January 1, 2018 | Dr. S. D. Naik (Former Chief, The Economic Times Research Bureau, Mumbai and Economics Editor, The Hindu Business Line, Mumbai Office)
Rapid Growth in Civil Aviation
The Indian aviation industry has grown at a rapid pace over the last decade. Privatisation has opened up gates for many international players to reach out to the large untapped middle class market in India. Now India is the ninth largest civil aviation market in the world and is projected to become the third largest by 2020. Driven by the rapid increase in passenger traffic over the last few years, almost all Indian airlines are focussed on increasing their capacities.
The rapid growth of civil aviation over the past few years has put tremendous pressure on the existing civil aviation infrastructure in the country. Hence, the thrust now is on modernisation of airports, communications, navigation and surveillance systems for air traffic management, radars and facilities for maintenance, repair and overhaul of aircraft and subsystems.
Thus, there is enormous potential for collaboration and creation of joint ventures in this sector for establishing maintenance, repair, overhaul facilities for civil and military aircraft, overhaul and maintenance of aero engines and production of avionics, components and accessories, both in civil and military aviation sectors. India is also fast emerging as a centre for engineering and design services in this sector.
At present there are about 20 major aviation enterprises in India. Of these, the top 10 are: (1) Hindustan Aeronautics Ltd (HAL); (2) Brahmos Aerospace Pvt. Ltd; (3) Bharat Electronics Ltd.; (4) Electronic Corporation of India Ltd.; (5) Boeing International Corporation India Pvt. Ltd.; (6) Raytheon; (7) Lokheed Martin; (8) Honeywell Aerospace; (9) BAE Systems; and (10) GE Aviation.
Of these, the biggest one HAL, based in Bangalore Karnataka is a State-owned aerospace and defence company and was formed way back on October 10, 1964.
Big Infrastructure Push
India’s fast-growing civil aviation sector offers tremendous growth prospects for the aerospace industry in the country. Presently, the country has 464 airports and airstrips, of which 125 airports are owned by the Airports Authority of India (AAI). By 2020, AAI aims to operationalise around 250 additional airports across the country. Passenger traffic handled by airports in India is set to grow to 421 million by 2020 from 223 million in 2016, indeed a phenomenal growth.
This is indeed a plan for a big infrastructure push which will call for relentless efforts and allocation of financial resources on a large scale. Government alone may not be in a position to make available the resources required for operationalising 250 additional airports across the country by 2020 and serious efforts may be needed to ensure private sector participation, may be in the form of joint ventures.
Incidentally, the Government of India released the National Civil Aviation Policy (NCAP) in June 2016. This new policy is expected to help revive some 100-plus non-functional airports in India, improve connectivity across the country, and further simplify the rules, making it easier for foreign players to participate.
Another area of focus is the increasing number of public-private partnerships (PPP) to develop the sector with government-backed financing, concessional land allotment and tax holidays. Incidentally, with total investment of US$ 3 billion, airports in Bangalore, Cochin, Delhi, Hyderabad and Mumbai were expanded under the PPP route, increasing the overall efficiency.
Projections over next 10-12 years
Even these efforts appear quite inadequate if one looks at the projections by competent organisations about the growth prospects of the sector over the next 10-12 years. Hence more efforts are needed to meet the challenges. For instance, according to a joint report by India Electronics & Semiconductor Association (IESA), Nasscom and Roland Berger, the market for India’s aerospace and defence sector is projected to reach US$ 70 billion from its present size of just US$ 1.7 billion.
Of the total market opportunity of US$ 70 to72 billion over the next 10-12 years, almost US$ 35 to 54 billion will emanate from electronic spend as part of the platforms, while another US $ 17.8 billion worth of demand will come from projects that are traditionally called system-of-system projects. Hence it would be important for the country to make efforts for technology transfer from more advanced nations. The role of the government will be very important here tomodernise its aerospace and defence equipment base by addressing the prevailing shortcomings as well as by building additional capabilities through capital acquisition.
Risks and Potential Rewards
However, along with the evident exuberance, it needs to be noted that much of the civil aviation market in the country still carries substantial risk. Most Indian airlines are heavily indebted with the country’s national carrier, Air India having lost nearly US $ 1 billion annually over the last four years.
Incidentally, access to modern technology remains the biggest challenge for Indian aerospace manufacturing companies. The industry is badly in need to keep pace with global aerospace technology across the value chain. As operating conditions and ease of doing business improve across India, more and more global private companies within the aviation and defence sectors are expected to forge partnerships with Indian companies. That will bring in the potential rewards for those venturing in the sector.
The encouraging development is the shifting dynamics of the sector. Once a tightly held monopoly of the state-owned aeronautical giant, HAL, the Indian aerospace sector is now showing signs of resurgence with a number of private entities working towards acquiring arange of manufacturing capabilities and technological expertise.
Lack of domestic manufacturing
The real worry so farwas the lack of aviation-based manufacturing in India after all these years. While the Indian automobile industry and the space industry in the country have done quite well, aviation-based manufacturing has lagged woefully behind. India desperately needs to build up its aviation manufacturing base without losing further time. In fact, with the past government policies, even maintenance, repair and overhaul services have not been adequately developed and often, our airlines are required to send their aircrafts abroad for servicing.
