This document discusses offset challenges and global practices related to defense procurement. It provides details on different countries' offset policies, including minimum thresholds, obligation levels, and penalties. It notes that success rates for offset obligations are lower in developing economies due to lack of industrial base. The document outlines concerns from India's defense industry and suggests conducting a technology valuation study with stakeholders. It proposes increasing foreign direct investment limits and developing defense special economic zones to help meet offset obligations.

1. OFFSET
CHALLENGES
Wg Cdr DK Sharma
HQ Maintenance Command, IAF
17 Mar 2012, Chennai

2. OFFSET CHALLENGES
GLOBAL PRACTICES
Country Minimum
Threshold
Level of
Offset
Obligation
Preference Tenure Penalties/
Banking
Brazil 1 M $ 100 to
120%
Primarily direct,
focus on the
aeronautics industry
No/Yes
China No formal
offset
policy
Seeks TOT, licensed
production, licensed
assembly and
participation in R&D
programs
India 60 M$ 30 to
50%
Direct and indirect Co-terminus No/Yes
Israel 5 M$ 50% Direct and indirect Co-terminus Yes/Yes
02/26

3. OFFSET CHALLENGES
Country Minimum
Threshold
Level of
Offset
Obligation
Preference Tenure Penalties/
Banking
Malaysia EUR 10 M 50% Direct and
indirect
No/Yes
Taiwan 5 M$ 40% + Direct and
indirect
No/Yes
United
Kingdom
No formal
offset
policy.
EUR 1.2
million
100% Direct Co-
terminus
No/Yes
Singapore 10 M$ 25 – 30 % Direct,
with
indirect in
isolated
cases
10 years 10 percent of
the unfulfilled
obligation /
Yes
03/26
GLOBAL PRACTICES

4. OFFSET CHALLENGES
Source E & Y
04/26

5. OFFSET CHALLENGES
Success rate of offset in developed
and industrial nations is almost 100%
In the developing economies is about
30-40% of offset %age
Primary reason for shortfall - lack of
sufficient industrial base
Global Trend
05/26

6. OFFSET CHALLENGES
The revised offset bids included third
party offset MoU with Indian companies
such as HAL, BEL, Tatas, Mahindras,
L & T and others
•Around 150 MoU signed
A Step Forward
06/26

7. OFFSET CHALLENGES
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
Industry’s Concerns
07/26

8. OFFSET CHALLENGES
The Value Proposition
Capabilities assessment is the biggest
challenge
Level of industrial infrastructure, reliability
and credibility to meet delivery schedule
Key determinator for the potential partner -
technology and commercial valuation
08/26

9. OFFSET CHALLENGES
Defence Offset Valuation Model (DOV)
Technology valuation Lack of sufficient
expertise and lateral coordination between
MoD, Service HQs, DRDO and the industry.
No industry representation in the core
committee of Tech Evaluation of offset
technical proposals
09/26

10. OFFSET CHALLENGES
Defence Offset Valuation Model (DOV)
activity to review technology, industrial
infrastructure 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 sense
and is it worth the money? 10/26

11. OFFSET CHALLENGES
Boeing / USAF Valuation Study
Way Back in 1975
USA selling Boeing AWACS aircraft to NATO for 2
billion $
First time idea of offset took a concrete shape to
ascertain tech, commercial and political viability
A collaborative, comprehensive, well researched
study conducted by RAND institute, USAF, Boeing
and NATO industry
11/26

12. OFFSET CHALLENGES
Source – RAND, USA
02/23
12/26

13. OFFSET CHALLENGES
Valuation Study
CII, CAPS, IAF, DRDO and DOFA
in active consultation with Dassault
may conduct a Tech-commercial
valuation study to be the
trendsetter and game changer
13/26

14. OFFSET CHALLENGES
Dassault – Taiwan TOT and manufacturing
offset agreement in 1995 for 3.5 B$ sale of
Mirage aircraft
Lockheed Martin - Taiwan for 150 F-16
aircraft – offsets created repair facilities for
>500 aircraft components with a long term
objective of regional aviation maintenance
centre
Valuation Study
14/26

