Menu

As the government moves ahead with a second term, the nation’s defence export gambit needs to be refined

As a nation seeking to achieve self-reliance across defence segments by 2025, India presents a complex case of procurement and industry. For the past few years, policy and action were oriented toward increasing indigenous defence industrial capabilities through foreign original equipment manufacturer (OEM) linkages. This is a time-consuming process, but while the indigenous industry’s manufacturing and research and development (R&D) capabilities slowly build up, India must simultaneously construct an environment that facilitates defence export growth. SIPRI estimates indicate that over the past decade, India contributed to less than 0.1% of global defence exports, a figure that must be improved. It’s not that the country does not produce quality products; Indian defence electronics find their way into some of the most complex defence subsystems and platforms in the world today. However, there are fewer institutional mechanisms to promote exports and build the Indian brand compared to global defence majors—an area where interventions are required immediately.

Defence exports are a testament to a nation’s technological prowess and the proficiency of its industry. They are also valuable foreign exchange earners and key tools of geopolitical engagement. These are some of the drivers that propel India to transform itself from a majority importer of defence equipment into a self-reliant net exporter. To convert these drivers into results, India has two paths.

The first one is the long road, where new government policies are formulated, new industry engagements are initiated, engagements are analyzed post-initiation and then course-corrected following the analysis. The problem with this pathway is that it takes a substantial investment of time to deliver, and India does not have the luxury of time to stay competitive in the global defence market.

This brings us to the second path, a shorter and smarter approach that involves understanding the best practices of nations that have facilitated the establishment of leading defence companies with considerable exports and adapting them to the Indian milieu to leapfrog ahead. Frost & Sullivan, through this brief, explores this pathway in terms of enhancing and sustaining India’s defence exports.

Simplifying Regulatory Processes & Permits—Lessons from France

Regulation in defence exports is a multi-stakeholder process due to the sensitive nature of equipment. In India, exporters of lethal equipment need permissions from institutions such as the Concerned Service Headquarters, Ministry of External Affairs, Planning & Cooperation Wing (Ministry of Defence), Defence Research & Development Organization, Department of Space and Indian Space Research Organization. The Department of Defence Production coordinates the process. Submitting applications to multiple bodies, located at different locations and having differing mandates, is not the most efficient way to meet this objective. This is where France—one of the world’s leading defence exporters—stands out.

In France, the Inter-ministerial Commission for the Study of Military Equipment Exports (CIEEMG), a permanent body composed of representatives of ministries of defence, foreign affairs, economy and finance, screens and gives recommendations on permitting individual and global defence export licenses. The prime minister approves the recommendation of the CIEEMG or if the CIEEMG members cannot reach a consensus, a decision is made directly by the Prime Minister’s Office. This centralized decision-making coupled with the establishment of the générale de l’armement (DGA) in the early 1960s accelerated the nation’s exports. The first decade of functioning of the DGA-CIEEMG combine (1961-71) saw French exports increase by 140% 1. France’s integrated approach toward exports has cut multiplicity of channels between stakeholders and led to specialization. This permanent inter-ministerial engagement has enabled it to continuously refine its defence policies and processes.
As India expands its participation in global export control regimes, it needs to balance speedy export permission with strong non-proliferation and control. Here again, the French defence export system provides a model in maintaining a simple regulation system while not compromising on multilateral export control commitments. The French have done this by making it incumbent on the exporters to make periodic submissions of export and delivery details and also putting in place strong ex-post-facto controls involving the DGA and Ministry of Customs. Exporting companies are required to send biannual reports to the Ministry of Defence (MoD), listing the equipment orders and the deliveries made for verification. Their customs department is also empowered to initiate control procedures; these may include interviews, seizure of documents, visits to company premises, recognition of an infringement or sanctions. This approach could prove useful to India in case of export of Non-Appendix II Munitions as government resources will be freed up and Indian OEMs get a certain degree of freedom because of a shift from external case-by-case regulation to batch processes, self-declaratory compliance and periodic checks.

