Saturday, January 15, 2011

India Expands Approved Categories For Offset Offerings

Aviation Week & Space Technology Jan 17 , 2011 , p. 44
Neelam Mathews
New Delhi

India’s broadening of its offset list should help manufacturers
Printed headline: More Possibilities

A much anticipated shift in India’s offset policy will allow foreign manufacturers to apply work they do in internal security and civil aerospace to defense projects.

Announced early this month as part of 2011’s defense procurement procedures policy, the new rules will be applied retroactively to Jan. 1 and widen the opportunities for foreign manufacturers to satisfy India’s strict requirements for 30% offsets in the value of any defense contract.

Vivek Lall, vice president of Boeing Defense, Space and Security in India, is looking for the move will benefit large programs such as the pending Medium Multi-Role Combat Aircraft (MMRCA) competition. “This is clearly a very forward-looking policy change,” he says.

But it’s not clear that the MMRCA will fall under the new procurement procedures since it predates the Jan. 1 start date. The six bidders, including Boeing for the F/A-18, have been asked to resubmit their proposals by the end of the month.

Because of its broad array of product offerings, such as Eurocopter’s AS365 N3 helicopter, EADS is expected to have an advantage under India’s new offset policy.Credit: EUROCOPTER
The 126-aircraft competition faces even higher offsets than usual. India wants to see 50% of the estimated $11-billion order covered by offsets.

Vendors are lining up small- and medium-size Indian businesses as partners to meet MMRCA requirements.

The outside contractors typically work directly with their Indian counterparts or through a network of suppliers. Boeing has signed memorandums with 38 companies as part of its bid to win the MMRCA contract.

As India increases military spending, it is creating more offset opportunities. National defense was budgeted for $32 billion in the fiscal year that ends March 31, but the target for 2015 will triple that level to $100 billion. Currently, 70% of India’s procurement needs are met by foreign sources.

The new listings for internal security products include arms and ammunition, protective equipment, vehicles for security, riot control and equipment, surveillance devices and training aids.

The civil aerospace products list is quite broad, including technical publications, raw materials and semi-finished goods, as well as flight and technical institutions. Core requirements cover all types of fixed- and rotary-wing aircraft, including airframes, engines, components, avionics, and design and engineering services.

Some concern has been expressed that India may unwittingly have set back the growth in its defense industry by broadening the offset list. The rationale is that the new policy aids the industry’s conglomerates, such as Boeing and EADS, because they already have such an array of civil aviation and internal security products in India that they can now apply to defense contracts.

India’s experience has been that its Tier-3 suppliers, such as Hindustan Aeronautics Ltd., which builds bulk items like aircraft doors for the global market, are unable to step up to Tier‑1 status for more lucrative contracts because India’s overall industrial base is immature. The solution may depend more on how much investment foreign companies are able to make in India’s industrial markets than on how many offset contracts are let.

“We’re subassembly suppliers,” says one defense official. “I don’t see Tier‑2 [entities]—like companies making flaps—getting into business until the government allows partners to share risks by increasing the equity stake for foreign companies.” The current cap is 26%.

Discontent over the technology-transfer issue is widespread. Pricewaterhouse­Coopers says the new policy leaves out a number of goals held by Indian industry and foreign vendors, including broader rules for allowing tech transfers and extending the period for recording offsets. But it notes that the defense ministry has established a committee to recommend changes to the new policy, including allowing plant-and-equipment investments as offsets.

S.P. Tyagi, a former Indian air force chief of staff, says progress will be measured by the levels of private investment made within India. “We need capability-building in manufacturing,” he says. “We would like to see markets open [beyond government-controlled companies].”

Others say the policy plays into the hands of what is already being done. “Boeing and Airbus are already setting up pilot training schools and simulators,” says one aerospace official. “The issue that should have been addressed [is] in the transfer-of-technology area.” The new policy is extraneous, he declares. “The government does not seem to have given it much thought.”

But such pessimism is not universal. “There are immense spinoffs from civil to military projects,” says one official. “The civil sector produces more technology.”

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