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Defence Offset Challenges


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Defence offsets - my talk delivered in CII seminar at Chennai on 17 Mar 12.

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Defence Offset Challenges

  1. 1. OFFSETCHALLENGES Wg Cdr DK SharmaHQ Maintenance Command, IAF 17 Mar 2012, Chennai
  2. 2. OFFSET CHALLENGES GLOBAL PRACTICESCountry Minimum Level of Preference Tenure Penalties/ Threshold Offset Banking ObligationBrazil 1M$ 100 to Primarily No/Yes 120% direct, focus on the aeronautics industryChina No formal Seeks TOT, licensed offset production, licensed policy assembly and participation in R&D programs India 60 M$ 30 to Direct and indirect Co-terminus No/Yes 50%Israel 5 M$ 50% Direct and indirect Co-terminus Yes/Yes 02/26
  3. 3. OFFSET CHALLENGES GLOBAL PRACTICES Country Minimum Level of Preference Tenure Penalties/ Threshold Offset Banking ObligationMalaysia EUR 10 M 50% Direct and No/Yes indirectTaiwan 5 M$ 40% + Direct and No/Yes indirectUnited No formal 100% Direct Co- No/YesKingdom offset terminus policy. EUR 1.2 millionSingapore 10 M$ 25 – 30 % Direct, 10 years 10 percent of with the unfulfilled indirect in obligation / isolated Yes cases 03/26
  4. 4. OFFSET CHALLENGES Source E & Y 04/26
  5. 5. OFFSET CHALLENGES Global TrendSuccess rate of offset in developedand industrial nations is almost 100%In the developing economies is about30-40% of offset %agePrimary reason for shortfall - lack ofsufficient industrial base 05/26
  6. 6. OFFSET CHALLENGES A Step ForwardThe revised offset bids included thirdparty offset MoU with Indian companiessuch as HAL, BEL, Tatas, Mahindras,L & T and others•Around 150 MoU signed 06/26
  7. 7. OFFSET CHALLENGES Industry’s ConcernsPolicies, objectives and methodologiesLong term requirements not knownService sector benefits moreInsufficient FDI limit of 26%,Unfavourable tax regime,Undue preference to DPSU 07/26
  8. 8. OFFSET CHALLENGES The Value PropositionCapabilities assessment is the biggestchallengeLevel of industrial infrastructure, reliabilityand credibility to meet delivery scheduleKey determinator for the potential partner -technology and commercial valuation 08/26
  9. 9. OFFSET CHALLENGESDefence Offset Valuation Model (DOV)Technology valuation Lack of sufficientexpertise and lateral coordination betweenMoD, Service HQs, DRDO and the industry.No industry representation in the corecommittee of Tech Evaluation of offsettechnical proposals 09/26
  10. 10. OFFSET CHALLENGESDefence Offset Valuation Model (DOV)activity to review technology, industrialinfrastructure and market factorsApproaches to the valuation of technology –Cost / Market / Income / Line of CodesInitiation of dialogue with Dassault.Will the investment make business senseand is it worth the money? 10/26
  11. 11. OFFSET CHALLENGES Boeing / USAF Valuation StudyWay Back in 1975USA selling Boeing AWACS aircraft to NATO for 2billion $First time idea of offset took a concrete shape toascertain tech, commercial and political viabilityA collaborative, comprehensive, well researchedstudy conducted by RAND institute, USAF, Boeingand NATO industry 11/26
  12. 12. OFFSET CHALLENGES 02/23 Source – RAND, USA 12/26
  13. 13. OFFSET CHALLENGES Valuation StudyCII, CAPS, IAF, DRDO and DOFAin active consultation with Dassaultmay conduct a Tech-commercialvaluation study to be thetrendsetter and game changer 13/26
  14. 14. OFFSET CHALLENGES Valuation StudyDassault – Taiwan TOT and manufacturingoffset agreement in 1995 for 3.5 B$ sale ofMirage aircraftLockheed Martin - Taiwan for 150 F-16aircraft – offsets created repair facilities for>500 aircraft components with a long termobjective of regional aviation maintenancecentre 14/26