The Institutional Driver—Lessons from Israel

The creation of a dedicated export promotion body has been mooted in India’s “Strategy for Defence Exports,” released by the Indian MoD, but has not yet been operationalized. Israel’s International Defence Cooperation Directorate (SIBAT) 2 presents a case where a dedicated body has successfully worked with the Israeli defence industry to make the nation a defence exporter par excellence. SIBAT works closely with Israeli private industry to align its activities with Israel’s strengths and match customer requirements. The body is not just a facilitator for marketing Israeli products and companies but proactively identifies upcoming market opportunities and works through diplomatic and government-to-government (G2G) channels to promote sales of Israeli defence equipment. This way, the body helps local companies plan and execute their marketing and business development strategies.

Leveraging Diplomatic Assets—Lessons from France and the United States

The presence of dedicated divisions and personnel for trade promotion within diplomatic establishments can help nations competitively engage and promote local industry in overseas markets.

The French Diplomatic Establishment is proactive in its target markets for export promotion. Most embassies and even some consulates have a Regional Economic Service 3 that supports exports by following up on foreign direct investments, public and private projects, and contracts in target markets. Its mandate also includes strengthening bilateral economic relationships and increasing the visibility of French companies within the target market. The wing also helps set up higher-level meetings with leaders to push an economic agenda, which includes defence-related propositions. The wing’s support was key in brokering the contract between Eurosam, Roketsan and Aselsan for a Turkish missile defence system as part of the LORAMIDS (Long-range Air and Missile Defence System) program initiated by Turkey.4 The Economic Service also routinely provides French companies with local market forecasts, trade policy updates and go-to-market advisory, as it has dedicated personnel for economic benchmarking. It also has dedicated defence export promotion attachés in high-value markets.

Setting up dedicated defence export promotion wings within diplomatic establishments has also helped the US in defence exports. Institutions such as Team Department of Defence (Team DoD) 5 in Turkey and Offices of Defence Cooperation attached to embassies look into the operational aspects and act as a single point of contact for US Foreign Military Sales (FMS) programs. These offices support the US defence industry by providing liaising and networking services with target market officials. In many cases, host country professionals have local knowledge that could aid in business development, which is why the US Foreign Commercial Service 6 has active professionals from both the US and the host country to help US businesses in commercial diplomacy, project advocacy and business-to-business (B2B) matchmaking. The service has previously helped US companies promote business in markets such as Turkey.

Our research indicates a direct correlation between a nation’s contribution to world defence exports and the number of specialized defence trade promotion personnel it has in its target markets. From an analysis of the top 15 defence export markets, Frost & Sullivan finds that the defence promotion agenda explicitly figures as key result areas of over 30% of US personnel involved in trade promotion. The figure goes up to 45% for the UK. India’s long-term defence export policies could benefit from a key expansion of specialized personnel or the creation of a dedicated institution such as Team DoD of the US.

Every diplomatic mission in a target market should have a defence business mandate, targets and clearly delineated responsibilities matched to departmental stakeholders to further defence exports. Indian defence OEMs today need support from diplomatic establishments similar to that provided by France and the US to grow its visibility in target markets and proactively engage prospective buyers. India’s diplomatic assets need to be briefed on indigenous industry capabilities, products, and upcoming opportunities in foreign markets and routes to market entry so they become active assets in soliciting business. The Indian government is currently putting in place a similar business development mandate across many of its overseas diplomatic institutions; however, certain elements in terms of market access and business potential (discussed later in the article) need to be considered for this approach to be effective.

Selling the Solution Mix, Not the Product—Lessons from Turkey

Winning a defence contract abroad and making a presence in the global market is a tricky issue, especially for new market entrants such as India. While the product mix is mostly related to technical and operational capabilities where tried, tested and established defence primes hold sway in both brand and performance, it is in the solution mix that a new entrant seeking to establish a brand can make that difference. The solution mix is an extension of the defence product made up of ancillary and support mechanisms to make the buying nation’s acquisition and operation of the product easier. Many potential Second-World and Third-World markets are on the lookout for a solution mix that Indian companies can dovetail into their export offerings.

