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Tata companies band together for bigger piece of defence pie
Posted on 30th September 2014
In July, when Tata group Chairman Cyrus Mistry identified defence & aerospace as one of the four clusters that could drive growth for the conglomerate over the next decade, he clearly had his eye on the estimated $250 billion (Rs 15 lakh crore) that the government would spend to purchase arms and equipment in this period. The other three clusters, in Mistry's view, were consumer goods, infrastructure and financial services.

For the group, however, a key challenge in aiming at a chunk of the defence business will be to prevent competition within the group companies for orders. There are 14 companies within its fold that are focused on defence production. "Till now some of them have actually been competing with one another in defence business," admits V S Noronha, vice-president, defence and government business, Tata Motors. The companies also have to contend with engineering behemoth L&T, which has been preparing for just such an opportunity for the past decade, Mahindra & Mahindra, Ashok Leyland, Bharat Forge and Pipavav Shipyard. "A more synergetic approach will have to be taken," says Noronha.

Mistry's idea of banding the group's defence companies into one cluster will play a crucial role in this new vision. As Noronha says, "Clusters are what will give us competitive advantage as the combined strength of the group is going to be formidable for other companies who are getting aggressive on defence."

Prominent among the 14 group companies engaged in the defence business are Tata Motors (land systems), Tata Advanced Systems (aerospace), Tata Power SED (defence research & development), Tata Advanced Materials (composite components), TCS (software) and Titan Industries (precision engineering). There also are Tata Technologies and Telco Automation that have design and manufacturing capabilities to support the defence business.

The group envisions synergy as a lead company being supported by the rest of the group. For instance, if a land systems project is undertaken, then Tata Motors will take the lead and the other companies will pitch in. For an air system, the lead role will go to Tata Advanced Systems and so on.

"We have already started working together," says Sukaran Singh, director at Tata Advanced Systems. "TCS, Tata Motors and Tata Advanced Systems are working together and thinking very hard about projects."

The prospects for Tata and other Indian companies are bright with the defence establishment, saddled with obsolete armaments, planning a major modernisation drive. Domestic brokerage Edelweiss says that the likely defence outlay of the government will be $248 billion over the next decade. With a 30 per cent offset requirement, the domestic players can contemplate business worth at least $75 billion in 10 years.

Already, in the last one month, the government has cleared orders worth Rs 41,000 crore. "The quick clearance of pending defence orders by the new government, the focus on domestic production along with increase in foreign direct investment in the sector to 49 per cent and the statements about making India an aircraft MRO (maintenance, repair and overhaul) hub are indicators that have filled the industry with optimism," says Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

Building a case for defence

In many ways, the Tata group was prepared for this opportunity. As far back as 2007, Ratan Tata, then the chairman, had incorporated defence production in the vision for the group. At the time, Tata Motors and Tata Power SED were the group's main players in the defence sector.

Tata Advanced Systems, whose launch marked the group's entry into aerospace, has now scaled up operations across its seven lines of manufacturing and is preparing to bid for building a complete aircraft in the next three to five years. It is also eyeing the Rs 11,900-crore government contract for 56 military transport planes that will replace the Indian Air Force's ageing fleet of Avro jets.

Tata Advanced Systems is a strategic vehicle for the group and it already has four joint ventures that each have 26 per cent stake held by foreign partners. For aero-structures and aircraft tails, it has tied up with US-based Sikorsky and Lockheed Martin. Its partnership with the Israeli Elta Systems involves radar parts, while with Swiss firm AGT International, it handles homeland security.

At its Hyderabad facility, the company is building the fuselage of six presidential helicopters for the Marine One fleet that the US Navy ordered from Sikorsky for $1.24 billion. "Our strategy is to build for export first since this allows us to develop world class capability," says Singh. "But eventually all the preparation is for the Indian market."

To support the designated lead company in various defence projects, the group will depend on Tata Power SED, which has been in defence R&D since 1973. "Though we have partnerships, we do not need to go to somebody who will give us know-how," says Tata Power SED Managing Director Rahul Chaudhry. "We are a know-why company and continue to remain a know-why company." The company is engaged in building launchers, modernising airfield infrastructure and building electronic warfare equipment. It is also one of the biggest players in the weapon systems and sensors business in the country.

The formalisation of the four clusters in the group is expected soon with the nomination of a group executive council (GEC) member to head it. GEC is the core body that provides strategic and operational support to Tata Sons, the holding company of the group. It has already nominated GEC member Harish Bhat as head for the consumer cluster, which includes companies such as Titan, Trent, Croma and Tata Global Beverages. The nomination of cluster heads for defence, infrastructure and finance business is awaited.

"It makes sense for large corporate groups to consolidate their defence business under one head because this helps in seamless planning, bidding and interaction both within and outside the group," points out Dubey of KPMG, referring not just to the Tata group, but to a generic approach to handling defence business with a single customer, the ministry of defence.

The Tata group realises the practicality evident in Dubey's prescription. It hopes the internal synergy among its own companies will stand it in good stead in the defence business.

Related Companies: Tata Motors   TATA Consultancy Services ( TCS )   Larsen & Toubro Limited   

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