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Published by Ravindra Nath J

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Published by: Ravindra Nath J on Mar 25, 2011
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‘We have to build capability to utilise offset credits


The Hinduja group declared its intention of being a serious player in the promising Defence equipment business when it signed an MoU last month with a well-known German company, Krauss-Maffei Wegmann, to collaborate in the development of advanced Defence systems. A new company, Ashok Leyland Defence Systems Ltd., has been created with flagship, Ashok Leyland, holding 26 per cent equity in it. Spearheading the group's foray into the Defence equipment business is Dr V. Sumantran, Executive Vice-Chairman, Hinduja Automotive, and Chairman, Ashok Leyland Defence Systems. In this interview with Business Line, Dr Sumantran sets out the rationale for the foray into the Defence and aerospace businesses. Excerpts: Q. Could you elaborate on your strategy for the Defence business? We've had a good Defence business for sometime. But we felt that running a Defence-oriented activity within a large automotive company was not giving it the right amount of focus. The pressures of a 3,000-4,000 unit specialised vehicles business was getting lost in a 1,00,000 units a year commercial vehicles company. What we've done is to carve this business aside. We have effectively a greater than 50 per cent foreign ownership technically, because Hinduja Automotive is London-based. So we decided to create a 26 per cent Ashok Leyland-owned Indian company that will make it fully eligible to participate in Indian Defence tenders and qualify for offset obligations. Q. So who owns the balance 74 per cent?

KMW. How did you zero in on your partner for the Defence business. hopefully. They have other products like artillery. We've taken longer to reach this conclusion compared to some of the other bigger groups but we were busy with many other things. Now. to spread the work through a broader enterprise and. Today. huge credits are being accumulated and the common refrain from the European and American players is that we can't even spend the money if we want to. For us. It is inevitable that in India over a period of time. we are getting into a much broader range of products rather than limit ourselves to logistics vehicles. we are in serious discussions to enter the aerospace sector. we'll set up our own limited volume production for the specialised vehicles. but not very high volumes. Now. They are the Porsche of the Defence business. two. That is high volume. We are now doing design and engineering for some sub-systems in India. The NATO's main battle tank. Q. The advantage cannot be limited to cars alone. That is not a good situation for India and it is enterprises like us that have to step in and make profitable use of the offset obligations. we have to develop our own equivalents of a KMW or Rockwell. I had a ride in it and all I can is that it is staggering. we needed to fulfil the FDI limit norms. The new company will expand its product range. no exaggeration. which will continue in ALL. Particularly over the next 10 years we can build a company that to my mind can exploit the low-cost advantage that India has. To get into contention for these orders. The organic project we're already building. We've . One. rocket propelled grenades… it can run over dunes at 80 km/hr. Now we have a team in place to do two things.Indian residents of the Hinduja family. It's a tank that drives like a sports car. It has the elements of ALL's legacy and remains an Indian company. leverage some of the private sector's focus on economics. is a KMW product. Q. very different dynamics but for the kind of industry that we are. Very. Two. We've got a good stable product in Stallion. very high-end products. The players with an advantage of building that business would be players with some degree of incumbency in manufacturing large systems. to mobilise wider capital and. as a group we've decided we will not go into cars. we have to make a start and build capability to utilise the offset credit. they have the Dingo which is an armoured personnel carrier. Krauss-Maffei Wegmann (KMW)? We talked to several partners and zeroed in on this prestigious German company. we'll use some of the ALL facilities on loan but. eventually. high performance. the Leopard 2. Initially. We are now developing a number of new products with them. which we now do with the new company. Will ALL's existing Defence business move into the new company? Not all of it. including armoured vehicles. but several new programmes will move into the new company. The success of the venture hinges on your ability to get Defence tenders and you'll be head on with Heavy Vehicles Factory and other Ordnance Factories… More and more the government is saying that there will be a role for the private sector for two reasons. we have to constantly find new frontiers and this is a logical one for us to get into. We've already started with some of the prototypes building at our plant near Sriperumbudur. protected from mines. Q.

Q. top-line ones at that? Plus maybe 560 helicopters… nobody in the world can see the line of sight to such an order for the next five years. We are talking to a couple of global players about stepping into some form of aircraft assembly. All this will be done under the banner of Ashok Leyland Defence Services? Initially we'll look at how we'll incubate this but the scale that we are thinking of. has not been finalised. We've got some pretty good clients as well. if all things start to align and we decide to do both and its feasible. Q. it will deserve to become a separate company. Are you open to offering equity to your technology supplier? Yes. medium range transport aircraft… and all this is only military. Will you go for multiple partners or just one? Hopefully we'll end up with at least one. We've converted one of our test facilities in Defiance. Will this be military or civil aerospace products? Both. Q. obviously nonconflicting. Q. Q. Many of these will have civil and military applications. it may be two separate partners. What will be the likely capitalisation of this venture? Difficult to say because what the scale of the business is and to what level we structure it. This is a big step for us. . Do you see scope for this business in India or do you plan to look at other markets too? If you look at the MMRCA order. Q. So. will you produce only fixed wing aircraft or helicopters as well? Both are under consideration. Q.acquired a small group that does design and engineering services for an European aerospace manufacturer. all the global manufacturers are salivating. And ALL will hold equity in it? ALL will hold equity in it along with parts of the group. So there will be a separate aerospace company. The partners we are talking to we cannot disclose for some time but they are well known European and US companies. how much work will be done in India and how much overseas and how much will be done through perhaps a third partner. It also depends on how much work share we will end up with. Add to this the 20 Boeing C-17 transporters. it will have both civil and military use. military heavy-lift helicopters. AWACS. Detroit to address aerospace testing. definitely. One initiative and one partner. Where do you get an order for 126 aircraft and expensive. So we'll distribute the shareholding between ALL and the group. There is civil too. Q. if you take helicopters. For instance.

