The Case of HAL

Leveraging Value Chain Competencies & Resources on a Global Platform: The Case of HAL

Malay Kumar Das & Prashant Salwan

Introduction Strategic industries companies which are 100% controlled by A news which came in all the ma- emerging economy governments jor financial news papers in the world faced difficulties when these econo- on 22nd October 2009 in absolute terms mies opened up/liberalized. These changed the image of an emerging companies faced all round competi- economy state-owned aeronautics com- tion from international big players. pany. In the history of Boeing this was This paper studies Hindustan Aero- the first time when the company had nautics Ltd (HAL) during last ten signed to supply a very complicated part years from 2001 to 2009. Strategic called flaperons for the Boeing’s 777 industries use the gap analysis in series commercial jetliners. The 777 their value chain by studying the flaperon is a complex composite assem- dynamism of external forces in fu- bly that is instrumental in controlling the ture time frames and internal re- airplane’s and maneuverability in flight, sources. They successfully choose referred to as a ‘control surface’, and implement corporate strategies flaperons work both as an aileron to which minimize risks and help in fix control roll as a flap to control lift. the resource gaps. The paper also Boeing had earlier signed a 10-year analyzed how HAL leveraged manufacturing contract ($1 billion or Rs. knowledge (marketing, political 4,650 crore) in December 2007 with connections) and resources (distri- Hindustan Aeronautics Ltd for making bution channels, human resources, subsystems for its fighter planes such production facilities) for developing as F-18 Super Hornets and Apache competitive advantages in their own helicopters. “HAL and Boeing share a country and also in international very special relationship. Showcasing expansion. HAL’s composite manufacturing capability on one of the world’s premier long- Malay Kumar Das is a former Manager , Hindustan haul commercial jets positions us for Aeronautics Ltd , Bangalore. Prashant Salwan is Associate Professor, Indian Institute of Management, even greater opportunities at the fore- Indore. E-Mail: [email protected] front of technology,” said Soundara

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Rajan, Director, Corporate Planning & three major defence wings in India namely, Marketing, HAL (Boeing, 2009). Boeing’s Army, Navy and Air force. To maximize relationship with HAL dates back to 1991. its resources usage, building synergies and Boeing India President Dinesh Keskar said minimizing risks and increase revenues, “The composite 777 flaperon that HAL will HAL entered Civil Aviation with launch of produce represents a significant leap for- Dornier (14 seater) and civil versions of ward in technological capability, and sup- Advanced Light Helicopter. ports Boeing’s strategy to work in partner- ship with India’s aerospace industry for the How does an emerging economy com- long-term”. (Boeing, 2009) pany, which is in a strategic industry, chart its global strategy, why and how? We It was a long way for a 100 % Gov- would be looking at the outside in approach ernment of India owned strategic defense (PEST and industry forces) and inside out industry company to achieve. As on 2010, perspective (resource and value chain HAL has 19 production units and 9 research perspective). We discuss how an emerg- and design centers in 7 locations in India. ing economy, strategic industry company It has sold its products in more than 20 has transformed itself and grew in the in- countries. The company has total 26 types ternational arena. Government of India has of aircrafts. Out of which 12 types of defined all the institutions and government aircrafts have been manufactured using in- owned companies in Defence Department house R & D and 14 types produced un- and Space Department as strategic insti- der license. By 2010 March, HAL had tutions and allowed 26% FDI in the de- manufactured more than 3550 aircrafts, fence production space with some restric- 3600 engines and overhauled over 8150 tions. There are around eight defence aircrafts and 27300 engines. HAL is the public units. As can be seen from table 1 largest player in the Aerospace industry in HAL is the largest public sector unit (PSU) India. HAL supplies its products to all the in terms of turnover and exports volume.

Table 1 Indian Defence Public Sector Companies: 2008-09

Name of the Company Total Turnover Export Turnover (Rs. Crore) (Rs. Crore) Hindustan Aeronautics Limited Rs 10,373.38 Rs 436.58 Bharat Electronics Limited Rs 4,624 Rs 80 Bharat Earth Movers Limited Rs 3013.47 Rs 304.34 (including trading) Mazagon Dock Limited (MDL) Rs.2568.93 Nil Goa Shipyard Limited (GSL) Rs 508.01 Nil Garden Reach Shipbuilders & Engineers Limited (GRSE) Rs 672.69 Nil Bharat Dynamics Limited (BDL) Rs 465 Nil Mishra Dhatu Nigam Limited (MIDHANI) Rs.364.03 Rs 1.38 (value of production before ED) Note:1 Crore = 10 Million (Source : Dept of Defence Production, Govt of India )