15. OFFSET CHALLENGES
Process Value Chain & Stakeholders
Design, Dev &
Simulation
Manufacturing,
Integration
Test & Evaluation Product
Support
Concept &
Structure Design
Sub sys &
acces Design
Prototype
Performance
Eng analysis
Simulator
testing
Re-engineering
Process Planning
Product Planning
Tooling Design
Metal Crafting
Vendor
qualification/Mgt
Assy Jigs &
Fixtures
Gr Support Eqpt
Precision Mfg
Special process
Qualification
& test reports
Acceptance &
tests
Automated
test Eqpt
Repair & Service
Customer
Support
Warranty
Supply Chain
Upgrade
User & Maint
Manual
Prime OEM/Sys
Integrator or
Tier-I supplier
Raw Mat
vendor, T-1,2,3
Suppliers
OEM or System
Supplier/sub
sys integrators
OEM or System
Supplier/User
Supply Chain 15/26

16. OFFSET CHALLENGES
Production / Delivery Lead Time
Assuming MMRCA contract would be signed
by 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. OFFSET CHALLENGES
Business Model
Systems of aircraft and segment of value
chain (manufacturing / product support)
Extent / speed of technology absorption /
production
Investment & sourcing orders from Dassault
Resource mobilisation - skilled manpower
17/26

18. OFFSET CHALLENGES
FDI
Source E & Y
18/26

19. OFFSET CHALLENGES
Unfavourable Tax Regime and
Preferential Treatment to DPSU
Creation of defence SEZ infrastructure
Review of Gujrat’s proposal for a
dedicated SEZ committed by state
minister in the CII meet held in Apr 2010.
19/26

20. OFFSET CHALLENGES
Export Opportunities
Global spectrum of operations of Dassault for
long term strategy
7500 civil and military aircraft manufactured by
Dassault are in operation worldwide
Aggressive approach to prove our mettle as
credible supplier following zero DPMO and
always on time delivery standards
20/26

21. OFFSET CHALLENGES
Industry reps not part of the Technical
Valuation of offset proposals
CII may persuade MoD for participation
It would enable realistic assessment of
capabilities and offers to absorb technology
and deliver
Industry Representation
21/26
Suggested Way Ahead

22. OFFSET CHALLENGES
DOFA Charter revolves around Service HQs
and DRDO.
Charter should reflect presence of Indian
industry as an equal stake holder
European Union charter on offset places
industry at the forefront
Industry Representation
22/26
Suggested Way Ahead

23. OFFSET CHALLENGES
Co-terminus time frame is restrictive
Restrict the sourcing of major assemblies /
components
If commercial viability demands longer time
frame, concession should be granted beyond
contract
Tenure of Offset Obligations
23/26
Suggested Way Ahead

24. OFFSET CHALLENGES
CII, CAPS/IDSA, Air HQ, DRDO, DOFA and
Dassault for conduct of Technology Valuation study
Initiate dialogue with Dassault to formalize
agreements
Work to accomplish - technical drawings, creation
of facilities, development and quality certification,
scheduling of production aligned to main delivery
schedule etc
Tech-Commercial Valuation
24/26
Suggested Way Ahead

25. OFFSET CHALLENGES
Initiation of dialogue within the industry on
increase in FDI limit from 26 to 49%
Review of governments plan on defence
SEZ
Industry (specially SMEs) Dassault meet
FDI – SEZ – Industry/Dassault Meet
25/26
Suggested Way Ahead

26. OFFSET CHALLENGES
26/26
Members can learn how others are meeting these requirements.
Forum for members to meet service providers who may offer
solutions to offset needs.
Affords service providers and academics an opportunity to meet
companies from around the world that need offset solutions.
Provides education to the community at large.
http://www.globaloffset.org

27. Thank
You