L&T Heavy Engineering

Integrating MSMEs with Defence

Manufacturing Value chain
14 May 2013

Cmde Mukesh Bhargava (Retd)

Vice President
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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

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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
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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
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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

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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 theirs 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

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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 nonstrategic 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 its inherent uncertainties
Streamlining of licensing procedure for D&A industry to encourage MSMEs
to enter this sector

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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

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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
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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

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L&T Heavy Engineering

THANK YOU

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