Modi’s budget will show the seriousness of his “Make in India” campaign. Can the civil aviation sector, which has many Indian companies striving to make the PM’’s dreams come true, thrive despite rules, regulations and tax constraints? [/h2]
By Shobha John
It’s the season for all kinds of slogans, be it for elections or for economic prosperity. And the flavor of the season is “Make in India”, pegged to Prime Minister Narendra Modi’s campaign slogan to attract businesses from around the world and catalyze manufacturing. Meant to generate more jobs and make India a self-reliant country, its ripples are already being felt in the civil aviation sector. The coming budget will show just how serious the government is. Incidentally, the forthcoming Aero India 2015 show in Bengaluru from February 18 to 22 will also have “Make in India” as its central theme.
Unlike other sectors, aerospace manufacturing is a complex industry needing highly technical research, advanced manufacturing processes and very skilled people with strict standards of excellence. While earlier this manufacturing used to be with government entities such as Hindustan Aeronautics Limited (HAL), today, private players such as Tatas, Mahindras and Wipro are coming to the fore. They are contributing either by way of expertise or manufacturing various components for the final aviation product.
And in a ringing endorsement of Indian skills, the US Federal Aviation Administration (FAA) approved in January, for the first time, a life raft developed in India for use by manufacturers in the US. The four-person raft was developed by UTC Aerospace Systems (UTCAS), which designs, manufactures and services integrated systems and components for aerospace and defense industries. In addition, Tatas, HAL, Dyna-matic, Aequs and Moog are some of the other Indian companies exporting parts to big aircraft manufacturing companies such as Airbus, Boeing, Lockheed Martin, Sikorsky and Bell.
While this is a drop in the ocean, it may be the beginning of things to come if Modi’s well-intentioned dream is translated on the ground by bureaucrats and regulators under various ministries. But the case of the MRO (aircraft maintenance, repair and overhaul) industry, a potentially $700-million-a-year money-spinner, shows how “Make in India” could remain just hype if taxes and custom duties are not cut (see Box). So, unless these hurdles are tackled fast, many industries would find it unviable to operate in India and would prefer to locate elsewhere, leading to loss of foreign exchange and Indian jobs.
Nonetheless, Indian technical expertise and manpower have surmounted many challenges and been recognized by the best of foreign companies. Take UTCAS, India, which has a facility in Bengaluru. Estab-lished in 1997 with 12 employees to provide MRO support for airlines in India and the Middle East, today, it has over 2,400 employees and is an integrated manufacturing, engineering and sourcing hub. The products being built include aircraft evacuation systems, aircraft interior and exterior lighting, cargo systems, pilot and cabin attendant seats, flight control motors, actuation systems and sensor systems.
The company got a fillip with FAA’s recent approval, which allows UTCAS to directly send parts to manufacturers in the US. Aircraft parts from India and elsewhere undergo stringent checks in the US before they can be used by their industry. In that sense, UTCAS’ life raft is an international certification and testimony to the strong technical know-how in India.
Chris Rao, vice-president and head, UTCAS, India, says that with FAA’s approval, its Bengaluru unit is among the first Indian entities to domestically produce and export an aviation product to aircraft manufacturers in the US. “The approved product, a four-person life raft, is compact and lightweight and enables passengers and crew in the aircraft to evacuate in case of an emergency landing on water. We have been working closely with the Directorate General of Civil Aviation (DGCA) and the FAA for over 6-7 years to get this.”
The raft will be used by US-manufactured general aviation aircraft manufacturers and carried on board. Rao says that one of UTCAS’ strengths is its “ability to build outstanding products, meeting the highest quality standards and our ability to establish a local supply chain and hire and train engineers with a global perspective.”
Then, there is American company Sikorsky, which has a joint venture (JV) with Tatas for making cabins for its S-92 choppers in Hyderabad. While this is for the defense sector, it again shows the ability of Indian companies to surmount all odds to be part of a global supply chain. Already, more than 75 cabins have been produced and the unit has become 100 percent indigenous. Air Vice Marshal (Retd) Arvind Walia, regional executive, India & South Asia, Sikorsky, told India Legal: “We started off our operations in a completely greenfield environment a few years ago in Hyderabad. Today, the aerospace ecosystem there has come a long way and production has increased from two cabins a month in 2012 to four.”
Chris Rao of UTCAS India: “One of UTCAS’ strengths is its ability to build outstanding products, meeting the highest quality standards and our ability to establish a local supply chain and hire and train engineers with a global perspective.”
