Introduction

In India, the aerospace industry is growing significantly with the rising activities from both the defence and civil aviation sector. With increasing demand for large aircraft from Indian carriers such as SpiceJet and Indigo, and focus on Powered by Hour Contracts (PBH), many of India’s aerospace services and manufacturing activities are expected to be carried out. Similarly, as India’s defence capital expenditure spending is continuously growing, there are also many opportunities in defence aerospace. This offers opportunities for start-ups as well as further expansion for existing players.

The Indian aerospace & defence (A&D) market is projected to reach ~US$ 70 billion by 2030, driven by the burgeoning demand for advanced infrastructure and government thrust.

Drivers

Rising passenger traffic

Domestic air travel demand continued an upward trend in October 2020, with a 33% increase (over September) to ~52 lakh passengers. In June 2020, the Ministry of Civil Aviation approved capacity increase to 45% from one-third, soon after domestic flights resumed from May 25, 2020. It further increased to 60% from September 2, 2020. With the festive season around, the government expects capacity to go up to 75%.

Further, under the Vande Bharat Mission, between May 7, 2020 and October 31, 2020, international passenger traffic (inbound and outbound) stood at ~10.96 lakh. The aerospace industry is expected  to

Increasing military and defence expenditure

India’s defence budget for 2020-21 is Rs. 4,71,378 crore (US$ 67.4 billion), 9.37% higher than that in 2019-20. Of the Ministry of Defence total allocations, Rs. 323,053 crore (US$ 46.2 billion) has been provided under the Defence Services Estimates (DSE), which deals with expenses of the three-armed forces and the Defence Research and Development Organisation (DRDO).

Further, to support development of military procurement, in October 2020, the Modi government lifted expenditure restrictions on defence spending amid the ongoing stand-off with China. As a result, the Ministry of Defence, would be able to spend in line with its quarterly expenditure plan, which includes emergency procurement processes of over 100 contracts, each with a budget of Rs. 500 crore (US$ 67.10 million).

Strong A&D ecosystem

India ranked 19th among the world’s defence exporters in attracting foreign investments. India’s defence exports increased 700% in two years—from Rs. 1,521 crore (US$ 204.13 million) in 2016-17 to Rs. 10,745 crores (US$ 1.44 billion) in 2018-19.

In August, the Union Ministry of Defence formulated the Defence Production and Export Promotion Policy 2020 as an underlying guidance document to accelerate PM Modi’s commitment for ‘Atmanirbhar Bharat’ and provide a guided, streamlined and significant boost to the country’s defence production capabilities for self-reliance and exports. The policy aims to generate revenue worth Rs. 175,000 crore (US$ 23.49 billion), including exports of Rs. 35,000 crore (US$ 4.70 billion), in the aerospace & defence products and services space by 2025.

Opportunities

Strong industry support

As India is rapidly modernising its military sector, the aerospace and defence industry is expected to consume electronics worth US$ 70-72 billion over the next decade in agreement with two industry associations—the National Association of Software & Services Companies (NASSCOM) and the India Electronics and Semiconductor Association (IESA).

Rising initiatives by industry players

Industry players, innovators and researchers, backed up by the Indian government and space agencies, are focussing on creating new aerospace opportunities.

For example, in October 2020, Starburst Aerospace announced plans to expand presence in India and develop an innovation centre in Mumbai and conduct engagement activities in Delhi, Bangalore and Hyderabad through partners in the aerospace and defence community.

Cost-effective environment

Aerospace requires highly qualified workers and precision capabilities. India presents an ecosystem, which ensures quality and improves performance for the overall effectiveness of business operations.

In the third and latest edition of FDI’s Aerospace Cities of the Future 2020-21 rankings, Hyderabad was ranked number one by FDI Intellegence.com, a division of the Financial Times Group, under the category ‘Top 10 Aerospace Cities in Cost Effectiveness.’ The other Indian cities that also made to the top 10 list include New Delhi and Bengaluru.

Government initiatives

The government is taking several measures to boost domestic manufacturing and growth across industries.

