Market Intelligence Report: Aerospace in India

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This Programme is funded by the EU under the EU4Business initiative and supported by the EBRD

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This Programme is funded by the EU under the EU4Business initiative and supported by the EBRD

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This Programme is funded by the EU under the EU4Business initiative and supported by the EBRD

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This Programme is funded by the EU under the EU4Business initiative and supported by the EBRD

Indian Aerospace and Defence Sector Overview Indian aerospace industry primarily comprises public sector units (PSUs) promoted by the Government of India over several decades. While Bangalore has emerged as the hub of aerospace industry in India, smaller aerospace clusters have developed around the cities of Delhi, Chennai, Hyderabad and Nagpur.

In recent times, there has been an increased attention on identifying the bottle necks, which have held back the projected potential of the aerospace sector in India.

The Government of India has been steadily creating and enabling a stable ecosystem of policies and regulations, to give the much-needed boost to the Indian Defence Industrial Base (DIB). Over the last few years this has led to significant interest in this sector from domestic and foreign companies alike which is primarily driven by defence equipment demand in India.

One of the interesting facts about defence sector is the multitude of stakeholders that are involved even while there is only one primary buyer involved i.e. the Government.

The ‘buyer side’ comprises armed forces (Army, Air & Navy) as demand drivers.

Research & Development is handled by Defence Research & Development Organization (DRDO), while decision making lies with the Ministry of Defence (MoD)

Local Production Indian Defence Sector (USD Billion) 29.58

30 28

27.7

Imports - Indian Defence Sector (USD Billion) 15 10

26.93

26

10.52

11.3

6.77

5

24

0 Local Production FY16

FY17

FY18

Imports FY16

FY17

FY18

(Source: Directorate General of Foreign Trade, Ministry of Defence, Global Trade Atlas)

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India has the third largest armed forces in the world and plans to spend billions in defence acquisitions over the next several years. According to IHS Jane’s latest annual Defence Budgets report, India is the fourth largest defence spender. Due to an underdeveloped defence manufacturing sector, India is one of the largest importer of conventional defence equipments in the world.

According to the Govt of India (GOI), India imports approximately 60 percent of its defence requirements. This makes India’s defence sector one of the most attractive markets globally for both domestic and foreign defence manufacturers. (Source: Economic Times) Market Size - Indian Defence Sector (USD Billion) 36

35.09

34

32.06

32 30

29.53

28 26 Market Size FY16

FY17

FY18

(Source: Directorate General of Foreign Trade, Ministry of Defence, Global Trade Atlas)

The defence sector continues to be one of the government’s high priority focus areas. In 2018-19, total allocation for the Indian military is approximately USD ~62.8 billion, which represents a 7.8 percent

High Priority Sector

increase from last year. (Source: Ministry of Defence)

India’s Defence Budget FY 2019

USD 62.8 Billion

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The GOI has announced measures to develop two Defence Industrial Corridors in the country. The first corridor is proposed for development in the south Indian state of Tamil Nadu and the second corridor in

Policies & Reforms Shaping up India as manufacturing base

the north Indian state of Uttar Pradesh. Additionally, the Indian government issued the Defence Production Policy in 2018 to promote public and private sector production, as well as encourage medium and small enterprises participation in defence production. Also, there is an Aerospace Park which is planned in Bangalore owing to increasing investments in the sector.

The Indian defence sector has historically been dominated by state-owned enterprises, known as Defence Public Sector Undertakings (DPSUs) and Ordinance Factory Boards (OFBs). According to industry sources, these DPSUs and OFBs contribute 90 percent of the total domestic defence manufacturing output.

The GOI began allowing private sector participation in defence manufacturing in 2001. While the Indian

Public Sector

DPSUs and private sector suppliers produce combat

Dominance

aircraft, naval vessels, heavy trucks, and other military equipment,

they

invest

little

in

research

and

development, resulting in slow development of current or next-generation technologies. As a result, India’s defence industrial base is underdeveloped.

