Arms and the man
India’s private sector could create a world-beating defence industry, if only the government would encourage it, says the head of this emerging manufacturer.
Lunch, Khutub Hai says, is a non-event for him, so could we eat whatever comes from home instead of visiting a restaurant? Have a good breakfast, he joked. It really is a joke. We are in Hai’s Mahindra Towers office but judging from the quality of fare in front of us we could as well have been in, say, Big Chill, writes Kanika Datta. The ghar ka khana in this instance is mushroom soup with crisp toast followed by penne in tomato puree and herbs, an exquisite quiche, garlic bread and a large bowl of salad with a piquant dressing.
As chief executive of the 11-year-old Mahindra Defence Systems (MDS), Brigadier Hai, who retired from the army in 1998, has been on the frontline, so to speak, ever since defence production was opened to private sector participation, becoming an articulate votary of the emerging domestic industry. He has much to say about the prospects (exciting) and problems (many) of this business and ends up eating so sparingly that I am almost ashamed of my substantial repast.
Hai’s initiation to the business was not entirely planned. He had had, he says, a good innings in his 32 years as an officer in the 3rd Cavalry. He had fought “a war-and-a-half” — in Bangladesh and the north-east, where he was commanding officer before his retirement. And “someone actually paid me to live in Prague for three years” as military attaché. That remit, which covered Bulgaria and Hungary, coincided with the period just before, during and after the fall of communism, an experience he describes as “great fun”.
Persuaded by family friend Anand Mahindra to oversee the group’s automotive business in Delhi, his initial work involved just that. Any defence business at the time was connected to Mahindra’s work-horse, the jeep. In those days, Hai recalls, “You sat in your office, they called you, you went there and signed a contract and came back. No marketing was needed.”
When defence was opened to private participation, “Anand said, let’s form a focus on defence and see what we need to do to organise ourselves for future opportunities”. So MDS was formed as a profit centre within flagship Mahindra & Mahindra (M&M), a structure that Hai says may change soon. In the early days, the aim was to have a single point of contact for the group for defence opportunities and to look beyond the jeep. Then it started exploring the market with a view to developing its own R&D and manufacturing.
For instance, an internal memo that Mahindra was looking to get rid of some chemical product capacity coincided with a CII seminar in which the Navy said it was looking for sea-mines. “We suddenly saw that our filament mining capability could be used to make these mines, so let’s give this a shot,” Hai recalls.
That was the kernel of a naval systems division, which focuses on underwater weapons systems and started making cases for mining, decoy and torpedo launchers. Hai says MDS has had several overtures from foreign companies. “This is a huge difference. In the early days when I went to the US nobody would talk to me. Today, half the US companies are here — in fact some of them have just left my office!” When I ask for names, he grins and gets busy with the soup, admitting only that a deal was “90 per cent through with a leading company”.
Foreign partnerships was the lynchpin of MDS’ strategy because, Hai points out, “there’s no need to reinvent the wheel.” Plus, foreign companies needed access to one of the world’s fastest growing markets. The search began for a long-term relationship with a company that was looking to make India a manufacturing hub for its worldwide products and eventually zeroed in on the UK’s BAE Systems.
That joint venture, called Defence Land Systems India, which Hai also heads, makes a mine protected vehicle (MPV) at a 20,000 square foot facility in Faridabad that MDS set up four years ago.
One project that’s keeping him in a state of animated anticipation is the Future Infantry Combat Vehicle (FICV), which the army is looking to bring into service in 2017. Hai says the $12 billion FICV project is “potentially bigger than MMRCA,” the medium multi-role combat aircraft for which financial bids were recently opened.
The FICV project comes under the “make” procedure in the Defence Procurement Procedure (DPP) rules, which means Indian companies execute the work and choose their technology partners. But the intellectual property will be Indian and the government will fund the technology up to 80 per cent.
MDS is one of three companies (the Tatas and L&T being the others) that have been evaluated and Hai is confident of making the shortlist due to be announced in December. “Our joint venture with BAE means we have the best technology available.” For the elements that BAE does not have, MDS has formed a joint venture with Israel’s Rafael.
Hai sees this as a great leap forward in developing indigenous capabilities since Defence Land Systems will be the final systems integrator. “We have some 25 engineers working for the past 18 months, continuously attending workshops in Sweden and Israel.”
So, although MDS still sells jeeps, Hai says it’s becoming a smaller part of the business. “Our current range — armoured vehicles, high mobility vehicles, MPVs, going into artillery systems going into infantry combat vehicles…and it’s kept us quite busy.”
To give him a chance to taste the excellent pasta, I say as a latecomer, MDS is up against fierce indigenous competition from Tata and L&T that already have the capabilities his company is building. He insists that the way MDS has gone about the business makes it a first mover. “We are the only company that has a dedicated factory for defence vehicles in India — we’re not the last shed in the assembly line making defence products.”
Was that not expensive? “No, after all, company that wants to sell 200,000 vehicles a year cannot afford to spend too much time to selling 1,000 vehicles a year. We learnt this early. When I set up the second shed to make MPVs, everyone said, why are you setting up a second shed when you have no orders.” I point out that this was the other observation about MDS — there were no buyers for its products. “Factually,” he counters, “we have 87 per cent of the armoured vehicle market. No one else sells 300 vehicles a year.”
As we help ourselves to a largish slice of quiche each, he launches himself on one of his (and the industry’s) pet peeves: government decision-making that crimps the development of the private domestic industry. India is going to be buying almost $80-100 billion worth of capital equipment in the next seven to eight years (excluding offsets). Some 80 per cent will be imported. Who’s benefiting? Only the foreign partner. “Unless some drastic action is taken quickly and the private sector is incentivised to come into defence production the situation is not going to work,” he says. For instance, we intend to target a business opportunity of $18 billion and hope to achieve 60 per cent of that. But even now, no major projects are coming out.”
Why is the government so intransigent? Hai takes a long pause before answering carefully. “For better or for worse, they wanted a public sector monopoly. It hasn’t worked but the government has decided it’s an implementation problem. Now, a company like Bharat Electronics has a turnover of Rs 5,000 crore. It should be Rs 50,000 crore. HAL [Hindustan Aeronautics Limited] has a turnover of Rs 11,000 crore. What are they talking about? Had it been us or Tatas or Leyland, we would have been different.”
Two or three things explain why India lags in defence technology. One, the government makes changes to the DPP every year. “They’re largely cosmetic and, as a result, the procedures have become a means to an end.”
“Tell me,” he warms to the subject, “which other country would not take an artillery gun just because one vendor dropped out, another got blacklisted, you found one company left, so you say single vendor, re-tender! In view of our national security, it’s a horrendous risk. Are we buying for process or for national security?”
Unless acquisition and production form pillars of national security, things are not going to change, Hai predicts. I suggest the DPP has been a casualty of Defence Ministry A K Antony’s legendary honesty. “What does corruption have to do with it? You don’t need the enemy for this!” he counters.
There is much more forthright comment after he requests I switch off the tape but time is running out and, coffee over, I regretfully end a most instructive conversation on the ways of Raksha Bhawan and the global arms business.
As I wait for my guest, one of the most respected designers in Indian fashion, who is also 15 minutes late, I wonder if he’s chosen a suitable venue ...
Analysts expect earnings surprises from consumer discretionary, financial and industrial sectors
Street worried on impact of lower oil prices; analysts say these can be partly offset by de-leveraging gains