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It is clear that HAL is the largest the eighth airframe only 80 percent of the defense public sector and has exports fourth, the 16th only 80 percent of the eight, turnover of 4365 Million Rupees. Other and so on. This observation implies that public sector units do not have any ex- the $80 million in per unit variable costs ports and even if they have some exports required to build a 777 will decline over it is more of trading. The above are the time as output expands, primarily because reasons that we have taken HAL as the of gains in labor productivity. Thus, while study point in industry international strat- variable costs per unit might be $80 mil- egy in emerging economies. lion by the time 100 aircraft have been manufactured, by the time 500 aircraft Aeronautics Industry have been manufactured, they may have fallen to $60 million per unit”( FMBD 2000). “World demand is large enough to In the commercial aircraft indus- support only a limited number of aircraft try, the competition is immensely producers at high output levels. Forecasts intensive even though it is mainly suggest that the global market for long- between Boeing and Airbus. range aircraft with a seating capacity of about 300, such as the 777, will be about In the commercial aircraft industry, 1500 aircrafts between 1997 and 2008. If the competition is immensely intensive we assume that Boeing has to sell about even though it is mainly between Boeing 500 aircrafts to make a decent return on and Airbus. Economies of scale in the its investment, this suggests that the world commercial aeronautics industry comes market is large enough to support only from the ability to spread fixed costs over three producers profitably!” (FAA, 2012). a large output. Boeing is spending an es- timated $5 billion to develop its Boeing Extensive aircraft portfolio is required 777 jetliner. Boeing needs to sell around to satisfy the requirements of customer 300 aircrafts to get respectable amount airlines. Pressures from customers are of profit. The economies of scale here forcing aircraft manufactures to develop are significant, with average unit costs products which can be run by only one falling by $40 million as output expands pilot. An aircraft producer has to give from 100 units to 500 units. leasing and financing services to customers over and above other requirements “In addition to economies of scale, of customers. As airlines face financial learning effects also exist in this industry. difficulties, financing terms become a key Learning effects were first documented selling factor. Alliances, joint ventures— in the aerospace industry where it was especially with foreign government found that each time accumulated output funded programs—and extensive lobby- of airframes were doubled, unit costs de- ing, political posturing in national and in- clined to 80 percent of their previous lev- ternational forums. “Some 45 businesses els. Thus the fourth airframe, typically 80 in 6 Asia- Pacific Economic Cooperation % of the second airframe to produce, (Apec) economies provide Boeing with

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 545 Malay Kumar Das & Prashant Salwan about 70 different parts and major as- dom of expression. As such it is a semblies...” (Boeing, 2005) positive factor for any industry • Regulating rules: HAL was created As can be seen from a brief over- view of the commercial aircraft indus- to provide services to defence ser- try, political, financial, customer forces vices specially The Air Force. Be- effect the product development and sale cause of high security involved, Gov- of aircrafts. In defence aircraft sales the ernment favors procurement of ser- competition is more intense and political vices for defence from a public sec- forces and costs are the major influenc- tor company with its own control ing factors. • Employment laws laid down by the government which provide for mini- Political, financial, customer forces mum employment to the people and effect the product development job security for its employees and sale of aircrafts. • Environmental regulations that any company has to adhere to and the Political, Economic, Social, Techno- necessary certifications to be ob- logical (PEST) Analysis tained from various government certified agencies like ISO, etc. For ex- Political Factors ample HAL is ISO 14001 environ- mentally certified. Political factors include government • regulations and legal issues and define India has a federal tax structure both formal and informal rules under whereby both the Central and the which HAL must operate. HAL, being a State governments impose a range of public sector undertaking under the Min- taxes. The Central Government lev- istry of Defence, there is a large impact ies income tax on both corporate and of political factors on its strategies. Fol- individual incomes as well as indirect lowing are the examples: taxes such as customs duties, central excise and service tax. The State • Government type and political stabil- Government imposes other indirect ity: India is a democratic country with taxes such as Value Added Tax governments elected by the people. (VAT) and the like. The complex and In recent years we have seen stabil- multi-tiered tax structure in India ity in the elected government. So the makes domestic manufacturing political scenario may be considered uncompetitive in a range of situations favourable for industries. for example in defence sector some imported supplies of defence goods • Freedom of press, rule of law and to MoD are subject to lower inci- levels of bureaucracy and corruption: dence of taxes than locally supplied In Indian democracy press has free- goods.

