The untapped potential of India’s SMEs in defence production
Major
General Mrinal Suman
Innovation implies sustained generation of newer ideas, views,
concepts and solutions. The basic tenet of the term innovation means ‘doing
things in a newer and better way’, with a view to improve upon the
existing products and processes. Innovation is considered to be a dynamic catalyst
to growth. Any country that fails to develop and sustain a culture of
innovation is bound to become a straggler.
It is also a well recognised fact that almost all innovations
are carried out by small and medium enterprises (SMEs). They are rightly called
‘the engines that spearhead technological advancement’. All developed nations
owe their growth to their highly developed SMEs. Governments provide support to
their SMEs to help them retain their technological lead through continuous
innovations. The importance of SMEs in the defence sector gets further enhanced
due to the fact that defence industry is highly technology-intensive and needs
continuous upgradation of defence systems through regular infusion of
innovative skills and knowledge.
In its white paper on Defence
Industrial Strategy of 2005, the UK underlined the decisive role played by SMEs
in producing cutting-edge technologies in critical areas and promised enhanced
governmental assistance. Effective utilisation of
potential and innovation of SMEs was considered to be the key factor
by the European Commission for the success of the European Defence
Technological and Industrial Base. Seven conferences were held in different member states between
October 2009 and March 2010 to study ‘Competitiveness of European SMEs in the
Defence Sector’ and to explore concrete ways to support them.
Strength of SMEs
Compared to large
companies, SMEs enjoy a number of significant advantages. As they operate in
niche segments, they master manufacturing processes, acquire specialised
knowledge and achieve exceptional expertise. Resultantly, they attain unique
innovative and inventive capabilities. Credit for most cutting-edge
break-throughs in precision machining, electronics and nano technologies goes to SMEs.
Being small and focused players, they possess greater
flexibility and speed. They can learn and absorb new technologies more
efficiently. Due to limited administrative expenses, they have lower overhead
costs. Once they establish their credentials in a supply chain, they win the
confidence of their customers and move up the technology ladder. Thus the cycle
continues.
All major defence contractors are integrators who procure
sub-assemblies and sub-systems from SMEs to configure defence systems as per
the required performance parameters prescribed by the buyers. Supplies by SMEs
can be of the items which are manufactured by them as per the engineering
documentation provided by the contractor; items whose development and
manufacture is sub-contracted by the contractor to SMEs based on his
procurement drawings/specifications; and items sourced by contractor against
his procurement specifications as ‘fully finished’, with IPR resting with the SME concerned.
Challenges Faced by SMEs
SMEs are small players with limited resources and cannot compete
on their own. Defence business is characterised by long and complex procurement
procedures. In the case of developmental contracts, time lag between R&D and
returns can be excessively long. Due to the uncertainties of defence business,
many SMEs find investment risks to be dissuasive. While venture capital is not easily
available, banks are reluctant to lend. Resultantly, SMEs lack adequate
financial endurance for long term sustainment.
Being deficient of adequate resources, most SMEs fail to gather
timely information about future capability requirements and perspective plans. Consequently, they are unable to do advance planning for impending business
opportunities. They know little about the business opportunities available in
the foreign markets. At times, due to the lack of adequate visibility, they get
overlooked by default.
As the government is the
main and even sole customer of their products, subsequent variation in
budgetary allocations or change of priorities of procurement proposals can
adversely affect flow of orders after the creation of necessary facilities. For
SMEs operating in niche segments, economies of scale is a matter of serious
concern.
Abysmal Neglect of Indian SMEs
India
has failed to recognise the potential of SMEs in defence production. It has
neither provided facilitative environment to them nor tapped their huge
technological prowess. Neglect of SMEs has resulted in our
failure to create, stimulate and nurture
an environment of innovations in the Indian defence industry. It is one of the
primary reasons for the dismal state of India’s defence industry – more than 70
percent of defence requirements have to be imported even after six decades of
independence.
Although
SMEs have been supplying sub-assemblies and components to the public sector entities
for decades, they continue to be peripheral players and produce low-tech items.
Their technological competence has not kept pace as they have never been
encouraged to invest in developing newer products or carrying out pioneering
innovations. Resultantly, very few SMEs have acquired competence to develop, manufacture
and upgrade defence systems.
Ministry of Defence (MoD) carries out
capital procurements as per the Defence Procurement Procedure (DPP) and revenue
procurements as per the provision of the Defence Procurement Manual (DPM). Whereas
DPP focuses only on major contractors and system integrators, DPM lists 358
items that have been reserved for SMEs and micro enterprises. The list is
common to all government procurements and has no specific application for
defence.
The reserved items are low-tech
mundane products like agricultural implements, nuts/bolts/brushes, hosiery
products, handicrafts and tradesmen tools. The list is also a reflection of the
fact that the Government considers SMEs to be fit for commonplace products
only. It does not recognise their potential for technology upgradation and
innovation.
The much awaited Defence
Production Policy was released on 13 January 2011. It assigned the role of indigenisation
(import substitution or duplicating imported components) to SMEs. Once again, it
showed Government’s lack of faith in the capabilities of SMEs to develop and
master high-end technologies. That has been the bane of SMEs in India.
Interestingly, the
Defence Production Policy promised to ‘set up a separate fund to provide necessary resources to
public/private sector including SMEs as well as academic and scientific
institutions to support R&D of defence equipment/systems enhancing cutting
edge technology’. As is the Government’s wont, three years have passed and the
promised fund is yet to be set up.
According to DPP-2013, Small Industries Development Bank of
India (SIDBI) has decided to set aside an amount of Rs 500 crore for providing
loans. Further, a fund of Rs. 50 crore out of ‘India Opportunities Fund’ (managed
by its subsidiary SIDBI Venture Capital Ltd) has been earmarked for equity
support. Thus regular supply of funds to SMEs involved in the manufacture of
defence products has been promised. However, SMEs are cautiously optimistic as
there is a huge gap between promises and implementations.
