Samtel Avionics is one of India’s leading players in high-technology avionics and rugged electronic systems for military applications. In an exclusive interaction with The Dollar Business, Puneet Kaura, MD & CEO, Samtel Avionics Ltd., talks about opportunities available to Indian companies in the defence sector and how Samtel is tapping them to become a powerhouse in avionics and technology solutions.

Ahmad Shariq Khan | March 2017 Issue | The Dollar Business

TDB: How has Samtel Avionics evolved with time?

Puneet Kaura (PK): Samtel Avionics is a part of the four-decade old Samtel Group, India’s renowned integrated manufacturer, with a well-established history of manufacturing a wide range of displays for avionics, military, industrial and professional applications. Thanks to the rapid strides made by us using indigenous manufacturing and technology, we are today, one of India’s fastest growing private defence companies that deal in the entire range of high-technology rugged military systems and products. In fact, we straddle the entire value chain – from design, development, manufacturing, testing, qualification, repair and maintenance to obsolescence management of avionics products and equipment.

TDB: In recent times, defence budgets around the world have witnessed a dip because of the sluggish global economy. Has this impacted you?

PK: It is true that the global economy isn’t at its best. Defence budgets worldwide are being slashed and the global aerospace and defence players are now reviewing their strategies. However, we see an opportunity here. To accommodate their shrinking budgets, global companies and a number of governments are now increasingly looking for much more cost-competitive supply partners, and this is where we come into the picture. The eye of the entire world is now on upcoming manufacturing hotspots such as India. Also, with big ticket defence purchases by India on the cards, global firms are looking at competent players like Samtel Avionics to fulfil their huge offset obligations.

TDB: Despite MSMEs being the backbone of Indian economy, the segment has a mere 9% share in the defence sector. What do you think needs to be done to help MSMEs integrate into the global defence supply chain?

PK: Yes, that’s the hurtful truth. While India’s spending on defence (as a percentage of the GDP) is the fifth largest in the world, nearly 60% of our defence need is currently being met through imports. So, I would say that over-dependency on imports in this segment have hurt the growth of indigenous players. Therefore, to reverse the trend and give a boost to the ‘Make in India’ initiative through MSMEs and to integrate the sector with the global supply chain can be the obvious panacea for the Indian defence sector. As a sequel to 100% FDI in defence production sector, we already have several foreign majors in India. Boeing, Lockheed Martin, Saab, Bell Helicopter, Rolls Royce, Northrop Gruman, Rolta, BAE Systems, Dassault, Honeywell, Thales and Finmeccanica are some of the big foreign players actively looking at the Indian market now. Going forward, these companies will have to depend on MSMEs to meet their offset obligation for a host of purposes: equipment, spares, IT-related services and other techno-commercial services. Thus, huge opportunities are up for grabs in this sector and MSME sector must seize these with both hands.

TDB: How do you look at the government’s Defence Procurement Procedure 2016? How can the measures introduced give the much-needed push to MSMEs in the defence segment?

PK: I believe that today, both the government and private players have acknowledged the fact that India needs to increase self-reliance in defence production. The Defence Procurement Procedure (DPP) 2016 finally delivers Indian MSMEs with a growth opportunity they have long been waiting for. The advantages that MSMEs will leverage are their innovative capabilities in niche manufacturing, greater flexibility, lower overhead costs and their ability to learn and absorb new technologies quickly.

Through DPP 2016, I think the government has definitely initiated a host of measures to simplify policy procedures in order to give a boost to manufacturing in defence sector, based on the priority of MSME sector.

DPP 2016 not just allows 100% FDI in the defence sector, but also encourages the MSMEs associated with the industry with funding up to 90% of their project’s prototype development cost. This is a path-breaking development. Outsourcing and Vendor Development Guidelines for Defence Public Sector Undertakings (DPSUs) and Ordnance Factories Board (OFBs) have now been formulated too. These guidelines also include vendor development for import substitution. Also, what is worth noting is the Exchange Rate Variation (ERV) protection that has now been allowed on the foreign exchange component to all Indian companies, including private companies, in all capital acquisitions categories.

