Swedish Investments in the Indian Defence Industry

By on Monday, October 1st, 2012

In end August 2012, the Swedish defence and security company Saab Technology signed a Memorandum of Understanding (MoU) with the Indian private-sector company Pipavav Defence and Offshore Engineering Company Limited. Saab, with total sales of US $3,582 million in 2011, holds a vital role in Sweden’s defence industry. Partly as a result of changing economic conditions, the firm’s strategy is now directed towards international cooperation, with greater focus on investments in Asia in general and India in particular.

This commentary will take a closer look at the characteristics of Saab’s recent investments as well as the prospect and challenges for current and future Swedish-Indian collaboration in the defence industrial sector.

Saab in India
Swedish defence industry is internationally renowned for its high quality of competence and its top-edge and sophisticated technology. A broad-spectrum, advanced military-industrial base in Sweden developed during World War II without much influence from foreign interests or investments, as part of the country’s ‘neutrality politics’. Saab, being one outcome of this development, is the number one company within its sector in Sweden today.

With the recent MoU, Saab commits to strategic investments in Pipavav to a value of $38 million1 – investments that will mainly be focused on enhancing Pipavav’s infrastructure capability, maintenance and building of military hardware for the Indian army as well as for export purposes.2 Additionally, the two companies have signed a technical partnership agreement, securing the continuation of an already ongoing cooperation and an extension of Saab’s engagement in Pipavav.

Saab is involved in partnerships with several large Indian companies, i.e. Bharat Electronics Limited (BEL), Hindustan Aeronautics Limited (HAL), The Mahindra Group, Wipro, Samtel, FFV Services and S.M Creative Electronics.3 As of now, Saab’s business base encompasses ground combat systems, coastal surveillance systems, signature management, electronic warfare systems as well as communication equipment and avionics. The company’s recent investments, however, reveal an interest in expanding the product line to other segments of the defence and security industry.

Saab’s commitment to the Indian defence industry is characterised by several incentives to support and develop an indigenous Indian defence industry, to contribute to research and development, facilitate knowledge- and technology transfers, and generate customized solutions to the Indian market. Two examples of such attempts are the Saab India Technology Center in Hyderabad – a research centre and development facility in cooperation with Mahindra Satyam, and a sourcing office in Bangalore with focus on supplier development.

Opportunities in India
Saab’s increased interest in the Indian defence industry can be understood as part of a larger structural change in the international geo-economic context. The Asian region, with sales amounting to SEK (Swedish Krona) 5,176 million for 2011, is Saab’s second largest market. On the other hand, Sweden, and large parts of Europe, are struggling with economic instabilities, distressed markets, and diminished political and public support for retaining a strong defence industry.

This can be seen, for instance, in the decrease in Swedish military expenditure by 18 per cent during the past ten years – a fall from 2 to 1.3-percentage points of GDP. In India, however, the trend has proceeded in the opposite direction, with military expenditure increasing by 78 per cent, to $46,086 million, for the same time-period.4 In addition, India is also the largest arms import nation in the world – making the country a ‘hub’ of potential for foreign investors.5

Saab intends to make India its new home market, which is explained by India’s strategic position in Asia, its emerging industrial capacities, democratic political and social foundation, and a comparably lenient regulation on their defence industry in relation to other major Asian nations such as China and South Korea.6 With its presence in India, Saab will have a prime position in the expanding Indian market for defence and security products as well as earning a more direct access to the rest of the emerging Asian economies.

Saab is still a small player in relation to some of the giant defence and security firms, which makes it even more important for the company to establish a trustful relationship with the Indian industries and be a responsible partner. The company’s strategy to sustain its competitive advantage is to contribute to capacity building and transfer of technological know-how for local partners, commitment to the development of an independent defence base and an enhanced civil security, and social development. India should value such an approach and support smaller scale collaborations with similar actors.

What Indian markets provide and how the relationship can be strengthened?
Scholars and expert committees have raised concerns about the deficiencies in India’s defence industrial sector.7 The defence and security industry is under heavy policy and export constraints, making innovation and structural improvements difficult.

India has thus to reconstruct its policy towards foreign investors if the country is to have a strong defence profile and safeguard its increasingly important role in the region. Despite these impediments, some advances have been made to attract foreign expertise, one of which is giving Indian private firms the chance to participate in the defence sector. The benefit of this initiative for foreign investors, like Saab, is that partnering with private firms is much easier compared to public sector companies.

Entering into a Joint Venture (JV) also provides the foreign investor greater chances of winning contracts than by acting independently. Furthermore, as a JV is free to engage in offshore production, the foreign stakeholder will, by locating parts of its operations in its home country, have the opportunity for supporting the domestic industry and labour force. However, the most recent FDI policy allows foreign firms a 26 per cent stake in JVs with Indian companies – a level considered too low to attract relevant and sufficient technologies and expertise from abroad. A raise in the FDI cap to 49 per cent has been suggested, which would provide greater incentives for foreign investments as well as making the JVs more competitive in the domestic and export markets.8

In the recent MoU between Saab and Pipavav, the companies stated how they would be targeting global markets, besides meeting Indian and Swedish requirement for specific military segments.9 Hence, these types of partnership, or JVs, will aid Indian firms in accessing new European markets. As a result, there will be opportunities for increasing procurement from Indian companies, providing India a reversed role in the current arms trade market.

There are, however, still some holdbacks to improved and increased partnerships with foreign companies, which stem from offset policies. If India is to enhance its defence industrial capabilities and attract advanced military technologies through foreign participation from nations such as Sweden, offset policies must continue to meet the interests of foreign investors. The 2008 provision of ‘banking of offset credits’, which allows foreign vendors to accumulate credit for discharging their future obligations, attempts to obtain long-term engagement by the supplying firm and is a sign of an economic policy more open to international economic influences.

However, the current two-and-a-half year’s validity period for banking of offsets is not a strong enough enticement for foreign investors. A longer banking period, along with further incentives to enable private participation and foreign partnerships, would be necessary for India to attract the right military technology and competences for its defence industry. Furthermore, the Ministry of Defence must make the requirements for future use of the accumulated credits more explicit, and be pragmatic about the areas in which new investments should be placed to benefit the Indian industry in the best way possible.

Conclusion
The Indian defence industry provides great investment opportunities for Swedish firms. Simultaneously, investments by Saab and other companies can speed up the development of an indigenous and modernized Indian defence. These opportunities, however, do not come without challenges. An assessment of the future of the Swedish-Indian industrial collaboration in the defence sector needs to be made by taking into account the prospects for bilateral cooperation in future political, economic, and security issues.

Apart from the recommendations put forth here, further collaboration between Swedish and Indian firms necessitates an intensified bilateral political engagement to deal with the offsets and export restrictions on the defence industry.

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