India is likely to have eight to ten manufacturing companies that are global leaders within the next three to five years. That forecast was made yesterday at a conference in Delhi by Baba Kalyani, chairman and managing director of Bharat Forge – which will certainly be one of them because it is already the second biggest forgings company in the world. Kalyani told my colleague Clay Chandler (see current article) that he expects to overtake Germany’s Thyssen Krupp as the world leader “by the end of next year.” Others should include Tata Steel, Suzlon Energy which is already a leader in wind turbines, Larsen & Toubro (L&T), which is India’s leading heavy construction company, and Bajaj Auto with its two-wheelers, plus Ranbaxy in pharmaceuticals.
Kalyani was speaking at a conference on Indian companies becoming big in defense and civil aerospace manufacturing. This is the only area has not been opened up and developed since India’s economic reforms began in 1991, so the potential is huge – emulating what has happened in the auto industry. “We could build a self-reliant aerospace industry,” said Kalyani, based on India’s skills and the cost of its components which were 20-30% lower than in Europe, Japan and the U.S.
“High skills at lower cost” was his slogan. That led to “frugal engineering” – a phrase used by Carlos Ghosn, CEO of Renault, to describe the advantages of India’s auto industry (see my current article). Ghosn is making Renault’s Logan car with Mahindra & Mahindra in India, and is talking to Bajaj Auto about a low cost car which Ghosn has said he would like to price at $3,000.
Several of the potential leaders named above would benefit enormously if only the Indian government would really open up defense production to the private sector instead of just talking about it. L&T already makes rocket parts and is building the hull of a (secret) nuclear submarine. It wants to be a leader in India’s shipbuilding industry, which is only just beginning to emerge, and plans to build warships. M&M is already making jeeps and other vehicles including a multi-purpose high mobility rival for the Humvee. Bharat Forge would diversify from its auto industry focus. It is now aiming at the international civilian aerospace industry where Kalyani sees big potential for supplies from India.
But the government is going slow in the defense area. In a post on this blog, I wrote that the government would “soon make defense production history by naming a small number of leading Indian private sector companies as Raksha Udyog Ratnas (RURs) – literally defense industry jewels – that will be allowed to compete for big research, development and production projects on equal terms with the public sector.” I confidently said that “names will be published soon.”
I should have known better, having lived in India for many years. The list is still not out, blocked some contacts tell me by trade unions in the public sector-dominated defense industry that do not want private sector competition. But this is only half (or less) of the truth. That is of course the trade unions’ line, but they are really only the foot soldiers for the defense brass – industry bureaucrats and officers who do not want their cozy lives, including comfortable relationships with overseas defense suppliers, upset.
Currently up to 70% of India’s $10.5 billion capital expenditure budget for military equipment is being spent abroad. Little more than 30% of the orders placed in India – or 9% of the total – goes to India’s private sector. A new, and as yet untested, offsets policy requires foreign defense suppliers to spend 30%-50% of their orders in India, which the government forecasts will generate $12 billion in orders in the next four to five years. That illustrates the huge potential for Indian private sector companies to grow fast, using defense manufacturing as a base. Companies like Bharat Forge can start by supplying the world’s civilian aerospace industry, but the real potential is in this defense field – when the government really does something about it.