OFFSET CHALLENGES

 

 Wg Cdr DK Sharma

HQ Maintenance Command, IAF

17 Mar 2012, Chennai

OFFSET CHALLENGES

GLOBAL PRACTICESCountry Minimum

ThresholdLevel of Offset

Obligation

Preference Tenure Penalties/Banking

Brazil 1 M $ 100 to 120%

Primarily direct, focus on the aeronautics industry

   No/Yes

China No formal offset policy

  Seeks TOT, licensed production, licensed assembly and participation in R&D programs

   

India 60 M$ 30 to 50%

Direct and indirect Co-terminus  No/Yes

Israel 5 M$ 50% Direct and indirect Co-terminus Yes/Yes

02/26

OFFSET CHALLENGES

Country Minimum Threshold

Level of Offset

Obligation

Preference Tenure Penalties/Banking

Malaysia EUR 10 M 50% Direct and indirect

   No/Yes

Taiwan 5 M$ 40% + Direct and indirect

   No/Yes

United Kingdom

No formal offset policy.

EUR 1.2 million

100% Direct Co-terminus

 No/Yes

Singapore 10 M$ 25 – 30 % Direct, with indirect in isolated cases

10 years 10 percent of the unfulfilled obligation / Yes

03/26

GLOBAL PRACTICES

OFFSET CHALLENGES

Source E & Y04/26

OFFSET CHALLENGES

Success rate of offset in developed and industrial nations is almost 100%

In the developing economies is about 30-40% of offset %age

Primary reason for shortfall - lack of sufficient industrial base

Global Trend

05/26

OFFSET CHALLENGES

The revised offset bids included third

party offset MoU with Indian companies

such as HAL, BEL, Tatas, Mahindras,

L & T and others

•Around 150 MoU signed

A Step Forward

06/26

OFFSET CHALLENGES

Policies, objectives and methodologies

Long term requirements not known Service sector benefits more

Insufficient FDI limit of 26%,

Unfavourable tax regime,

Undue preference to DPSU

Industry’s Concerns

07/26

OFFSET CHALLENGES

The Value Proposition

Capabilities assessment is the biggest challenge

Level of industrial infrastructure, reliability and credibility to meet delivery schedule

Key determinator for the potential partner - technology and commercial valuation

08/26

OFFSET CHALLENGES

Defence Offset Valuation Model (DOV)

Technology valuation Lack of sufficient expertise and lateral coordination between MoD, Service HQs, DRDO and the industry.

No industry representation in the core committee of Tech Evaluation of offset technical proposals

09/26

OFFSET CHALLENGES

Defence Offset Valuation Model (DOV)

activity to review technology, industrial infrastructure and market factors

Approaches to the valuation of technology – Cost / Market / Income / Line of Codes

Initiation of dialogue with Dassault.

Will the investment make business sense and is it worth the money? 10/26

OFFSET CHALLENGES

Boeing / USAF Valuation Study

Way Back in 1975

USA selling Boeing AWACS aircraft to NATO for 2 billion $

First time idea of offset took a concrete shape to ascertain tech, commercial and political viability

A collaborative, comprehensive, well researched study conducted by RAND institute, USAF, Boeing and NATO industry

11/26

OFFSET CHALLENGES

Source – RAND, USA

02/23

12/26

OFFSET CHALLENGES

Valuation Study

CII, CAPS, IAF, DRDO and DOFA in active consultation with Dassault may conduct a Tech-commercial valuation study to be the trendsetter and game changer

13/26

OFFSET CHALLENGES

Dassault – Taiwan TOT and manufacturing offset agreement in 1995 for 3.5 B$ sale of Mirage aircraft

Lockheed Martin - Taiwan for 150 F-16 aircraft – offsets created repair facilities for >500 aircraft components with a long term objective of regional aviation maintenance centre

Valuation Study

14/26

OFFSET CHALLENGESProcess Value Chain & Stakeholders

Design, Dev & Simulation

Manufacturing,Integration

Test & Evaluation Product Support

Concept & Structure DesignSub sys & acces DesignPrototypePerformance Eng analysisSimulator testingRe-engineering

Process PlanningProduct PlanningTooling DesignMetal CraftingVendor qualification/MgtAssy Jigs & FixturesGr Support EqptPrecision MfgSpecial process

Qualification & test reportsAcceptance & testsAutomated test Eqpt

Repair & ServiceCustomer SupportWarrantySupply ChainUpgradeUser & Maint Manual

Prime OEM/Sys Integrator or Tier-I supplier

Raw Mat vendor, T-1,2,3 Suppliers

OEM or System Supplier/sub sys integrators

OEM or System Supplier/User

Supply Chain 15/26

OFFSET CHALLENGES

Production / Delivery Lead Time

Assuming MMRCA contract would be signed by Mar 2013

Delivery to begin in 36 months (Mar 2016)

18 aircraft / per annum delivery plan

Delivery (126 ac) to complete – Mar 2023

Cutoff for offset contracts – Oct 201316/26

OFFSET CHALLENGES

Business Model

Systems of aircraft and segment of value chain (manufacturing / product support)

Extent / speed of technology absorption / production

Investment & sourcing orders from Dassault

Resource mobilisation - skilled manpower17/26

OFFSET CHALLENGES

FDI

Source E & Y18/26

OFFSET CHALLENGES

Unfavourable Tax Regime and Preferential Treatment to DPSU

Creation of defence SEZ infrastructure

Review of Gujrat’s proposal for a dedicated SEZ committed by state minister in the CII meet held in Apr 2010.

19/26

OFFSET CHALLENGES

Export Opportunities

Global spectrum of operations of Dassault for long term strategy

7500 civil and military aircraft manufactured by Dassault are in operation worldwide

Aggressive approach to prove our mettle as credible supplier following zero DPMO and always on time delivery standards

20/26

OFFSET CHALLENGES

Industry reps not part of the Technical Valuation of offset proposals

CII may persuade MoD for participation

It would enable realistic assessment of capabilities and offers to absorb technology and deliver

Industry Representation

21/26

Suggested Way Ahead

OFFSET CHALLENGES

DOFA Charter revolves around Service HQs and DRDO.

Charter should reflect presence of Indian industry as an equal stake holder

European Union charter on offset places industry at the forefront

Industry Representation

22/26

Suggested Way Ahead

OFFSET CHALLENGES

Co-terminus time frame is restrictive

Restrict the sourcing of major assemblies / components

If commercial viability demands longer time frame, concession should be granted beyond contract

Tenure of Offset Obligations

23/26

Suggested Way Ahead

OFFSET CHALLENGES

CII, CAPS/IDSA, Air HQ, DRDO, DOFA and Dassault for conduct of Technology Valuation study

Initiate dialogue with Dassault to formalize agreements

Work to accomplish - technical drawings, creation of facilities, development and quality certification, scheduling of production aligned to main delivery schedule etc

Tech-Commercial Valuation

24/26

Suggested Way Ahead

OFFSET CHALLENGES

Initiation of dialogue within the industry on increase in FDI limit from 26 to 49%

Review of governments plan on defence SEZ

Industry (specially SMEs) Dassault meet

FDI – SEZ – Industry/Dassault Meet

25/26

Suggested Way Ahead

OFFSET CHALLENGES

26/26

Members can learn how others are meeting these requirements.

Forum for members to meet service providers who may offer solutions to offset needs.

Affords service providers and academics an opportunity to meet companies from around the world that need offset solutions.

Provides education to the community at large.

http://www.globaloffset.org

Thank You