Richard Aboulafia: April 2015 letter

Dear Fellow Foreign Film Festival Attendees,

Bollywood romantic comedies often feature a goofy fat guy with lots of eyeliner who constantly gets in the way of the two lovers’ first kiss. At the end of the movie, the romantic couple finds a way to distract him, and finally hook up (off-screen, of course). The intrusive interloper reminds me of India’s national defense prime, HAL. HAL demands a large share of any Indian arms buy, and works to de-rail any deal in which it doesn’t get a major role. Named after the psychotic computer in 2001: A Space Odyssey (actually, it’s Hindustan Aeronautics Ltd), HAL is an institutionalized obstacle for a military seeking to buy useful equipment at a reasonable price in a reasonable time frame with few complications. Yet two would-be romantic partners, the Indian Government and Dassault, have found a clever way to circumvent this comical fellow, with big possible implications.

Since 2011, the Indian Air Force (IAF) has wanted to buy 126 Rafales under its Medium Multirole Combat Aircraft (MMRCA) procurement program, one of the largest export fighter contracts in history. Under the original plan, HAL would build 108 of the 126 jets in-country (Dassault wanted to work with Reliance Industries, but HAL inevitably got in the way). But bizarrely, the company found a way to overplay their strong hand, kind of like someone with four aces insisting they had a fifth ace. HAL demanded that Dassault guarantee the work done by HAL on the India production line. Dassault, not being crazy, refused to sign that deal. This helped create a four year MMRCA impasse.

But this month Indian Prime Minister Narendra Modi said the government would move to buy 36 Rafales off the French line “as quickly as possible.” This government-to-government deal would kill the earlier MMRCA program, but 36 jets is a sweet spot number – enough to be useful and to establish the type as an important part of the IAF’s fleet, but too small to justify an HAL production line.

This deal would remove HAL from one of India’s biggest defense procurement programs, a major problem for them. HAL’s backers may seek to scuttle the new deal; without Rafale procurement, HAL could instead continue building Su-30s under license, guaranteeing lots of work (they break often and need constant care). HAL could also get to build its proposed Advanced Medium Combat Aircraft (AMCA).

AMCA, by the way, would come after HAL’s Light Combat Aircraft (LCA). Just for some perspective, the LCA was launched the same time as Taiwan’s Ching Kuo, another indigenous fighter. AIDC built 121 Ching Kuos, with the last one delivered in 1999. The LCA program, subject to HAL’s bungling, has yet to produce a fully operational jet. It’s coming up on 40 years since the LCA was conceived. And 20 years since it was obsolete.

Indian military procurement practices are bad enough. Layering on HAL’s demands make things much worse, saddling India’s armed forces with one of the least cost-effective arsenals in the world. But the Indian military is taking action. In the past few months, service chiefs have worked to restrict HAL’s role on a variety of procurement programs. Last July, they removed HAL from the Medium Transport Aircraft (MTA), effectively giving the 56-aircraft program to Airbus, which is bidding its C-295 with local assembly by Tata. In March, the IAF boosted Pilatus PC-7 procurement by 38 trainers (to 113 so far), staving off HAL’s predictably dysfunctional alternative, the HTT-40 turboprop. They’ve also moved to restrict HAL’s role in India’s huge 400-helicopterLUH program. India has also increased direct procurements, with no local assembly (C-130Js, C-17s, P-8s, and soon AH-64s and CH-47s).

Before HAL hits rock bottom (and looking at these big Indian military procurement changes, that day is approaching fast), they should remember that almost any anyone can improve themselves. Get serious, lose weight, and wipe off the eyeliner. Any wannabe national defense champion should follow three simple rules:

1. Privatization is essential. Worst thing I’ve heard at an air show: A HAL executive proclaiming “We are the customer.” State ownership produces for that kind of complacency. Best illustration of a smart change from public to private: Embraer. Korea Aerospace Industries (KAI) is on this path too. If privatization means being taken over by a foreign company (as Portugal’s OGMA was taken over by Embraer), so be it.

2. Competition keeps companies sharp. One of the worst things about HAL’s commanding presence (until recently) is that it has sucked up India’s defense spending while starving more qualified local non-state owned firms, such as Tata, Reliance and Mahindra. Most countries with emerging defense industries can only afford one or two primes, but any competition helps. Brazil has other defense primes than Embraer. In March, South Korea awarded KAI the KF-Xfighter contract, but only after securing a competing bid from Korean Air Lines (with Airbus). South Korea’s government mandates at least two bidders for any contract, which guarantees an aggressive bid. By contrast, Turkey is likely heading for trouble with Turkish Aerospace Industries’ sole-source status on the TFX fighter, Hurkus trainer, and other platforms.

3. Exports are essential too. Relying solely on domestic producers (autarky) is bad for a military, and relying solely on a national military customer (a monopsony) is bad for domestic producers. Diversifying through exports ensures that a company’s costs aren’t out of line with international market prices. It also helps companies manage risk. After the Ching Kuo, Taiwan no longer wanted a national defense prime. But AIDC has been able to stay alive through contract work for many international customers. After the Lavi fighter died, Israel Aircraft Industries re-invented itself as Israel Aerospace Industries, with a much greater focus on high-tech exports.

Back to the Rafale. Production has been stuck at 11 per year since 2000, but things are looking up. The recent Egypt sale won’t change output much (the French military is using this sale as an opportunity to defer deliveries). But a 36-plane order is a nice bump, particularly with follow-on buys likely. Still, we’re not changing our forecast yet. After all, it ain’t over until the Bollywood interloper sings. Or at least changes his ways.

We’ve updated our annual business aircraft overview this month. Other updated Teal aircraft reports cover the Eurofighter, C-235/295, Airbus’s H135, and the Mirage 2000. Have a great spring.

Yours, ‘Til Some Bollywood Character Actors Visit Me At Le Bourget,

Richard Aboulafia