The niche player: Mahindras driving into defence

On a chilly November morning last year, an army Rakshak jeep crawled slowly along a side road near Sopore in J&K. The six Rashtriya Rifles jawans inside were on alert; in that area danger is always just around the corner.

But when the attack came, there was little they could do; with a deafening blast, a scooter, parked by the roadside, blew up firing metal fragments into the side of the jeep.

Had it been any other vehicle, lives would almost certainly have been lost. But all six soldiers emerged unscathed; they were lucky to be in an armoured Rakshak, one of just 200 that the army uses in J&K.

Mahindra Defence Systems (MDS), the defence division of the Rs 24,000-crore ($6 billion) Mahindra Group, is hinging a major foray into defence manufacture on an anticipated surge in demand for "up-armoured light vehicles", as security forces "" army, paramilitary and police "" gear themselves up to deal with growing internal insecurity.

This June, MDS will inaugurate a brand new factory near Faridabad; it will be India's first private sector plant dedicated to making military vehicles.

While MDS plans to expand into other, more lucrative, areas of defence manufacture, it understands well the growing importance of its core strength.

Brigadier Khutab Hai, the CEO of MDS explains his high-risk strategy of sinking resources into building a factory, when the security forces themselves have been less than enthusiastic about buying Mahindra's Rakshaks.

Hai believes, "This is the fastest growing segment in defence, given the times that we live in. Before we introduced the Rakshak the army didn't have a bullet-proof vehicle. It was only after seeing the Rakshak that the army realised the need for such a vehicle. In the years ahead, every small vehicle in militancy-affected areas "" buses, troop carriers, light vehicles, ambulances "" will be armoured. Consciousness is coming in about saving lives. And money is not an issue; this is the kind of low-cost modernisation that we will concentrate on."

MDS has kept costs low by setting up an international supply chain for bullet-proof material, which is fitted onto low-cost Mahindra vehicles. Initially starting with Israel, MDS today sources armour from Israel, France, Germany and Sweden.

Run-flat tyres, which function even after being perforated by bullets are made in Buffalo, USA. And now local vendors are being developed to further reduce costs.

But the MDS vision extends beyond bullet-proofing vehicles. Mahindra Group MD and vice-chairman, Anand Mahindra, revealed at last month's Defexpo India '08 that MDS would bid for contracts worth over Rs 16,000 crore ($4 billion) over the next seven years, and hoped to secure at least Rs 4,000 crore ($1 billion) worth of orders.

Underpinning those ambitious targets is the worst kept secret in Indian defence: MDS is in advanced talks with the British defence giant, BaE Systems, for a long-term strategic partnership.

This would see MDS-BaE Systems joint ventures bidding for the major Indian multi-billion dollar projects like the 155 mm artillery gun, which would then be built in Mahindra facilities in India.

MDS is already lobbying the MoD to buy BaE Systems' redoubtable RG-31 Mine Protected Vehicle, which Mahindra hopes to manufacture at its Faridabad plant. The MDS display at the Defexpo India '08 prominently displayed the RG-31.

MDS is unwilling to name its prospective partner, but admits that negotiations have almost been wrapped up. Brig Hai told Business Standard, "While others tom-tom every handshake, we have almost completed detailed negotiations that had begun in March 2007. We are discussing with our partner, setting up block by block, a global manufacturing hub.... We don't have an opportunistic, contract-based approach. We're looking at the long-term, at what India's requirements are going to be."

A question mark, though, hangs over whether MDS will contribute technology and R&D to its JV with BaE Systems, or whether the Indian end of the JV will merely manufacture according to blueprints provided by the foreign partner.

MDS has also ventured into naval systems, mainly mines and torpedoes. It has signed an agreement with WASS, of the Italian Finmeccanica Group. A manufacturing unit "" Mahindra Underwater Systems "" has been set up in Chinchwad, near Pune.

MDS plans to move that to Vishakapatnam within two years, so as to be near the sea, as well as to benefit from the large number of naval installations in that area.

(This is the third part of a series on the private sector in defence production. Next: Part IV: Reality Check: how ready is the MoD to support the private sector?)