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Civil Aviation in India Overview India is currently the ninth-largest civil aviation market in the world with a market size of USD 16 billion. It is among the five fastest growing aviation markets globally, growing at ~15.2% YoY. Operator Category

No. of Operators

Scheduled Domestic Operators

15

Scheduled International Operators

92

Non-Scheduled Domestic Operators

116

*Source: DGCA, Data based on FY 2017

Passenger Traffic in India The passengers carried by scheduled domestic airlines have increased from 103.7 million in FY14 to 158.4 million in FY17. Despite this accelerated growth, the country is one of the least penetrated air markets in the world with only 0.04 trips per capita per annum compared to 0.3 in China and more than 2 in the US. With continued migration from conventional modes of transport, air travel is expected to witness a similar growth trajectory from here. As per Centre for Asia Pacific Aviation (CAPA) report 2015, passenger traffic is expected to cross 339 million by 2025, with an estimated annual growth rate of 10%.

Accordingly, Ministry of Civil Aviation estimates the Indian aviation market will become the third-largest aviation market by 2020 and among the largest by 2025. This rate of growth suggests huge investment in aircraft over the next few years. CAPA estimates suggest the current aircraft fleet should grow by at least 2-3x to meet in this incremental demand, requiring spend of ~USD 100 billion.

Passengers Traffic in India (FY 2008-2025) -In Million 400

339

300 200 100

158.4 71.6

97.9

0 FY 2008

FY 2013

FY 2017

FY 2025

(Source: DGCA)

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The domestic passenger traffic registered a compound annual growth rate (CAGR) of 9.89% during the period 2007-08 to 2016-17 while the international passenger traffic grew at 8.07% (CAGR) during the same period. Total domestic passengers registered an annual growth rate of 21.77 % during FY 2017 Passenger Traffic

Unit

FY 2017

FY 2016

Domestic Passengers

Departing Passengers

103.75

85.20

million

million

Revenue Passenger

98.64

80.97

Kilometers (RPK)*

billion

billion

Available Seat Kilometers

116.94

97.73

(ASK)**

billion

billion

Departing and Arriving

54.68

49.78

Passengers

million

million

Total Passengers (Domestic &

158.43

134.98

International)

million

million

Domestic Airline Demand Domestic Airline Capacity International Passengers

*RPK is calculated as the sum of the product obtained by multiplying the number of revenue passengers carried on each flight stage by the stage distance. **ASK is calculated as the sum of products obtained by multiplying the total number of seats that are available in each flight by the flight stage distance.

Source: DGCA

Domestic Passenger Market in India (Scheduled Carriers) ยง

Out of total 15 scheduled domestic operators, Indigo accounted for ~40% of the passenger traffic, followed by Jet Airways (15.7%), Air India (13.2%), Spice Jet (12.8%), Go Air (8.3%). Together the top 5 operators accounted for ~90% of the domestic passenger aviation market in India.

ยง

During the years from FY 2008 to FY 2017, the capacity (ASK) in the domestic passenger market grew at a rate of 7.58% (CAGR) while the demand (RPK) grew at 10.03% (CAGR) during the same period.

ยง

The high growth of 21.77 % in the total domestic passengers during FY 2017 is mainly due to the high growth in passengers carried by IndiGo, SpiceJet, Vistara and Go Air.

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International Passenger Market in India (Scheduled Indian & International Carriers) ยง

Out of total 92 scheduled international operators, top 6 operators accounted for nearly 50% of total International Passenger traffic and top 15 operators accounted for three fourth of the total International Passenger traffic in the year 2016-17. Jet Airways had the maximum market share (14.5%) followed by Air India (10.6%), Emirates Airline (9.9%), Air India Express (6.0%), Etihad Airways (5.0%) and Qatar Airways (3.9%).

ยง

More than half of the passenger traffic to and from India is accounted by the countries in Africa & Middle East.

Freight Traffic in India Air cargo carried by scheduled airline operators, both domestic and international witnessed a positive growth in FY 2017.

Cargo Freight Traffic

2016-17

2015-16

Domestic

0.64 Million MT

0.62 Million MT

International

1.51 Million MT

1.4 Million MT

Freight Traffic Carried By Scheduled Carriers (FY 2008-2017)

'000 Metric Tonnes

2500

2,151

2000

1,690 1,393

1500 1,025

1000 500

1,513

1,238 638

452

368

0 FY 2008 Domestic

FY 2013 International Passengers

FY 2017 Total Passengers

Source: DGCA ยง

The domestic cargo traffic registered a growth of 6.3% (CAGR) over the period from 2007-08 to 2016-17 while International cargo traffic grew at 4.4% (CAGR) during the same period.

