Robb Fipp, Rina Singh, David Stevens

Rising Chinese military power, ongoing tensions with Pakistan, and the creeping obsolescence of Indian military hardware are creating opportunities for Western defense corporations to aggressively enter a market in which they have long played relatively marginal roles. India, the world’s largest arms importer as the recipient of nine percent of international arms transfers between 2006 and 2010, has increased its 2011 defense budget an additional 11.59 percent to $36.03 billion. According to the Stockholm International Peace Research Institute, Russian companies accounted for 82 percent of India’s 2006-2010 imports, but Western firms are poised to make substantial inroads as the Indian government seeks to expand and upgrade its arsenal with cutting-edge technologies. Israel has already developed into a key source of advanced missile systems, and France’s Dassault and the European Aeronautic Defence and Space Company (EADS) are the finalists in the $11 billion Medium Multi-Role Combat Aircraft (MMRCA) tender to replace India’s aging fleet of Soviet-era MiGs. While lingering suspicion of US ties to Pakistan has complicated the positioning of American companies, steady improvements in Indo-US diplomatic relations and recognition of India as a strategic regional partner are likely to bolster market access for US firms.

Despite these shifts, penetrating the Indian defense market remains as difficult as it is potentially rewarding. This article provides an overview of the core challenges that Western defense companies face, along with guidance on how to manage a number of central issues and risks in the Indian defense procurement process. As in many emerging markets, successful entry and operation is contingent on robust information collection permitting companies to identify key decision-makers and credible local partners, monitor their standing with major stakeholders, and track the actions of competitors. The nature of the defense sector, where decision-making can be particularly opaque and secretive, heightens the indispensability of such an approach.

Challenges of the Indian Procurement Process
Entrants into India’s defense sector must overcome a range of bureaucratic, regulatory, and political obstacles that demand patience, vigilance, and a clear understanding of local practices and dynamics. Indian governmental decision-making tends to be lumbering, opaque, and subject to corrupt practices that potentially skew the playing field against Western firms bound by the US Foreign Corrupt Practices Act (FCPA) and similar national and transnational statutes. In addition, while the Indian government has opened procurement to international participants, it remains committed to the development of an indigenous defense industry through local production and technology transfer requirements that necessitate careful management and negotiation.

Defense Procurement Decision-Making
India’s vast and complex bureaucracy impedes streamlined decision-making, and contending interests among the multiple participants in the defense procurement process can subject decisions to particularly lengthy delays. The MMRCA tender is a case in point of the potential for start-and-stop progress. The Indian Air Force (IAF) submitted Requests for Information (RFI) to a range of international defense companies in 2004 but then took three years to issue Requests for Proposals (RFP). Despite projections of delivery in 2011, the government has yet to select a vendor.

Competing sets of actors can potentially enter the process at a number of different stages, exposing defense procurement to incongruent or rival agendas and to shifting criteria that may contribute to tender delays. While the armed services or intelligence agencies typically play leading roles in the evaluation and testing phases, Ministry of Defense (MoD) civil servants with little or no background in technical defense matters often shape RFPs. Particularly for large-scale projects, ultimate purchasing decisions often take place at the cabinet level or within the office of the Prime Minister. In the course of a typical procurement cycle, the basis for decision-making thus often evolves from potentially unrealistic criteria established by functionaries to technical criteria established by professionals, and then on to considerations subject to political and diplomatic pressures. Particularly at this final stage, vested interests can shift the basis of vendor selection away from objective performance to contenders’ political influence and outreach efforts.

Large-Scale Defense Project Procurement Cycle and Key Decision-Makers

Competition and Corruption
India’s emergence as a major market for arms and defense technology has intensified competition for military tenders, reinforcing incentives to capitalize on the underlying opacity of decision-making by resorting to bribery and to bending or breaking regulations regarding the use of agents well-positioned to broker sales. In addition, Western companies may face an uphill battle against Russian and Israeli competitors whose established relationships with procurement officials may tilt tenders in their favor.

Despite a general crackdown on corruption in India, bribery remains a potentially significant factor in the defense sector, where the specialized nature and secretive handling of tenders creates opportunities for vendors to attempt to influence the process through illicit means. As discussed above, the selection procedures on which acquisition decisions depend often are shrouded in mystery or subject to unexplained shifts that underscore the degree to which small groups of officials can shape a tender’s procedural course and outcome. Western companies find themselves at a potential disadvantage as enforcement of India’s own anti-bribery statutes is inconsistent and not all international competitors are subject to the same anti-bribery statutes—such as the FCPA—in their home country or other jurisdictions.

Western defense suppliers entering a complex new market typically hire agents to assist them in minimizing their competitive disadvantages and winning audiences with key figures and bureaucratic entities. In the Indian context, however, reliance on agents can create more problems than it solves. Many former MoD personnel who offer their services as agents served during periods when corruption was an inescapable element of nearly all major acquisition decisions. This background may lead them to rely on a similar approach on behalf of their new employers, with or without the latter’s knowledge or permission, requiring close monitoring of their actions in order to minimize FCPA exposure.

