Integrating MSMEs with Defence Manufacturing Value chain 14 May 2013 Cmde Mukesh Bhargava (Retd)

1. Integrating MSMEs with Defence Manufacturing Value chain 14 May 2013 Cmde Mukesh Bhargava (Retd) Vice President Larsen & toubro Limited

2. Scope • Development of Defence Manufacturing Sector • DPP amendments & New Defence Offset Guidelines • Role of MSMEs in creating DIB • Role of MSMEs in Defence & Aerospace Sector • Role as Offset Partners to Indian Primes & OEMs • Scope for MSMEs in D&A Sector • Araes of concern for MSMEs

3. Development of Defence Sector • Defence Production as a reserved sector under Public Sector till 2001. • Private Sector essentially involved in supply of raw materials, semi-finished products, parts & components to Defence PSUs and Ordnance factories. • Major Weapons & Equipment deployed by Armed Forces were either Imported or built under ToT. • ToT brought in know-how but Know-why remained elusive. • India remained a top importer of D&A product > 70 % Imports • MoD plans to spend $120 Bn in next 5 yrs • ~ $ 84 Bn Opportunity for OEMs and ~ $ 20 bn+ for MSMEs • MoD seeking to improve domestic share from 30% to 70% • $84 Bn opportunity for Indian co. & ~ $70 Bn+ for MSMEs

4. DPP Amendments and New Offset Guidelines • Each DPP caters for the creation of SME Fund of Rs 100 Crs • Implementation of this fund should be given top priority • DOG 2012 directs Offset to be exercised thru: • Direct Purchase of goods & services • FDI in permitted industries • ToT • Transfer of equipment/means thru investment-in-kind • Benefits to MSME – Multiplier of 1.5 times for ToT • Banking of offsets now permitted up to 7 years • MSME Defined as per MSMED act, 2006: • Micro < 10L for services and < 25L for manufacturing • Small > 10L to 2Cr for services and > 25L to 5Cr for manufacturing • Medium > 2Cr to 5Cr for services and > 5Cr to 10Cr for manufacturing

5. Role of MSME in creating Defence Industrial Base • MSME comprise 90% of all biz. Segments, provides 50% employment, contributes to 40% exports, 50% output & 6% GDP • MSMEs closely work with OEMs & large companies as an integral part of supply chain as tier I and II partners • India emerging as significant destination for Global OEMs seeking D&E and Manufacturing outsourcing resources • MSMEs need to develop and offer niche technologies & products to OEM • Offer themselves as tier II Vendors to Indian Primes and OEMs for JVs/TAs • Offer greater flexibility, lower overhead costs, ability to learn & absorb key technologies, continuously innovate & leverage export potential

6. Role of MSMEs in Defence & Aerospace • ~ 6000 SMEs supply 20-25% of components & sub assemblies to DPSUs/OFs • Leverage Govt. policy of enhanced pvt sector role to integrate in their’s as well as OEMs Global supply chain • Leverage their strength of innovation, low economies of scale & innovation to help Indian DIB to attain elusive Self-Relaince • Leverage strength in IT and automotive industry to take Design, Engineer and manufacture defence & aerospace products • Aim to integrate global D&A into value chain thru OEMs and build relationships with global SMEs in niche technology areas • Leverage global shift from vertically integrated manufacturing to design and integration to our advantage using local strengths

7. Role of MSMEs in Defence & Aerospace Contd. • Move up the global D&A value chain thru innovation, creating IPs and adopt global Quality practices/processes to become globally competitive • Indian D&A sector needs rapid domain knowledge development. Need to form govt-industry-academia partnership with leading global tech institutes to upgrade, design and offer tailored courses for Indian D&A industry • Focus on building complementary activities and capacities, sharing common facilities thru creating of D&A clusters • MoD to focus on sectors of strategic importance and leave the non-strategic sector for Pvt. Sector participation. To enable planning of investments and supply chains by Pvt. Sector, MoD must involve industry during the planning project categorisation stage • Active encouragement of industry to participate in R&D thru financing by govt, due to the expensive nature of this R&D and it’s inherent uncertainties • Streamlining of licensing procedure for D&A industry to encourage MSMEs to enter this sector

8. Scope of MSMEs in D&A Sector • Aerospace: Sub systems, accessories, GSE and tooling • Naval systems/ sub system & accessories • Land systems/ sub systems and accessories • Capital goods • IT hardware and electronics • MRO • Casting, forging and sheet metal works, R&D • Software

9. Areas of Concerns for MSMEs • Technological base: expertise, reluctance of OEMs to part with high end tech, lack of access to IPs, legal issues. • Payment terms: Small capital base, low working capital, MoD payment terms unsuitable and a deterrent to enter D&A sector • Security Requirement: OEMs demanding detailed accounting procedures, IPs protection thru a detailed security setup • Tight Schedule: Defence production demands a tight delivery schedule making it difficult for SMEs to effect the supplies • Competitive Pricing: DPSUs have to also compete against imports thus they exercise price pressure on MSMEs • Certification Process: Process certification by the OEMs for international certification. MoD need to facilitate getting this

10. Areas of Concerns for MSMEs • Quality Issues: This cannot be compromised and demands zero defect. MSMEs are unable to provide the international quality with repeatability demanded by the OEMs • Funding Requirements: The capital intensive nature of the sector necessitates that Mod must facilitate funding of MSMEs. DPP caters for SME funds which should get operationalised ASAP. • Supply Chain of System Integrators: MSMEs would like get registered as Supply chain of RURs/System Integrators. An early RURs announcement would benefit MSMEs

11. THANK YOU