1. Mahindra & Mahindra’s Defense divisions make it one of the largest private sector suppliers to thegovernment, designing and constructing its own line of armored vehicles. The ability to incorporatestate-of-the-art technology at reasonable cost has enabled it to supply up-armored vehicles to theIndian Army, Air Force and Paramilitary and State Police Forces. The defense divisions also providedefense systems like sea mines, surveillance solutions, weapons, ammunition and more. These divisionspartner with several countries to bring them a range of defense solutions.The Indian defense industry and M&M face certain key business issues unique to the defense industryand also due to the very recent entry of private sector into this sector.Private Government PartnershipThe defense industry is unique in that the customer is a single entity – the Indian Government, includingthe Ministry of Defense, Home Affairs or the State Governments. On the other hand, other industrieshave multiple customers who can be reached through marketing and a range of communicationchannels to build stable relationships. In most western countries too, the defense industry experiences aspecial relationship with their respective governments.In the context of the Indian defense industry, what measures should a private player like M&M take tobuild a partnership with the government so that they are given priority over international suppliers?Risk MitigationThe current scenario shows peaks and troughs in demand with changing government policy and budgetallocation. Defense acquisition programs are created and tenders structured in such a way that thewinner takes all. But, companies incur high tender submission costs with no commitment of allocationfrom the government at any level. How can M&M mitigate the risks involved in the tendering process?In addition, what should M&M aim for in terms of share of services (overhaul, upgrades, maintenance,repairs, spares) vs share of product sale to minimize risk?Technology Capability
2. Considering that the private sector is just a decade old, denial of technology until recently has limitedthe technical capability of the private players. How can M&M acquire high technical capability rapidlythrough economical means? Identify the potential areas for such technology acquisition given the factthat there is no guarantee of sale? Who could be the potential partners that can enable this?M&M StructureThe Indian defense market is estimated to become a vast $80-100 Bn within the next decade. Currently,75% of the defense budget is spent on purchase of equipment from foreign companies. How shouldM&M restructure itself to aid indigenization by the Government of India? In which areas must M&Mseek partnerships to ensure indigenization, eg., heavy manufacturing, electronics, defense software,communication infrastructure, aerospace and so on.Policy RecommendationsStudy countries with similar method of government functioning or industry structure like South Africa,Brazil, South Korea to build an action plan for the Government to actively promote indigenization.Give an industry level plan of action to ensure that indigenous sourcing accounts for 75% with anestimated duration for achieving this. Study the public and private sector defense companies in Indiaand suggest a plan of restructuring the industry to promote indigenization.What should be the Government’s approach to strengthen indigenous defense manufacturingcapabilities? What policy measures are required to ensure and speed up the process?SME IncubationDefense industry is marked by the presence of large scale integrators. Yet, in the western world manysmall and medium enterprises provide defense software and electronics products.Given the long gestation period and high technical capability required, start-ups find it difficult to sustainthemselves in the defense industry. Give the role and type of support that venture capitalists, defenseindustry players and the government can offer in supporting the establishment and growth of SMEs.
3. Specifically in the case of M&M, how can these SMEs support the company’s direction and growthplans? What measures should M&M take to support their growth?Human Resource ChallengeAs the defense sector opened up to private participation just a decade ago, the industry faces severeconstraints in the availability of qualified technical human resources. This is compounded by the factthat the caliber of technical resources within the DRDO, Defense PSUs and Ordnance Factories does notmeet the requirements of M&M. How can M&M meet this ramp up challenge? What are the organic orinorganic ways of meeting this challenge?As a medium to long term measure, what measures should private players like M&M as well as theGovernment take to enhance the output of trained manpower from technical institutions? Whichdisciplines must be clustered to effectively create divisions, platforms, academies and institutions thatare specific to the defenseindustry
4. Issues affecting the sector: FDI restriction - 26% in defence equipment manufacturing Industrial license - cumbersome procedure Approval process - slow, often opaque Unclear policy regime – definition of defence equipment not clear IPR Protection – an issue with 26% FDI Valuation of R&D investments Indirect Offsets not permitted Banked credits valid for only two years Multipliers not allowed Technology transfer not countedOur work in the sector Market entry and growth strategy o Market size, scope and mission identification o Buying behaviour and market accessibility o Gauge competition o Outline strategy Bid support o Technical , tax & regulatory Joint venture partner search o Financial / Strategic Transaction support o Due diligence of JV partner (Financial, Legal and Tax) o Shareholder agreements Implementation assistance o Tax & regulatory structuring o Funding options o Industrial License o FIPB approval o SEZ unit approval Offset related assistance o Structuring offset and banking proposals o Review of offset bid o Preparation of quarterly reports