  15. 15. OFFSET CHALLENGES Process Value Chain & StakeholdersDesign, Dev & Manufacturing, Test & Evaluation ProductSimulation Integration SupportConcept & Process Planning Qualification Repair & ServiceStructure Design Product Planning Customer & test reportsSub sys & Tooling Design Support Metal Crafting Acceptance & Warrantyacces Design Vendor tests Supply ChainPrototype Upgrade qualification/Mgt AutomatedPerformance Assy Jigs & User & MaintEng analysis test Eqpt Fixtures ManualSimulator Gr Support Eqpttesting Precision MfgRe-engineering Special processPrime OEM/Sys Raw Mat OEM or System OEM or SystemIntegrator or vendor, T-1,2,3 Supplier/User Supplier/subTier-I supplier Suppliers sys integrators Supply Chain 15/26
  16. 16. OFFSET CHALLENGES Production / Delivery Lead TimeAssuming MMRCA contract would be signedby Mar 2013Delivery to begin in 36 months (Mar 2016)18 aircraft / per annum delivery plan Delivery (126 ac) to complete – Mar 2023Cutoff for offset contracts – Oct 2013 16/26
  17. 17. OFFSET CHALLENGES Business ModelSystems of aircraft and segment of valuechain (manufacturing / product support)Extent / speed of technology absorption /productionInvestment & sourcing orders from DassaultResource mobilisation - skilled manpower 17/26
  18. 18. OFFSET CHALLENGES FDI Source E & Y 18/26
  19. 19. OFFSET CHALLENGES Unfavourable Tax Regime and Preferential Treatment to DPSUCreation of defence SEZ infrastructureReview of Gujrat’s proposal for adedicated SEZ committed by stateminister in the CII meet held in Apr 2010. 19/26
  20. 20. OFFSET CHALLENGES Export OpportunitiesGlobal spectrum of operations of Dassault forlong term strategy7500 civil and military aircraft manufactured byDassault are in operation worldwideAggressive approach to prove our mettle ascredible supplier following zero DPMO andalways on time delivery standards 20/26
  21. 21. OFFSET CHALLENGES Suggested Way Ahead Industry RepresentationIndustry reps not part of the TechnicalValuation of offset proposalsCII may persuade MoD for participationIt would enable realistic assessment ofcapabilities and offers to absorb technologyand deliver 21/26
  22. 22. OFFSET CHALLENGES Suggested Way Ahead Industry RepresentationDOFA Charter revolves around Service HQsand DRDO.Charter should reflect presence of Indianindustry as an equal stake holderEuropean Union charter on offset placesindustry at the forefront 22/26
  23. 23. OFFSET CHALLENGES Suggested Way Ahead Tenure of Offset ObligationsCo-terminus time frame is restrictiveRestrict the sourcing of major assemblies /componentsIf commercial viability demands longer timeframe, concession should be granted beyondcontract 23/26
  24. 24. OFFSET CHALLENGES Suggested Way Ahead Tech-Commercial ValuationCII, CAPS/IDSA, Air HQ, DRDO, DOFA andDassault for conduct of Technology Valuation studyInitiate dialogue with Dassault to formalizeagreementsWork to accomplish - technical drawings, creationof facilities, development and quality certification,scheduling of production aligned to main deliveryschedule etc 24/26
  25. 25. OFFSET CHALLENGES Suggested Way Ahead FDI – SEZ – Industry/Dassault MeetInitiation of dialogue within the industry onincrease in FDI limit from 26 to 49%Review of governments plan on defenceSEZIndustry (specially SMEs) Dassault meet 25/26
  26. 26. OFFSET CHALLENGES http://www.globaloffset.orgMembers can learn how others are meeting these requirements.Forum for members to meet service providers who may offersolutions to offset needs.Affords service providers and academics an opportunity to meetcompanies from around the world that need offset solutions.Provides education to the community at large. 26/26
  27. 27. Thank You