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• The civil aerospace industry is simi- • Economic growth: India has been larly disadvantaged. The tax incen- characterized with a positive growth tives are available for R&D in only rate throughout the next decade. As Special Economic Zones (SEZs) but such the aircraft industry is expected these are limited and not broad-based to grow. enough to provide meaningful relief. • Interest rates: Interest rates will help Particular mention needs to be made determine the availability of funds for of the indirect taxes on aircraft ser- expansion and growth. Stable inter- vicing in India. customs duties, ser- est rates will ensure stable growth in vice tax and VAT. This does not cre- the aircraft industry ate a very conducive environment for competitive development of technol- • Exchange rates: Since aircraft indus- ogy. try is a complex and capital intensive industry with a large number of parts On the whole, the Government en- of the supply chain in foreign lands, courages private investment in both the it is undoubtedly affected by the fluc- civil and defence aerospace sector with tuations in the exchange rate. the goal of encouraging technology trans- fers and achieving indigenization only. The • Inflation rate: In the recent days we Indian Government has significantly lib- have seen huge rise and fall in the eralized the civil aviation sector. It wel- inflation rates. This creates lot of un- comes domestic private participation in certainty in the industry. The reces- manufacturing and R&D in the aerospace sion has largely impacted the aircraft sector with 100 percent foreign direct in- industry. vestment (FDI) allowed on the automatic • Unemployment and labor supply: In- route in most areas, the exceptions being dia is in a favorable spot for good fac- air traffic services. The defence sector tor conditions and skilled labor. Un- has more restrictions: while 100 percent employment is quite high compared domestic private investment is allowed, to developed nations. As such it is subject to licensing, in the manufacture of an ideal place to locate a major part defence equipment, there is a cap of 26 of the value chain of the aircraft in- percent on FDI (which is also subject to dustry in India licensing requirements, and there are other restrictions as well).( PWC, 2009) • Labor costs: Labor costs are com- paratively low and education levels Economic Factors are high which is favorable for an aircraft manufacturer. R&D in India Economic factors affect the purchas- costs 50% lower than in developed ing power of potential customers and the countries. firm’s cost of capital. The following are • Levels of disposable income and in- examples of factors in the macro-economy come distribution: In India air travel that affect the aircraft industry: is still considered a luxury and the

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amount of disposable income available • Lifestyle choices and attitudes for air travel is low. But with the • Socio-Cultural changes gradual increase in the income levels of the average Indian, the aircraft in- Technological Factors dustry may hope to grow in future. Technological factors can lower bar- • Impact of globalization: Globalization riers to entry, reduce minimum efficient has opened new doors and has production levels, and influence brought all companies in level play- outsourcing decisions. Some technologi- ing field although not without certain cal factors that affect the aircraft indus- restrictions. Components and assem- try include: blies can now be outsourced and technologies licensed from other • Research & development activity countries. (Barney, 1997) • Automation Components and assemblies can • now be outsourced and technolo- Technology incentives gies licensed from other countries. • Rate of technological change • Impact of emerging technologies Socio-Cultural Factors • Impact of internet, reduction in com- Social factors include the demo- munications costs and increased re- graphic and cultural aspects of the ex- mote working ternal macro-environment. These factors • Impact of technology transfer affect customer needs and the size of potential markets. Some social factors Strengths that affect the aircraft industry include: • Capabilities- HAL uses high tech- • Population growth rate nologies in its manufacturing processes. • Age distribution (demographic pro- file) • HAL has a diversified product base related to aircraft industry. • Career attitudes • • Competitive advantage - only manu- Emphasis on safety facturer of aircrafts in India. • Health, education and social mobility • Unique Selling Point- Quality Policies and attitudes ISO 9001:2000, prestigious custom- • Employment patterns, job market ers like IAF, Boeing, Airbus, etc. freedom and attitudes to work • Resources, assets, people- highly • Press attitudes, public opinion, social trained professionals from elite insti- attitudes and social taboos tutions.

