For three decades Israel and India are maintaining close defense relations, the dialog is conducted at low key, but is ever growing, spanning all military services, government and local authorities and security services. Israeli defense systems operated in India include satellites in space, air-defense, avionics and aerial weapons, radars and other surveillance systems, special mission aircraft, unmanned vehicles, naval systems and coastal defense, electronic warfare, communications, equipment for special forces and more.
Israel established it’s position in the Indian defense market in the late 1990s, when India suffered from the international embargo that followed the Nuclear test in Pokhran in 1998. At that time, Israel and India did not establish formal relations, but under the initiative lead by former IMOD Director Generals Maj. General (Ret.) David Ivri, and his successors Ilan Biran and Amos Yaron, the expedited support for the Indian military during the Kargil War in 1999, created an unprecedented impact and convinced the Indian side that Israel is a true friend and dependable ally.
Israel established its position in the Indian market in a time of change, as India’s traditional ally – Russia, pressed with economic and technical issues, was unable to provide adequate military hardware to sustain the Indian needs, while US and European suppliers removed themselves from the market under the impact of international sanctions that also limited Indian access to advanced technology.
At the time acquisitions were typically based on Government-to-Government (G2G) agreements or other sole-source contracts. These processes seem to have taken less time to close, as the cost and general terms were negotiated at very high level, but the fine details may have taken years to fulfill.
Israel was quick to respond and developed close relations with the users and local partners, offering advanced defense systems and technologies as subsystems and know-how, to assist indigenous programs.
Since those days India have grown to become the world’s largest importer and producer of military hardware of programs. As the Indian market gradually matures with locally developed systems, improving Russian supply chain and introduction of American and European hardware, the Israeli companies are facing growing competition in India.
Transforming its traditional, unsophisticated and corrupt procurement system, India turned to a slow, ultra complex bureaucratic system that implemented lengthy international tenders with complex and inflexible offset system governed by the country’s Defense Procurement Policy (DPP) guidelines. This system limited the flexibility of foreign suppliers to establish footprint for local activities. The change of government in 2014 marked a new milestone in policy, aligning to Prime Minister Narendra Modi’s ‘Make in India’ policy.
The new MAKE policy, to be fully implemented around 2018, is bound to impact foreign companies as it drives more business, mainly to the local private sector. The Israelis are already preparing their stand in India. In recent months several Indian-Israeli Joint Ventures (JV) were established, others went through change in ownership according to the new rule. On the other side, Indian suppliers are scouting for Israeli partners, to establish new business models in view of the new regulation. However, regardless of the slogans released about Make-in-India, the detailed policy is yet unclear, lacking specific details to enable such business ventures to grow and prosper.
As the new policy permits such JVs to increase foreign ownership to 49%, the interests of foreign partners are assured, particularly when it comes to technology transfer and re-export to foreign markets.
This trend opens promising opportunities to technology driven companies like Elbit Systems, which has already invested in a number of JVs in India, with HAL, BEL and Bharat Forge, to name only a few. Elbit Systems’ position in the JV with Bharat Forge was recently increased to 49%. IAI already has several partnerships in India, the latest was established with TATA in 2014. In recent years Rafael has also established several JVs with public and private sector companies, supporting its missiles and armored vehicles offerings. Company executives expect this trend to continue, with 4-5 JVs in place by the turn of the decade.
Private companies in India now entering the defense market will undoubtedly leave their mark as well. For them, cooperation with foreign majors is considered a shortcut and cost saving market entry strategy, enabling them to bid on major programs without the having to invest in expensive infrastructure, research and development and workforce training. Through JVs they can provide all these trust their JV partners to deliver the knowhow.
But these JVs require significant investments that often come from the foreign partner, facing the long and complex procurement processes. For example, following its’s selection to provide the Indian Air Forces’ Future targeting Pod Rafael invested in the establishment of an assembly and integration line for the Litening targeting pods. The modern high-tech facility has been completed long ago but is idle for the past 12 months, as the formal order hasn’t been made so far. In fact, as of March 2016, there are outstanding Indian orders to Israeli suppliers worth US$3-5 billions still in the pipeline; some are idle for 2-3 years.
Senior Israeli officials complain that, unlike many foreign countries that rely on political leverages to promote their business, Israel’s defense establishment is not as helpful as it was in the early days, and is slow to respond to the changing reality.
Despite these delays, Israel is in good company in India. When Modi’s government came into power the government Defence Acquisition Council (DAC) has 395 procurement programs awaiting approval. Today, 314 cases are still open, only 86 are in the final stage of approval.
Israel is not alone; in fact, many major programs are awaiting approvals – the acquisition of 36 Rafale fighters in France, two IL-78 Airborne Early Warning aircraft from Israel, C-17s and P8s in the USA and helicopters in Russia are all sealed deals awaiting the final nod from the DAC.
As the Indian market shifts to MAKE, the majority of opportunities will be reserved to local companies, through their JVs with foreign ones. This trend means that a proportional share of research and development could also shift from government owned corporations and labs to the private sector. From slow and inconsistent development of indigenous technologies, some R&D is likely to shift to technology transfer and affordable, local development and manufacturing, facilitated through infrastructure modernization.
To make this change private sector enterprises are encouraged to move activities and investments to the defense sector and many show up in Israel, probing cooperation and business opportunities with Israel’s defense industry majors. Others directly invest in Israeli companies, in the fields of cyber, unmanned systems and electronics, to leverage on potential opportunities as they show up in the future.
“We see our activities here as a Marathon – long-term investments in a key growing market, positioned against the shrinking global defense market” a senior Israeli executive told Defense-Update.