Unfortunately, the Indian public sector aerospace industry, protected by successive governments, does not have much to show by way of results for all the money spent over the last seven decades. On the other hand, the private sector was denied the opportunity it deserved. Despite this, the private sector, which made a very late entry in the sector, has shown considerable progress and achievements with collaborations with foreign manufacturers.
Although India and China entered the aerospace domain almost at the same time, China has shown considerable progress compared to the poor show by India. India’s technology absorption has remained negligible after all these years even as China has made considerable progress. It is sad that India has not been able to produce a single aircraft for commercial purposes while China has three large aircrafts on its sale list.
Entry of Private Sector
In the wake of liberalisation in the early 1990s, private participation in the sector made modest beginnings and has steadily grown since then. Some of the prominent private companies that have entered the sector are:
Tata Advance Systems Ltd.
Of all the contenders, Tata Advance Systems Ltd (TASL) appears to be the one nearest to acquiring the capability to manufacturefull aircraft, radars and unmanned Aerial Vehicles (UAVs). It has tied up with Airbus for the manufacture of C-295 transport aircraft, a replacement for Avro HS-748. Its partnership with Airbus for C-295 would include supply of 16 aircraft in fly-away condition and 40 to be built in India. This would be a major breakthrough for private participation.
Mahindra Group entered the aerospace industry in 2008 through its new entity Mahindra Aerospace. In 2010it acquired Australian entity’s Gipps Aero and Aerostaff. It is the first Indian company to go into full aircraft production, albeit a small one and that too outside India.
In 2010, this company began developing a 25,000 sq. metre facility outside Bangalore to produce airframe parts and assemblies within the country. The facility was formally inaugurated in 2013 and is now delivering aerospace sheet metal parts and assemblies for global companies. The company recently signed a “Statement of Intent” with Airbus Helicopters for forming a joint venture to produce military helicopters in India.
This is another Indian company that Airbus is looking at to have some of its aircraft parts forged in India as the next logical step to expanding its supplier base and outsourcing activity in a fast-growing market. Bharat Forge is already having a similar arrangement with Boeing.
Reliance Defence Ltd.
This is a wholly-owned subsidiary of Anil Ambani’s Reliance Group. It has set up the Dhirubhai Ambani Aerospace park spread over 400 acres of land at Nagpur for the manufacture of aerospace components. It has entered into a joint venture with Rafael Advance Defence Systems Ltd, Israel. The initial outlay for the joint venture, excluding the technology cost, will be Rs.1,300 crore. The company will be located at Pithampur near Indore, Madhya Pradesh, and it will make air-to-air missiles, air defence systems and large air ships.
As per the current guidelines of the Centre, 51 per cent holding in the company would be from Reliance Defence and the rest would be held by Rafael. The JV is expected to provide a big thrust for the indigenous development of high precision weapons system in India.
The Make in India initiative launched by Prime Minister Narendra Modi in September 2014, has paved the way for airframe manufacturers to increasingly use the services of aerospace suppliers in the country. However, the momentum is still a little slow. However, there are signs that things will change for the better with the Department of Industrial Policy and Promotion (DIPP) proposing to raise the FDI cap to 74 per cent. This has encouraged quite a few Indian companies to enter into joint ventures with foreign companies.
Special Economic Zones (SEZs)
The country’s first SEZ for aerospace sector was set up by Quest Global at Hattargi, 37 km. from Belgavi in Karnataka. It is now rebranded as Aequs and is spread over 300 acres of land with an investment of Rs.150 crore marking a big leap for the sector. It provides an ecosystem for original equipment manufacturers, their suppliers and ancillaries with a thrust on precision manufacturing.
It has covered much ground in giving practical shape to domestic manufacturing in this sector. It has 150 Computerised Numerical Control (CNC) machines with an investment of US$ 150 million and is expected to generate revenue to the tune of US $ 75 million per annum when operated at its peak capacity. Airbus Group is a key customer of Aequs.
The country’s youngest State Telangana has recently set up a Special Economic Zone (SEZ) in Adilabad, on the outskirts of Hyderabad for aerospace products and has already secured its maiden investment from Tata Group for manufacture of fuselages and wings for Dornier 228 aircraft produced by Swiss-based Ruag AG. The Tata Advance Systems Ltd (TASL) will set up a manufacturing facility here.
It is evident that lack of domestic manufacturing capabilities foralmost seven decades – both in civil aviation and defence aerospace manufacturing - had remained a major worry till the early 1990s. After opening up of the sector for private sector in the post-liberalisation period in 1990s, and the entry of private sector enterprises, the sector has shown considerable progress. Thereafter, the Make in India initiative announced by Prime Minister Narendra Modi in September 2014, there are signs that things are changing for the better.
Evidently, as a recent report prepared by CII and its knowledge partner KPMG, explored the possibilities of the sector in India emerging as one of the shining sectors says: The aerospace sector in the country is at the inflection point, similar to the telecom and automotive sectors two or three decades ago. Hence it needs sustained government support to develop critical mass, skills and R & D to achieve its full potential.