Software in defence: IT companies eye the offset pie - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Tuesday 25 September 2007

Software in defence: IT companies eye the offset pie

(Part 2 of a four-part series)

by Ajai Shukla
Business Standard, 25th Sept 07

Since 28th August 2007, when India sent a request for proposals (RFP) to six global aerospace corporations for buying 126 medium multi-role combat aircraft (MMRCA) at an estimated price of Rs 42,000 crores (US $10.5 billion), there has been a buzz amongst India’s defence manufacturers, particularly amongst medium-sized software developers. On the 6th of March, the six aerospace giants will submit detailed bids to India’s Ministry of Defence (MoD), which must include an outline of their offset proposals.

With the RFP mandating that 50% of the contract value must be offset by investment into Indian defence production, roughly Rs 21,000 crores worth of foreign business will be tied up with Indian defence manufacturers over the next six months. A large share of this seems headed for India’s software industry.

Traditionally, offsets in India have taken the form of licensed manufacture of low-tech components, like aircraft doors, in Indian defence PSUs like Hindustan Aeronautics Limited (HAL). But with the Defence Procurement Policy – 2006 (DPP-2006) laying down that the quality of a vendor’s offset proposals will play a role in deciding the contract, each of the six aerospace giants that are bidding for the MMRCA are looking for high-value R&D tie-ups with Indian companies, which they know will fetch them higher credits than mere licensed manufacture.

Vendors emphasise that with a high 50% offset demand, they would have to find mutually beneficial offset proposals, rather than viewing offsets as an external cost on the contract. Their best option, they say, are India’s medium-sized IT companies that are already doing cutting-edge R&D and software development for US defence manufacturers.

India’s Secretary for Defence Production, Mr KP Singh emphasises that India’s software industry provides foreign vendors with opportunities for exactly such mutually beneficial offsets partnerships. Mr KP Singh says, “We have allowed the software industry to be recognised as a legitimate business for offsets, because we fully recognise that they will play a significant role in this.

Foreign vendors, eyeing the MMRCA contract have already swung into action. Lockheed Martin, which hopes to sell the F-16 fighter, and Boeing Corporation, which is hawking the F-18, have already held major supplier conferences in Bangalore. The Eurofighter’s manufacturer, EADS, is setting up a 2200 employee software facility in Bangalore, where developers will work out of EADS facilities, allowing EADS to retain intellectual property rights and bringing everything under one roof.

The industry itself is charged up and confident. Companies like MindTree Consulting are no strangers to defence design, having already worked with US defence majors like Honeywell and United Technology. Mindtree CEO, Krishnakumar Natarajan points out, “In some technologies, such as short range wireless, we’re at the global cutting edge. We’ve created a lot of intellectual property and we’ve demonstrated our ability to build from concept to product stage.”

This global signature is also visible in companies like Quest-Global, which already works for the US Pentagon, as well as for several Indian MoD laboratories. CEO, Aravind Melligeri, explains that firewalls are stringent; the Pentagon’s export controls specify that sensitive US military work is done on US soil, using US citizens as employees. With existing facilities, and a close relationship with US defence majors, Quest-Global hopes for fresh opportunities once offsets are implemented.

Infotech Enterprises, which also does export control work with the Pentagon through a factory in Puerto Rico, has positioned itself differently. While negotiating business directly with majors like Boeing and Lockheed Martin, Infotech has also set up a joint venture with HAL, hoping to get a share of the offsets business that will certainly flow to the giant DPSU.

Software executives, while enjoying today’s buzz, don’t all believe that the foreign vendors’ rush to tie up will result immediately in a rush of business. Infotech Enterprises’ Bharti Sinha explains that both sides, the foreign vendors and the Indian companies, will carefully observe how the first few offsets deals actually play out. Other than the first ever offsets deal in which private companies, L&T and Astra Microwave, cornered the offsets, the forthcoming deal to buy six C-130 Hercules transport aircraft from the US will be watched by firms that plan to participate in offsets.

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