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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?
One. Particularly over the next 10 years we can build a company that to my mind can exploit the low-cost advantage that India has. How did you zero in on your partner for the Defence business. we needed to fulfil the FDI limit norms. They are the Porsche of the Defence business. two. KMW. rocket propelled grenades… it can run over dunes at 80 km/hr. Today. We've taken longer to reach this conclusion compared to some of the other bigger groups but we were busy with many other things. which we now do with the new company. we'll set up our own limited volume production for the specialised vehicles. very different dynamics but for the kind of industry that we are. to spread the work through a broader enterprise and. 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. I had a ride in it and all I can is that it is staggering. We are now doing design and engineering for some sub-systems in India. We've already started with some of the prototypes building at our plant near Sriperumbudur. the Leopard 2. Now. That is high volume. The advantage cannot be limited to cars alone. Q. It is inevitable that in India over a period of time. 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 are getting into a much broader range of products rather than limit ourselves to logistics vehicles. It has the elements of ALL's legacy and remains an Indian company. We've got a good stable product in Stallion. hopefully. Will ALL's existing Defence business move into the new company? Not all of it. we have to make a start and build capability to utilise the offset credit. they have the Dingo which is an armoured personnel carrier. high performance.Indian residents of the Hinduja family. The new company will expand its product range. Now we have a team in place to do two things. we'll use some of the ALL facilities on loan but. we are in serious discussions to enter the aerospace sector. protected from mines. We are now developing a number of new products with them. eventually. The organic project we're already building. we have to develop our own equivalents of a KMW or Rockwell. as a group we've decided we will not go into cars. Now. to mobilise wider capital and. The NATO's main battle tank. For us. It's a tank that drives like a sports car. is a KMW product. no exaggeration. Initially. The players with an advantage of building that business would be players with some degree of incumbency in manufacturing large systems. but not very high volumes. To get into contention for these orders. 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. but several new programmes will move into the new company. which will continue in ALL. Q. including armoured vehicles. They have other products like artillery. leverage some of the private sector's focus on economics. very high-end products. Krauss-Maffei Wegmann (KMW)? We talked to several partners and zeroed in on this prestigious German company. Two. Q. We've . we have to constantly find new frontiers and this is a logical one for us to get into. Very.
definitely. We've converted one of our test facilities in Defiance. So we'll distribute the shareholding between ALL and the group. Will this be military or civil aerospace products? Both. Q. it may be two separate partners. Q. how much work will be done in India and how much overseas and how much will be done through perhaps a third partner. We are talking to a couple of global players about stepping into some form of aircraft assembly. Where do you get an order for 126 aircraft and expensive. if all things start to align and we decide to do both and its feasible. 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. Are you open to offering equity to your technology supplier? Yes. Q. We've got some pretty good clients as well. For instance. And ALL will hold equity in it? ALL will hold equity in it along with parts of the group. Q. So. Q. It also depends on how much work share we will end up with. obviously nonconflicting. The partners we are talking to we cannot disclose for some time but they are well known European and US companies. There is civil too. military heavy-lift helicopters. One initiative and one partner. This is a big step for us. AWACS. all the global manufacturers are salivating. if you take helicopters. So there will be a separate aerospace company. 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. Detroit to address aerospace testing.acquired a small group that does design and engineering services for an European aerospace manufacturer. will you produce only fixed wing aircraft or helicopters as well? Both are under consideration. Will you go for multiple partners or just one? Hopefully we'll end up with at least one. Q. it will have both civil and military use. Q. 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. it will deserve to become a separate company. medium range transport aircraft… and all this is only military. . Q. has not been finalised. 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. Add to this the 20 Boeing C-17 transporters. Many of these will have civil and military applications.
Bombardier makes tail pieces for Airbus. So. Take the F53 fighter fronted by Lockheed Martin. In aerospace. God willing. What is expensive is product development. But why will they even want to pick up a private sector player from India? We are coming back to the offsets. Here are three competitors sharing work. If you take Europe. We are all running off the starting blocks more or less at the same time. Q. So.Q. Even if you take the light combat aircraft programme. Raytheon and United Technologies. testing… If the investment on the product side is mitigated. How capital-intensive is the business? In many ways. it is globally characterised by two interesting dynamics. They are all major sub-contractors in large programmes. If you look at the F22 programme piloted by Boeing. The big difference is. 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. People work on pieces of the work.s critical you get a partner with a developed product. they build 40 per cent of the 787. So. Q. validation. there will be equivalents of a General Dynamics and a British Aerospace. It is sharing of risks and rewards and leveraging assets too. it's a long-term business… Yes it is. I would say that the capital intensity in aerospace has slightly different dynamics. . in the auto industry. then 20 years from now in India. Q. there is a distributed work model. if the strategy works right. Q. Then it. tremendous amount of work for that is done by General Dynamics and Lockheed Martin. you see the offsets as a prime pivot? Yes. Take 787. Q. then the investment in the plant itself can be managed by an automotive company. So nobody has a head-start. This is the first time that the doors are being opened for the private sector. It is not so intimidating to an automaker. They were a mechanism for the Indian government to nurture domestic industry. there is work done by Boeing. every partner must get what they want and a fair share in return for their contributions. Q. Fuji and Kawasaki. but he's going to demand his pound of flesh… It's normal dynamics. the way the aerospace sector works is: one. It is not uncommon for the participating contributors to a programme to also be competitors. we put a huge amount of the capex into the plant. the plant is not expensive. Do you see serious competition from the established multinationals in this business? The way the aerospace business has evolved. between Mitsubishi. the kind of capital expenditures are not that intimidating to an automaker.
Yes. are you taking on more than you can digest? One is you have to learn to groom skills and talent. they throw in their lot with you. I'm not discouraged. wheeled vehicles. Q. if they buy your story. we will be in a position to specifically announce what we will be doing.. it will be oriented predominantly towards the Indian market. you'll be piloting these new businesses… All of the new ventures. For instance. it will take at least twice that time. Personally. At the apex. For Albonair we got two MDs from Germany. What is the scope of the KMW MoU? It covers armoured vehicles. say June/July. Sesh spends a lot on the core growth strategy while I spend a lot of time on the new initiatives. for this LCV venture. I will be shepherding on behalf of the group. 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. A lot of it is people. For aerospace. One of them is the former Deputy Programme Director for the LCA. one of whom is the original patent holder for the technology. At that stage. taken in association with your plans for the Defence business with KMW. So you will pay only a technology fee to them for each of these? No. We have been working on the project and it is the fastest anybody has done a brand new engine and new product. Today its not difficult getting people. tracked vehicles. we had the deal with Carlos Ghosn towards the end of 2007. With that speed. They are very different businesses. So.Q. And the discussions leading to the formation of the company. we need to step up the level of our game. it still took us 3 years to be here. When do you see your plans coming to fruition? In aerospace. we have a CEO from India who has spent his career in the construction equipment business. whether it is Nissan or John Deere. In some others. will take time. Q. we are fine. Q. some of these we may end up producing together for not only the Indian market but for other markets. we have some very senior people working with us. definition of the projects. compared to the auto industry. I think by the second half of this year. on the other hand. for anything we do. artillery and special purpose applications such as bridge laying equipment. . products. In aerospace. Q. the time scales are multiplied by two. we are flexible to do whatever makes sense. we have got a lot of balls in the air but if we have to grow. etc. That will determine the structure. It's not easy but. For our John Deere JV. Q. Sesh and I look at what we want to do. The plans to enter aerospace. We would have tied up our partner by then and also identified the first set of products. For Defiance we got a very senior IT professional to come in as CEO. if we get the right people.
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