Defence OEMs such as ASELSAN in Turkey and various state-owned corporations in China are linked to financiers that provide loans with flexible payment schedules. The financial support (often state-sponsored or brokered) built into the solution mix is a key factor that enabled those OEMs to expand their presence in African, Central Asian and Latin American markets. Further, ancillary actions such as including extended maintenance and support contract provisions; having a fully operational, dedicated backend support system for the equipment sold; and bundling periodic trainings (especially because many potential markets have field conscripts or have high churn rates) are all factors that could influence a procurement decision.

Pragmatic, Long-term Strategy and Decision-making Support—Lessons from the US and China

Though the overall trend in defence spending usually exhibits an upward trajectory, a factor that some governments and newer defence companies tend to overlook is that this spending is cyclic. There are crests fueled by new procurement, replenishment or modernization drives and troughs as procurement ceases to give way to sustainability and maintenance contracts. Therefore, rather than have a “one-size-fits-all” strategy to promote exports, it has to be one that is based on the life cycles of platforms and subsystems. Adopting such a scientific approach and meshing it with the target markets’ defence budget, geopolitics, macroeconomics, indigenous industrial strengths and shortcomings provides a better picture of market potential and accessibility.

Using this approach, it is possible to understand that not every prospective high-revenue market is accessible and not every country with a relatively smaller defence budget should be written off in a firm’s business plan. It is also imperative to assess accessible market potential over a longer timeframe because of the high gestation periods of defence programs and to take into account future procurement that has not reached the initiation “project imitation” stage. This is because to win export contracts, defence companies need to be invested in the market way before the opportunity actually manifests itself. The adopted strategy should be forward-looking. As the Indian government is gearing up to promote defence exports in 85 nations by giving defence attachés a business development budget, it may bode well for the government to consider the aforementioned factors and devise a more pragmatic long-term strategy to ensure that business development budgets and expertise are funneled to the markets with the highest potential, and so should the nation’s private sector.

It may also be worthwhile for the Indian government to provide a country-specific analysis on the market potential of target countries, prospective partners, market-specific defence equipment demand and the process of exports. The US government has a dedicated website (export.gov) that details processes and revenue potential and helps guide US companies. Replicating this approach may be well received by the Indian defence industry, especially for tier 2 and tier 3 manufacturers and MSMEs, which cannot spend a lot in due diligence and business growth consultancy. Toward this end, the Indian government should consider investing in expert market intelligence.

In terms of business expansion strategy, Indian defence firms may benefit from a method China adopted to grow its defence business. China started by making inroads into markets that Western OEMs neglected or were blocked due to International Trade in Arms Regulations (ITAR)-related sanctions. This nation has slowly expanded its customer base by spreading its net wide, focusing on a large number of smaller-value contracts as opposed to major ones that Western OEMs often pursue. Broader market adoption of defence equipment can help build the brand, provided the quality of equipment meets customer requirements. Such a “market-skimming” approach could be suitable for Indian defence companies. This approach should not exclude smaller nations, which may not prima facie seem to be worthwhile defence markets. For example, the small nation of Trinidad & Tobago has procured naval radar upgrades and low tonnage naval vessels over the past three years with companies like Kelvin Hughes, Damen and Austal catering to the island nation’s demand. There are Indian companies that already have the capability and capacity to cater to such requirements; they just need to adopt and implement a long-term, incisive market expansion strategy.

Leveraging Geopolitical Exigencies—Lessons from China

Unexpected opportunities arise due to the strong interconnection between geopolitics and the defence industry. The Indian defence industry needs to be positioned to react quickly to such opportunities, and regulatory agencies must facilitate capitalization of such opportunities in mission mode as they are often short term but could be of high value. Chinese OEMs leveraged several crises in the Middle East to push their CH-4 and Wing Loong Unmanned Aerial Systems to nations such as Saudi Arabia and the United Arab Emirates at a time when Western options were not available to these countries. China seized the opportunity at the right time with a good-fit solution. An adaptable defence export policy should have built-in, fast-track approval policies so that domestic OEMs can capitalize on unexpected emerging opportunities.

