India Needs Association of Defence Manufacturers

Major General Mrinal Suman (Indian Defence Review Sep 2009)

Although manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991, it was only in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-

(a) Defence-Industry Long Term Partnership.
(b) Defence-Industry Partnership on Commercial Process.
(c) Public Sector Undertakings/Ordnance Factories/Private Sector Complementarity.
(d) DRDO-Industry Partnership.
(e) Defence Export Strategy.
(f) Defence-IT Industry Partnership.

Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence to the private sector for the production of arms and ammunition.

The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get all orders and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there has been no change in the ground situation.

One of the major reasons for the continued neglect of the private companies in the defence sector is their failure to organise themselves into a collective effort. There is no business association in India exclusively for the defence industry. There are three major business associations in India, as follows:-

(a) Confederation of Indian Industry
Founded over 112 years ago, the Confederation of Indian Industry (CII) is a non-government, non-profit, industry led and industry managed organisation with a direct membership of over 6500 organisations from the private as well as the public sectors and an indirect membership of over 90,000 companies from around 350 national and regional sectoral associations. With 57 offices in India, 8 overseas (Australia, Austria, China, France, Japan, Singapore, UK and USA) and institutional partnerships with 240 counterpart organisations in 101 countries, CII strives to serve as a reference point for the Indian industry and the international business community.
CII membership is open to companies/firms engaged in manufacturing activity or providing consultancy services (engineering/technical/management) or in the service sector (banks, financial institutions, software development, hospitals, travel/tourism, hotels & hospitality). There is no individual membership in CII. CII works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. Defence, Aerospace and Research is one of its numerous divisions.
(b) Federation of Indian Chambers of Commerce and Industry
Set up in 1927, the Federation of Indian Chambers of Commerce and Industry (FICCI) has 1500 corporate members and over 500 chambers of commerce and business associations on its rolls. It claims to represent over 250,000 business units, belonging to large, medium, small and tiny segments of manufacturing, distributive trade and services. FICCI has formed Joint Business Councils (JBCs) with over 69 countries, including the US, Japan, South Korea, Australia and the People's Republic of China. FICCI stands for quality, competitiveness, transparency, accountability and business-government-civil society partnership to spread ethics-based business practices and to enhance the quality of life of the common people. It provides a forum for continuous government-industry interface for evolving a shared vision on economic matters.
Thirty-four specialized committees have been formed to focus on diverse segments of the economy and grapple with sectoral issues to provide solutions to business and to suggest pragmatic policies to the Government. Defence is one of them.

(c) Associated Chambers of Commerce and Industry of India
Established in 1920 by promoter chambers, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has in its fold more than 300 chambers and trade associations, and serves interests of more than 300,000 direct and indirect members. It represents the interests of industry and trade, interfaces with Government on policy issues and interacts with counterpart international organisations to promote bilateral economic issues. ASSOCHAM has identified a number of key areas for special focus and has opened some overseas offices as well. It has established partnership with business chambers in more than 45 countries. ASSOCHAM has 60 expert committees covering the entire gamut of economic activity in India, e.g. Information Technology, Biotechnology, Telecom, Banking & Finance, Company Law, Corporate Finance, Economic and International Affairs, Tourism, Civil Aviation, Corporate Governance, Infrastructure, Energy & Power, Education, Legal Reforms, Real Estate & Rural Development. Defence is one of them.

As can be seen above, all the three business associations look after the complete gamut of business and industrial activities. Defence is handled by one of their numerous committees. In other words, defence does not get the attention that it deserves. Although all associations organise seminars, publish papers and participate in defence exhibitions, they are unable to influence Government policies due to lack of integrated and focused approach.

There are two activities of CII that merit special mention. First, it provides Defence Technical Assessment and Advisory Services (DTAAS) to its member companies to facilitate their entry in defence sector. The service strives to bridge information gap existing between the aspirant companies and the defence procurement agencies. DTAAS team assesses a company’s capability to manufacture various defence projects both with their existing facilities and with incremental additions. The team also offers specialist consultancy services relating to defence procurement procedures and policies. The service has been outsourced by CII to a team of professionals.

Secondly, CII conducts much acclaimed Defence Acquisition Management Course in India and abroad. DAMC aims to familiarise senior managers with defence procurement structures and procedures. The course provides latest information pertaining to defence acquisition policies and quality assurance procedures. India’s defence offset policy is also covered in detail.

