Opportunities & Challenges for SME in the Indian Defence Manufacturing Sector

The Editorial Team at www.industry40.com spoke to the security experts on strategic defence issues to find out their perspectives on opportunities for SMEs / MSMEs in the defence manufacturing sector. The whole article is derived based on a detailed analysis of the opportunities in defence manufacturing.

An overview :

Given the prevailing security challenges, India needs to transform its approach and move towards “self- reliance” in the defence sector. SMEs are already contributing substantially to the production of defence goods, primarily at subsystem and component levels, with thousands of quality products.  To improve defence indigenization, SMEs still need to play a bigger role in the region. However, due to different factors, the function of SMEs is hindered.

The way of thinking :

Indian SME entrepreneurs regard defence manufacturing as an unrealistic business idea and feel ill-equipped to pursue a project. The prime possibility being, lesser volume of orders.  

 “Make in India” Opportunity :

In 2014, Make-in-India campaign intended to develop India as a manufacturing hub. The idea behind this launching campaign is to support the growth of India as a global production centre. Indian small and medium-sized companies need to take a look at Make-in-India to increase production efficiency and their contribution to making India independent in defence production.

The SMEs in India will therefore see Make in India as a guide to penetrating the defence sector in India. Defence experts are of the view that the Indian defence and aviation industries will throw up business opportunities worth USD 200 in the next 15 years. This augurs well for the domestic SMEs. They need to affect the potential and also to consider OEM’s efficiency, quantity and supply obligations. To trust contract quantities, they will have to rework their current methods and take a long-term approach. 

There are specific avenues of growth that Indian SMEs can focus on to be able to enhance their contribution towards domestic defence manufacturing:

  • Revamping deliberate business divisions
  • Investment of time, resources and money into in-depth Research and growth
  • Creation of collaborative projects and joint ventures to bridge technology gaps; and
  • Foraying into new and non-defence divisions.

Two principal ways for SMEs :

Two routes can be pursued by the SMEs under the aegis of the development of defence equipment. The first is to buy in the categories “Buy (Indian)” and “Make” so that they can bid and win contracts directly. Secondly, it involves buying and making in the categories. “Buying and Making with Indian ToT (Transfer of Technology)” and “Buying (Global)” in which the offsets will come into the picture.

However, the inherent difficulties of each of these two routes draw uninspired responses from

  1. Small suppliers and entrepreneurs to join the defence sector.
  2. Foreign providers to identify and set up an Indian offset partner in India.

The following products appear on the list of qualifying defence manufacturing products for SMEs:

  1. Energy, explosive materials, pyrotechnics and propellants.
  2. Bombs, rockets, torpedoes, missiles and other explosive devices for military use.
  3. Tiny guns, mortars, guns, cannons, howitzers, antitank weapons and weapons, including ammunition.

Government Support allows SMEs to expand their defence base :

  • 100% FDI:  A progressive shift in the new FDI strategy is likely to make India a favourable investment destination for international manufacturers of original equipment (OEM). The current FDI policy permits FDI to rise from 49% to 74% through automatic approval.  The commonly advantageous policies would assist international OEMs to handle the defence market flexibly as well as to provide access to new defence technologies for the domestic defence industry.  The Government’s FDI policy relaxation will give a huge fillip to foreign defence players, such as Bell Helicopter, Saab, Lockheed Martin, BAE Systems, who are firming up their plans to build defence investments in India.
  • The DPP gap for SMEs: The latest Defence Procurement Procedure (DPP) is an initiative taken by the government to make MSMEs competent in defence production. This procedure boosts the MSMEs connected with the companies with a 90% subsidy of the production costs of a prototype. The new DPP will be a big advantage for the Indian MSMEs as it not only improves modern niche manufacturing capacities but allows more versatility and access to world-class defence technology. India has close to 6,000 MSMEs that supply various defences -related components or subassemblies to machinery factories, DPSUs, DRDO and private industries. The new DPP, therefore, represents a significant boost for these microenterprises to face their challenges and increase their production. The industries have also financed Make-II ventures, which do not surpass Rs.3 crore construction costs and Rs.50 crore acquisitions annually.
  •  iDEX  (Innovations for Defence Excellence) also offers funding for start-ups, MSMEs, SMEs, individual innovators and others to conduct research and development.
  • Exchange Rate Difference Protection: ERV protection for all Indian enterprisesincluding private companies in all capital acquisition categories on the foreign exchange portion. This provides more opportunities for the transfer of technology between OEM manufacturers and indigenous companies, particularly SMEs looking for technology up-gradation.

