Corporate Interview

India's effort to rapidly enhance its defence capability as turned it into potentially one of the world's biggest buyers of defence equipment. A project that has attracted a lot of attention has been the joint venture between French naval defence company DCNS and Indian shipyard Mazagon Dock Ltd (MDL) to produce six Scorpene submarines under an Indian project called Project 75 (P75). Some of the attention came its way following allegations of kickbacks, delays and cost over- runs. DCNS is also competing with companies from Russia, Spain and Germany for a $11 billion (`49,280 crore) follow-on order for six submarines under a programme called Project 75 (India) (P75I). When it is awarded, the follow-on order will be the biggest purchase by the Indian Navy.

Patrick Boissier, chairman and chief executive officer of DCNS, who was a part of the delegation accompanying French President Nicolas Sarkozy on his visit to India, spoke in an interview on a range of issues, including the status of the Scorpene project and allegations of kickbacks. Edited excerpts:

How important is the Indian de fence market, looking ahead?

The Indian market is quite important. If you look at the global market for naval defence programmers’, it is evident that while the defence industry in the West is shrinking, in South Asia and South-East Asia it is in- creasing. So the prospects of de- fence cooperation with India look very promising.

What is the final size of the Scorpene deal likely to be? It is under stood that the first three vessels will be built at a cost of $2.1 billion, while the remaining three will be built at a cost of $0.9 billion.

Can you confirm these figures?

This was the initial budget, but it is a long-term programme, which also had some teething problems. But we have over - come these problems. The cost of the entire programme will be in line with the budget, obviously taking into account increases in costs that have gone up with time. But I cannot put an exact figure to it.

What is the current status of construction of the submarines at MDL? When is the first submarine likely to roll out of MDL?

Building a submarine is something very complex. We started this programme five years ago, first by transferring technology to MDL. Developing submarine technologies takes a very long time and (a) lot of expertise. MDL is currently fabricating the hulls. You must understand that constructing a hull is not just welding steel. The foremost concern is the safety of the crew. A submarine, there- fore, has to be reliable. It has to have good acoustic dispersion, so that there is no noise. In order to achieve that, you have to be very precise. MDL has com- pletely mastered that technique. The hulls of two submarines have been completed and work on the third is under way.

Can you update us on the matter of transfer of technology?

I can say that as far as the hull is concerned, the transfer of technology has been completely done. We make a regular check of the people in the yard. I must say that the people at MDL are very good. They have achieved very high standards, which are even better than the French standards.

There was an issue related to the procurement of some critical equipment from Armaris -as part of the Mazagaon Procurement Material (MPM) category--which was earlier quoted at anywhere between $700 million and $1.044 billion, but the price was brought down to $444 million during the recent visit to Paris by Indian de fence secretary Pradeep Kumar.

Can you confirm this? (Armaris is a joint venture between DCNS and Thales SA, the European maker of defence electronics. MPM refers to a set of critical components that are to be imported, and on which France had earlier refused to transfer technology. There were also problems related to cost negotiations.)

The MPM pertains to all the equipment that is in the submarine. It took some time for us to resolve the MPM order. All the issues related to the MPM equipment have been settled and it has been ordered. A part of this equipment will be produced in India. So we can say that the programme is now fully on track. The cost of the MPM equipment will be in line with the budget.

As of now, what is the percentage of indigenous Indian content in the Scorpene submarines?

First, as I said, the fabrication of the hull has been completely mastered by MDL. I think, it is for the first time ever that the submarine has been built in the country of the customer, starting with the first submarine. Usual- ly, even with a ToT (transfer of technology) agreement, the first submarine is built in the premises of the original equipment manufacturer (OEM).
The MPM equipment will be progressively indigenized, beginning with the first sub- marine. You cannot, however, talk of percentages. Most of the equipment that can be built in India will be built in India. Even for those things that are bought from abroad, some subsystems will be built in India.

Can you brief us on the cooperation with Indian industry with regard to the P75 programme, specifically the areas in which DCNS is transferring technology to India/MDL under P75?