Active & Passive Governmental Support—Lessons from the US and France

Successful defence OEMs have strong governmental backing as defence sales tend to be a subset of foreign policy. Governments can promote exports actively and passively. The Turkish government has actively contributed to the development of joint ventures and collaborative agreements between Turkish defence industry players and other non-Turkish defence companies to secure contracts. A case in point is RBSS (a three-way, Turkey-based joint venture between BMC, Germany’s Rheinmetall and Malaysia’s Etika ), which is gunning for contracts in the Middle East and Asia-Pacific. Other similar “active” examples are France and the US, where the government sketches out a country-specific agenda for defence exports during high-profile foreign policy visits. This active mode of promoting defence exports becomes increasingly important today as many governments pursue collaborative development of defence programs; in such cases, governmental linkages with participating nations may be necessary as a precursor to industry linkages.

Major defence exporters also use “passive” methods to popularize defence technology where defence trade does not overtly figure in bilateral or multilateral agendas. This is carried out through joint trainings, military exercises and operations with militaries in target markets where they are exposed to new equipment. The US military participated in over 130 exercises from 2013-2017. Over 75% of these exercises where with operatives from six major US defence export markets. Similar corollaries may be drawn in the case of France as well (this was demonstrated during the Varuna Naval exercise with India, where the naval version of the Dassault Rafale took part). The best promoter of defence equipment is not always a dedicated business development executive, but a military operator demonstrating the equipment in action.

Conclusion

As the incumbent Indian government embarks on a second term, it has reiterated its commitment to the vision of transforming India into a defence net exporter. This is achievable but will require crafted visioning, policy construction and governmental support in the right areas. Carving a niche for India in this highly competitive industry is difficult. Success in this sector is about getting many interlinked factors right, which isn’t easy, but the history of defence exports is replete with case studies, best practices and examples from which we can learn what is best adopted and what needs to be discarded. The nation will have to streamline processes, build dedicated institutions, train and retrain its diplomatic assets and adopt a concerted and pragmatic go-to-market strategy after taking into account the Indian industry’s strengths, weaknesses and global upcoming opportunities. The key takeaway here is the nation’s gambit has to be well-planned, long-sighted and smart to build its mark in defence exports. The government and industry should make their moves based on actionable intelligence and need to be ready for concerted market action and dialogue. Results may take time to manifest, but the accruing benefit makes the investment worthwhile.

To speak to the author or receive further information, kindly contact Jacqui Holmes on jacqui.holmes@frost.com.

[1] as per SIPRI figures
[2] http://www.sibat.mod.gov.il
[3] https://in.ambafrance.org/Economic-presence-8227
[4] https://www.mbda-systems.com/2017/07/20/eurosam-together-aselsan-roketsan-lay-foundation-strategic-cooperation-air-missile-defence/
[5] https://www.military.com/base-guide/team-dod-turkey
[6] https://www.export.gov/article?id=U-S-and-Foreign-Commercial-Service-USFCS
https://www.armyrecognition.com/august_2016_global_defence_security_news_industry/bmc_rheinmetall_and_etika_strategi_form_a_joint_venture_for_armored_vehicles_development_50508161.html

About Arjun Sreekumar

Arjun SreekumarArjun Sreekumar is a Senior Consultant & Senior Industry Analyst, Aerospace, Defence and Security Team at Frost & Sullivan.

Have Questions?

We have Answers.

Schedule a Complimentary Growth Strategy
Dialogue with an Industry Expert

877.GoFrost

(877.463.7678)

myfrost@frost.com

We provide research and consulting solutions to help our clients accelerate growth.

   

Share This
X