Directinvestmentin India’s defence infrastructure (incl. R&D)

• Useofbankedoffsets

2 Player agrees to coproduce specific components of its products or to obtain related services in buying nation’s territory

3 Player agrees to assist importing country in development of its export or in investment requirements unrelated to principal contract

4 http://www.nytimes.com/2009/06/03/business/global/03outsource.html?pagewanted=all&_r= 0

5 http://machinist.in/?id=2832&Itemid=2&option =com_content&task=view

Outsourcing first has proved much more successful than going straight for a JV.

Pradeep Bhargav, TCS

http://www.nytimes.com/2009/06/03/business/global/03outsource.html?pagewanted=all&_r=0




http://machinist.in/?id=2832&Itemid=2&option=com_content&task=view





ahead of the curve; they have an evolving supply chain in India to enable indigenisation. Such strategic outsourcing can really be a pedestal for market penetration as well as a source of competitive edge in this promising market.”

Use available supportOur interviews highlight a range of available support for UK companies considering the challenges of offsetting in India; trade organisations such as ADS as well as consultants are able to provide advice. According to Brinley Salzman at ADS, “We work with a lot of companies on the subject of offsetting and we even have offices in New Delhi and Bangalore – SMEs can use our employees in the initial stages rather than have a full-time presence on the ground.” Graham Gabb at BAE Systems confirms that: “There’s lots of support available including ADS, UK IDC and UK TI, all willing to help. It isn’t easy, but it is possible.”

Make offsetting work internally

Ensure that offsetting has support from the very topCompanies who successfully negotiate the challenges of offsetting typically have very strong support for their approach from the top down. Offsetting can demand change within almost every function, and without a mandate from the top, this change is unlikely to happen. “A company’s approach to offsetting affects many other functions across the business including collaboration, technology development, outsourcing and investments” said Roger Bulgin at Offsets 2000. “The main tenet of offset best practice is that the offset strategy has to be adopted and approved at the highest level. Design, finance, sales and marketing – they all need to be on board, and this requires a mandate from the very top.” Graham Gabb at BAE Systems supports this view and explains BAE’s approach to offsetting globally: “To manage offsetting well requires commitment from the very top. This is something we very much recognise at BAE, and we put a lot of effort into managing our obligations in a coherent fashion. This commitment is managed by our central offset director who reports into the board.”

But it’s not just about commitment; organisations need processes to ensure that the commitment is honoured. Graham Gabb explains how BAE Systems manages its global offsetting commitments: “As well as a central offset team, each business unit has its own offset team. Throughout the process, functions are signing off that BAE Systems has adhered to the offsetting process. In some ways it’s rather draconian – but obviously very necessary.”

Pick the right partner

Have clear expectationsThe first decision companies need to make, before even looking for a partner, is what they hope to get out of the relationship. Are they in this for the long or short term? What are their expectations, and what does this mean for the type of company they ought to look for? “Companies need to be very clear as to whether a relationship is strategic or tactical,” says Roger Bulgin at Offsets 2000. “If it’s about a long-term commitment to the country, then companies need to think about the complete ecosystem and their place in that ecosystem. Strategic relationships bring long-term value: if you do a good job, you raise your reputation and gain a groundswell of local support. If you win, they win – and your position when the next competitive tender comes around is very much enhanced. Alternatively, it is quite legitimate to say that this relationship is just about

As well as a central offset team, each business unit has its own offset team. Throughout the process, functions are signing off that BAE Systems has adhered to the offsetting process. In some ways it’s rather draconian – but obviously very necessary.

Graham Gabb, BAE Systems



the one contract. The important thing is to be very clear what the end goal is. For offset to succeed, it must make financial sense for both parties; a good business plan is the bedrock for any offset arrangement.”

Graham Gabb explains how this works in practice at BAE Systems: “We only work with partners where they can add value to us and we can add value to them. We always make sure that our strategic aims and those of our potential partner are clearly communicated and aligned.”

Carry out appropriate due diligenceWhilst due diligence is always important, it is especially vital when working in a new geography. However, companies don’t need to invent a process from scratch – they should begin with their existing approach. “Most companies already have a good process for engaging with suppliers,” says Roger Bulgin at Offsets 2000. “The offset manager should start with this.”