• Aero India 2021

In line with this, in October 2020, the government announced the Aero India 2021 to position India among the top five countries globally in defence & aerospace industries with active participation from the public and private sectors. As of September 2020, ~36 companies from public and private sector undertakings such as Alpha Design Technologies Pvt Ltd., Bharat Electronics Ltd. and Hindustan Aeronautics Ltd. have already registered to participate in the five-day air show. The foreign participants in the show include Frances MBDA, Israel Aerospace Industries Ltd., US aerospace major Boeing, Russia’s Rosoboronexport JSC, etc.

To support its objective, the government is encouraging active participation from industry players.

For example, in the Defence Acquisition Procedure 2020, a new category of Buying ForeignManufacturing in India was incorporated to include provisions for encouraging FDI to establish manufacturing hubs. The new category involves manufacturing of equipment (Maintenance Repair and Overall) through subsidiary of a foreign corporation in India.

• Foreign Direct Investment

Various government reform initiatives indicate a step forward in achieving objectives such as increasing FDI to 74% via automatic routes in the defence sector.

As per data provided by 80 companies, FDI inflow of over Rs. 3,454 crore (US$ 463.55 million) has been registered in the defence and aerospace sector as of June 2020.

• Research and Development – Promoting start-ups under ‘Aatmanirbhar Mission’

In April 2018, an innovation platform called Innovations for Defence Excellence (iDEX) was launched. IDEX aims to build an ecosystem to encourage defence & aerospace innovation and technology initiatives.

It engages and supports industries such as start-ups, MSMEs, innovators and institutes with grants/funding to conduct R&D for future adoption of the Indian defence and aerospace needs.

‘Make in India’ initiatives

Defence and aerospace continues to be a strong pillar for India and key government systems such as Make in India to succeed. Government policies have centred on the implementation of advanced technologies in the defence sector, thus improving the potential of domestic manufacturing. The Defence Ministry has set a target of 70% self-reliance in weaponry by 2027, creating huge prospects for players in the industry.

The Indian government has implemented several policies to promote self-reliance in defence and aerospace manufacturing under the Aatmanirbhar Bharat Scheme.

E.g., 74% FDI in defence manufacturing, ‘Import embargo’ on 101 military items and Defence Production and Export Promotion Policy 2020.

In line with this, the Government of India is also supporting start-ups and promoting active participation in the industry. Describing MSMEs as ‘rising stars’ in aerospace and defence, the Defence Ministry estimates that their numbers would double to 16,000 over the next five years (by 2026) as they were integrated into global supply chains.

For example, in September 2020, Dynamatic Technologies Ltd., an aerospace company based in Bengaluru, announced a contract for constructing parts for the T-7A Red Hawk trainer, one of the largest and most advanced aircraft programmes built by Boeing and Saab in the world.

Conclusion

A long awaited $5.2 billion contract for 83 indigenous Light Combat Aircraft (LCA) Tejas Mk.1A jets is ready in all respects and is likely to be awarded to HAL in or before December this year. Livefist can confirm that completed paperwork is now awaiting a final clearance from India’s Finance Ministry before contract signature with manufacturer Hindustan Aeronautics Ltd (HAL).

Clearance to manufacture 18 LCA Mk.1 FOC trainer aircraft to expand numbers and keep the production line warm before the Mk.1A comes online is also under final review before expected clearance. The 83 Mk.1A jets will be higher performance jets both in terms of performance, weapons and avionics capability as well as crucial maintainability. Livefist had this detailed report on what goes into the LCA Mk.1A, the jet regarded by the IAF as the ‘true’ Tejas.

HAL chairman R. Madhavan told Livefist in an interview last month, “Production rate was an issue two years back. FOC clearance came last year. We have delivered the first aircraft within 12 months. As far as numbers are concerned, we’ve completed deliveries of the IOC (initial op clearance) aircraft. We have to deliver the 16 FOC (final op clearance) aircraft and awaiting clearance for the 18 trainers. For current order we are going at 8-10 aircraft per year. Our target rate is 16 per year, for which a second line has already been set up now. We can easily ramp up to 16-20 per year as and when we receive the 83 LCA order. We were expecting it around August when the Covid19 pandemic landed. Expecting a 2-3 month delay. Hopefully by December we should have the order.”

