The large scale modernisation of the defence forces and the indigenisation of manufacturing are going to boost the strategic electronics sector of the country.
India has the second largest armed force in the world, and is considered the seventh largest aerospace and defence (A&D) market globally with a sizeable budget to cover the needs of the country’s Army, Navy and Air Force. The large scale modernisation of the defence forces and the drive to manufacture locally have become focus areas of the government. Emerging technologies are going to reshape modern day warfare, and will harness the power of electronics to do so. This will make the Indian strategic electronics (SE) sector, mainly comprising aerospace and defence, a vibrant industry over the next decade.
Opportunities galore
The defence sector in the country has been growing at a modest pace for the past few years, and has received a boost because of the Make in India program. The concept of import substitution is being gradually accepted by stakeholders.
The Indian government is aiming at a turnover of ₹ 1.7 trillion and to export ₹ 350 billion (US$ 5 billion approximately) worth of military goods and services by 2025. It is the strategic partnership (SP) model in defence production that will boost the Make in India programme to a great extent. The ambitious weapon acquisition plans of the three armed forces, spread over the next ten years, will also help the sector to own capital assets worth ₹ 15 trillion.
Defence production in India is gradually heading towards private sector participation. As per the ‘India’s Defence Market Outlook 2019-2025’ report, published by Market Research, between 2015-16 and now, out of 188 contracts, 121 have been signed with Indian vendors including DPSUs (defence PSUs), PSUs, OFBs (Ordinance Factory Boards) and private vendors to procure defence equipment.
The next decade is likely to see exponential growth in combat systems as well as non-platform based programmes, facilitating smart battalions. Therefore, there are opportunities for electronics manufacturing in India in both standalone systems (as part of platforms) as well as at a sub-system level. According to the experts, the key factors that will influence growth are:
- The modernisation of weapon platforms
- The induction of state-of-art weapons by the armed forces
- The impact of indigenisation and the Make in India programme
Electronics is at the heart of each modern warfare system and currently, the country is attempting to cut down on its electronics import bill, which is expected to surpass the oil bill. So this is the opportunity for Indian companies. Prospects for growth will also be driven by the new Defence Procurement Policy and the offset policy, and other key initiatives.
Most of the recent upgradation on the military side involves the inclusion of electronics — for example, the upgrades of the Jaguar, Ilyushin and the MIG 29 aircrafts; the T-90 tanks, and many more. In addition, new ventures that include the light combat aircraft (LCA) Tejas, Advanced Medium Combat Aircraft (AMCA), C-295 W with the Tatas, single engine aircraft like the Saab JAS 39 Gripen, missile development, new aircraft carriers, submarines, and Mine Counter Measure Vessels (MCMVs) — all point to an increased focus on electronics.
Critical avionics, night vision devices for the armed forces, missile electronics, electronic warfare (ground based and airborne), software defined radios, robotics, and radars of all kinds, UAV (unmanned aerial vehicle) electronic navigation systems, weapon sensors, air defence systems, etc, are some of the much publicised projects. According to the experts, the key demand generating applications will be:
- Weapons control systems
- Avionics
- Digitalisation of displays
In addition, single board computers (new technology), advanced PCB design technology, cables and harnesses to meet aerospace standards are also in demand.
Security is a key concern for any defence application. Therefore, there is a huge demand for holistic security networks and indigenously developed security devices. In spite of these huge opportunities, there is a demand-supply gap in the strategic electronics space, with respect to the availability of indigenous electronic components, products and solutions, most of which are still imported. Indian companies seem either unwilling or are unable to marshal the resources to enter this space that involves low volumes, high technology and high investments.