In addition, it’s heartening to note that the anomalies in Excise duty and Customs duty have been removed. Now, Indian industries (public and private) are subject to the same kind of Excise and Custom duty levies. The defence products list for the purpose of issuing Industrial Licences (ILs) under IDR Act has also been revised and most of the components, parts, sub-systems, testing equipment and production equipment have been removed from the list.
Further, the initial validity of the IL granted under the IDR Act has been increased from 7 to 15 years with a provision to further extend it by three years. Also, the Standard Operating Procedure (SOP) for the issue of no-objection certificate (NOC) for export of military stores has been revised wherein the requirement of end-user certificate (EUC) to be countersigned/stamped by the government authorities has been done away with for the export of parts, components, sub-systems, etc.

I believe these are all important developments which will go a long way in helping the MSMEs complement large defence hardware manufacturing industries as ancillary units.

TDB: What are your thoughts on the Union Budget 2017?

PK: In my view, one major highlight for my sector in this Budget is the increased allocation towards capital expenditure in defence – which I regard as a welcome move. It shows the government’s commitment towards indigenisation. The increased spend by the government on capital expenditure will lead to trickle-down effect and more work for SMEs. It will further help in defence and fleet modernisation and in return will aid the ‘Make in India’ in the defence sector where MSME’s contribution has so far remained significantly low.

TDB: What is the biggest threat the industry faces at the moment?

PK: I would say regulatory bottlenecks still remain an eyesore for the sector, but I am hopeful that with measures initiated under the new DPP 2016 policy, things will turn better.

TDB: Do you procure any of your raw materials from outside India?

PK: We source most of our requirements domestically. We believe India is quite capable of meeting all its needs for the purpose.

TDB: Research & Development (R&D) must be high on your priority list considering that you deal in high-tech products. What is your R&D spend?

PK: Being in the high technology equipment industry, we spend a significant percentage of our revenues on R&D focused endeavours. I would say, our strong capability in this domain has helped us to always enjoy the first-mover advantage in the domestic market with customised, innovative and competitive new products. As of now, we spend approximately 12% of our annual revenues on R&D. But in the coming days, as we expand our capabilities and product range gets more complex, our focus on R&D is bound to become even more intensified to maintain our high standards of delivery.

TDB: You have set up joint ventures with HAL and Thales. Can you share with us the progress on these fronts?

PK: Samtel HAL Display Systems Ltd. is a joint venture (JV) between Samtel and Hindustan Aeronautics Limited (HAL). It was created to address the avionics requirements for all HAL Star platforms. The JV has achieved the unique distinction of being the first public-private partnership in the defence avionics space in India to indigenously design, qualify and serial produce multifunction displays which are currently flying on Sukhoi Su-30 MKI. We believe that this JV is a prime example of how DPSUs can successfully partner with the private sector to leverage on the strengths of both the sectors to support indigenous production.

The JV with Thales brings Thales’ technological expertise to India as part of its strategy of partnering with leading industry players around the world. It locally develops, customises, manufactures, sells and maintains indigenous helmet-mounted sights, state-of-the-art infrared search and track (IRST) systems and modern avionics systems. It aims at developing new product lines based on Thales technologies, creating offsets in the avionic and optronic fields and proposing services such as obsolescence treatment through redesign, either for the Thales Group or others with similar offset obligations in India. Samtel Thales Avionics’ joint venture was recently granted a defence license by DIPP – another milestone for us.

 
TDB: Samtel Avionics’ product line up has seen strong recognition, both in India and overseas. How do you plan to scale up your global footprint?