Walia said that Obama’s visit gave a boost to the Indian defense and aerospace industry. “To fully exploit the investment accruing from this, current policies should be interpreted liberally and positively. Meaningful terms of trade will ensure a large number of Indian companies becoming part of the aerospace global chain and a boost to indigenization.” Sikorsky plans to expand its manufacturing base in India and transfer technology and intellectual expertise.
UTCAS’ four-person life raft, has been approved by the Federal Aviation Administration of the US
For aircraft manufacturer Airbus too, India is a market it is keenly watching and wanting to engage with. After all, it is among the fastest growing markets, with a predicted annual traffic growth of above nine percent over 10 years (2014–2023). With many Indian airlines such as IndiGo, Go Air, Air India, Jet Airways, Air Asia India and Vistara opting for Airbus variants, the company has deep interests here. Indian companies are contributing to engineering design, sub-assemblies, and major components. Airbus India employs over 350 engineers in Bangalore and 5,000 professionals nationwide on various programs.
Dwarakanath Srinivasan, managing director, Airbus India, says that in 2013 alone, procurement from India reached approx Euro 300 million. “There’s a bit of India in every Airbus,” he attests.
Airbus reached an agreement with HAL to manufacture doors for its A320 planes in 1988. Today, HAL manufactures 50 percent of all forward A320 family doors, while Dynamatic Technologies Limited (in partnership with SPIRIT Aerostructures) produces flap track beam (used on the wings) assemblies for Airbus single aisle planes such as the A319s, A320s and A321s. It has got a contract for long range aircraft (the A330 family), making it the first company in the Indian private sector to become a global tier one supplier to Airbus.
In addition, Tata Advanced Materials (Bangalore) has partnered with SPIRIT Aerostructures to produce composite parts for the A350 XWB program. TATA, Mahindra and AEQUS have provided part for Airbus’s engineering services, aero-structures and other systems.
Meanwhile, Airbus’s centre in Hydera-bad specializes in high-tech aeronautical engineering and has more than 350 engineers engaging in modeling and simulation, computational fluid dynamics, structures as well as digital simulation. These are critical in the design and production of high-performance aircraft like the A380, the single-aisle NEO and the A350. Infosys, Tech Mahindra, Tata, Geometric and WIPRO have been selected to provide Information System Services to Air-bus/Airbus Group. In addition, a pilot trai-ning center in Bangalore and Greater Noida has trained many pilots.
Air Vice Marshal (Retd) Arvind Walia of Sikorsky: “Obama’s visit gave a boost to the Indian defense and aerospace industry and India needs to fully exploit the investment accruing from this.”
Meanwhile, Boeing too has been working with aerospace suppliers in India for over two decades and has invested over $100 million over the last few years in the Indian supply chain in developing their capabilities. It has set up a factory with TAL (a Tata enterprise) in Nagpur to produce composite floor beams for the Boeing 787-9, one of the most advanced aircraft. It has over 18 suppliers in India, providing aero structures, wire harness, composites and avionics mission systems for its 777s and 787s programs.
However, all this activity cannot take away from the fact that “Repair in India” is as important as “Make in India”. This will give the MRO industry a spurt, says Amber Dubey, partner and head, Aerospace and Defense, KPMG.
“Excessive tax and airport charges have forced Indian carriers to fly planes out of India for MRO. The Ministry of Civil Aviation should coordinate with those of commerce and industry to modify the Served from India Scheme so that export of MRO services is treated at par with export of “Made in India” products.”
NEEDED, A TAX BREAK
To make Modi’s dream come true in the civil aviation sector, Dubey suggests the government should provide a 10-year tax holiday on aeronautical manufacturing, MRO and import of aircraft. “Encourage states to extend the tax holiday to local VAT. The multiplier effect of new investments and jobs would generate revenue from consumption taxes several times over.” Among other suggestions, he adds: “Establish an independent Aeronautics Commission with a budget of around Rs. 500 crore for cutting-edge research. Allocate `1,000 crore to establish four national aviation universities. India should push for co-development programs with the US, Russia, UK, France, Israel, etc. And most importantly, ensure world-class infrastructure—uninterrupted power, water, land, access to ports, airports and highways, etc.
Analyzing Modi’s “Make in India” concept, industrialist Vinay Bharat-Ram wrote in The Indian Express that while it was a laudable objective, modern machines (such as planes) use components and sub-assemblies put together to get the final product over time. Bharat-Ram wrote: “The question is what proportion, in terms of components and sub assemblies of the final product, should be made indigenously and what proportion imported. This is largely determined by the foreign exchange rate, assuming the interest rate and other cost factors as given….”