ยง

Inbound Freight traffic to India is distributed in almost equal proportions from around the World except for America. Africa & Middle East (28.1%), Europe (26.6%), Asia 10

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pacific (23.9%), China & North Asia (20.3%) and America (1%) while from India, more than half of the freight traffic is carried to the countries in the Africa & Middle East (53.2%). Europe accounts for 22.4%, followed by Asia Pacific (16.3%).

Indian Attempts on Civil Aircraft Capabilities India has made reasonable attempts to build its own aircraft through substantial investments in infrastructure, capital and skill. For example, state owned Hindustan Aeronautics (HAL) has developed an indigenous multi-purpose light transport aircraft - Dornier 228 aircraft. The 19seater aircraft is being currently used by defence forces. Recently, the Directorate General of Civil Aviation (DGCA) has also given ‘certificate of airworthiness’ to this aircraft opening gateways for its civil use. It is envisaged the aircraft has substantial role to play in augmenting the regional connectivity under the ambitious UDAN1 scheme of the Indian government.

1 To boost economic development, job growth and air transport infrastructure development in all regions

of India, the Government in April 2017 launched ‘UDAN’. It is a regional connectivity scheme aimed at making air travel affordable and prevalent with the objective “Let the common citizen of the country fly”.

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Airports in India The Indian air transport industry requires upgradation of capacity. Majority of the largest 40 airports in India are expected to face capacity problems, with the problem most acute in Mumbai and Chennai airports, where slot constraints and congestion are already an issue. To cope with looming capacity shortage India aims to accelerate spending on airport infrastructure. For example, nearly USD 3 billion is recommended to be invested in improving regional air connectivity, with an additional USD 4.7 billion to be invested in the construction of 18 greenfield airports. However, the development and construction of additional airport infrastructure

is

predicted

to

take

~5

Category

No. of Airports

Total International Airports

24

AAI Airports

18

Civil Enclave

3

Private Airports (JVs)

3

Total Customs Airports

8

AAI Airports

4

Civil Enclave

4

Total Domestic Airports

101

AAI Operational Airports

49

AAI Operational Civil Enclave

18

AAI Non-Operational

30

State/ Private Government

4

Additional Airports being developed/ proposed Pakyong, Bareilly, Adampur (Jalandhar) Total Airports

years.

3 133

Source: Airport Authority of India

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Regulatory Landscape in India

Aerospace and Defence Policy Reforms in India The current government has brought in significant policy reform over the last few years. The new Defence Procurement Procedure (DPP 2016) and National Civil Aviation Policy (NCAP 2016) highlight government’s intent to alter the status quo which is a positive sign for the future of Aerospace industry. Some of the key reforms undertaken are as follows: Under NCAP 2016, the government encourages global OEMs for establishment of aircraft assembly plant in India along with its ancillary industries. It notifies areas with aero-manufacturing activities as Special Economic Zone (SEZ) where the government will be providing

National Civil Aviation Policy (2016)

fiscal and monetary incentives and fast-track clearances to global OEMs and their ancillary suppliers.

There would be a seamless issue of offset credits for investments in and sourcing from India on case of

ü Special Economic Zones for manufacturing activities

aerospace technology and products. To bring down the

ü Offset credit investments

nullify the cost differential between made in India

cost of made-in-India aircraft and components, the government has considered an incentive package to components and their original sources. The Defence

ü Incentive packages ü Modernisation of equipment

Acquisition Council (DAC) has given clearance to over USD 55 billion worth of proposals in less than 30 months after the policy, giving a huge boost to the military’s long pending modernization. These approvals now need to be quickly converted into actual purchase orders in order to kick-start big ticket investments and technology transfer in India, a lot of which has already started.

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DPP 2016 provided the first preference for any procurement through a new category called the ‘Buy (Indian - IDDM)’. IDDM stands for ‘Indigenously Designed, Developed and Manufactured’ equipment.

