strategic alliance proposal between mahindra aerospace and airbus military

Strategic Alliance Proposalbetween Mahindra Aerospaceand Airbus Military

Why Defence?

• Currently, FDI in defense stands at 26%• Proposals have been made to further ease it to 49%• Government has shown interest in increasing FDI inflows in defense which is currently

low (less than 0.01% of total FDI inflows)• Higher investment may be considered in state of the art technology

FDI Regulations

• Foreign vendors can offset credits by transfer of technology• Indigenization limit lowered to 30%

Relaxation in Defense Offset Policy (DOP)

• Contract worth Rs 11,897 crore to replace AVROS by 56 new transport aircrafts• Emphasis on developing private players in aircraft manufacturing • Private players encouraged to form JV’s with foreign players • Previous backlogs of PSU in delivering previous orders

Contract for purchasing transport aircraft by IAF

Why Defence?

Business Case

Partner Selection

AllianceManagement TerminationAlliance

NegotiationExternal

Environment

The past 20 years saw dramatic changes on the battlefield and the beginnings of an equally dramatic shift in economic power

The world’s attention shifted to the Greater Middle East

Innovations in defence technology and operations have marked these past two decades of conflict

Developing countries are emerging as true competitors to the developed economies with regard to their innovation and technical prowess, R&D expenses, etc.

The Global Shift in Defence Power (1 of 2)

The Strategic Landscape Reshaped, 1991 - 2012 Long Term Growth in Military SpendingCountry-wise Expenditure on Defense, 1991 vs. 2011

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

The Global Shift in Defence Power (2 of 2)

Global Defense Spending shifting away from the USExpected Changes in Defence Spending (2022)

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Is there a bright future for India’s Defence Industry?

FDI in Defence

FDI cap has been maintained at 26% in the Defence sector

Any FDI proposal beyond 26%, which brings state-of-the-art technology would be considered by the CCS on a case to case basis

Factors setting India’s Defence Demand

Changing geopolitical scenarios on India’s borders would necessitate continual augmentation of its defense equipment

New procurement would be necessary to replace obsolete equipment & to achieve combat readiness

Internal security requirements would drive demand for homeland-security equipment

Increased government expenditure on defence is likely to continue in the foreseeable future

The entry of new companies in the market would increase competition and innovation, further driving growth

India: The Largest Importer of Arms

75% of India’s weapons’ purchases are imports and India is now the largest importer of arms

5-Step Formula to create a sustainable Defence Ecosystem

Choose core capabilities Accelerate capability building Enable the optimal industry structure

and conduct Improve procurement processes Drive a performance orientation in

government defence entities

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Companies Mahindra & Mahindra-Defense Division

provide total solutions for the entire range of light combat and armoured vehicles and their derivatives for defence and security forces

largest private-sector supplier of bullet-proof vehicles in the country

Defence Land Systems manufacture world-class military

vehicles, select artillery systems, and other land system weapons at competitively low costs

Products Land

Sea

Companies Mahindra Aerospace

Vision is to become a globally recognized manufacturer of aircraft and a tier 1 supplier of components and assemblies

In partnership with the National Aerospace Laboratories, already developing a new 5-seat light utility aircraft

Aerostaff Australia one of the world’s premier suppliers of

close tolerance high-precision sheet metal and value-added products to Aerospace and Defence customers

directly supply the assembly lines of the Boeing 737, Gulfstream G150, and the world’s most advanced fighter aircraft, the Lockheed-Martin F-35 Joint Strike Fighter

Gipps Aero Products handles all aspects of aircraft

development, production, marketing and after-sales support

develops and manufactures a family of 2-20-seat utility aircraft which is sold in more than 30 countries

The Mahindra Group

Overview

Was founded in 1945 as a steel trading company

Today, the Group is $16.2 billion global corporation

Employees more than 155,000 people across globe

Group flagship company, Mahindra & Mahindra is a leader in tractor and utility vehicle space

Group Companies

Defense Mahindra Aerospace

Companies Mahindra & Mahindra-Defense

Division Defence Land Systems

Products Land Sea

Presence in 10 business sectors

Companies Mahindra Aerospace Aerostaff Australia Gipps Aero Products

Products Aircraft

Business case for Mahindra Aerospace to enter into JV for transport aircraft Favorable Goverment regulations Diversify its product portfolio in Defense sector Already operating in defense sector and in manufacturing of small aircrafts Aquire state-of-the-art technology to manufacturing large aircraft cariers Inability of foreign firms to enter India on their own

MPV Axe Marksman Rakshak

Sea mines

Torpedo Decoy Launchers

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Partner Selection (1 of 2)

Eligible Partners

Company Name

Embraer

Lockheed Martin

Airbus

Ilyushin

CASA

Saab

Alenia Aeronuatica

STE Ukraine

World Rank*

23

3

2

-

2

39

9

-

Home Country

Brazil

USA

Spain

Russia

Spain

Sweden

Italy

Ukraine

* As per Candesic report - THE WORLD’s TOP 100 AEROSPACE & DEFENCE COMPANIES - 2012

Part of the Italian conglomerate Finmeccanica, which is facing charges of paying bribes to swing the contract to supply 12 VVIP helicopters to India in favour of its UK-

based subsidiary, AgustaWestland

Already has a Joint Venture with Tata Advance Systems for constructing aerostructures