With the Indian MoD clearing expected procurements of a dozen Su-30 MKIs and 21 MiG-29 UPGs from Russia to top up existing fleets in service, a chorus has also begun to build for expanded orders of either the LCA Mk.1 FOC or the improved LCA Mk.1A.

In a detailed interview to Livefist this week, one of India’s top aviation researchers Angad Singh argues that it would be ‘huge mistake to leave the line idle’. He says, “There’s room for expanding the LCA FOC or the LCA Mk.1A before the LCA Mk.2 comes on. We’ve heard a lot of really ambitious stuff out of Bengaluru between ADA and HAL about dates and times, and frankly I think it would be a little naive to take those at face value with the benefit of hindsight. The Mk.1A is definitely closer to delivery. Between stretched out LCA Mk.1 FOC production and 18 trainers trainers, don’t think there’s room between now and Mk.1A deliveries to squeeze out more FOCs.If that route does open up however, it would be a huge mistake to leave the line idle before the Mk.1A comes on. Even if it means building a couple of squadrons of white tails.“

Meanwhile, as officially sanctioned work begins on an LCA derived twin-engine deck based fighter (TEDBF) for the Indian Navy (full details in this previous post), suggestions are also gaining strength for financial resources to include a conventional air force version, unofficially being called ORCA (omnirole combat aircraft), a sort of ‘Super Tejas’.

The Indian government is all set to clear paperwork in the coming months to acquire a U.S. ISTAR (Intelligence Surveillance Targeting and Reconnaissance) battlefield and ground surveillance aircraft platform, the first step towards a larger joint project that will see India’s Defence Research & Development Organisation develop sensor technologies for an additional four aircraft. A model of proposed Indian ISTAR jet was displayed for the first time at the Aero India 2021 show earlier this month, which Livefist can confirm is a signal that things are on track after a troubled journey thus far.

The first official literature on the Indian ISTAR describes it as ‘cutting edge technologies for the nation in support of precision strike’. That the speeding up of the program has happened in the aftermath of the Balakot air strikes by India on Pakistan is no coincidence. Tomorrow marks two years since the military operation that saw Indian Air Force jets, supported by Indian airborne surveillance assets, striking terrorist targets deep in on Pakistani soil. Laboratory literature on the Indian ISTAR program goes on to say, ‘ISTAR is a MULTI INT Solution capable of exploiting image, SIGINT and track info from sensors and provide actionable intelligence for tactical and strategic advantage.’

In 2019, a Livefist newsbreak had revealed that efforts to acquire ISTAR aircraft had been bedeviled by a DRDO-Indian Air Force turf war over testing. Since then, the Indian and US governments have managed to bring things back from the brink. You can read Livefist’s detailed report with the background here. Sources familiar with the Indian ISTAR program confirm that paperwork to support the Indian MoD’s procurement clearance is under creation and will be moved by the middle of this year. The Indian Air Force is said to have expressed urgency in the program, and has provided full backing to the indigenous ISTAR as a priority future asset.

In the mean time, work on the Indian ISTAR’s radar, electronic intelligence, communication intelligence and other sensors has already begun at the DRDO’s Centre for Airborne Systems (CABS), with two years of work already in. The team that developed the Netra AEW&C airborne system in service with the Indian Air Force has now been split into two expanded teams — one focused on the ISTAR program, and the other working on the Netra Mk.2, a program where the existing Netra radar system will be integrated with pre-owned Air India A320 passenger jets. Livefist has detailed that latter program here.

Described by the DRDO as a ‘system of systems’, the ISTAR comprises airborne and dround segments based on a ‘high altitude, high endurance, transport jet’ sporting very high resolution imagery from long range SAR and EO/IR, ground moving target detection of slow moving objects, the ability to track mobile ground targets, map natural disasters, area monitor vessels, monitor activities near border and littoral areas. It also states that the ‘multi intelligence system’ uses AI/ML/DL to infer actionable Intelligence IMINT and SIGINT information to form a common operating picture (COP).

A formal decision hasn’t been taken yet, the Indian ISTAR — like the U.S. aircraft to be procured under the Defence Technology & Trade Initiative (DTTI) — will be based on the Bombardier Global Express business jet platform. A separate procurement of four jets will commence as the program matures in the next two years. Much of the work done on the Netra Mk.1 AEW&C program will expectedly flow into the DRDO’s ISTAR, though a large number of Indian private start-up companies have been enlisted to contribute to the indigenous software architecture will be proprietary to Indian battlefield and ground surveillance needs.