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• Experience- More than 60 years of • HAL follows time consuming proto- existence in the aviation sector. 12 cols for meeting requirements of pro- types of aircrafts have been manu- duction. factured with in-house R & D and 14 • types produced under license. The Lack of basic facilities like drinking company has manufactured over 3550 water, poor canteen services, etc. aircrafts, 3600 engines and overhauled leads to employee dissatisfaction. over 8150 aircrafts and 27300 engines. • Poor work culture due to the inher- • Financial reserves- Company has a ent built-in job security in the com- net worth of Rs 10260 crores. pany. • • HAL has 19 production units and 9 Interference of labor unions into pro- research and design centres in 7 lo- duction activities lead to delays in pro- cations in India. This covers most of duction plans. the Indian geography. • Deadlines not taken seriously by • Company has implemented Lean many employees due to lack of manufacturing processes and Kaizen knowledge. on shop floors which helps manage • Poor remuneration or incentives production activities better. compared to competitive counter- • Location and geographical spread- parts. various divisions are located in prime • Technologies in HAL are less ad- locations in various cities in India. vanced compared to those in devel- • HAL policies entail a high security oped nations. As such heavy compe- of job and financial benefits. tition is faced in export performances. • • The company provides an environ- Plan predictability- Poor planning of ment, which allows freedom to inno- production activities leads to loss of vate and experiment various ideas valuable production time. and thoughts. • Morale, commitment, leadership- • Better employee satisfaction may be Poor HR policies and low employee achieved by providing better facilities. morale resulting in high attrition. • Technology development and innova- Opportunities tion- advanced technologies; CNC • machines, etc. will boost production Market developments- Good market activities. growth opportunities within the country and abroad. Weaknesses • Export to other countries like other • Gaps in capabilities- Old and worn developing nations. out machines and poor infrastructure • New markets, vertical and horizon- lead to slow production processes. tal- Diversification into other related

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products like passenger aircraft seg- • Vital contracts and partners- Non ment may help HAL grow. compliance of production sched- ules may lead to liquidation of con- • New target markets- Exploring new target market in the South Asian and tracts and loss of important cus- African countries will build better tomers. prospects for the company. • Loss of competent professionals- • New Unique Selling Point- Brain drain of highly trained techni- Customization of products as per the cians and engineers. requirement of the customer for bet- • International Relations- As most ex- ter customer satisfaction. ternal customers are governments of • Major contracts from customers like other countries, international relations Boeing and Airbus. may affect the growth prospects of the company. • Business and product develop- • ment. More research and devel- World Economy - Recession in the opment into fifth generation world economy may lead to lower aircrafts and stealth technolo- expenditure on defence. gies. • Inability to attract skilled technicians • Partnerships- Outsourcing its ac- or professionals. tivities to vendors in and outside • Changing government policies and India helps in reducing costs in- the influence of government agencies volved. affect the smooth functioning of the • As the Indian market, specially de- company. fence is opening up, foreign players This SWOT analysis brings out the will require the help of local produc- various internal and external factors that ers for localization and maintenance need to be considered while preparing requirement. the Strategic Plan for the company. Threats The Bargaining Power of Buyers • Political effects- Changes in government policies from time to time might HAL’s main buyers being the hamper the smooth running of the armed forces, government agen- company. cies retain considerable power. • Competition- Other external competitors like Boeing, TATA, etc. may HAL’s main buyers being the eat-up prospective market share. armed forces, government agencies retain considerable power. The custom- • Limited customer base because of ers’ power becomes more visible dur- the high cost of the products. ing downturns in the economy, as dur-

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Fig. 1 Industry Analysis Porter’s five forces analysis

• Engine Manufacturers • Electronics, semiconductors, etc. • Other material suppliers, speciality metals, composite materials, etc. • Taneja Aerospace & Aviation Ltd • Government Institutions • TATA • Capital sources, banks, investors • L&T • DGCA, DGAQA, RCMA, CEMILAC, etc • Godrej Aerospace Other small aircraft manufacturers • Other regulating bodies

•Eurocopter • Armed Forces (Air Force, Army, Navy) •Russian manufacturers • Other forces (Coast Guard, BSF) •Chinese spares Manufacturers • Government Institutions •Dassault Aviation • State governments • Other regulating bodies • RCMA, DGCA, DGAQA, CEMILAC, etc Foreign country government agencies

• Unmanned air vehicles • Advanced fifth generations fighters • Advances in Automotive industry infrastructure • Fast trains for shorter distances • Advances in telecommunication, video-conferencing • Latest technologies like stealth

