Indian airline operators are expected to spend $130 billion on
commercial jetliner purchases over the next 20 years, making India the
fifth largest aviation market. [1] India is also aggressively upgrading
its military apparatus. This financial year, New Delhi plans to spend
$37.7 billion on defence. [2] By 2017, India is projected to become the
fifth largest military spender in the world. [3]
As is customary in the Aerospace and Defence (A&D) business for a
country involved in massive military imports, India has put in place
industrial compensation practices as a condition of purchase in
commercial direct sales and government-to-government sales of defence
hardware and services. This industrial compensation is called “offsets.”
Offsets are a powerful mechanism to ensure that large purchases from
abroad are matched by large spends domestically.
Offset obligations can be met in different ways. “Direct Offsets,”
for example, are contractual arrangements for defence articles and
services referenced in the sales agreement for military exports.
“Indirect Offsets” involve goods and services unrelated to the military
exports. “Co-production” is overseas production based on
government-to-government agreements that permit a foreign government or
producer to acquire the technical information to manufacture all or part
of a foreign-origin defence article. “Foreign Investment” arising from
an offset agreement could take the form of capital invested to establish
or expand a subsidiary or joint venture in India.
In the Indian context, it is mandatory for the winning contractor to
invest nearly 30% of the contract value (in some cases, up to 50%) in
India – leading to partnerships, technology-sharing, setting up of new
manufacturing facilities, co-investments, and collaborative R&D.
If used wisely, offsets can help build capabilities that will become
building blocks for long-term productivity. However, offsets should be
seen as enablers, and not as an end in itself. In fact, as some
industry-specialists have cautioned, the offset policy could blunt
India’s competitive edge, because guaranteed business can lead to an
illusory complacency.
Most private players in the Indian A&D sector today operate at a
tier-3 level, making individual parts and small components. Most of them
are focussed on the domestic market and do not export their products
into the global A&D supply chain. By global standards the Indian
A&D sector remains puny in terms of scope, scale, and ambition.
Given the fledgling nature of the Indian A&D industrial base, the
number of vendors who can service the Original Equipment Manufacturers
(OEMs) and their tier partners to meet offset obligations, is limited.
When these vendors sign up with a few global OEMs to meet their offset
obligations, their ability to service additional customers becomes
constrained.
Besides, offsets take a long time to materialise, given the
bureaucratic nature of defence contracting cycles. If Indian companies
continue to focus primarily on defence offsets and ignore the
opportunities from other A&D sectors, instead of a couple of
decades, it might take India half a century to have global OEMs.
Most Indian companies interested in A&D are consumed by the
pursuit of defence offsets. Although some of are now taking an interest
in commercial aviation products, they are yet to wake up to the
multi-billion dollar global space economy.
India has an accomplished government space programme, but no real
space industry. Although the Indian Space Research Organisation (ISRO)
claims that more than 400 companies, big and small, manufacture and
supply parts for their satellite and rocket programmes, no Indian
companies can compete in the international space marketplace. This is a
real gap for a country that ranks in the top dozen space-faring nations,
along with the U.S, Russia, China, France, and Japan.
At the inception of the space programme in India in the late 1960s,
the focus on technology independence was essential. More than four
decades later, it is now time to look outwards. The industry revenue and
growth figures for 2012 should be a wake-up call for India’s
policy-makers.
In 2012, the global space industry revenues totalled nearly $304
billion, overall telecommunications industry revenues were around $4.9
trillion, while the worldwide satellite industry were around $190
billion. The growth in telecommunications revenue was 14%, space
revenues grew by 5% and satellite industry revenues grew by 7% in 2012.
[4]
Each of these outpaced both the worldwide economic growth rate of
3.1% and the U.S. growth rate of 2.2%, not to mention India’s growth
rate of barely 5% for 2012-13. [5] As in previous years, the vast
majority of this growth was in the commercial sector, which now
constitutes nearly three-quarters of the space economy, with government
spending making up the rest.
The global satellite industry is a subset of both the global
telecommunications and space industries. In 2012, satellite industry
revenues were 62% of space revenues (the remainder of primarily
governmental budgets) and 4% of telecommunications revenues. According
to the 2013
State of the Satellite Industry Report [6] published by the Satellite Industry Association (SIA):
- Satellite Services revenues
increased by 5% globally from 2011 to 2012, reaching $113.5 billion,
powered by continued growth in consumer satellite television services.
- Satellite Manufacturing revenues, reflecting in-year satellites launched, grew by 23% worldwide to $14.6 billion.
- Satellite Launch Industry revenues,
reflecting in-year launches, increased by 35% globally, with U.S.
revenues increasing from $1.4 billion to $2.2 billion.
- Satellite Ground Equipment revenues
continued to increase, growing 4% over 2011 to reach $54.8 billion.
Consumer ground equipment, including satellite TV, satellite broadband,
mobile satellite terminals, and GPS devices, constitute the bulk of the
revenues for satellite ground equipment.
Commercial space products and services such as broadcasting,
communications, and Earth observation made up the largest portion of the
space economy, growing by 6.5% in 2012. Commercial infrastructure and
support industries, which constitute a slightly smaller proportion of
the total, grew at a faster rate of 11% during the year. [7]
The first Indian company that attempted to enter the lucrative
satellite services market – Devas Multimedia – is now embroiled in court
battles. [8] This setback will certainly delay if not deter future
ventures. Devas could well have been India’s first company to join the
league of international satellite operators, a tremendously lucrative
area given the explosive growth of consumer satellite services and
mobile broadband.
Satellite manufacturing is a highly specialised area that Indian
companies should consider as well, especially large communication
satellites (comsats). It is dominated by U.S. companies that, the SIA
report says, made $8.2 billion of the global total of $14.6 billion in
2012.
According to the Tauri Group, an analytical consulting company in the
U.S. that authored the report, at the end of 2012 there were more than a
thousand operational satellites. [9] More than half are communication
satellites and more than one-third are commercial satellites.
As most satellite components are manufactured in the U.S., Europe,
and Japan, Indian companies might have to consider acquiring some of
those first, or even acquire one of seven major companies (there each
are located in the U.S and Europe, and one is in Russia) that build
these megaton comsats. [10] These acquisitions will be far from easy.
Space is a highly regulated sector, with governments heavily subsidising
their private A&D companies through multi-billion dollar contracts.
As for the launch industry, India stands a good chance with its
smaller rocket, the Polar Satellite Launch Vehicle (PSLV), but has yet
to cash in. A Gateway House article in February 2011 discussed this opportunity in depth. [11]
India is sitting on a space gold mine. Indian companies can leverage
the impressive portfolio of space products and services that ISRO has
developed over four decades to serve ISRO’s expanding needs, exploit the
satellite services market, and become competitive in the global
marketplace. This requires New Delhi to overhaul its space policy. It
also requires ISRO to amend its policy on contracts, Indian industry to
share risk and investment, and the two to co-develop and co-innovate.
Susmita Mohantyis the founder and CEO of Earth2Orbit, India’s first private space start-up.