September 28, 2012 Saurabh Joshi - stratpost.com
The program was for the procurement of 56 aircraft of which 16 would be delivered off the shelf by a foreign manufacturer and 40 were to have been manufactured in India. Indian industry has found the order to be too small to justify the capital expenditure.
The Indian Air Force (IAF) program to replace its Hawker Siddeley 748M Avro transport aircraft with one manufactured by domestic private industry is proving to be a non-starter.
After more than a year of discussion, it now appears that Indian industry has decided not to step up with bids to build the replacement aircraft, in partnership with foreign manufacturers, because of the financial infeasibility of the project.
The program envisages the procurement of 56 aircraft of which 16 would be delivered off the shelf by a foreign manufacturer and 40 were to have been manufactured in India. The procurement was stipulated to have been under the ‘Buy and Make Indian’ channel under the Defense Procurement Procedure (DPP), for which only Indian companies could be the lead bidders, in collaboration with foreign manufacturers. The idea was also to encourage domestic private industry to get involved in the program, to the exclusion of Hindustan Aeronautics Limited (HAL).
In fact, at one point there was also a plan to form an Indian industry consortium for the purpose, with the Tata Group nominated to lead as the Production Agency.
But after scrutiny, Indian industry has found the order to be too small to justify the capital expenditure they would incur in setting up a line in India. Over the past couple of months, StratPost has heard the desired minimum order to number from a low of at least 120 aircraft to around 200, between two and a half to almost four times the present requirement.
At present, the capital expenditure required of Indian industry for the order expected to be worth USD 2 billion is between USD 200 million to USD 250 million. They figure that at the completion of the order, their EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) would come to only about USD 150 million. Back of the envelope calculations, keeping in mind margins of 20 to 30 percent, indicate an ultimate revenue of around USD 80 million.
This, they feel, is too small a figure to justify the expenditure and a bid, especially in the absence of any clarity on how the domestic manufacturing line would be employed after the completion of the delivery of the order for the 56 aircraft.
Now, with Indian industry failing to see the business case for the program, it is likely that the IAF and the Ministry of Defense would make the program ‘Buy and Make Global’ and throw open the tender to foreign manufacturers to bid, something that is expected to take place over the next month or so.
Some of the aircraft that were under consideration for the replacement of the Hawker Siddeley 748M Avro fleet include the EADS CASA C-295, the Alenia Aeronautica C-27J Spartan and the Saab 2000.