A Look Abroad

National Defence Industrial Association (NDIA) is America's leading defence industry association promoting national security. Though founded in 1997, it traces its history to the American Defence Preparedness Association (1919) and the National Security Industrial Association (1944). Its mission is to provide a legal and ethical forum for the promotion of insightful interaction between the Government and the industry on national security issues. NDIA provides individuals from academia, government, the military services, small businesses, prime contractors and the international community, opportunities to network effectively with the government. It addresses and influences issues as well as government policies critical to the health of the defence industry.

The International Division serves as the NDIA focal point and coordinating element for the identification, study and resolution of management and business problems associated with government policy and practices in the areas of foreign military sales. The Legislative Information Division aims to provide NDIA members with access to key government and industry officials and to monitor defence industry related legislation. NDIA's Procurement Division monitors and advances sound acquisition policies and processes.

South African Aerospace Maritime and Defence Industries Association (AMD) represents the collective interest of all the main players and interest groups within the Defence Related Industry. The membership represents in excess of 90% of defence related business in South Africa and in excess of 97% of all defence related exports. The Department of Trade and Industry recognises AMD as the Joint Export Action Group representing the Aerospace and Defence Industries sector.

With a view to promote Korean defence industry, Korean Defence Industry Association (KDIA) was founded in 1976 as a civilian non-profit organisation. Subsequently, it was designated as the sole approval agency for defense exports. In 1986, it took over the responsibility of being a financial guarantee agency for defense contracts. Enlarging its charter further, it was designated as an approval agency for defence imports in 1998. Interestingly, KDIA has much larger participation. Unlike defence associations in other countries, its membership is not limited to defence manufacturers only. Interestingly, concerned defence ministry officials are also on its rolls.

Australian Industry & Defence Network Incorporated (AIDN) was established in 1995 to facilitate business in the defence sector for small-to-medium enterprises (SMEs). It has over 800 members and acts as a focal point for interaction between the Government agencies and defence companies. It represents member companies at the highest Government levels and to the prime contractors over a wide range of issues. AIDN has continued to play an integral role in the development of new defence and industry policies to maximise SME participation.

Defence Manufacturers Association of the UK is often cited as an example of dynamically evolving industrial association. Due to synergy of activities, Association of Police and Public Security Suppliers has recently been incorporated in DMA. In further consolidation, DMA and the Society of British Aerospace Companies decided in March this year to merge the two organisations into one new trade association to create a more robust entity with much larger membership. The merged association will provide the industry with a more powerful voice, unified approach and a single point of contact with the Government. Representing a much wider network of large, medium and small companies across the complete supply chain, it will be able to influence Government policies effectively. The Government has also welcomed simplification of structure for interface with the industry.

It was in December 2005 that Canadian Defence Industries Association decided to widen the scope of the organisation's representation and mandate due to the increasingly integrated nature of the national defence and internal security. Canadian Association of Defence and Security Industries (CADSI) boasts of a membership of over 500 companies, providing employment to more than 70,000 Canadians and generating $7 billion in annual revenues, with half of it coming from international sales. It aims to facilitate closer relationship and dialogue between the government and the defence industry. CADSI membership provides benefits in terms of customer intelligence, company visibility, government recognition, influence and networking.

The following facts emerge from the above discussion:-

· In all countries, defence manufacturers have exclusive association to provide single point interface for effective interaction with their respective governments and other agencies to promote their interests.
· Although in most cases membership of the associations is restricted to companies associated with defence products and services, there are some notable exceptions. KDIA members are also drawn from ministries handling national defence, strategy and finance. Even the acquisition staff, defence R&D scientists and representatives of strategic think tanks join as members. Similarly, NDIA has both corporate and individual members.
· KDIA has been assigned additional functions by the Korean Government. It has been designated as the approving authority for defence exports and imports. Additionally, it performs the functions of a financial guarantee agency for defence contracts.
· In addition to promoting defence industry’s business interests, NDIA also acts as a think tank in that it has members drawn from academia to ensure continued existence of a viable competitive national technology and industrial base.
· All associations publish regular newsletters and prepare directory of their member companies for ease of reference.

Most importantly, all associations are granted due recognition by their governments and are regularly consulted while framing policies and procedures. Feedback obtained from the associations helps in streamlined functioning. Associations are considered as indispensable partners in national progress and given due recognition.