But these processes will need fortifying for a less well-known market. “UK companies should seek clear, up-front positions on things like the business ethics of potential partners,” says Peter Dickinson at TCS. “They need to be really clear about the governance processes and to actually go and see the organisation in question or, at the very least, have another reputable organisation review the potential partner on their behalf. This can’t be done remotely.”

Since the 2011 revisions, UK companies have the option to work with private sector companies in India. There are a number of large multinationals such as Tata and Mahindra who are known for both their ethical stance and capabilities. And as Dinesh Singh at TCS points out, “A large group like Tata with revenues of $100 billion – 65% of which comes from outside India – will be a most suitable, fair and ethical partner. UK companies need to find a partner with a strong reputation, substantial overseas business, and whose interests are aligned with their own.” Our interviewees caution against seeing limited historical revenues in the defence sector as evidence of limited capability. In the past, private sector Indian companies were forced to supply the Ministry of Defence through public sector organisations, limiting their revenues. Taking TCS as an example, Singh explains, “In the last 2-3 decades, TCS and Tata Defence sector entities had revenues of just about $50 million in total. However, in the last 3-5 years, our sister companies have notched up orders worth $500 million plus. It’s the same people and the same capability but operating in a freer economic environment. As we can bid for most defence opportunities directly, costs, deliverables and projects are better managed. Larger companies with deeper pockets, multi-skill capabilities and long-term view are best suited to harness this changing environment in the Indian Aerospace and Defence sector".

In summaryIndia’s aerospace and defence programme offers a significant opportunity for UK companies searching for growth. It is not an easy option, but it is one that has been successfully realised by companies in other countries. UK companies need to think strategically about this issue as well as taking time to really understand the detail of the many options to be considered. Success in the Indian market could be delivered through many different routes, including outsourcing to the market first to develop relationships, reputation and insight. Whatever the route taken, companies need to ensure that they have support from the very top of the organisation, that they use the support available, and that they select partners in India with care.

Whilst caution, careful analysis and thorough preparation are obviously vital, it shouldn’t mean that UK companies have to remain seated on the sidelines. In the words of author H. Jackson Brown,6 “Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.”

6 http://www.goodreads.com/quotes/tag?utf8=%E2%9C%93&id=action

Success in the Indian market could be delivered through many different routes, including outsourcing to the market first to develop relationships, reputation and insight.

http://www.goodreads.com/quotes/tag?utf8=%E2%9C%93&id=action



288Bishopsgate•London•EC2M4QPTel: +44 (0)20 3178 6445

POBox340505•Dubai•UnitedArabEmirates

Tel: +971 (0)52 989 5224

Email: [email protected]

www.sourceforconsulting.com

© Source Information Services Ltd 2013

Source Information Services Ltd and its agents have used their best efforts in collecting the information published in this report. Source Information Services Ltd does not assume, and hereby disclaims any liability for any loss or damage caused by errors or omissions in this report, whether such errors or omissions result from negligence, accident or other causes.

Notice: This document is protected by copyright law. It is illegal to copy any of the contents of this document without permission.

About SourceSource Information Services Limited (Source) is a leading provider of information about the market for management consulting. Set up in 2007 with offices in London and Dubai, Source serves both consulting firms and their clients with expert analysis, research and reporting. We draw not only on our extensive in-house experience, but also on the breadth of our relationships with both suppliers and buyers. All of our work is underpinned by our core values of intelligence, integrity, efficiency and transparency.

Source was founded by Fiona Czerniawska and Joy Burnford. Fiona is one of the world's leading experts on the consulting industry. She has written numerous books on the industry including: The Intelligent Client and The Economist books, Business Consulting: A Guide to How it Works and How to Make it Work and Buying Professional Services. Joy Burnford was Marketing and Operations Director at the UK Management Consultancies Association between 2003 and 2010, and prior to that worked for PA Consulting Group and has extensive experience of marketing consulting services.

For further information please visit www.sourceforconsulting.com

About Tata Consultancy Services Ltd (TCS)Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT, BPO,infrastructure, engineering and assurance services. This is delivered through its unique Global Network Delivery Model™, recognised as the benchmark of excellence in software development. A part of the Tata group, India’s largest industrial conglomerate, TCS has over 276,000 of the world’s best-trained consultants in 44 countries. The company generated consolidated revenues of US $11.6 billion for year ended March 31, 2013 and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at www.tcs.com

For more information about TCS’ services, contact [email protected]

aerospace and defence in india: an opportunity …info.tcs.com/rs/tcs/images/a&d opportunity...

Documents