Do you see serious competition from the established multinationals in this business? The way the aerospace business has evolved. Q. How capital-intensive is the business? In many ways. validation. In aerospace. They are all major sub-contractors in large programmes. Q.Q. What is expensive is product development. then 20 years from now in India. Then it. . I would say that the capital intensity in aerospace has slightly different dynamics. it is globally characterised by two interesting dynamics. Q. Even if you take the light combat aircraft programme. the plant is not expensive. every partner must get what they want and a fair share in return for their contributions. Here are three competitors sharing work. Bombardier makes tail pieces for Airbus. Fuji and Kawasaki. in the auto industry. But why will a Lockheed Martin or a Boeing choose a new company set-up in India to even share a part of the work? The only reason we are doing this is that until now the aerospace business remained a preserve of the public sector. Q. It is not uncommon for the participating contributors to a programme to also be competitors. If you look at the F22 programme piloted by Boeing. So. there will be equivalents of a General Dynamics and a British Aerospace. They were a mechanism for the Indian government to nurture domestic industry. you see the offsets as a prime pivot? Yes. but he's going to demand his pound of flesh… It's normal dynamics. they build 40 per cent of the 787. So nobody has a head-start. This is the first time that the doors are being opened for the private sector. Take 787. Q. it's a long-term business… Yes it is.s critical you get a partner with a developed product. The big difference is. the kind of capital expenditures are not that intimidating to an automaker. then the investment in the plant itself can be managed by an automotive company. God willing. the way the aerospace sector works is: one. It is not so intimidating to an automaker. testing… If the investment on the product side is mitigated. there is work done by Boeing. Raytheon and United Technologies. we put a huge amount of the capex into the plant. It is sharing of risks and rewards and leveraging assets too. People work on pieces of the work. If you take Europe. Q. if the strategy works right. there is a distributed work model. But why will they even want to pick up a private sector player from India? We are coming back to the offsets. between Mitsubishi. Take the F53 fighter fronted by Lockheed Martin. tremendous amount of work for that is done by General Dynamics and Lockheed Martin. We are all running off the starting blocks more or less at the same time. So. So.

With that speed. they throw in their lot with you. etc. In some others. some of these we may end up producing together for not only the Indian market but for other markets. for anything we do. products. you'll be piloting these new businesses… All of the new ventures. That will determine the structure. Sesh spends a lot on the core growth strategy while I spend a lot of time on the new initiatives. And the discussions leading to the formation of the company. One of them is the former Deputy Programme Director for the LCA. I think by the second half of this year. The plans to enter aerospace. Sesh and I look at what we want to do. we are flexible to do whatever makes sense. What is the scope of the KMW MoU? It covers armoured vehicles.. compared to the auto industry. we are fine. In aerospace. They are very different businesses. it still took us 3 years to be here. you are not offering them an equity stake to start with? We have decided we'll wait and see how each of these projects shapes up. At the apex. it will be oriented predominantly towards the Indian market. Q. So. Q.Q. if we get the right people. artillery and special purpose applications such as bridge laying equipment. we had the deal with Carlos Ghosn towards the end of 2007. we need to step up the level of our game. are you taking on more than you can digest? One is you have to learn to groom skills and talent. whether it is Nissan or John Deere. So you will pay only a technology fee to them for each of these? No. I will be shepherding on behalf of the group. For instance. for this LCV venture. We would have tied up our partner by then and also identified the first set of products. I'm not discouraged. Q. one of whom is the original patent holder for the technology. . For Defiance we got a very senior IT professional to come in as CEO. the time scales are multiplied by two. we have got a lot of balls in the air but if we have to grow. Yes. it will take at least twice that time. say June/July. For aerospace. At that stage. Q. definition of the projects. on the other hand. we will be in a position to specifically announce what we will be doing. will take time. When do you see your plans coming to fruition? In aerospace. taken in association with your plans for the Defence business with KMW. Q. we have a CEO from India who has spent his career in the construction equipment business. A lot of it is people. We have been working on the project and it is the fastest anybody has done a brand new engine and new product. Personally. we have some very senior people working with us. Today its not difficult getting people. For our John Deere JV. For Albonair we got two MDs from Germany. It's not easy but. wheeled vehicles. tracked vehicles. if they buy your story.

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