Adani-Saab Collaboration: Background of Private Participation and Strategic Partner Model in Defence

Recently, Swedish defence company Saab Aeronautics and India’s Adani group have announced collaboration in defence manufacturing mainly for producing single engine fighter jets and other defence products under India’s recently unveiled “strategic partnership” model. In this study, we are looking at the background of Private sector participation in defence manufacturing along with current status and recent projects.

Background – Private Sector in Defence Manufacturing

The Defence sector was opened for participation by the Indian private sector In 2001 but despite of passage of more than a decade, the role of private sector in defence manufacturing remains peripheral. This is partly due to the inability of the Ministry of Defence to swiftly evolve a workable system for engaging private sector by making them as prime contractors, under the ‘Buy and Make (Indian)’ category, or to nominate them as the Indian Production Agency in ‘Buy and Make’ case. Thus, defence manufacturing is currently dominated by state-run outfits. However, these entities are criticised for their inefficiency, poor performance and long delays in production.

With an aim to end India’s too much dependence on arms imports, the government asked the foreign defence manufacturing companies to share technology with local players and then manufacture in India under the ‘Make in India’ initiative.

Of late, private firms such as L&T, Mahindra Group, Tata group, Adani Group, Reliance Group etc. have started to show great interest in defence manufacturing. In May 2017, India’s first private sector small arms manufacturing plant was inaugurated in Chambal area of Madhya Pradesh. The facility will supply world class weapons to the armed forces. The facility has been set up under a joint venture between India’s Punj Lloyd and Israel Weapon Systems. The facility will produce four products, namely, X95 carbine and assault rifle, Galil sniper rifle, Tavor assault rifle and Negev Light Machine Gun (LMG).

In May 2017, the Union Cabinet approved the “Strategic Partnership” model to boost defence manufacturing in India.

Strategic Partnership Model

The ‘Strategic Partnership’ model is aimed at creating and nurturing an ecosystem for private defence manufacturing in India. It would make defence manufacturing as a centrepiece of Make in India. Under this model, the government will pick Indian companies that would tie up with foreign players. The government would then provide the winners with guaranteed billions of dollars of orders and will incentivise them to manufacture defence products like submarines, fighter jets, helicopters, armoured vehicles etc. The government believes that the strategic partnerships with select Indian firms would be quintessential for enabling private sector participation in defence manufacturing.

In the beginning, the government will pick one Indian private entity as a strategic partner to manufacture one major system (single-engine fighter aircraft, helicopters, submarines, and armoured vehicles). This will cater to the most of present needs of the armed forces. Over time, this policy will encourage specialisation among Indian firms. The strategic partner will be chosen by the government by following a well-defined process that include an assessment of the technical capabilities, its plans for indigenisation over time and its capability to forge a network of domestic suppliers. Simultaneously, the government will also identify foreign Original Equipment Manufacturers (OEMs) with whom strategic partners can tie up for technology transfer.

The joint venture must be owned and controlled by resident Indian citizens. The OEMs cannot own more than 49% FDI in the joint ventures. Also, the OEMs are required to obtain licence for technology transfer from their home governments.

Criticisms of the Strategic Partnership Model

Although, the Strategic Partnership Model looks noble and if the policy implemented efficiently, it could potentially become a turning point in India’s endeavour to achieve self sufficiency in defence manufacturing. However, there  are some lingering problems that needs to be addressed by the government.

• First, the FDI ceiling of 49% will not be attractive for the large number of foreign firms to tie up with Indian firms. With insufficient control, the OEMs may be reluctant to transfer significant technology for production to Indian firms. Additionally, the home governments of OEMs will not be happy to permit significant technology transfer under these unfavourable conditions. So as a result, the OEMs may supply advanced sub-systems from abroad while transferring only the lower-end technology to the Indian strategic partner. On the flip side, the Indian firms will also be wary of being forced to assume all the risks without commensurate control over key technology. So, the Ministry of Defence has to find a way out to this issue so that higher levels of technology transfer do take place and the strategic objectives of the policy are met.
• Second challenge is the lack of consistency and delay in defence approvals. The inordinate delays usually place OEMs in tight spots. With 49% cap imposed on OEMs, most OEMs have no other option other than to extract the technology cost through transfer pricing mechanism. This would make the Indian strategic partner unhappy as it would be left with little revenue.
• Lastly, some corporate entities which are possessing defence licenses are newbie with little exposure in defence manufacturing. So they may lack requisite technological experience of a hi-tech original equipment manufacturer (OEM). This could eventually put many projects at risk.

Adani-Saab Collaboration

India is set to issue $10 billion procurement tender for procuring over a 100 single engine fighter jets. So, the Swedish giant Saab is looking forward to offer Gripen fighter jet in line with the India’s Make in India initiative. For this purpose, it has collaborated with Adani group for design, development and production of Gripen Jets in India.

Saab Aeronautics is also looking forward to supply modified version of Gripen with advanced features to the Indian Navy which will be capable of taking off from aircraft carriers. Earlier, Saab had offrered Gripen for the Medium Multi-Role Combat Aircraft deal which was eventually bagged by France’s Dassaults Rafale. The Saab Aeronautics has already bagged $5 billion worth of global orders for Gripen. Gripen jets are now used by the air forces of Hungary, Thailand, South Africa, Brazil and Czech Republic.

Another major contender in the race to grab defence deals from India is the U.S. aircraft major Lockheed Martin. Recently, Lockheed Martin signed an agreement with Tata Advanced Systems Limited (TASL) to produce the F-16 Block 70 fighter aircraft in India. We note here that IAF urgently needs to procure new fighter jets in order to augment its falling fighter strength. At present, the IAF has only 33 squadrons as opposed to the sanctioned strength of 42 squadrons. Worryingly, in another five years, about 11 squadrons of MiG-21s and MiG-27s will be phased out from service.