Indian MoD rules further complicate the task of locating suitable agents by prohibiting the payment of success fees to those who assist in winning tenders. This raises the expense and competition involved in hiring agents with proven track records, or pushes companies to hire them in ways that circumvent the standing rules and create potential vulnerability to subsequent tender disqualification. Companies seeking to stay safely within MoD guidelines often are left with a selection of relatively junior agents typically less effective in advocating for projects with key constituencies.

Technology Transfers
Upgrading the technological sophistication of the country’s armaments to compete with regional rivals, including both China and Pakistan, is at the heart of India’s current defense expansion and opening to international defense suppliers. As retired Air Marshal Padamjit Singh Ahluwalia, the former head of India’s Western air command, has explained, “The Soviet Union gave equipment and transferred technology to India at subsidized costs and ensured a steady flow of material free from sanctions in time of conflict.” On this basis, it emerged as India’s preferred supplier. “After the break-up of the Soviet Union, however, the Russians began demanding hard cash for all sales at a time when they were losing their ability to compete with the West technologically. Because it has to pay cash, India now feels that it should shop around for the best technology possible.”

Yet merely providing advanced weaponry is not sufficient to win major defense tenders, as India also seeks access to underlying technologies to maintain and develop its indigenous arms industry. As a result, international defense suppliers seeking to enter India face significant technology transfer requirements that have evolved into key tender selection criteria. Beginning with the MoD’s 2005 Defense Procurement Policy (DPP), suppliers have to meet a 30-percent offset requirement for all defense orders over $66.6 million in value; for the MMRCA RFP, the MoD raised the requirement to 50 percent. Offset conditions often place foreign companies in a position where commercial success depends on transferring sensitive technologies to Indian partners with few or no intellectual property protections, confronting suppliers with difficult choices and underscoring the importance of selecting trustworthy local manufacturing partners. In addition, US or other government prohibitions on the export of certain technologies can limit the tender competitiveness of firms subject to these restrictions.

Keys to Successful Navigation
Successful navigation of the Indian defense sector requires adapting to the local environment. This includes developing a nuanced understanding of Indian decision-making in conjunction with the ability to constrain the activities of competitors through local institutions. Rigorous due diligence of potential partners and agents is also vital to compete effectively while minimizing the danger of running afoul of the FCPA.

Engage Early and Prepare for a Lengthy Process
For companies seeking to enter India’s defense sector, patience is a necessity. Tenders rarely adhere to their initial schedules, and companies must be prepared to stay the course over a long—and potentially elastic—period subject to delays, shifts in criteria, legal proceedings, and retendering. Early engagement in the tender process is key, particularly in the stage between the RFI and the RFP. Companies that wait for the RFP have missed a significant window of opportunity to develop pivotal relationships, gauge or stimulate demand, and shape RFP requirements.

Use Local Regulatory Bodies to Ensure a Level Playing Field
The Indian defense market is potentially conducive to corruption, but companies need not sit back and allow less ethically constrained competitors to capitalize. When there are grounds for concern, companies can petition Indian regulatory and investigative bodies, including the Central Vigilance Committee (CVC) and the Central Bureau of Investigation (CBI), to examine suspicious proceedings. After losing a 2007 Indian military tender for 197 light attack helicopters, US-based Bell Helicopter protested vociferously that EADS had benefitted from preferential treatment. With the backing of the US government, Bell eventually succeeded in bringing its case to the CVC, leading to the retendering of the contract on the grounds that EADS agents had engaged in improper activity and that the company had used a civilian helicopter model in test flights, biasing the trials decidedly in its favor.

Identify Qualified Indian Partners
Partnering with capable and trustworthy Indian companies can reduce international defense suppliers’ reliance on potentially problematic local agents while also facilitating the task of meeting offset requirements. Allowing Indian partners to take a leading role in tender bids naturally strengthens their competitiveness and appeal to Indian authorities. Locating credible local counterparts, however, requires detailed checks on candidates’ technical backgrounds, political connections, and legal and business track records, including indications of their involvement in corruption. Confidence in the competence and trustworthiness of local partners should alleviate some concerns that accompany the transfer of sensitive technologies. Many of the same considerations hold true when companies opt to engage local agents to advance their tender prospects. Due diligence service providers who are familiar with the local lay of the land and have access to independent sources of information can vet potential agents to ascertain their professionalism, effectiveness, political positioning, and potential implication in unethical conduct.

Breaking the Indian Code
Following a long period of relative exclusion, Western suppliers are at an early stage in the process of establishing their brands and mastering the Indian procurement process. While several companies have developed toeholds, there are no indications that any has truly deciphered the Indian puzzle or developed a strong basis of support among key decision-making constituencies. Even within Western companies that have succeeded in winning contracts, business units continue to grapple with the task of translating individual successes into a winning formula. The market remains relatively open and will reward those with the patience and adaptability to meet its challenges.
All authors are affiliated with Veracity Worldwide, a political risk consultancy focused on emerging markets, including the Indian defense sector.
Robb Fipp, Partner and Managing Director, is based in Singapore and can be reached at rfipp@veracityworldwide.com. Rina Singh, Managing Director, is based in New Delhi and can be reached at rsingh@veracityworldwide.com. David Stevens, Associate Director, is based in New York and can be reached at dstevens@veracityworldwide.com.