The structure of offset programmes and direct supplies is opened up for SMEs in the defence sector. Together with the defence industry, public sector firms have started offloading parts of their production to tier suppliers. This cuts the production lead times and also makes it perfect to pilot or test goods. Besides, start-up companies and entrepreneurs are an important part of the manufacturing trade. India is the third-largest start-up power globally with 85,000 employees.

Benefits and Investment overview :

Defence experts envisage that by 2021, the number of Indian start-ups will be 11,500 and 3,00,000 jobs are going to be created accordingly.  Considering India’s ambitious agenda to turn its status as the world’s biggest importer of defence equipment from domestic manufacturing to the majority of its requirements, it is going to be a great opportunity for start-ups, MSMEs and SMEs to take up joint ventures with foreign companies.

Boston Consulting Company’s Findings on creating a vibrant space for SMEs in Defence Manufacturing :

With active support from the CII (Confederation of Indian Industry), the Boston Consulting Group (BCG) prepared-report in 2018 on creating opportunities for SMEs in the Defence manufacturing sector, noted that despite the Government’s constructive stance, concerning defence manufacturing participation by the private sector, doing business in India is still a highly complex and challenging to business in India for companies. Several challenges continue to exist in enforcing policy changes, which will have to be addressed if this policy shift is to succeed. In the past, international firms were

given the bulk of defence equipment contracts in preference to domestic companies. The domestic private sector could not compete successfully in this sector due to strong restrictions in force. Indian companies accounted for 10 % of overall defence turnover in 2018.

The most recent statistics revealed by the Defence Ministry in the Parliament observed said that the annual revenue of defence and aerospace private sector companies is close to Rs. 15,000 crore, whereas the revenue of state-owned companies is four times that of Rs.63,208 crore.

Irritants and challenges in accessing risk and growth capital :

SMEs face three potential challenges as described below:

  • Lack of credit provision and insufficient facilities.
  • Difficulty and lack of centralized information.
  • Rigid and outdated and entrepreneur evaluation and eligibility criteria resulting in financial exclusion.

Defence experts recommendations for pushing SMEs entry into the Defence Sector :

New Micro Enterprises must start small. Approximately, there are 140-140 active procure schemes and almost 40% of which are worth less than Rs.150 crore. This market window would be a fantastic start for new SMEs.  The Secretary of the Ministry of MSME must, depending on the acquisition costs, notify the Defence Acquisition Board of the opportunity at an appropriate time, and not when the request is made.

Apart from the above, the Ministry of Micro, Small and Medium-sized Enterprises (MSMEs) implements various support schemes and programmes, including defence sector micro, small and medium enterprises throughout the country. These programmes cover Prime Minister’s Program on Job Generation (PMEGP), Credit-Related Capital Subsidy and Technology Scheme (CLCS-TUS), Micro and Small Enterprises Program (TCSP), Technology Center Systems Programme (TCSP) and Prime Fund for Traditional Industries Reconstruction (SPTI).

Suggested measures for ensuring SME participation in the defence sector :

The Ministry can support these SMEs by establishing a consortium that will work together to create niche technology. Relaxation in loan repayment, bringing in new facilities for testing of products, declaring incentives to indigenous players, as well as export promotion and local offsetting of big players will go a long way in involving SMEs in defence production. 

Quick Takeaways:

 Indian SMEs will make a major contribution to India’s dream of self-reliance in defence manufacturing taking into consideration global developments such as decreasing world defence budgets. Global investors view India as a potential investment hub due to factors such as easy and affordable workforce availability and government support. However, obstacles such as unskilled labour, resources and technology must be dealt with in future years to ensure that they continue to become more involved in defence manufacturing.

Meanwhile, what SMEs will be needed is to be more disciplined and to identify possibilities until they are easier to access.

Editorial team of INDUSTRY 4.0 can be contacted at [email protected]

Also read our earlier articles