HAL: Flying into the future

It’s been a bit of a bumpy ride for India’s locally-built combat aircraft, the Tejas. The government kicked off the process to build the light combat aircraft way back in 1984, but it took more than three decades of technical challenges, U.S. sanctions following India’s nuclear tests, and domestic politics before the fighter jet was finally ready for takeoff. After all the ups and downs, the jet’s manufacturer, Hindustan Aeronautics Ltd (HAL), handed over the Tejas to the then defence minister, Manohar Parrikar, and then Air Chief Marshal Arup Raha in January 2015. It was showcased at last year’s Republic Day parade .

Given the fighter jet’s long and difficult journey, its handover to the Indian Air Force (IAF) was certainly a champagne-popping moment for the Indian aerospace industry in general—and state-owned HAL in particular. The supersonic fighter jet is likely to replace the ageing Soviet-era MiG-21 jets which the air force plans to phase out eventually because of their spotty safety record. “It has been a great journey… the long years that it took to build a four-and-a-half generation fighter jet that can fly and which is comparable to the F-16 and better than the MiG-21,” the chairman and managing director of HAL, T. Suvarna Raju, tells Fortune India. “In aviation, failure is not tolerated because you cannot take a risk with the life of a test pilot. This is primarily the reason why development of an aircraft is such a rigorous process.”

But HAL might want to hold off on popping the bubbly just yet. The air force might have ordered 123 Tejas jets from the Bengaluru-based company, but defence experts say the aircraft manufacturer doesn’t have the production capacity to meet the order. Former Air Vice Marshal Kapil Kak, who retired in 1996, says HAL has only delivered five aircraft so far, and they do not meet air force quality standards. “Although the IAF has put in a request for 123 Tejas and provided funding for 40 aircraft in 2009-10, HAL has only delivered five aircraft till date and that too is awaiting final clearance,” he says. “The initial batch had as many as 57 deficiencies as pointed out by the IAF and need to be rectified before they can be made fully operational.”

Despite the scepticism , the Tejas could be a take-off point for HAL’s flight into the future. The air force order could translate into revenues of more than Rs 50,000 crore over the next 10 years, a shot in the arm for the largest public sector defence enterprise, which is already one of the top profit-making state firms in India, going by disclosures in its draft red herring prospectus filed ahead of a proposed public offer. Its net profit grew 31% to Rs 2,624 crore in 2016-17 and it had an order book of Rs 63,333 crore during this period, including fighter, trainer, and transport aircraft, as well as civil and military helicopters.

Now, the country’s only maker of fighter aircraft is hoping to use lessons learnt from projects like the Tejas to futureproof itself. Its strategy is multi-pronged: One, it wants to be a one-stop shop for all defence requirements in the aviation sector. Two, it wants a greater share of the export pie and wants to work alongside the private sector to achieve this goal. It wants to monetise its position as the knowledge hub of aircraft manufacturing in India by signing transfer of technology deals with the private sector. Three, it wants to capture a chunk of the small-sized civil aircraft market which is just starting to grow through the government’s regional air connectivity scheme. And, finally, it wants to introduce modern manufacturing techniques like robotics to improve efficiency levels.

However, HAL faces several challenges in implementing its grand plans. A defence industry consultant, who does not want to be identified, says HAL is a highly inefficient company. The U.S. sanctions on India after the nuclear blasts, for example, are blamed for the delay in the development of the Tejas, but work at other organisations such as the Indian Space Research Organisation (ISRO) did not grind to a halt despite the sanctions. “For years, they have been sitting on large order books, delivering their products late because they don’t outsource enough, and hence force the country to import more,” says the consultant .

Bharat Karnad, a national security expert and research professor at the New Delhi based Centre for Policy Research, is even more scathing. “In the absence of competition, it is habituated to a production cost plus profit regime, which has led to very low labour productivity, a bad working milieu, and wasteful production processes,” he says. “Moreover, its manufacturing competence is limited to screwdrivering aircraft and helicopters from imported SKD/CKD kits under licence production, with almost no capacity for technology or process engineering innovation.”

To be sure , for decades there was nothing indigenous about HAL’s manufacturing. Most of its initial years were spent assembling—or manufacturing under licence— foreign origin aircraft such as Russian MiG21s, MiG-27s, British Jaguars, and French Alouette helicopters. The Cheetah helicopter is also built under licence. Even non-combat military aircraft such as the Avro are made under licence in India. In many ways, the Tejas is a first for HAL as it is both indigenously designed and manufactured without any outside help, propelling India into an elite club of five countries that can build fighter aircraft including the U.S., Britain, and France. The Tejas can also be a big boost for the government’s “Make in India” programme if HAL succeeds in meeting the air force’s order by 2024-25.