As I said, under P75, most of the technology will be transferred to MDL. But we are not limiting our cooperation with MDL. We are also cooperating with a lot of other companies in India. To indigenize the equipment, we are in touch with a lot of big- and medium-sized companies in India. We have set up a subsidiary in India, which has been done for the purpose of increasing our capability to inter- act with Indian companies, and not just for the P75 programme.

How has this experience played out for you in India? How was this cultural difference managed?

This is a completely different culture, and this was an interesting part of our job. It took us a while to get to know each other better, but now I can say that the teams are working well with each other. And we are sure that our joint programme here will be successful.

DCNS and Spanish company Navantia have ended their collaboration and decided to go their separate ways in undersea warfare equipment. Could you outline the reasons for the split? What impact, if at all, might the split have on the current programme and your bid for P75I?

We had a long-term cooperation with Navantia, which went through some problems. I cannot go through the specifics of the problems. But the most important thing is that, in the end, we have settled the dispute amicably and have decided to end our cooperation. DCNS is now the sole manufacturer and seller of Scorpenes. This split will have no negative impact but will rather make things simpler.

But you now have another competitor.

Yes, we do have another competitor, but we believe our sub- marines are the best. We have now been in partnership with MDL for a while, which puts us in a good position.

How do you view your chances for the repeat order of six submarines under P75I? Do you think that the taint of kickbacks in Scorpene deals, both in India and in Malay sia, will hurt French chances? Now you not only have the Spaniards to contend with as competitors, but also the Russians and the Ger mans.

First, I must stress that DCNS is a well-known global player in the defence business. We strictly follow the OECD (Organization for Economic Cooperation and Development) requirements. As far as the P75I goes, I think we have a real chance of success, despite the fact that we face good competition.

Investigations into the sale of Scorpenes to several countries including India are reportedly gaining steam in France. It is being said that these investigations might have some political ramifications in France with several well known politicians under the scanner. What impact, if at all, is it likely to have on DCNS?

Since this issue is before the courts, I cannot comment on it.

What are your views on the upcoming Defence Procurement Policy (DPP) and as an exporter, and what changes would you like to see in the new policy?

I think the new DPP will be a positive step to further India's defence relationship with the French companies, particularly DCNS. But I cannot comment on the changes that might hap- pen in the DPP.

In your own global perspective, how unique is the Indian market?

If you look at the global market, Indo-Asia is the most important part. If you consider just submarines, more than a hundred will be built in the next 10 years. But the Indian programme is the biggest of all. We have demonstrated with the collaboration with MDL that we can forge links with the Indian industry. We want to go further.

How do you deal with the situation in India, which does not have ground level indigenous capacities, unlike the more developed markets? The Indian companies are not yet up there, being equal partners. You also have foreign direct investment restrictions in de fence in India.

We are forging links with Indian companies to develop technologies here. We may consider investing in some companies in India. We do think we will have a long term partnerships with Indian companies. We want to increase outsourcing in India.

How viable is it for DCNS to exe cute your offset obligations visa vis P75 and P75I, assuming you win the contract?

There are no offset obligations in the current programme. And, as I said, it will be progressively indigenized, starting with the third submarine to the last.

You mentioned that South-East Asia is an important market for you. In percentage terms, how does it reflect on your balance sheet?

It is difficult to talk of percent- ages as that will change year after year. But it is increasing with each passing year. Our programme with MDL is one of the most important for us. So, India will really be important for us in future.

Considering MDL's constricted existing capacity, how viable do you think it is for it to execute P75I, considering it does not have any demonstrated capabilities of making submarines?

One has to consider that building a submarine is a complex task, which needs unique competencies. To acquire those competencies takes long. These have been acquired by MDL, which has the capacity to build one submarine a year. You have to be very careful not to lose that momentum. MDL used to pro- duce submarines 20 years ago.
But then there was a gap of 15 years where they did not pro- duce a single submarine. In 15 years, you lose everything. So you need to keep producing regularly.