PK: Besides being the sole source, world-wide, for Honeywell, when it comes to avionics equipment for their general aviation range in US, Samtel Avionics, today, is a part of the global supply chain for Curtiss-Wright Controls Defence Solutions (CWCDS), where we are collaborating with them for a new generation of intelligent, rugged displays for the defence and aerospace markets. This will establish Samtel as a tier II supplier to helicopter manufacturers such as Bell, Eurocopter, Augusta Westland and Sikorsky. Besides these, Samtel is forging various levels and types of partnerships with at least five of the top 10 global players in the aerospace and defence industry. We are also a partner with General Dynamics Mission Systems Canada for co-production and co-marketing of products for military ground vehicle market. There will be very few firms in India which can lay claim to being in the league that Samtel belongs to now.
We have also, very recently, collaborated with a leading defence electronics company, Hanwha Systems, based in Korea. The new partnership is aimed at creating synergies for both the companies for Guided Missile, EOIR, RADAR, and Laser Guided Bomb (LGB). Also, at the moment, we are in discussion with various other market leaders for partnerships and collaborations, but it’s too early to comment.

TDB: How do you see the road ahead for the industry?

PK: I believe that in the case of indigenous manufacture of defence hardware, a substantial portion of the work can be transferred to MSMEs by DPSUs and OEMs. MSMEs can now act as strategic partners with DPSUs, foreign defence manufacturers and larger corporates. The initiative has to come from MSME-based industries followed by a government push. MSMEs need to understand OEM expectations, in terms of quality and supply commitments which require them to invest in technology, research and manpower training in anticipation of a contract.

TDB: What are your medium to long term plans for India and beyond?

PK: We plan to make Samtel Avionics a name to reckon with in the field of high-technology products for avionics and military applications. In the near future, Samtel Avionics, along with its joint ventures, plans to widen its product and domain expertise. We have already moved forward from being a display manufacturing company to a multiple-product, high-end technology company. Another area of growth will be opto-electronics as we have a very strong division in optoelectronics, where there is a lot of traction via our partner Thales. BTP (build to print) and BTS (built to specifications) activities will also drive our business into the future. Over the next few years, we plan to further strengthen our R&D culture and leverage the expertise of our international partners to produce world-class products. In the long run, we want to become a complete aerospace company providing end-to-end solutions.

TDB: How do you think this industry can benefit from ‘Make in India’?

PK: We fully endorse the ‘Make in India’ campaign that is designed to improve and strengthen manufacturing capabilities in India and also act as a strong mandate to foreign players to develop manufacturing units in India. We, Samtel Avionics, a key domestic player in the Indian defence industry, are looking at this initiative with a lot of optimism.

The government has introduced several initiatives to enhance the role of MSMEs in the defence sector. Besides, ‘Make in India’, augmenting the role of MSMEs is one of the defining features of Defence Procurement Procedure (DPP) 2016. In DPP 2016, the ‘Make’ procedure has been recast wherein greater impetus has been provided to MSMEs, by reserving certain categories of ‘Make’ projects exclusively for them. The eligibility criteria for shortlisting Indian vendors, for participation in ‘Make’ projects, have now been made liberal for MSMEs. Besides this, a multiplier of 1.5 is permitted for discharging of offset obligations through MSMEs as an Indian offset partner.

In addition, the government has launched various schemes for supporting MSMEs so that they can supply their products to various organisations, including the ones in defence sector. The Lean Manufacturing Competitiveness Scheme that was launched to improve the quality of the products of MSMEs, Credit Linked Capital Subsidy Scheme (CLCSS) and Technology Up-gradation Scheme (TEQUP) are measures which can accelerate the private sector’s involvement in defence manufacturing.

TDB: Does India have the capability to become a defence manufacturing hub?

PK: I think India is quite well-placed vis-à-vis its competitors because of many initiatives by our government. Like Samtel Avionics, many defence companies have now joined the bandwagon and are offering world-class products at competitive prices. Today, the government and private players both feel that India needs to increase self-reliance in defence production and capitalise on the vast domestic potential in defence production so that India can emerge as a global defence manufacturing hub. The DPP 2016 has given the sector a boost. Today, it is important for Indian companies, especially MSMEs, to integrate themselves into global supply chains of national and international defence majors. This will give them the technical know-how and the recognition across global marketplaces. Once that happens, we will be rightly positioned to be a defence manufacturing hub.