Apart from airborne intelligence aircraft operated by India’s Research & Analysis Wing (RAW), the Indian Air Force currently operates three Phalcon AWACS (with two more to be contracted) and two DRDO-Embraer Netra AEW&C jet. A third of the type is being used by the DRDO as a sensor testbed. The DRDO was earlier also developing an AWACS system based on the Airbus A330 widebody jet platform, though that has, at the very least, been pushed down the priority ladder, if not shelved for now. On the other hand, with priority backing, and transactional muscle provided by the India-US relationship, the ISTAR program is expected to move smoothly forward.

The advantages of contract manufacturing, commonly known as outsourcing, are many and substantial. A company reduces overhead when it does not have to build and maintain its own facilities or train and employ its own workforce. The company can move production to a country where raw materials and labor are cheaper, and where competition for the contract within that country helps to reduce costs even further. However, there are challenges to contract manufacturing which, if not managed properly, can defeat the purpose entirely. Therefore, before committing to an outsourcing plan, you should understand the risks and develop strategies for mitigating those risks.

Below are the leading issues for outsourcing along with the solutions that Umac-HMT offers:

• Supply chain — As we are currently witnessing with the COVID-19 outbreak, outside factors can disrupt business operations and interrupt supply chains. While a pandemic is unpredictable and rare, you can and should plan for annual work slowdowns and stoppages for cultural events. It’s also important to be aware of any political or labor unrest that could erupt in the country you’ve selected. Finally, you should assess whether the raw materials are going to be available, whether the country has the infrastructure to get materials from point A to point B, and if a facility has the capacity to complete your order. Having a backup plan in the event of an interruption is essential.
• Quality control — Everyone wants to save on the cost of production, but not at the expense of quality. Quality materials, trained and capable labor, and efficient production processes are necessary for creating a finished product you are proud to market. Choosing a facility with effective controls at all stages of production is vital. Quality control is especially critical when you are introducing a new product.
• Distance from production process — When you are an ocean or a continent away from the locus of production, you lack moment to moment knowledge of what is happening on site. You may only have a general understanding of production techniques. It’s imperative that you can trust the managers who are overseeing production.
• Risks to intellectual property — Whenever you outsource manufacture, you have to hand over your product specifications to someone outside your company. This creates a security problem that can lead to counterfeiting in violation of your intellectual property rights. Two strategies are imperative. First, you have to understand that a patent in your home country won’t help you, since all patents are regional. Therefore, you must patent your product within the region it will be manufactured. Secondly, if your invention requires discrete components, you might consider outsourcing production to separate facilities, so that neither will possess the full specifications. Additionally, you must secure appropriate legal agreements concerning the use of your IP. Naturally, you can feel more confident in such agreements if you or someone you trust has a long-standing relationship with the supplier.
• Communication — Communication across great distances is a challenge under the best of circumstances. But when there are differences in languages and customs, articulating your needs, arriving at an understanding, and ensuring openness throughout the process are exponentially harder. Poor communication can result in deviations from your expectations, delays, and substandard quality. Anyone doing business with a foreign manufacture must have a plan in place to bridge the barrier of language and customs.
• Increased liability — When the quality of a product drops, consumers can be put at risk. Each year, tens of thousands of consumers are injured or killed by defective products, including adulterated drugs, exploding batteries, lead-tainted toys, collapsing furniture and flammable clothing, to name just a few. When a defective product harms a consumer, strict liability attaches to the company that placed the product on the market. You can go after the manufacturer, but if you didn’t address the issue of liability appropriately in your contract, you’re going to have a very difficult time, especially as a plaintiff suing in a foreign country. And, even if you prevail against the manufacturer, your company’s reputation could be irreparably tarnished.

Umac-HMT helps companies avoid pitfalls by providing detailed guidance and reliable processes, and by connecting them to vetted, reliable suppliers with a reputation for quality work. Our in-country product managers ensure quality control through every step of the process. Umac-HMT takes the worry out of overseas manufacture, so your company can prosper and grow.