The electronic products and solutions required in India, in volume, are in the areas of:
- EMS, build to print, line replaceable units for Indian programmes like LCAs, Light Combat Helicopters (LCHs), drones, Kamov helicopters, etc
- Rugged displays, personal digital assistant (PDA) devices, laptops etc. for the Battlefield Management System (BMS) projects
- Electronic components, products and solutions used in vehicles for projects like the Futuristic Infantry Combat Vehicle (FICV), self-propelled guns, etc
Moreover, India needs domestic capabilities to sustain and upgrade existing systems through innovative maintenance, repair and operational (MRO) solutions. Opportunities related to defence offsets will increase. However, there will be less emphasis on hardware and a disproportionately higher focus on embedded intelligence. This will be India’s second coming in the domain of software, but in the high-value added smart systems and analytics domains. Indian companies that are ready to leverage this will grow tremendously. So offsets will have to be defined in terms of service offerings rather than hardware.
| Defence production self-certification scheme The Indian Ministry of Defence (MoD) has issued a new policy on May 13, 2019, to allow private industrial units and PSUs to self-certify the quality of products being supplied to the Indian armed forces. After a manufacturer demonstrates its capabilities to consistently produce defect-free products over a period of time, the responsibility of self-certification will be delegated to it by the Department of Defence Production (DDP), government of India. Presently, except for a few vendors, who have earned the self-certification status, all supplies are subjected to review by the Directorate General of Quality Assurance (DGQA), an organisation under the Department of Defence Production in the Ministry of Defence. All items purchased by the defence forces are subjected to trials and evaluation. This policy will bring about a major change in the certification process. According to the policy statement, “In the light of the government reiterating self-reliance in the manufacture of defence products, the self-certification scheme assumes greater significance.” |
Emerging tech trends
The aerospace and defence industry across the globe will focus more and more on technologies that are clubbed under what is being referred to as the fourth industrial revolution. These include artificial intelligence (AI), 3D printing, fuel cells, etc.
AI is becoming prevalent across new naval technology—missiles, navigation and naval aircraft—and this trend is set to grow stronger, with intelligence increasingly devolved from platforms and systems, and injected into weapons. Recent developments in AI in the aerospace and defence domain also include research initiatives in the field of navigation techniques for drone swarms, cognitive electronic warfare, detection and signal processing in sensors, and dynamic spectrum allocation for radar/radio equipment in the congested radio frequency (RF) spectrum.
3D printing will gain importance as a low-cost parts manufacturing option, particularly in remote areas, like forward-deployed locations. As engineering improves either through component design or the way that powders and filaments are developed, it will be used to reduce cost, compared to traditional fabrication methods.
Defence industry leaders are also investing in the development of next-generation diesel electric submarines with high endurance capabilities. Fuel cell technology will enable these submarines to generate power without surfacing to charge their batteries. Various companies such as ThyssenKrupp Marine Systems (TKMS) and Naval Group India, along with the DRDO, are developing next-gen air independent propulsion (AIP) technologies for this purpose.
Unmanned underwater vehicles (UUV) will soon demonstrate their genuinely disruptive potential as reconnaissance and weapon systems. With reports of Russia testing the Poseidon system (earlier named Status-6) in December 2018 (a nuclear powered-nuclear armed UUV with theoretically unlimited range and endurance), the threat perception has become very real. This is going to have an impact on the development of weapons, to include defences against such UUVs and probably even an entirely new range of weapons.
The industry will also see the development of counter-unmanned air systems (C-UAS). Vehicle-mounted C-UAS are still under testing and their usage is currently limited; however, that is expected to change in the coming days.
Command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) are other domains that will undergo significant technological innovation and development. The influence of C4ISR will be seen in the following areas:
- Multi-function RF systems that consolidate several functions like radar, electronic support, electronic attack and data link communications within a shared set of electronics and antenna apertures using active electronically scanned array (AESA) technology
Satellite constellations signifying a paradigm shift in space-based electro optical and infrared (EO/IR) sensors - Anti-access area denial (A2/AD) threats driving the development of aerial network alternatives to satellite communications
- Use of gallium nitride indicating a shift towards non-silica-based semiconductors, in the field of power electronics in defence applications, such as amplifiers for radar-based applications
- Application of shortwave infrared (SWIR) sensors for crucial surveillance and reconnaissance missions, as well as applications in medium-sized turrets, targeting pods, and portable systems
- Cyber-security concerns impacting procurement schedules, particularly of commercial off-the-shelf (COTS) wireless technology
- Tactical cloud based applications that reduce reliance on data centres and offer a rapidly available and powerful battlefield cloud, where tactical devices can be seamlessly connected
Focusing on ‘Design in India’
In spite of the immense opportunities, the Indian strategic electronics sector is still far from achieving self-reliance due to the lack of synergy between R&D and manufacturing, as well as the absence of an integrated approach.