And in a highly intensive and complex sector such as aviation, it is these factors that will finally determine the success of Modi’s dream.
What makes India’s civil aviation market so attractive? This is what the Government of India’s website on “Make in India” says:
- It is the 9th largest market; will be the 3rd largest by 2020
- Catered to 163 million passengers in 2013; could go upto 209 million by 2017
- Will have 800 aircraft by 2020
- Hopes to host 60 million international passengers by 2017
- Has 85 international airlines connecting over 40 countries
- Will have 800 aircraft by 2020
- The aviation sector is likely to see investments of $12.1 billion during 2012-17
- India plans to increase the number of operational airports to 250 by 2030
- Airports Authority of India plans to spend $1.3 billion on non-metro projects between 2013 and 2017
- Aircraft engines and parts eligible for duty exemption when imported for scheduled operations
- Development of new airports in tier I and tier II cities
- Basic customs duty exemption for parts and testing equipment for MRO
- Budgetary support to AAI for airport infrastructure in the North-east
Rules create hurdles in MRO business”[/h2]
Air Works is one of the biggest independent MRO companies in India, catering to both commercial and general aviation, and has an enviable reputation, both in India and abroad, providing maintenance to customers such as Air Arabia, Etihad, Mihan Lanka, Qatar Airways, Royal Jordanian and Tiger Airways. If Prime Minister Narendra Modi’s “Make in India” concept actually takes off, MRO business will boom, as the potential for it in India is around $700 million.
VIVEK N GOUR, managing director and CEO of Air Works, tells SHOBHA JOHN that while Modi’s concept is laudable, the ground reality is that no MRO competency outside government-owned Air India has been allowed to develop at any airport owned by Airports Authority of India. Things should change if India has to beat growing competition in this field, he stresses.
Prime Minister Modi’s “Make in India” concept is the backbone of his government policy. The MRO business is important for that
Air Works doing maintenance work in Hosur, near Bengaluru
How huge is this business in India?
India spends about $700 million on MRO services. Of this, only $175 million is spent in India, the rest goes abroad, as Indian carriers send their planes there for MRO services. Indigo, for example, sends its fleet to Sri Lanka; SpiceJet, mainly to Malaysia and Jet, often to
What is the quantum of MRO business Air Works gets in India?
We do MRO for Vistara and Jet. Our maintenance capability covers business and commercial jets, twin turbo-props and helicopters. We maintain about 100 business aircraft and helicopters. We get $25million MRO business in India, while $95 million is delivered from our subsidiaries abroad.
That’s a huge loss for India. What are the factors responsible for this?
There is the 12 percent service tax in India, plus 13 percent royalty on total sale value of the invoice. That’s a total of 25 percent tax on the MRO industry here, making it unviable. In other countries, MRO is a tax-free industry. Then, there are inadvertent rules by government agencies, which have created hurdles. For example, the Airports Authority of India has not provided facilities (be it land, hangers or space) to independent MRO operators at any of its airports. Though Air Works has given several presentations to various ministries, be it aviation, finance or commerce, nothing has come out of it.
Air Works does a lot of MRO work abroad. What are these?
We have subsidiaries in the UK, France, UAE, Nigeria, Slovak Republic, Nepal and Hong Kong. Ninety percent of our profits come from outside India, be it MRO, charters, aircraft painting or management. We are also looking at Maldives and Malaysia.
In what ways are these countries easier to do business with?
Malaysia, for example, has a single-window clearance and there is no suffering of forms to be filled. It has also appointed our equivalent of a joint secretary from their ministry of industrial development to move files. It provides grants, term loans and land, plus a menu card on tax conce-ssions. The difference in attitude and courtesy is stark. To support growth, Air Works has a 10,000 sq-meter hanger space in Hosur near Bengaluru, which has been taken on a 25-year lease from a private company.
What sops would you want from the government so that the MRO business is attractive here?
We would like changes in the Served from India Scheme, meant to accelerate growth in export of services. It is a duty credit worth 10 percent of the foreign exchange earned by Indian service providers and can be used to import goods such as tools and test equipment. But this benefit is mainly for manufacturers; the MRO sector doesn’t import much.
Which are the countries giving India a run for their money in the MRO business and how?
Many neighboring countries are taking away our business by being more cost-effective. For example, MRO work in India would cost $48 an hour approx, which includes taxes. Compare that to Dubai’s $45, Sri Lanka’s $34 and Malaysia’s $32, and you know how far India lags.