India Needs an Exclusive Association for Defence Industry

It is time Indian defence manufacturers come together to form an association with total focus on defence industry. They can continue their current membership of existing associations as well. The proposed Association of Defence Manufacturers of India (ADMI) should aspire to be the collective voice of the Indian defence industry. In addition to corporate members, ADMI should have associate members from academia and think tanks. Retired service officers should also be co-opted as they know the requirements and functioning of the services best. They can prove invaluable in establishing working level liaison. It should have the following groups:-

Policy Advisory Group
_Render advice on policies affecting defence industry
_Apprise Government of indigenous capabilities
_Help categorise new proposals

Self Reliance Group
_Promote Indian defence industry by showcasing local competence
_Advocate more ‘Buy Indian’ cases
_Encourage MOU with foreign vendors for increased local content

Internal Security Group
_Identify synergy between defence & internal security needs to develop commonality of goods
_Focus on emerging requirements of police & para-military forces

SME Group
_Assist SME move up the value chain
_Take up issues affecting SME
_Provide advice and facilities for SME to further their business

Cooperation Group
_Establish close relationship with foreign defence industry associations & other stake holders
_Develop network through regular
liaison & reciprocal visits

Research & Data Group
_Direct research in selected areas to obtain feedback for action
_Maintain databank of Indian and foreign procurement needs and policies, especially offsets

Offset Group
_Provide platform for exchange of views & data on offsets
_Help foreign vendors identify suitable Indian offset partners
_Take up offset policy related issues with Government

Export Group
_Assist Government to promote exports through pro-active policy
_Help Indian companies identify export opportunities
_Facilitate exports through liaison with foreign contacts & networking

ADMI should undertake the following major activities:-

(a) Interface with the Government

ADMI should provide a platform for regular interaction between the Government and the industry. Both the Government officials and representatives of the industry should be able to discuss all issues in a spirit of partnership and to promote Indian defence industry. Commercial interests of the industry should be in tandem with the broader national interests. Prior to framing defence procurement policies, the Government can sound the industry and obtain useful feedback. Similarly, the industry can project impediments faced by it and suggest measures for streamlining the procedures and processes.

The current policy on FDI in defence has failed to evoke interest amongst foreign investors. ADMI can propose changes to make FDI policy attractive. Similarly, a number of corrective steps can be suggested to facilitate defence exports.

(b) Promotion of Defence Exports

Whereas India imports defence goods worth billions of dollars, its defence exports are a paltry 50 million dollars annually. Despite its best efforts, the Government has not been able to penetrate foreign markets. ADMI can spur growth of exports through networking with associations of other countries. It can apprise foreign buyers of Indian product range and technological competence. It can recommend policy changes to the Government to facilitate smooth and speedy clearance of export proposals.

A close understanding can be developed with foreign defence companies through regular exchange of trade missions and participation in seminars and exhibitions. Such interaction will result in better appreciation of business opportunities available in the world arms market.

(c) Development of Indigenous Capability

The Government has been trying, albeit unsuccessfully, to reduce imports from the current level of 70 percent to 30 percent by sourcing most of the defence requirements from indigenous sources. Due to the continuing predominance of the public sector, full potential of the private sector remains unutilised. At times, procurement functionaries place orders on foreign vendors in complete ignorance of similar capability existing in the Indian private sector. ADMI can effectively bridge this communication gap by projecting indigenous capability effectively. Additionally, through collaborations with foreign vendors, technology can be imported for local production.

(d) Offset Facilitation

Indian offset policy is still in embryonic state. There are a large number of gaps that need to be filled. The Government remains undecided whether to accept technology against offset obligations for the development of an indigenous technology base. Similarly, a number of issues relating to offset value, offset threshold and acceptance of indirect offsets need urgent attention. In the absence of adequate experience, the Government is wary of making major policy changes. The current drift has created uncertainties in the environment.

ADMI can make effective contribution by suggesting desirable modifications in Indian offset policy, implementation procedure and monitoring system

(e) Research and Creation of Data Bank

The current crop of Indian think tanks appear more concerned with Kosovo and Iraq Wars as it is easy to churn out papers by ‘cut and paste’ of abundant material available in public domain. Sadly, no worthwhile research is undertaken in India on issues affecting defence industry, defence exports and procurement procedures. This critical void can be effectively filled by ADMI by co-opting experts from academia and the industry. Research findings can provide factual feed back and help the Government to make policy changes to further streamline the process. All research papers and study reports should be made public to generate debate.