(Source: Porter, 1985) ing these times the armed forces opti- The Bargaining Power of Suppliers mize their operations and cut their in- vestments due to the defence budget Engine manufacturers represent the pressures. But this power is exhibited single most significant group of suppli- by the customer while considering pur- ers. There are only a few of such manu- chase of new equipment. In the case facturers like General Electric, Pratt & of services and spare parts, HAL has Whitney (US), Rolls Royce (UK), CFM a competitive advantage and the cus- (Europe) who compete to supply the en- tomer has no option but to buy the ser- gines. Each of them has their advantages vice and parts. HAL is bringing this to and disadvantages. Even when planes balance by seeking more orders like are usually designed for more than one OEM orders from aerospace compa- engine types and the fact that customers nies and also international orders from enter in separate negotiations with the defence forces of other countries. The engine suppliers to determine the choice bargain power of the buyers is moder- of the engine for their planes based on ate to strong. their prices, engine manufacturers yield

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 551 Malay Kumar Das & Prashant Salwan considerable power. This is because their Threat of New Entrants manufacturing capacities are limited and booked in advance. Yet in case there is At first look, any new entrant in this spare capacity engine manufactures can market faces a steep, uphill battle. Some offer huge discounts. The game is purely of the very high barriers to entry that and based on advanced and accurate fore- new entrant has to deal are: cast. In future, the need for higher fuel efficiencies, increased reliability —espe- • Local government and international cially for twin engine transatlantic wide regulations bodies—and more power for the new • Capital requirements large body aircraft is forcing engine manufacturers to enter in joint develop- • Extremely skilled labor needs ment programs. Therefore it can be as- • sumed that their bargaining power is go- Sophisticated support industries ing to significantly increase as they un- • Need to have proven track record dergo concentration before getting orders • Regulating bodies, such as the DGCA, Long breakeven cycle CEMILAC, RCMA, etc., may be consid- However, one cannot completely ex- ered as suppliers to the industry as they clude this possibility. Just as Europe did, determine the constraints that the indus- Japan or China may decide that this in- try has to deal with. The bargaining power dustry is strategically vital for their long- of these institutions is considerable and term well being and encourage a highly they can create major obstacles for the subsidized entry in the market by their final approval of the aircrafts. national champions. In the case of Ja- pan, subsidies may even not be neces- There are large number of suppliers sary as the sophisticated industrial infra- for other material and parts with ample structure and naturally protective trade capacities. Therefore they do not yield policies may very well encourage such high power. But while the options Mitsubishi or another firm to engage in are available galore, the specifications the battle. and design may leave a manufacturer limited on the choices and hence increasing The former Soviet Union represents the power of the supplier. a significant growth potential for the big three, but also has its own national air- The bargain power of the suppliers craft industry. While this market may be is moderate to strong. open to competition, it is also possible that the Russian Tupolev enhances its capa- The bargain power of the suppli- bilities, rationalizes its operations and ers is moderate to strong. succeeds in entering the market with a low cost, no frills product strategy, especially in emerging countries. Indian manu-

552 The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 Leveraging Value Chain Competencies & Resources facturers of smaller aircrafts like Taneja tion—for instance, a great many airlines Aerospace & Aviation Limited and com- may lose market share and as a conse- ponents manufacturers like Dynamatic quence reduce their fleets, which will Technologies Limited are fast gaining directly affect the aircraft manufactur- access to the technologies that will en- ing industry. Likewise, advances in au- able these companies to stand competi- tomotive industry, such as cars capable tion to HAL. Finally, although highly un- of very high speeds, under electronic likely, existing defence aerospace com- control on specially equipped highways panies may be tempted by a late entry or may have an impact on aircraft industry. re-entry—such as Lockheed—as they Due to the highway development initia- see their traditional military market tive of the government, the roads are dwindle. We would rate the threat of new posing a serious threat as an alternate entrants to be moderate (Porter, 1990). mode of travel than air (Osborne, Stubbart & Ramaprasad, 2001). Inter Threats of Substitute Products or Continental Ballistic missiles and such Services other advancements in the long-range attack weapons also pose as substitutes It is difficult to imagine, for the fore- to military aircrafts. Finally, advances in seeable future, a direct substitute for telecommunications techniques, collabo- commercial or military aircrafts. Air rative computing, and desktop video- travel is the most effective, secure, con- conferencing based on broadband, cable venient and economic transportation type services may reduce business travel method. However, a few threats exist, requirements and impact the aircraft in- especially in the low end: dustry. We would rate the threat of substitutes to be low (Kurt, 2008). Fast trains offer between cities Global Value Chain of HAL less than 600 kilometers a very attractive solution. “The value chain describes the full range of activities that firms and work- Fast trains offer between cities less ers do to bring a product from its con- than 600 kilometers a very attractive so- ception to its end use and beyond. This lution. As their speeds approach and ex- includes activities such as design, produc- ceed 200 kmph, they bring such travel tion, marketing, distribution and support below three hours from one city to an- to the final consumer. The activities that other; a performance that hardly any air- comprise a value chain can be contained line can match. After the start of TGV within a single firm or divided among dif- service between Paris and Lyons, Air ferent firms. Value chain activities can Inter faced a 50% reduction in air travel produce goods or services, and can be between the two cities (Andrew 2010). contained within a single geographical If such solutions are implemented widely location or spread over wider areas” in India—a very speculative assump- (http://www.globalvaluechains.com).

