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Right time for Indian SMEs to enter aerospace and defence sector supply chains Print E-mail
Written by Anand   
Friday, 20 November 2009
New Delhi: Marshal of the Indian Air Force Arjan Singh, DFC released a report titled, 'Enhancing role of SMEs in Indian Defence Industry', prepared by CII and Ernst & Young. As per the report, currently there are over 6,000 SMEs supplying around 20–25% of components and sub-assemblies to Defence Public Sector Undertakings, Ordnance Factories, DRDO and the armed forces.

With the Government of India keen on increasing the share of indigenous procurement and laying down necessary policy framework, time is ripe for Indian SMEs to integrate themselves into the supply chains of national and international defence majors to explore significant business opportunities in the aerospace and defence sector.

"In current times, when productivity and competitiveness have assumed greater importance, we need to acknowledge the contribution which SMEs can make to the aerospace and defence sector. In this sector SMEs contribute most to innovation because of low economies of scale and the high importance of knowledge. Thus, in order to achieve self reliance in defence production and subsequently emerge as a significant defence player, India needs to support and enhance the role of SMEs in the Indian defence industry," said K Ganesh Raj, Partner and Leader, Aerospace & Defence Practice, Ernst & Young.

SMEs in India contribute 50% of total industrial output, 40% of total exports and account for over 90% of all enterprises.

India is expected to spend close to USD 100 billion on defence procurements during the period of implementation of the 11th Plan (2007–2012). It ranks among the top 10 countries in the world in terms of military expenditure. The country’s cumulative defence budget (capital plus revenue expenditure) has grown at 11.5% CAGR during FY06-09 to reach at the current level of USD26.5 billion.

The aerospace and defence sector is equally attracting close attention of not just foreign OEMs but their Tier I and Tier II vendors in terms of setting up joint venture, technical collaboration, etc and this is the segment which the Indian SMEs need to really focus on.

Commenting on the report, Mr Baba N Kalyani, Chairman, CII National Committee on Defence, said “The global defence industry which is primarily dominated by a few Original Equipment Manufacturers (OEMs), prefer to work in close co-ordination with SMEs and their prime contractors because of their innovative capabilities in niche manufacturing, greater flexibility, lower overhead costs and their ability to learn and absorb new technologies. Such OEMs require that the SMEs they work with should have the ability to perform, maintain continuity of supplies and clearly understand how the defence procurement procedure works. Thus, in such a scenario, it becomes imperative for SMEs to try to develop niche products and capabilities, continuously innovate and fully leverage export opportunities that are now available to them under the Defence offset policy.”

Other key findings of the report:

- India should leverage its strengths in the information technology and automotive industries to graduate into design, development and manufacturing in the aerospace and defence sector

- Indian SMEs should aim to integrate into the global aerospace and defence value chain through Indian prime contractors involved in global defence programs and/or build relationships with international SMEs in niche technology areas. OEMs in the aerospace and defence sector are shifting their focus to design and systems integration from vertically integrated manufacturing. This provides an added opportunity to SMEs to venture into areas of aerospace and defence manufacturing which were earlier the exclusive domains of OEMs and large prime contractors.

- To move up the global defence value chain, SMEs should focus on innovation, building intellectual property and adopt quality and process standards to be able to offer complete sub-systems or assemblies

- The Indian aerospace and defence industry needs rapid development of domain knowledge. This would require active industry-government-academia partnership with leading technology institutes across the globe, to upgrade, design and offer tailor made courses for the aerospace and defence industry in India

- SMEs in the aerospace and defence industry should focus on building complementary activities and capacities and sharing common facilities through clusters

- On the policy front, the Government may consider focusing on areas of strategic importance and gradually integrate the private sector into non-strategic areas. To enable the private sector to plan their investments and supply chain in advance, the private sector could be closely involved in planning and project categorization.

- Private sector participation in defence R&D should be actively encouraged and primarily financed by the government, given the fact that defence R&D is expensive and marked by an element of uncertainty

- The licensing procedure for defence manufacturing should be streamlined to encourage entry of SMEs in the defence industry

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