(f) Facilitating Entry in Defence Sector of New Aspirant Companies

As discussed above, there is a huge information gap between the procurement functionaries and private sector companies. Whereas new entrants have little knowledge of defence procurement regime and procedures, procurement functionaries are ignorant of indigenous capability. ADMI can bridge this gap through the following steps:-

· Provide assessment and advisory service to the aspiring companies to help them identify areas in which they could operate fruitfully with their current product profile and with incremental add-ons.
· Publish directory/catalogue of all companies manufacturing defence goods and service providers. It should also include system integrators, platform producers and SME. The aim should be to cover the complete supply chain and provide due visibility to all players in defence industry.
· Conduct training capsules to apprise functionaries of procurement structures, procedures and processes.
· Conduct seminars, conferences and workshops to create better understanding between officials and the industry. Both sides must appreciate strengths and limitations of each other.

(g) Dissemination of Information

Dissemination of information to member companies is an important function that all associations perform. Members have to be kept informed as regards changes in Government policies, developments in equipment development, MOU signed between foreign vendors and Indian companies, impending procurement proposals and emerging business opportunities in overseas defence markets.

ADMI should issue a fortnightly/monthly news bulletin to cover all defence industry related developments. Additionally, a monthly/quarterly magazine containing thought provoking and analytical articles should be published to generate new ideas and thereby evolve future recommendations. ADMI could also undertake publication of compendium of important Government policies as a handy reference book.

Conclusion

India is expected to spend close to 100 billion dollars on the modernisation of the armed forces in the next 10 years, with imports accounting for 70 percent of the expenditure. Consequently, offset inflows worth 35 million dollars would get generated. It implies that the total defence business would amount to a mind-boggling 135 billion dollars.

CII, FICCI and ASSOCHAM are striving hard to assist their members’ entry in the defence sector. They deserve credit for forcing the Government to take the private sector seriously. They have been partnering organisation of exhibitions, seminars and conferences to improve visibility of the competence of the private sector. Such events have certainly helped bridge communication gap to some extent. However, there is little to show for tangible results on ground. By frequently resorting to ‘Buy and Make’ deals, entry of the private sector gets effectively blocked as recipient of imported technology for ‘make’ part is invariably a public sector undertaking. Thus, it is the public sector that continues to rule the roost while the private sector is still waiting in the wings for business opportunities to come its way.

The primary reason for the neglect of the Indian defence industry is the absence of a united, forceful and influential voice to project its viewpoint to the Government. CII, FICCI and ASSOCHAM are unable to provide focused attention to the defence sector as they handle vast array of subjects. In some cases, these associations compete against each other. Additionally, the Government does not get a coordinated and concerted opinion from the industry.

Creation of ADMI will in no way dilute the standing of the existing business associations. There is no contradiction in joining ADMI while retaining current membership of existing business organisations. ADMI should be viewed by all as an effective adjunct to facilitate closer industry-government interaction with respect to defence and security sectors rather than an unwelcome competitor.

Appendix A - US National Defence Industrial Association

US National Defence Industrial Association (NDIA) boasts of a membership base of over 1,100 corporate members and more than 36,000 individuals. A defence industrial-government network consisting of 29 Divisions and 5 Industrial Working Groups drives the future of defence through education, access and influence. The divisions maintain close contact with representatives of appropriate government agencies and through their constructive counsel have become institutions in American defence-industry relationships.
Areas of functioning of the committees can be broadly grouped as follows:-
· Armaments, Ballistics, Bomb & Warhead, Munitions, Combat Survivability, Combat Vehicles and Tactical Wheeled Vehicles
· Chemical Biological Defence, Environment & Energy, Health Affairs and Homeland Security
· Command, Control, Communications, Computers, Surveillance, Intelligence and Reconnaissance
· Expeditionary Warfare and Targets and UAVs & Range Operations
· Government Policy Advisory, Legislative Information, International
· Logistics, Manufacturing, Procurement and Small Business
· Robotics, Science and Engineering Technology and Systems Engineering
· Space and Missile Defence
· Special Operations/Low Intensity Conflict and Undersea Warfare
· Strike, Land Attack and Air Defense
· Technical Information and Test & Evaluation
The Industrial Working Groups are as follows:-
· Chemical Biological Defence Acquisition Initiatives Forum
· Committee of Small Arms Producers
· Industrial Committee of Ammunition Producers
· Industrial Committee of Tank and Automotive Producers
· Industrial Committee on Operational Test and Evaluation
Through its monthly journal ‘National DEFENSE’, information is disseminated about the latest developments in technology, equipment and other important business issues. NDIA has 52 chapters, located near major military commands, research centers and defence agencies to facilitate networking at local levels to gain first-hand knowledge of policy and trends.
In addition to managing defence tradeshows and symposiums, NDIA organises training courses on defence systems acquisition management to familiarise defence industry with the latest defence acquisition policy, reforms, initiatives and procedures. Faculty is made available by the Defence Acquisition University.