Strategic Alliance Proposalbetween Mahindra Aerospaceand Airbus Military
Why Defence?
• Currently, FDI in defense stands at 26%• Proposals have been made to further ease it to 49%• Government has shown interest in increasing FDI inflows in defense which is currently
low (less than 0.01% of total FDI inflows)• Higher investment may be considered in state of the art technology
FDI Regulations
• Foreign vendors can offset credits by transfer of technology• Indigenization limit lowered to 30%
Relaxation in Defense Offset Policy (DOP)
• Contract worth Rs 11,897 crore to replace AVROS by 56 new transport aircrafts• Emphasis on developing private players in aircraft manufacturing • Private players encouraged to form JV’s with foreign players • Previous backlogs of PSU in delivering previous orders
Contract for purchasing transport aircraft by IAF
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
The past 20 years saw dramatic changes on the battlefield and the beginnings of an equally dramatic shift in economic power
The world’s attention shifted to the Greater Middle East
Innovations in defence technology and operations have marked these past two decades of conflict
Developing countries are emerging as true competitors to the developed economies with regard to their innovation and technical prowess, R&D expenses, etc.
The Global Shift in Defence Power (1 of 2)
The Strategic Landscape Reshaped, 1991 - 2012 Long Term Growth in Military SpendingCountry-wise Expenditure on Defense, 1991 vs. 2011
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
The Global Shift in Defence Power (2 of 2)
Global Defense Spending shifting away from the USExpected Changes in Defence Spending (2022)
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Is there a bright future for India’s Defence Industry?
FDI in Defence
FDI cap has been maintained at 26% in the Defence sector
Any FDI proposal beyond 26%, which brings state-of-the-art technology would be considered by the CCS on a case to case basis
Factors setting India’s Defence Demand
Changing geopolitical scenarios on India’s borders would necessitate continual augmentation of its defense equipment
New procurement would be necessary to replace obsolete equipment & to achieve combat readiness
Internal security requirements would drive demand for homeland-security equipment
Increased government expenditure on defence is likely to continue in the foreseeable future
The entry of new companies in the market would increase competition and innovation, further driving growth
India: The Largest Importer of Arms
75% of India’s weapons’ purchases are imports and India is now the largest importer of arms
5-Step Formula to create a sustainable Defence Ecosystem
Choose core capabilities Accelerate capability building Enable the optimal industry structure
and conduct Improve procurement processes Drive a performance orientation in
government defence entities
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Companies Mahindra & Mahindra-Defense Division
provide total solutions for the entire range of light combat and armoured vehicles and their derivatives for defence and security forces
largest private-sector supplier of bullet-proof vehicles in the country
Defence Land Systems manufacture world-class military
vehicles, select artillery systems, and other land system weapons at competitively low costs
Products Land
Sea
Companies Mahindra Aerospace
Vision is to become a globally recognized manufacturer of aircraft and a tier 1 supplier of components and assemblies
In partnership with the National Aerospace Laboratories, already developing a new 5-seat light utility aircraft
Aerostaff Australia one of the world’s premier suppliers of
close tolerance high-precision sheet metal and value-added products to Aerospace and Defence customers
directly supply the assembly lines of the Boeing 737, Gulfstream G150, and the world’s most advanced fighter aircraft, the Lockheed-Martin F-35 Joint Strike Fighter
Gipps Aero Products handles all aspects of aircraft
development, production, marketing and after-sales support
develops and manufactures a family of 2-20-seat utility aircraft which is sold in more than 30 countries
The Mahindra Group
Overview
Was founded in 1945 as a steel trading company
Today, the Group is $16.2 billion global corporation
Employees more than 155,000 people across globe
Group flagship company, Mahindra & Mahindra is a leader in tractor and utility vehicle space
Group Companies
Defense Mahindra Aerospace
Companies Mahindra & Mahindra-Defense
Division Defence Land Systems
Products Land Sea
Presence in 10 business sectors
Companies Mahindra Aerospace Aerostaff Australia Gipps Aero Products
Products Aircraft
Business case for Mahindra Aerospace to enter into JV for transport aircraft Favorable Goverment regulations Diversify its product portfolio in Defense sector Already operating in defense sector and in manufacturing of small aircrafts Aquire state-of-the-art technology to manufacturing large aircraft cariers Inability of foreign firms to enter India on their own
MPV Axe Marksman Rakshak
Sea mines
Torpedo Decoy Launchers
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Partner Selection (1 of 2)
Eligible Partners
Company Name
Embraer
Lockheed Martin
Airbus
Ilyushin
CASA
Saab
Alenia Aeronuatica
STE Ukraine
World Rank*
23
3
2
-
2
39
9
-
Home Country
Brazil
USA
Spain
Russia
Spain
Sweden
Italy
Ukraine
* As per Candesic report - THE WORLD’s TOP 100 AEROSPACE & DEFENCE COMPANIES - 2012
Part of the Italian conglomerate Finmeccanica, which is facing charges of paying bribes to swing the contract to supply 12 VVIP helicopters to India in favour of its UK-
based subsidiary, AgustaWestland
Already has a Joint Venture with Tata Advance Systems for constructing aerostructures
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Partner Selection (2 of 2)
Airbus or CASA
Both are subsidiaries of EADS (European Aeronautic Defence and Space Company N.V.) EADS is World’s 2nd Rank Air Defence company
Airbus has expressed its interest in the IAF deal of 56 aircrafts
Partner Selected: Airbus Military
