Auto majors vroom into defence sector

With the state-controlled defence sector slowly opening up to private participation, auto majors such as Tata Motors, Mahindra & Mahindra, Ford India and Ashok Leyland are gearing up to tap one of Asia’s largest markets.

Auto ancillary companies have also shown interest in the defence sector and are taking the first steps to enter this world. For instance, lighting company Lumax Industries and Sona Koyo, which supplies components to auto majors such as Maruti Suzuki, are conducting feasibility studies to become vendors.

“We are awaiting the outcome of our exploratory studies to help us diversify both into the railways and defence sectors,” said Surinder Kapoor, MD, Sona Koyo. He is not willing to divulge any more details.

The reasons are clear enough: there is a large market to be tapped. The Indian defence expenditure is slated to touch Rs 1 lakh crore over the next 3-4 years and about 20 per cent of it would be open to the private sector. Much of this amount will be spent for modernising the country’s ageing Soviet/Russian arsenal.

“According to the offset plan of the defence ministry, 30 per cent of the value of the orders given to foreign companies and their JVs have to be spent within the country,” says Sulabh Agarwal, analyst, Angel Broking. (In the case of the yet-to-be-decided contract for 126 jet fighters, half of the value must be re-invested in India, according to the defence ministry’s tender guidelines.)

Secondly, India can produce them cheap as a result of its lower cost of technical labour. Experts say the manufacturing cost of defence equipment in the country is 15 per cent cheaper than global averages, a key reason attracting foreign companies to get into JVs with Indian auto makers. And three auto makers can leverage their expertise, especially in the large area of defence transportation.

Mahindra Defence Systems (MDS), a subsidiary of the Mahindra Group has tied the knot with Whitehead Alenia Sistemi Subacquei (WASS), a subsidiary of the Italy-based Finmeccanica Group, to manufacture underwater weapon systems for the Indian Navy.

MDS holds 74 per cent equity in the JV, while the rest is with the Italian company. The JV hopes to do a business of over $500 million over the next 5-6 years.

MDS has also launched new versions of light infantry and armoured vehicles in the market. Anand Mahindra, vice-chairman and MD, Mahindra Group, says: “We will be targeting a market, which would be around $3 billion in size. We intend to be in every segment of the Indian defence industry.” That is why group company Tech Mahindra is developing defence electronics, while another sister concern Mahindra Plexion is concentrating on the aeronautics segment.

Auto makers say margins in selling defence armoured vehicles are better than just selling civilian products. That is why most auto makers are developing new products in this arena. Chennai-based Ashok Leyland introduced the common gun tower (CGT) and unveiled the beefed-up Stallion 6x6, a heavy vehicle with night vision system that offers visibility through an LCD screen and an infra-red camera even in zero light conditions. In 2007, 172 Stallion heavy vehicles were supplied to the US army.

And they are not looking at the Indian market alone. The company’s range of defence vehicles is under validation by armies in Thailand, Oman and countries in Africa and West Asia.

T V Anand, general manager, defence vehicles, Ashok Leyland, says: “For FY09, our exports of defence vehicles should touch $30 million.”

On tie-ups with foreign majors, Anand added, “We are in talks with defence majors for technology transfer for vehicle body structures.” The company is also looking at outsourcing components to the French defence services.

Tata Motors is also not far behind. The company recently showcased a light specialist vehicle (LSV) that is designed to undertake diverse missions such as reconnaissance, special forces missions, counter-insurgency operations as well serve as an armoured ambulance. This is the second major foray by the firm into the defence sector after it won the bid to make Pinaka multi-barrel rocket launchers.

Tata Motors’ defence vehicles are exported to countries in the Asian and African regions. V S Noronha, head of defence business, Tata Motors, said, “The company has major plans to enter the upgrade of armourment and mobility platforms.”