But HAL can’t afford to be complacent with the private sector entering the defence sector. Swedish combat aircraft manufacturer SAAB has a tie-up with Adani Group to manufacture Gripen E fighter jets in India and U.S. defence giant Lockheed Martin has a joint venture with Tata Advanced Systems to produce F-16s in India. Both deals are contingent on which fighter jet is procured by the air force.

Competing with big private players won’t be easy. Kak is optimistic about HAL’s future but says it needs a lot of reforms like a change in management structure as well as strict delivery schedules and quality standards. Does HAL have the chops to compete with global giants? Its history suggests it does. India’s journey to build its own aircraft began in 1940 when industrialist Walchand Hirachand formed Hindustan Aircraft Company. The company was taken over by the government within five years and ultimately became Hindustan Aeronautics Ltd (HAL). Not many countries have developed a supersonic fighter jet from scratch. India did it back in the 1960s when German aeronautical engineer Kurt Tank helped HAL develop the HF-24 Marut. Inducted into the air force in 1967, the Marut had its moment of glory when it helped India win the 1971 war against Pakistan.

After the Marut was retired in 1985, India did not have a locally-developed fighter jet for years—until the Tejas. Although it was conceptualised in 1984, it remained on the drawing board for years as the political establishment doubted HAL’s capabilities. By the time the aircraft’s first technology demonstrator, or TD-1, took to the skies in 2001, India had already been blacklisted by the U.S. for its 1998 nuclear tests. HAL then had to develop modern avionics from scratch. “The fly-by-wire mechanism (a partially computer regulated system for flight controls) took 20 years for Indian scientists to decode and establish,” says Raju, who was director of design and development before taking over as CMD.

OF course, HAL had a lot more on its plate over these years. It maintains, repairs, and overhauls not just locally-made aircraft and helicopters, but also those procured by the air force from third parties like the Mirage 2000. It has 11 research and development centres, spends 7% of its revenues on R&D—more than most PSUs— and owns one trademark, seven patents, and 44 copyrights. A lesser known role is that of technical evaluator of all military aircraft procured by the air force. “There is no better technical evaluator of military aircraft than HAL because it is the only institution in the country which has built an aircraft from scratch,” says a defence analyst, who declined to be identified.

For all its roles , its biggest achievement—however long it might have been in the making— is still the Tejas. Defence experts believe its technology can be used as a building block for the advanced medium combat aircraft (AMCA). Karnad says the best way is for the Aeronautical Development Agency (ADA)—tasked with the design and development of light combat aircraft in HAL—to transfer the blueprints and technologies of the new variant of the LCA and the next generation of AMCA to private sector companies like Larsen & Toubro and Reliance Defence, not just to grow the competition for HAL, but because there is enough business to go around.

Karnad says the limited range and endurance of the Tejas can easily be corrected because it is indigenously designed and all the “intelligence” lies within the country. “The Tejas light combat aircraft MK-1A is more agile and pilot-friendly than any aircraft presently in the Indian Air Force fleet or in the running in the single-engine fighter jet competition,” says Karnad. “There is huge potential for development and growth as an advanced weapons platform.”

Former Air Chief Marshal S. Krishnaswamy also believes that it is time for HAL to develop an improved variant of the Tejas. “It would not only give a push to the ‘Make in India’ initiative, but also save the nation billions in importing the Gripen E of Sweden or the 50-year-old F-16 from the U.S. We just don’t have the money to buy as well as manufacture aircraft,” he says.

Until then, HAL is looking to spread its wings overseas. Raju says the company will target the export market in partnership with the private sector which is entering the defence manufacturing space. “For us, the private sector is not competition. As India becomes a global power, countries around the region will look to our country for defence equipment supplies,” he says. “When that happens, HAL alone would not be able to meet the demand. We would need the private sector to supplement our production. The thought process is not just to cater to Indian demand but also the export demand.”

HAL could be well placed for an early mover advantage as India ramps up its defence exports. In 2015-16, defence exports grew 22% to Rs 2,059 crore, according to the government’s Defence Manufacturing Sector Achievements report. The exports to over 28 countries included patrol vessels, helicopters, radars, and small arms. HAL is confident about competing in the global market. “We always have a cost advantage in India because of the rupee versus dollar and rupee versus euro comparison. We can be very competitive commercially,” says Raju.

The question now is: Will HAL manage to attract suitors for a 10% stake on the block under the disinvestment programme? After a stuttering start, it is finally gearing up to launch road shows for its listing. Hopefully, there won’t be any turbulence this time.

(The article was originally published in the March 2018 issue of the magazine. )