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Tata’s Forays into Defence Production

Laxman Kumar Behera was Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • June 17, 2008

    In early May 2008 Tata Group of India and Israel Aerospace Industries Ltd (IAI) signed an agreement to establish a joint venture (JV) in India to develop, produce and support defence products such as missiles, unmanned aerial vehicles (UAVs), radars, electronic warfare (EW) systems and homeland security (HLS) systems. The agreement is in sync with Tata’s broader objective of becoming a “lead system integrator” in the Indian private sector, by consolidating its own resources, diversifying into various fields of production and forging partnerships with major global defence companies. While Tata’s foray into defence production bodes well for the industry at large, it also has larger implications for state enterprises.

    For a long time Tata, like many other private companies, was largely confined to supplying raw materials and components to various production/maintenance units under state control. With the government opening up defence production to the private sector in 2001 and allowing FDI in defence production, the way was cleared for private companies to participate directly in the defence production process. Among the private companies that have so far obtained 73 letters of intent/industrial licenses to produce defence items, big private companies such as Tata, Larsen and Toubro (L&T) and Mahindra and Mahindra are at the forefront.

    According to a 2004 Ministry of Defence (MoD) release, Tata Motors Limited, a subsidiary of Tata Group, has been issued industrial licenses for manufacturing a diverse range of military vehicles, including Light Armoured Multi Role Vehicles, Heavy Tank Transporters, Special Attack and Surveillance Vehicles and Mine Protected Vehicles. Though vehicle manufacturing has remained a forte of Tata, it has also successfully diversified into other complex areas of defence production. In 2006, the Strategic Electronics Division (SED) of Tata Power, the third largest subsidiary of Tata Group, secured two important orders from the armed forces: Pinaka Multi Barrel Rocket Launcher and Futuristic Automatic Data Handling Systems, from the Army and the Air Force, respectively. The SED got a shot in the arm when in the same year it reportedly bagged seven industrial licenses to produce, inter alia, electronic warfare systems; tactical and strategic communication systems; rocket and missile launchers; ground, naval and air combat and surveillance systems; avionics and airborne assemblies; and UAVs.

    Though Tata has ventured into defence production with some contracts already in hand, the challenge remains in producing big systems that involve critical technology and require high-end engineering and manufacturing skills. The vision of becoming a lead system integrator is, of course, a long-term proposition. Tata seems to be approaching this on two fronts. One, by consolidating resources, it plans to utilise the manufacturing and development capabilities existing in various companies of the group. In this regard, it has set up Tata Advanced Systems (TAS), an umbrella organisation for the Group’s thrust into defence and security. The TAS would draw upon relevant expertise from various Tata companies such as Nelco, Tata Motors, Tata Power, TCS, to offer the “most appropriate solutions to its customers”.

    Second, by reaching out to the established global defence companies, Tata is trying to enlarge its technological base, complement its existing capabilities and increase business opportunities. It is aware that the external linkage is crucial for its venture into defence production and, given the opportunities created by the government’s recent offset policy, it can also benefit from this. The Indian offset policy mandates a foreign vendor to plough back a minimum 30 per cent of the contractual value of Rs. 300 crore or above to the Indian defence industry.

    In less then two years since the promulgation of the offset policy in 2006, Tata has been able to forge a number of partnerships with major global defence contractors such as Boeing, EADS, IAI and Thales. The agreements with Boeing and IAI for establishing JVs in India will provide Tata not only majority stakes but also increased business opportunities and technological benefits. The Boeing JV alone will provide it initially more than $500 million component work, possibly for the Boeing’s F/A 18 Super Hornet, CH-47 Chinook and/or P-8 Maritime Patrol Aircraft. The agreements with EADS (to bid for the Indian Army’s $1 billion tactical advanced systems), and Thales (to offer optronics solutions for airborne platforms) complement Tata’s larger vision of building its own capability in defence and aerospace.

    With the growing interest in defence production, Tata’s emergence as a major force bodes well for the Indian defence industry, which is otherwise characterised by monopolistic enterprises and high import-dependency. Tata, as an additional lead system integrator in the industry, would bring in competition among various players and help address the cost and quality constraints faced by the industry. Its presence in the industry will also enhance India’s ‘self-reliance’ in defence production which, despite years of efforts, is languishing in the range of 30 to 35 per cent.

    However, Tata’s forays into defence production have implications for existing public sector enterprises. The product portfolio of Tata is in direct competition with those of many state enterprises, including Hindustan Aeronautics Limited, Bharat Electronics Limited, and Ordnance Factories, among others. state enterprises would now have to compete with Tata – or vice versa – for products like UAVs, missiles and their components, launchers, radars, and IT and communication systems. While fair competition is good for the industry and the Armed Forces, it will not be surprising if Tata outbids some of the established government-owned companies on its way to securing some big-ticket contracts from the MoD. In such a situation, the credibility of government enterprises would be at stake. The only way they can withstand such competition is by becoming competitive in an environment where companies like Tata of global reputation operate. To do so, they need to adopt some – if not all – of the best commercial practices that Tata adopts. However, this is easier said than done, given the inhibitions on the part of government in allowing state enterprises to operate in a free market situation. For Tata, this would only help their consolidation process in Indian defence industry.