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Fig. 2 Global Value Chain of HAL Value Chain of Hindustan AeronauticsLtd

Infrastructure Acquire capital, perform accounting, legal approvals, and administrative task for each activity

Human Resource Recruiting, hiring, Ensuring attraction Recruiting, hiring, Ensuring most Management training and of the best brains training and effective compensating the to the firm and compensating communicators staff. they stay abreast the staff. are hired who about the latest can do in the field. techno-sales.

Technology Train and help Indigenously deve- Reduce Help make Development the company to lop technology transportation technological identify the best to create the parts cost at highest presentations technologies locally for a longer security. specially for available and time and at cheaper comparisons suitability of the rates. Evaluate and with other same for HALs use. suggest the vendors technology partners for manufacturing.

Software Develop software Develop software Software for IT enabled Logging and Development for cost and quality for quality control quality control Marketing maintaining regression for during assembling. research database of vendor selection Software for issues and fixes. Software for engineering Mechanism of Quality control design and aids query registrat- and monitoring to assembly services ion and resolution Procurement Negotiation of Procure best-suited Procure most Procure most Economies contracts for technology and economical economical service, technology. site at cheapest means means of Material and price. Insure of distribution. communi- components from continuous and cation Indian and economical supply international of services and companies. up gradation of plant

Technology Research and Shipment and Marketing Maintain, selection - development transportation to HAL products overhaul, Evaluation and activities. i.e. buyer site (critical and services service and finalization of developing new for exports) to defense, repair planes technologies, models for better Ensuring delivery civil and of all Indian materials and efficiency, speed, of its products foreign defense services components. passenger comfort and services customers. irrespective of Vendor selection etc.Develop and in an efficient Liaise with its make and - Evaluation and manufacture parts and discreet Govt. and kind.Repair finalization of of the planes manner. Defense and maintena- suppliers (includes owned by Indian agencies to nce services for country decision) during their lifetime. understand its products. Manufacture new their policies Customer with the defense and interaction for partnersDesign requirements its services. and manufactures planes itself. In Bound Operations Outbound Marketing Services Logistics logistics

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HAL is in the capital-intensive aerospace HAL has so far undertaken its own manufacturing industry and is character- research and design activities. This be- ized by a high focus on technology. ing a very high value addition activity is undertaken by HAL. Various upgrades (Variable taken from Prahalad & G. to aircrafts like MiG 27M, Jaguar, etc Hamel, 1990; North, 1990; Barney, 2002) have been carried out to make these aircrafts more capable for Indian Air The aerospace value chain is com- force. plex and is characterized by a long project life cycle spanning R&D, engineering Since 1980s, HAL has started to design, manufacturing, assembly and af- move up the value chain. termarket (spare parts, overhaul and service). Engineering Design: Since 1980s, Research & Development: HAL has HAL has started to move up the value nine Research & Design Centres en- chain. Its operations saw a rapid increase gaged in the design and development of which resulted in the development of new combat aircraft, helicopters, aero-en- indigenous aircrafts such as HAL Tejas gines, gas turbines, engine test beds, air- and HAL Dhruv. HAL also developed an craft communication and navigation sys- advanced version of the MiG-21, known tems and mechanical system accessories as MiG-21 Bison, which increased its spread across the country. These are: life-span by more than 20 years. It has been developing designs for Light • Aircraft Research and Design Cen- aircrafts and Helicopters. The two well tre known examples of its success in design and development are: • Rotary Wing Research and Design Centre 1. Design and development of the com- • Aircraft Upgrade Research and De- pletely new Advanced Light Helicop- sign Centre ter, which was designed in collaboration with Messerschmitt-Bölkow- • Transport Aircraft Research and Blohm now Eurocopter Design Centre Deutschland), Germany. • Engine Test Bed Research and De- sign Centre 2. Design and development of Light Combat Aircraft, with Dassault Avia- • Strategic Electronics Research and tion of France as a consultant to re- Design Centre view the Project Definition and provide advice based on its extensive • Aerospace Systems & Equipment Research and Design Centre aviation expertise. • CM and PL Research and Design Manufacturing: The number of Centre components and subassemblies in any