Business Opportunities for Indian SMEs in the Defence Sector
Although enormous opportunities exist for SMEs in the Indian
defence sector, they need support and encouragement to thrive and deliver. For
major acquisitions, SMEs can become sub-vendors to prime contractors for the
supply of sub-assemblies and components. They can supply items which are
developed in-house by them. Or else, items can be manufactured as per the
specifications and designs supplied by the buying contractor.
Vast opportunities for the development and manufacture of niche
items to fight asymmetrical
wars, terrorism
and insurgency have emerged. Demand for explosive detectors, scanners, IED
suppressers, bomb disposal equipment, bullet proof jackets and such items has
increased multifold. Such items can be best produced by SMEs.
India is undertaking many large-scale and multi-dimensional
projects like F-INSAS (Future Infantry Soldier as a System), Network Centric
Warfare and Tactical Communication System. SMEs can gainfully join hands with
other companies to excel in the areas of their expertise.
Nearly 50 percent of the defence equipment held by the Indian
armed forces is close to
becoming obsolescent and needs upgradation for the extension of its useful
life. It is estimated that business opportunities worth USD 10 billion exist in
this segment. As such programmes entail multiple technologies; SMEs can
profitably participate in them.
With India preferring ‘Buy (Indian)’, ‘Buy and Make (Indian)’
and “Make’ routes for defence procurements, Indian companies will have to
assume the role of systems integrators. They will need to source required
components, sub-assemblies and sub-systems from Indian vendors to meet
stipulations of indigenous content. As the world trade is heading towards the ‘Global
Village’ concept, highly competitive SMEs can establish themselves in worldwide
supply chains by exploiting their specialised knowledge and skills.
Maintenance of imported equipment
also throws up huge opportunities for SMEs as foreign suppliers find it more
beneficial to have competent Indian partners to provide maintenance support. India has a huge
inventory of expensive imported equipment that requires regular backup support
to include periodic maintenance, repairs and overhaul. It is likely to generate
business worth USD 1.2 billion over the next 10 years.
Similarly, in order
to fulfill offset obligations worth billions of dollars, foreign suppliers will
need to partner not only the large Indian companies but also efficient SMEs. It
is for the enterprising SMEs to position themselves accordingly. The Defence
Offset Policy allows a multiplier of 1.5 in case foreign vendors choose SMEs as their
Indian offset partners.
Homeland security is another area where defence SMEs can prosper.
Unfortunately, inadequate attention is being paid to the fact that a large
number of items are common to both the armed forces and the internal security
organisations. They include weapons and protection systems, both for
individuals and vehicles; communications, data transmission systems and mobile
command & control equipment; explosive sensors and disposal equipment; early
warning security and surveillance systems; radio interceptors and jammers; decontamination systems; and simulators
for training. Most items are produced by SMEs.
The
Ministry of Home Affairs (MHA) is responsible for India’s internal security and
has a number of central police forces under it for special tasks and to
supplement states’ resources. As maintenance of law and order is a state
subject, all states maintain considerable police, armed police and special
police forces. India has 28 states and 7 Union Territories. Provisioning and
procurement of all items for the modernisation of central police forces is
handled by the Police Modernisation Division (PMD) of MHA. PMD also assists and oversees
modernisation of state police forces, although most of the procurements are
carried out by the state governments.
According to reports appearing in the press, the Union Government
is likely to spend over USD 7.5 billion and
state governments close to USD 2 billion on the modernisation of their police
organisations in the near future. Commonality of equipment held by the
defence forces and the internal security organisations will ensure continuous
flow of orders to SMEs and help them to achieve economies of scale.
The Way Forward
India needs to improve the competitiveness of its SMEs and
enhance their role in the Indian defence industry. A supportive and facilitative
environment is essential for tapping the enormous potential of SMEs. Dynamics of defence industry pose atypical challenges
to their sustenance and growth. To surmount them, regular interaction is necessary
between different stake holders for bridging the existing communication gap and
speedy evaluation of newer ideas and their optimum exploitation through
appropriate adoption.
To start with, the Government should evolve a national policy to nurture and protect SMEs in the
defence sector with time-bound action plan. SMEs must be assured of continuity of policy; fairness and
transparency of evaluation process; and probity of the whole environment.
The long promised special fund should be set up to
provide financial support to deserving SMEs. In times of financial crisis, they
should be helped through painless financing instruments. Information regarding
future capability requirements and impending tenders should be disseminated
through fortnightly electronic bulletins, as is done in many countries. A data
base should be prepared of all SMEs in the defence sector with their
capabilities duly highlighted. Defence Offsets Management Wing should have a section exclusively to help SMEs with
offset opportunities.
SMEs often complain that their interests are being neglected by
their trade/industrial associations as these have been hijacked to serve the
interests of a few aggressive big players. As SMEs lack resources to be able to
compete on their own, collective assertion is essential. They should organise
themselves into focused associations and clusters. It will help them to pool their resources to reduce
overheads and increase
R&D spending to move up the technology ladder. SMEs should improve their visibility
and position
themselves in niche areas of their specialised knowledge and skills.
Finally and most importantly, it is for SMEs have to be capability driven, competent
and competitive. They have to establish their credibility for performance,
quality assurance and timely supplies. Hand-holding by the Government cannot be
a substitute for commitment to excel. No external support can sustain SMEs that fail to innovate continuously to improve their niche expertise. Competition is tough and defence technology becomes obsolescent
rapidly. As is commonly said – ‘there is no place for laggards in the defence business’.*****