It is expected to be a game changer as this is likely to

Defence Procurement

encourage Indian Industry to undertake serious R&D

Procedure (2016)

to meet the stringent criteria. This is expected to

ü New Category - IDDM ü Promote R&D

reduce participation of foreign companies and their products through their Indian Partners as meeting criteria of 60% indigenous content would not be so easy to achieve.

ü Incentive packages ü Modernisation of equipment ü IDDM category introduced o 40% if designed in India o 60% if design is not indigenous ü FDI – 49% via automatic route ü Less approvals ü Support to joint manufacturing ü Freedom to choose offset partners ü Strategic partners for long term contracts ü Testing facilities opening up ü Liberalisation in blacklisting Norms

Under this new IDDM category, the product will be required to have at least 40% indigenous content(IC) in case it is designed in India or at least 60% indigenous

content

if

the

design

is

not

indigenous.

These changes in IC will help in

indigenization efforts as foreign OEMs will have to go for higher share of technology transfer in order to win the contracts.

Foreign direct investment (FDI): FDI and FPI (Foreign Portfolio Investment) have been increased to 49% via automatic route, permissible up to 100% on case by case basis. There will be no approval required by the high-power Cabinet Committee on Security (CCS).

Industrial licenses: Over 55% items have been taken out of the licensing requirement. Now, only limited items will require license, allowing wider scope for joint manufacturing and export potential for aerospace components.

Defence offset reforms: Foreign OEMs will have freedom to choose offset partners over course of contract along with ease of replacement of existing partners, bringing in more competition and efficiency.

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Strategic Partners (SP): The concept of Strategic Partners has been brought in to create a strong, sustainable aerospace industry in India. The SPs will be given large, long-term orders with due checks and balances.

Testing Facilities: DRDO and DPSU testing facilities are being opened up for use by the private sector firms with due checks and balances.

Blacklisting Norms: Blacklisting norms are being liberalised to ensure it doesn’t become counter-productive by stopping supply critical spares and upgrades. Agents have been identified as legitimate business partners.

Make in India Under the "Make in India" program, there are broadly six procurement categories with the Indigenously Designed Developed and Manufactured category being the most "preferred" acquisition option. The six categories are: §

Buy (Indian – Indigenously Designed Developed and Manufactured): Direct purchase from an Indian vendor whose products meet Indigenous Content requirements.

§

Buy & Make (Indian): Purchase from an Indian vendor (including an Indian company forming joint venture/establishing production arrangement with OEM), followed by licensed production/indigenous manufacture in the country.

§

Buy (Indian): Direct purchase from Indian vendors whose products meet a minimum indigenous content.

§

Category

DPP-2013

DPP-2016

Buy (Indian)

30 %

40 %

Buy & Make (Indian)

30 %

50 %

Buy

&

Make:

Purchase

from

a

foreign

vendor

followed

by

licensed

production/indigenous manufacture in the country. §

Buy (Global): This involves purchase from foreign or Indian vendors. There is also a "Make" category that can be pursued separately, in sequence or in tandem, with any of the five above categories. Although, Acquisitions in the "Make" category must be designed, developed and manufactured by an Indian vendor.

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Indian Aerospace Manufacturing Value Chain India has successfully built a manufacturing sector for capital goods, consumer goods and automotive products. Key drivers were competitive labour cost, large pool of well qualified engineering talent, growing consumption, attractive loan products and attractive policies to attract foreign OEMs. The Indian aerospace sector is coming of age over the last decade – from complete dependence on platform imports to gradual indigenization by the DPSUs and few Private Sector companies through license manufacturing.

In the next phase, the sector is moving towards the inclusion of the Indian private sector companies as partners. A mature automotive sector in India is ideally suited to become part of the aerospace supply chain. The automotive manufacturing setup deals with large number of components and the suppliers are in different tiers. An example of aerospace OEMs and the various activities carried out by their Tier 1/2/3 and raw material suppliers, is as shown below: Level

Products

OEM

Aircraft – Military and Commercial

Tier 1

Engine, Turbines, jets, engine propulsion systems etc.