Business Case for Airbus Military to form JV with Mahindra Aerospace Conglomerate with 70 years of experience. Knowledge about Indian industry and politico-
regulatory framework Already built up Aerostructure facility Parent company is involved in defense sector Acquired companies outside India for cross country presence- Aerostaff Australia and
GippsAero Directly supply the assembly lines of the Boeing 737, Gulfstream G150, and the world’s
most advanced fighter aircraft, the Lockheed-Martin F-35 Joint Strike Fighter Enable Airbus to fulfil offsets for any defence exports to India
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Preparation for Negotiation
Building the Negotiation Team
Conducting the Negotiation
Preparation for Negotiation
Building the Negotiation Team
Conducting the Negotiation
Preparation for Negotiation
Building the Negotiation Team
Conducting the Negotiation
• Cooperative Goal Strategy to create a win-win situation for both partners as the JV is formed with the long-term objective and its is not just a manufacturing facility created to tap into cost synergies
Strategy
• Granting of Technology Licenses, Scope of License Territories and Royalties• Capital Allocation issues, New product development• Letter of Intent
Hard/Soft Issues
• Term Sheet containing Time Frame and Schedules, Obligations & Rights of each party, Financing & Pricing terms, Intellectual Property, Non Solicitation clausesAim/Constraints
• Timeline for completion of Negotiation Stage• Do not plan for more than 10% of lifespan of allianceRoad-Map
• Parties should sign the Non Disclosure agreement.• This will build trust against any chances of Technology leakages as well help in
performing Due Diligence of each other’s capabilityTrust
Alliance Negotiation
Stages of Deal Negotiation
Preparation for Negotiation
Building the Negotiation Team
Conducting the Negotiation
Mahindra Aerospace should bring in executives from Mahindra Defence Division who have experience in dealing with Indian Government
The early negotiations should allow the parties to get to know each other, clarify expected benefits, and identify shared goals and objectives
The prenegotiation stage should have identified proprietary knowledge that needs to be protected, so before disclosing proprietary data, managers should ensure their competitive advantage is adequately protected
Negotiating History of the partner should be used while conducting Negotiations Emerge from these negotiations with a clear focus on goals and a plan for achieving
them
Core Team
• Manufacturing• Technology• R&D
Other Key Members
• Marketing• Finance• Legal
Technological
• Ownership of technology
• Royalty Rights• Legal Rights
Market Issues
• Product Lifecycle
• Cost Sharing• Legal Liabilities
Structure
• Board Representation
• Division of Resources
• Mechanism for Business expansion
Alliance Management
Alliance Manager Role
Alliance Benefits Proposition
Partner Selection Mapping strategic fit between
Mahindra and Airbus Sensitivity to Cultural Differences
Understanding finer aspects and nuances of Indian and French cultures
Benefit both sides Mahindra – Technology, R and D
Expertise Airbus – Market Access, Government
Approvals Structured Decision Making Enhanced Learning
Alliance Manager Selection
Executives from Mahindra Defence Division who have dealt with Indian Government before can be employed
Identify mid level managers who would serve as interface between top level and operational level management
Establish congenial working atmosphere
Trust building exercises, Personal Relationships
Bridge cultural differences (Indo-French)
Monitor Partner Contribution Resource Allocation Corrective Action
Regulate Information Flows Defence sector associated with
extremely sensitive information, careful monitoring required to avoid leakage
Reassess Strategic Viability, Flexibility Changes in External Environment – Ex:
Current regulations permit 26% FDI which could change in future based on which action can be taken
Changes in Internal Environment
Mahindra - Airbus
Board of Directors
Management Committee
Representation from both sides
Top Management Roles and Responsibilities
External Role Internal RoleEncouraging organizational reciprocal behavior through frequent interactions, amicable resolution of differences
Selection of Alliance Manager to oversee regular operations with requisite experience and expertise – Executive from Mahindra Defence Division
Organization Commitment to create shared value through close interaction at multiple levels of partner firms
Resource Allocation for shaping shared strategic intent
Identification of new strategic opportunities to further strengthen alliance and leverage on partner strengths
Maintain links at all levels, Recasting reward systems (incentives on winning and successfully completing government orders)
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Termination
• Mahindra will acquire state of the art technology in manufacturing transport aircraft• Airbus can build a strong relationship with Mahindra• Airbus can build its manufacturing facilities for other products in India to tap the labor
arbitrage• By maintaining a strong relationship with Indian conglomerates it can tap the opportunities to
grab a larger share of rapidly increasing defense budget of India
Grow It
• Mahindra and Airbus will follow the contractual terms: Building 16 transport aircrafts with 30% indigenous material and remaining 40 carriers with 60% indigenous material
• Mahindra using its experience will bid for the project and Airbus manufactures the aircraft
Fix It
• JV does not win the bid for the contract • JV wins the bid and 56 aircraft are supplied to complete the project, the purpose of forming JV
would be completed• PSU’s are allowed to take part and Airbus decides to form a JV with HAL or BEML
Exit
Why Defence?
Business Case
Partner Selection
AllianceManagement TerminationAlliance
NegotiationExternal
Environment
Strategic Alliance Proposalbetween Mahindra Aerospaceand Airbus Military
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