In the last few years, the defence sector got a boost through the amendment of the Defence Procurement Policy (DPP). The DPP 2016 includes a special category called ‘Buy Indian – Indigenously Designed, Developed and Manufactured (Buy Indian-IDDM)’, which will get the highest priority in the defence procurement process — above all other categories, namely the ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Buy (Global)’, in that order. Inclusion of this new procurement category ‘Buy (Indian-IDDM)’ will provide a greater thrust to the Make in India initiative in defence production, focusing on ‘Design in India’ products and solutions.
This will promote in-house design capabilities and higher localisation, strengthening the role of the domestic industry, especially the private sector, in defence production. However, it is to be noted that the responsibility prove that a design is indeed indigenous rests with the industry, while the final approval would come from the government. This offers unique opportunities for companies currently operating or wanting to operate within the defence industry, specifically in the areas of electronics system design and manufacturing (ESDM), original design manufacturing (ODM), etc.
The government has already launched some programmes and schemes to facilitate R&D activities in this field. The Technology Development Fund (TDF) and the recently launched Army Design Bureau are worth mentioning here. The TDF is bound to enable and enhance R&D activities by broadening the scope of industry-academia partnerships and is going to boost the Make in India programme in the defence sector. The Army Design Bureau can work in sync with the DRDO and private industries to achieve modernisation and indigenisation. This will also enhance opportunities for public-private partnership.
Currently, only the DRDO labs work on designing defence weapons and equipment. Products designed at these labs are invariably transferred to defence PSUs for manufacture. Very little technology gets transferred to the private sector from DRDO labs. This needs to change. The private sector, including MSMEs, needs to be given a fair share of technologies for product development by the DRDO. These labs could even be involved with the private sector in the design stages, which would ensure seamless transfer of technology. When the private sector lacks infrastructure and test facilities, these should be provided by DRDO or the DPSUs. This will ultimately help in the creation of viable defence manufacturing capabilities in the private sector and promote self-reliance in defence.
It is also recommended that the prototype development by the private sector be funded, preferably with funds from the budget of the user defence service, which will create a sense of ownership. The recipient of the design service could then closely monitor the development process and may even be able to suggest modifications, if required.
Policy boost
In the last few years, the strategic electronics (SE) sector has received a significant policy boost with the amendment of the Defence Procurement Policy (DPP) and the removal of the 49 per cent Foreign Direct Investment (FDI) limit in the defence sector. The key provisions of DPP 2016 are:
- Inclusion of the ‘Buy (Indian-IDDM)’ procurement category
- Higher (but flexible) indigenous content requirement
- Revamped procedures for ‘Make’ projects
- Institutionalisation of the request for information (RFI) process
- Introduction of the L1-T1 methodology for selecting the final bidder
- Increased threshold limit for offsets
The removal of the 49 per cent FDI limit in the defence sector has opened up avenues for significant investments, and has given the much required impetus for many SMEs to access finance and technology. The liberalised FDI regime permits up to 100 per cent (up to 49 per cent through the automatic route and beyond that through the Foreign Investment Promotion Board or FIPB route) foreign equity in the defence sector as India looks ahead to increasing indigenous manufacturing in defence.
However, the FDI policy cannot become the only instrument to attract investment. It will be successful only if the foreign OEMs can get the necessary confidence in the system from an operational point of view. Moreover, foreign OEMs are less likely to create intellectual property (IP) in India. Therefore, the ‘Design in India’ concept will not be promoted through joint ventures with higher FDI.