Tier 2

Flight Control Systems, Landing gears, interiors, hydraulic and pneumatic systems etc.

Tier 3

Sensors, Pumps, motors, cables, connectors, filters etc.

Job Shops

Built-to-print jobs as per drawings provided by OEMs or Tier 2/3 manufacturers

Raw Material

Metals, special alloys, speciality chemicals, explosives, gases

Suppliers

etc.

Currently presence of Indian private sector is limited to Tier 2 or 3 manufacturing, engineering and R&D services domain.

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Indian Private Sector is limited to a few service domains only

Design Engineering and IT solutions

Aircraft and subsystems design

Avionics, critical components design

Simulation and testing service

Component design, IT solutions

Component Manufacture (Tier-3)

Castings, forgings

Power, electronic components, cables, wiring

Sheet metal components

Aircraft interior seats, window, upholstery

Component Manufacture (Tier-2)

Hydraulic systems

Electrical systems

Avionics & flight system components

Subsystems manufacture

Engine Manufacture

Avionics & flight control systems

Wing & landing gear assembly

Full Aircraft assembly

Aircraft Testing and validation

Fuselage, empennage assembly

(Tier-1) Aircraft Assembly

(Source: KPMG Analysis Reports)

Presence of private Players in India

Key Government Players in the Aerospace Sector

Hindustan Aeronautics Limited

National Aerospace Laboratories

Defence Research and Development Organisation

Indian Space Research Organisation

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Key Indian Private Aerospace Companies Mahindra Aerospace

Reliance Defence

TATA Advanced Systems

14 and Taneja Aerospace Aviation Limited

Dynamatic Technologies

Key Foreign Aerospace Companies Dassault Aviation

Honeywell

Airbus

Boeing

Safran

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Key Trends in the Aerospace Sector •

The opening up of Aerospace sector of India has brought attention global giants such as Boeing, Lockheed Martin Dassault Aviation of France, the European Eurofighter consortium, Sweden’s Saab, and United Aircraft Corporation of Russia, which are eyeing a USD 15 billion air force tender for 110 planes, and USD 8 billion navy offer for around 60 aircraft

•

Boeing announced a Joint Venture with Indian company Tata to build all fuselages in India for the Apache helicopter sold worldwide

•

Lockheed Martin is eyeing the Indian Market and will move all future production of the F16 to India if it wins the air force contract

•

Dassault Aviation’s Rafale, the Eurofighter consortium’s Typhoon, Russian Aircraft Corp’s MiG 35, and Saab’s Gripen are also eyeing to build aircraft in India

•

Tata, Mahindra, Reliance- the top Indian companies are entering into Joint Ventures with global defence firms. Adani, Larsen and Toubro, and Kalyani Group are also major players in the sector which are active in the industry for opportunities and are seeking suppliers and partners

TATA has formed joint ventures with the defence companies around the world Tata Tata Sikorky Aersospace Limited Advanced Systems Limited Tata Lockheed Martin Aerostructures Limited

§

Nova Integrated Systems Ltd

§ Hela Systems Pvt. Ltd Tasec Limited

Sikorsky is a company based in USA which has formed Joint Venture to produce helicopters parts in India Hela Systems Pvt. Ltd is a Joint Venture of TATA and ELTA systems from Israel focused on defence electronics equipment

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India- Ukraine Aerospace Trends •

India’s Ministry of Defence

(MoD) signed a USD 400 million contract with Ukraine in 2009 to upgrade the IAF’s 105-strong fleet of An-32s by overhauling the aircraft’s Ivchenko AI-20 turboprop airframes AN-32

platforms avionics,

engines and with

fitting

and the

advanced

navigation,

and

communication equipment

•

Recently, the countries have agreed to resume the upgrade programme for the Indian Air Force’s (IAF’s) fleet of Antonov An-32 ‘Cline’ turboprop transport aircraft as developed alternatives to replace the Russian-made systems in the platforms

•

Key opportunities in the modernisation ad upgradation of Soviet Weapons. India’s decision to partner with Ukraine is a consequence of Russia’s inability to fulfil part of its Indian contracts because of the breakdown of technical cooperation between Russia and Ukraine

•

As of now, there are 400 contracts between India and Ukraine. The areas of engagements include: •

Modernizing of Indian tanks and armoured vehicles and equipping them with guided missiles.

