The current defence market for private sector firms in India is estimated to cross over US$ 700 million and expected to register a growth of 30% by 2010, according to the Study brought out by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Ernst & Young.

The highlights of the study released by ASSOCHAM President, Mr. Venugopal N. Dhoot today, says there are more than 5,000 companies supplying around 20% to 25% of components and Sub-assemblies to state owned companies.

Currently about 70% of the procurement in value terms, is from foreign sources because the Indian public sector cannot deliver in terms of quality or speed on either research or production. And only about 30% of the orders placed in India – or 9% of the total – goes to the private sector.

The study observed that barring the Air Force, there is an equal distribution of procurement towards imports & indigenisation. Navy has increased its share of imports over the years whereas the Air Force has started focussing on indigenisation as well. As far as the spending pattern of the Army is concerned, the focus has shifted between imports & indigenisation over the period 2001 to 2005 and the government has set a 70% target for procuring its defence requirements from indigenous sources by 2010.

The public-private partnership PPP enables the MoD to exploit industry’s comparative advantage and expertise where the generation of in house military capability is less cost effective, thereby ensuring value-for money, through life defence support. PPP reduces incentives for ex post supplier opportunism because contracts are configured to create forms of ‘gainshare’ or ‘incentivisation’ that provide ‘value-added benefits for both MoD and industry’. Through ‘mutual trust’, the combining of complementary assets and the identification of shared objectives.

Mr. Dhoot says, the survey of the various advantages of increasing public private participation and its leading to indigenisation shows that it is definitely one of the favourable measures of defence production prevalent in the global defence industry. One of the most distinguished advantages of indigenisation of defence production was witnessed in the case of Germany wherein more than 50% of money spent on equipment inside Germany came back to the state in one form of tax or another.

Since the mid-1990s, the arms industry has been characterized by increasing concentration through mergers and acquisitions (M&As). As a result of the merger and acquisition activity since the end of the cold war, there has been a clear change in the structure of the industry. At the end of the cold war the international arms industry was not very concentrated, with the top 5 companies accounting for 22 per cent of the total arms sales of the SIPRI Top 100. By 2005, the study observed arm industry this had changed significantly, with the top 5 firms accounting for 43 per cent of total arms sales.

Globally, companies based in Europe are looking to capture market share from US firms. Airbus and Boeing have a long-standing rivalry; the satellite launch industry is becoming dominated by European firms, with other space opportunities migrating there; and European defence contractors are becoming more aggressive in bidding for Pentagon contracts. In defence, the European incursions have included acquisitions of US companies as well as strategic partnerships.

The IT sector which has in the recent times become a major partner for the defence forces across the world has also seen active transaction activity in its midst. Cisco Systems’ acquisition of BroadWare Technologies, while small in dollars, highlights the rising demand for companies that make video surveillance gear. Driving that trend is the confluence of US homeland security concerns and the spread of sophisticated security networks based on Internet technologies.

In 2006, venture capitalists and other investors poured $100 million into late-stage video surveillance technology companies. Experts think the market is ready for consolidation. To date, most of the buyers have ranged from companies that offer security and building infrastructure services, such as GE and Honeywell, to defence companies such as L-3 Communications, Inc. Defence contractors are expected to seek out opportunities for growth beyond traditional defence businesses, especially in civilian government technology services and homeland security. A number of companies have strong balance sheets, which give the companies the means to acquire the right deal. High multiples for acquired companies, however, may make it difficult for companies to make acquisitions pay off.