In 2018, the government had announced that it would bring out an industry-friendly defence production policy to promote domestic production by the public sector, private sector, and micro, small and medium enterprises (MSMEs). Consequent to this, a draft Defence Production Policy 2018 was prepared, which provided a focused, structured and significant thrust to the development of defence design and production capabilities in the country. The draft policy has been shared with all concerned stakeholders for their views before notification.
The salient features of the draft policy, which has already been placed in the public domain for consultation with stakeholders, is as follows:
- Creation of a dynamic, robust and competitive defence and aerospace industry as an important part of the ‘Make in India’ initiative.
- Creation of a tiered defence industrial ecosystem in the country.
- Reducing current dependence on imports in order to achieve self-reliance in the development and manufacture of weapon systems/platforms.
Moving forward
To ensure that Indian industry makes full use of this opportunity, and creates world-class companies and capabilities that address not only India’s needs but also integrate into the global value chains of OEMs, there is an urgent need for the government to address some of the following issues:
- Complex buying process and delays in completing the tendering process
Inadequate government funding for R&D projects - Inadequate provision for technical superiority to score over L1
- Absence of a level playing field for the Indian private sector players, especially for SMEs, in relation to the PSUs and the overseas vendors
- No self-reliance in critical technologies
- Absence of indigenous product development capabilities
The above issues can be resolved through the transfer of technology (ToT) for niche equipment, the proper understanding of offset obligations and having a methodology to handle them, as well as understanding and executing international collaborations and joint ventures (along with a proper emphasis on IPR and patents), to help this sector reach its full growth potential.
In addition, this is the right time to explore the export potential for space technology. India has a substantial cost advantage in the global market for these technologies. It is worth mentioning that recently, Bharat Electronics Limited (BEL), the largest DPSU in the country, identified space electronics as a growth area. After successfully assembling and building one satellite for ISRO, BEL is now going ahead to build future satellites by partnering with Indian industry. The company has bought 30 acres of land in Devanahalli, in Bengaluru, to build a separate facility to cater to ISRO’s satellite needs.
| Experts’ views |
| Today, due to various global and domestic factors, the Indian strategic electronics segment is facing a unique situation of a quantum jump in manufacturing opportunities. There is an urgent need in the short term to provide easy access to finance to support cash flow and to fund these new opportunities. The government should immediately look at coming out with a comprehensive financial package and putting in place a mechanism to ensure that access to finance is never an issue for developing the electronics manufacturing ecosystem. Col. Sharath Bhat (retd), senior VP, Kaynes Technology DRDO labs have been doing R&D for the defence sector for a long time. Over a period of time, they have developed many crucial technologies that are useful not only for defence purposes, but also find application in industry. But DRDO labs are not marketing these technologies to industry, aggressively. We need to exploit these technologies to the maximum possible extent so that the country avails the best value for the efforts put in by the DRDO labs. I feel we should have an independent central agency for this purpose, whose agenda should be to transfer the technology developed by these labs to industry expeditiously on the basis of simple terms and conditions, purely on a commercial basis, as is done by C-DOT. The clarity on financial models for the transfer of technology (ToT) has to be clearly defined for technology transfer from DRDO labs to the private sector. MSMEs hesitate a lot to pay for the ToT without clear production assurance. A small upfront fee (that MSMEs can afford) with a licensing model would be ideal. Also, preference should be given to the vendor/MSME that has developed the initial product working closely with the technology that was transferred. It is an acknowledged fact that India’s space programme has been a notable success. However, the exploitation of this programme has largely remained bound to domestic utilisation, except for the commercial launches of a few foreign satellites. Recently, ISRO has engaged those from the private sector to help augment its satellite building capacity. With the infrastructure, skilled manpower and R&D facilities created over the years, both within ISRO and the expanding private sector, there is a tremendous opportunity and need to scale up the commercial exploitation by exporting space technologies and services to the huge global market. This needs to be implemented at the earliest, lest we miss the bus with the increasing competition from other countries. The setting up of New Space India Private Ltd under the Department of Space, in addition to the existing Antrix Corporation, will hopefully help exploit this potential. |
