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IDSA COMMENT

Private Sector Challenge to Ordnance Factories

July 17, 2008

Ordnance Factories constitute a major segment of India’s defence industrial set- up, whose other constituents are the Defence Public Sector Undertakings (DPSUs), the Defence Research and Development Organisation (DRDO) and varied Service-specific workshops, repair and maintenance establishments. The gross production of ordnance factories during the year 2005-06 was Rs. 8811.59 crores. Total sales including issues to armed forces and other agencies and civil trade in the same year was Rs. 6891.68 crores. This constitutes approximately 40 per cent of domestic supplies to the armed forces.

The traditional challenges to the management of Ordnance Factories have been:

  • significant reduction of cost including overhead cost through reduction of excessive staff while at the same time retaining quality manpower
  • speed up production targets to meet the expectations of the prime customers
  • faster absorption of imported new technologies either from abroad under license production or from the DRDO
  • reduced budgetary support from the Government.

They have perceptibly not done very well except in the case of the last of these challenges; they have not been taking net budgetary support from the government since 1999-2000. While the above issues may continue to remain the basic challenges, the entry of the private sector into defence industry since May 2001 has brought about a new dimension. Now, the challenge is ‘customer focus’ rather than merely ‘internal’ in character. Private companies, which have all long been only suppliers of raw materials, parts, components and in some cases systems and sub-systems, are now allowed to be ‘integrators of complete systems’. It is a reality that tomorrow the armed forces and other security agencies may use ‘Mahindra Rifles’ or ‘Tata armoured vehicles’ etc. This is the new challenge confronting Ordnance Factories, and of course Defence PSUs as well.

A look at the items for which licenses have been granted to the private sector indicates the ambitious scope of this venture. These include items and equipment ranging from bullets proof vests/jackets to military aircraft, armoured vehicles, warships, radars, sensors, arms and ammunitions, Unmanned Aerial Vehicles, night vision devices, communication equipment, small arms, avionics, air defence and artillery guns, computers, etc. Thus, in terms of the nature of the items for which licences have been granted to private companies, Defence Public Sector Undertakings are going to get more affected. However, the fact remains that these items are generally of high-tech nature and require huge investments, and the private sector is therefore likely to take some years to make inroads into this segment of the defence market.

What is more likely to happen is that those items which are currently manufactured by Ordnance Factories, being ‘mature technology’, will have more producers and sellers. The capacity to produce products quickly and of reasonable quality is the essence of the business. These would include bullet proof jackets/vests, transport and other vehicles, varied platforms, and arms and ammunition. Thus, Ordnance Factories would face immediate challenges in respect of items which can be easily produced and are required in large quantities – clothing, weapons, vehicles including armoured vehicles, equipment, all of which today make up over 50 per cent of their total production.

The customer profile of Ordnance Factories is also a matter of relevance. In the year 2004-05, they supplied 78.44 per cent of their output to the Army; the Ministry of Home Affairs came a distant second with a share of 8.66 per cent; civil trade constituted 6.4 per cent; and the Navy and the Air Force had shares of 2 and 3 per cent, respectively. The Army is obviously the stronghold of Ordnance Factories, and the other two high-tech Services are beyond the reach of the former’s technological capability. Of course, supplies to the Home Ministry and civil trade constitute more than 15 per cent of sales. But they are more commercial rather than captive customers and are well outside the organizational influence of Ordnance Factories.

What then should be the core strategy for Ordnance Factories to meet these emerging challenges? Apart from organizational structure, the inherent weaknesses of Ordnance Factories are: (i) its dependence on the decision of the government or the Services for the type of technology to be imported; (ii) its exclusive dependence on the DRDO for induction of technology and its productionisation; (iii) weak in-house R&D for enhancing innovations and incremental product improvements; and, (iv) substantial mismatch between the created capacity of the organisation and the changing demands of prime customers in terms of skill, manpower, technology and organisational locations.

The first question that arises here is whether Ordnance Factories can be free from governmental control for import of technology without first getting corporatised. This is first significant strategic step necessary for the survival of Ordnance Factories, given that the private Sector is free to do so. Secondly, technology dependence on DRDO need not be considered a liability and can actually be converted into an advantage. In fact, it can be said that the private sector is envious of the privileged position that Ordnance Factories enjoy in this regard. The way to transform dependence on DRDO into an advantage is to innovate and make quick incremental product improvements. For this, a strong in-house R&D base is necessary. Unfortunately, this is precisely what is lacking and the budgetary allocation for R&D in the last few years have been capped at around Rs. 10 crores. Focused attention on in-house R&D would enable the organisation to make incremental product improvements without going back to the DRDO, which would strengthen its linkage with the users.

Another likely situation is that existing suppliers to Ordnance Factories may get poached by the private sector. The right response to this challenge lies in strengthening the process of vendor development and outsourcing activities. Ordnance Factories need to look at their suppliers as genuine and equal partners rather than mere suppliers of raw materials and components. More importantly, Ordnance Factories themselves need to ‘get outsourced’ by others, including the private sector involved in defence production. For example, more than 90 per cent of the product of the ‘Materials and Components’ group is for other factories. Similarly more than 26 per cent of production by the ‘weapons, vehicles and equipment’ group is for other sister factories. Ordnance Factories can exploit this strength to expand the market share by supplying not only to their own kind but to the private sector as well. After all, the production of defence and defence-related material and components is not a technology within easy reach. Therefore, Ordnance Factories need to strengthen their linkages with manufacturing industries both in the civil and defence sectors to face the challenges before them successfully. Herein lies the strategy for their survival in the growing and competitive defence industry market both within and outside the country