Defence cluster sees big business

The city’s SME cluster, which has evolved over the past few decades around defence research establishment activities, is getting ready for an all-new business environment provided by the offset policy.

Until now, what mattered to a vendor was its ability to fabricate components. Now, global corporations setting foot in India are going beyond this technical aspect, since they have to source 30 per cent of the contract value domestically.

“The offset policy will be a $5 billion opportunity by the time the defence ministry finalises the aircraft contract. The policy unveiled in 2009 has now started translating into new business opportunities for local industry. Even if three per cent of this business comes to the Hyderabad cluster, the opportunity would be huge,” says Subba Rao, chairman and managing director of Ananth Technologies.

To qualify for a contract from a global company, a vendor has to comply with specific standards in terms of testing, quality and management practices. “This is a major challenge faced by several SMEs, as they have to make additional investments to achieve the standards required by global companies. This is not an easy proposition, as many of these companies are small,” says Ravinder Reddy, chairman of MTAR Technologies, which is involved in defence and aerospace.

100 engineering & electronics cos
There are over 100 engineering and electronics companies in the city with annual turnover in the Rs 10-150 crore range. These form the vendor base of the defence and aerospace sectors. Though most have attained a high degree of technological prowess, not many have grown in size — defence contracts have been a low-volume business so far.

“Hyderabad is the centre for the entire knowledge-based defence industry and is much larger in size than the one in Bangalore. Core defence research and development happen here. That is why the support industry is also much larger here,” says Subba Rao.

These companies together generate an annual business of over Rs 2,000 crore. They operate in the fields of mechanical, metallurgical, alloys, electrical, electronics and software support systems, composites, hydraulics, tooling, forging and foundry.

A few SMEs also have global exposure. Ananth Technologies, an electronics and embedded systems company, provides core embedded systems, telemetry, telecommand, avionics systems for launch vehicles, simulator units among other products and services to the Indian Space Research Organisation (Isro), Space Applications Centre and National Remote Sensing Agency.

Similarly, Zetatek Industries Limited’s product portfolio includes test equipment, vibration testing, climatic chambers and quality control services for all defence projects. The company also makes motion simulators for testing of defence equipment, avionics components and navigation components. “We are the only company in the country that can calibrate guided systems,” says its chairman and managing director, R Siva Kumar.

The embedded systems and other electronic equipment developed by Ananth Technologies also go into foreign satellite systems being built by Isro. Zetatek exports its equipment to Israel, Russia, China, Germany and Spain. Siva Kumar says exports contribute 20 per cent to Zetatek’s business.

According to a survey by PricewaterhouseCoopers, global companies can achieve cost savings of 15-25 per cent through local sourcing, depending on the type of component.

The Tata group’s decision to establish four aerospace manufacturing units in collaboration with Sikorsky and Lockheed Martin in Hyderabad is testimony to the strengths of this cluster. The state government has also set up an exclusive aerospace SEZ near Hyderabad to boost the sector.

Samuha Engineering
To cash in on global opportunities, 40-50 companies led by Ravinder Reddy of MTAR Technologies and Subba Rao of Ananth Technologies have jointly formed a company of technocrats christened Samuha Engineering Industries Ltd. The government has given 200 acres of land in the aerospace SEZ to this cluster company, which includes SEC Industries, S&U Mek Engineering and SKM Technologies.

Apart from developing basic infrastructure with Rs 200 crore, the group will also set up facilities for high-precision meteorological tests and measurements to be utilised by its members.

Samuha plans to launch operations at the SEZ in the first quarter of 2012. Later, it will upgrade to sub-systems, systems and integration from the present level of component fabrication, says Sriram M M, director of Samuha. It will bid for high-value global contracts, which in turn will be sub-contracted to SMEs, including its promoter members, in the SEZ.