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Partner Selection (2 of 2)

Airbus or CASA

Both are subsidiaries of EADS (European Aeronautic Defence and Space Company N.V.) EADS is World’s 2nd Rank Air Defence company

Airbus has expressed its interest in the IAF deal of 56 aircrafts

Partner Selected: Airbus Military

Business Case for Airbus Military to form JV with Mahindra Aerospace Conglomerate with 70 years of experience. Knowledge about Indian industry and politico-

regulatory framework Already built up Aerostructure facility Parent company is involved in defense sector Acquired companies outside India for cross country presence- Aerostaff Australia and

GippsAero Directly supply the assembly lines of the Boeing 737, Gulfstream G150, and the world’s

most advanced fighter aircraft, the Lockheed-Martin F-35 Joint Strike Fighter Enable Airbus to fulfil offsets for any defence exports to India

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Preparation for Negotiation

Building the Negotiation Team

Conducting the Negotiation







• Cooperative Goal Strategy to create a win-win situation for both partners as the JV is formed with the long-term objective and its is not just a manufacturing facility created to tap into cost synergies

Strategy

• Granting of Technology Licenses, Scope of License Territories and Royalties• Capital Allocation issues, New product development• Letter of Intent

Hard/Soft Issues

• Term Sheet containing Time Frame and Schedules, Obligations & Rights of each party, Financing & Pricing terms, Intellectual Property, Non Solicitation clausesAim/Constraints

• Timeline for completion of Negotiation Stage• Do not plan for more than 10% of lifespan of allianceRoad-Map

• Parties should sign the Non Disclosure agreement.• This will build trust against any chances of Technology leakages as well help in

performing Due Diligence of each other’s capabilityTrust

Alliance Negotiation

Stages of Deal Negotiation




Mahindra Aerospace should bring in executives from Mahindra Defence Division who have experience in dealing with Indian Government

The early negotiations should allow the parties to get to know each other, clarify expected benefits, and identify shared goals and objectives

The prenegotiation stage should have identified proprietary knowledge that needs to be protected, so before disclosing proprietary data, managers should ensure their competitive advantage is adequately protected

Negotiating History of the partner should be used while conducting Negotiations Emerge from these negotiations with a clear focus on goals and a plan for achieving

them

Core Team

• Manufacturing• Technology• R&D

Other Key Members

• Marketing• Finance• Legal

Technological

• Ownership of technology

• Royalty Rights• Legal Rights

Market Issues

• Product Lifecycle

• Cost Sharing• Legal Liabilities

Structure

• Board Representation

• Division of Resources

• Mechanism for Business expansion

Alliance Management

Alliance Manager Role

Alliance Benefits Proposition

Partner Selection Mapping strategic fit between

Mahindra and Airbus Sensitivity to Cultural Differences

Understanding finer aspects and nuances of Indian and French cultures

Benefit both sides Mahindra – Technology, R and D

Expertise Airbus – Market Access, Government

Approvals Structured Decision Making Enhanced Learning

Alliance Manager Selection

Executives from Mahindra Defence Division who have dealt with Indian Government before can be employed

Identify mid level managers who would serve as interface between top level and operational level management

Establish congenial working atmosphere

Trust building exercises, Personal Relationships

Bridge cultural differences (Indo-French)

Monitor Partner Contribution Resource Allocation Corrective Action

Regulate Information Flows Defence sector associated with

extremely sensitive information, careful monitoring required to avoid leakage

Reassess Strategic Viability, Flexibility Changes in External Environment – Ex:

Current regulations permit 26% FDI which could change in future based on which action can be taken

Changes in Internal Environment

Mahindra - Airbus

Board of Directors

Management Committee

Representation from both sides

Top Management Roles and Responsibilities

External Role Internal RoleEncouraging organizational reciprocal behavior through frequent interactions, amicable resolution of differences

Selection of Alliance Manager to oversee regular operations with requisite experience and expertise – Executive from Mahindra Defence Division

Organization Commitment to create shared value through close interaction at multiple levels of partner firms

Resource Allocation for shaping shared strategic intent

Identification of new strategic opportunities to further strengthen alliance and leverage on partner strengths

Maintain links at all levels, Recasting reward systems (incentives on winning and successfully completing government orders)

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Termination

• Mahindra will acquire state of the art technology in manufacturing transport aircraft• Airbus can build a strong relationship with Mahindra• Airbus can build its manufacturing facilities for other products in India to tap the labor

arbitrage• By maintaining a strong relationship with Indian conglomerates it can tap the opportunities to

grab a larger share of rapidly increasing defense budget of India

Grow It

• Mahindra and Airbus will follow the contractual terms: Building 16 transport aircrafts with 30% indigenous material and remaining 40 carriers with 60% indigenous material

• Mahindra using its experience will bid for the project and Airbus manufactures the aircraft

Fix It

• JV does not win the bid for the contract • JV wins the bid and 56 aircraft are supplied to complete the project, the purpose of forming JV

would be completed• PSU’s are allowed to take part and Airbus decides to form a JV with HAL or BEML

Exit

Why Defence?

Business Case

Partner Selection


NegotiationExternal

Environment

Strategic Alliance Proposalbetween Mahindra Aerospaceand Airbus Military