•

•

Modernizing Indian radars and air defence assets

•

Designing and manufacturing Indian ships of various classes

•

Supplying components for existing Indian ships and submarines

•

Maintaining Indian aircraft and helicopters

•

Implementing joint Ukrainian-Indian research and development projects

The Ukrainian-Indian Working Group on Space was established in 2016. Its first session was held on February 16, 2016 in Kiev

•

Reliance Defence Ltd and Antonov agreed to cooperate on dual version transport aircraft for Military, Para military and Commercial use in India

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Indian

Space

Research

Organisation

engagements

with

Ukrainian

Companies In 2005, Ukraine agreed to provide India with designs for the RD-810 engine and, in 2006, the Indian Space Research Organization, ISRO, awarded a contract to KB Yuzhnoe for a project code-named Jasmine, which officially started the development of the RD-810.

In India, the RD-810-based engine was dubbed SCE-200, which stood for "semi-cryogenic," indicating the use of kerosene fuel, which can be stored at regular temperatures, and liquid oxygen, which requires cryogenic conditions to stay in liquid form. The "200" in the designation denoted its thrust of 200 tons.

In addition to assisting with the design of the engine, KB Yuzhnoe also advised ISRO on the development of the prospective launch vehicle itself. In 2017, Indian specialists approached Ukraine to test fire the actual hardware, which had been built in India within the Jasmine project.

Ukraine has been helping ISRO in testing and

validating

space

equipment

as

mentioned above, leading to opening up of opportunities for the countries to engage further in technology transfers, testing and validation services.

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Import Duty Structure The present rate of customs duty is imposed on AV (Assessable Value). •

CIF & AV (Assessable Value): n

CIF means cost + ocean freight + insurance

n

AV: AV is CIF +1% as landing fee

HS Code- 88022000 Segment: Other Aircraft: Aero planes and other aircraft, of an unladen weight not exceeding 2,000 kg.

Generally, this HS Code is used to import fully assembled aircrafts in India for both private and non-private usage. However, non-private players such as Flying Training Organisations, Scheduled and Non-Scheduled operators are granted certain exemptions.

Parameters A. CIF Value

Calculation 10,000

B. Landing Charge (in percent)

1%

C. Landing Charge (in value) (On A)

100

D. Assessable Value (AV) E. Basic Customs Duty (in percent)

10,100 3

F. Basic Customs Duty (in value) (On D)

303

G. Social Welfare Surcharge (in percent)

10

H. Social Welfare Surcharge (in Value) (On F)

30.3

I.

333.3

Total Customs Duty (F+ H)

J. Total Value with Custom Duty (D + I) K. IGST (in percent) L. IGST in Value (28% on J) M. Compensation Cess (In Percent) N. Compensation Cess (In Value) (On J)

10,433.3 28 2,921.3 3 313

O. Net Effective Duty (I + L + N)(35.323 %)

3,567.6

P. Total Value with Net Effective Duty(D+O)

13,567.6

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HS Code- 88033000 Segment: Parts of aircrafts or Helicopters (Parts of goods of under heading 8801 or 8802) Generally, this HS Code is used to import parts of microlight aircrafts in kit format in India for both private and non-private usage.

Parameters A. CIF Value

Calculation 10,000

B. Landing Charge (in percent)

1%

C. Landing Charge (in value) (On A)

100

D. Assessable Value (AV) E. Basic Customs Duty (in percent)

10,100 3

F. Basic Customs Duty (in value) (On D)

303

G. Social Welfare Surcharge (in percent)

10

H. Social Welfare Surcharge (in Value) (On F)

30.3

I.

333.3

Total Customs Duty (F+ H)

J. Total Value with Custom Duty (D + I) K. IGST (in percent) L. IGST in Value (28% on J)

10,433.3 5 522

M. Compensation Cess (In Percent)

0

N. Compensation Cess (In Value) (On J)

0

O. Net Effective Duty (I + L + N)(8.465 %)

855.3

P. Total Value with Net Effective Duty(D+O)

10,955.3

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-End of Document-

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