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 555 Malay Kumar Das & Prashant Salwan aircraft may vary from 12000 parts to ity of components is ensured by final in- 30000 parts. All these parts and subas- spection by HAL Quality department. semblies have to be manufactured before HAL has out-sourced manufacture of being assembled into the aircraft. In the components ranging from Wing stiffeners manufacturing realm, most value is added to sub-assemblies like the vertical fins of to the raw material. The various compo- aircraft and these vendors have been able nents and subassemblies are at present to successfully meet the requirements of brought from following sources: HAL to a great extent.

In-house manufacturing: HAL has HAL gains from these vendors in facilities and manufactures most of the terms of low cost of fabrication. very critical components in house like the undercarriages of aircraft, many special rubber components, very critical Titanium Analysis components and sub-assemblies, etc. These are state of the art facilities and 1. HAL is good in quality management match international standards. The loca- and process management tion in India coupled with the long expe- 2. Has an excellent resource distribu- rience provides it a competitive advan- tion structure tage in costs. Therefore HAL has also obtained several multi-million dollar con- 3. Competencies are strong, equal to tracts from leading international aero- international standards space firms such as Airbus, Boeing and Honeywell to manufacture aircraft spare 4. Indian factor of production advantage parts and engines. 5. Does not have cutting edge new technologies, special in materials and part Outsourced to Indian Vendors: No manufacturing company in the world can make all the parts of a final product itself. HAL has 6. The investment required in develop- also developed a healthy list of vendors ing the material science and compe- who manufacture the parts for its current tent advance parts manufacturing projects like Su-30 MKI, ALH, LCA, etc. very high. The outsourcing helps HAL to make bet- Global Outsourcing ter use of its resources (skilled manpower and finance). HAL establishes a win-win HAL has been integrating various relationship with these vendors. HAL sup- aircrafts to the customers’ requirements plies the design, technologies, raw mate- with some very high technology systems. rials and other necessary support. These For example ALH is flying with twin companies learn latest technologies and 1000 shp Turbomeca TM333-2B turbo- supply aircraft components to HAL. HAL shaft engines supplied by Turbomeca, gains from these vendors in terms of low France while the THL 20-20mm gun tur- cost of fabrication. At the same time qual- ret is supplied by Nexter Systems (formerly

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Giat), France. The Light Combat Aircraft years of training and practices. It is the (LCA) comes fitted with Israeli avionics highest value addition activity for HAL and radar. These are the multi-function dis- for manufacturing under collaboration. plays (MFDs) by Sextant (France) and Even for indigenously designed products Elbit (Israel), the helmet-mounted display the value addition is very high. Without and sight (HMDS) cueing system by Elbit, the proper assembly all the parts are a and the laser pod supplied by Rafael (Is- heap of metal and electronics. A small- rael). The ejection seat of LCA has been est mistake can make a loss of millions sourced from the Martin-Baker. The soft- of Rupees and lives even at the test stage ware used in the design and development or even later. HAL undertakes assem- of 3-D laminated composite elements, bly of the aircrafts in its various facili- Autolay Integrated Automated Software ties in Bangalore and Nasik factories. System has been licensed to both Airbus The flight testing of the aircrafts is also and Infosys. The LCA is powered by Gen- carried out at these locations before the eral Electric F404, F404-GE-IN20 engine aircraft is handed over to the customer. at the prototype stage. General Electric was awarded US$105 million contract in Marketing & Sales February 2004 for development engineering and production of 17 -IN20 engines HAL has also formed agreements for LCA.( HAL 2010) with global companies for promotion of aircrafts developed in India. For example, To compete with global competitors HAL and Israeli Air Force are jointly like Boeing, Airbus, Eurocopter, etc. marketing the Israeli avionics fitted ex- HAL started to look at alternatives to port versions of ALH. HAL has a very manufacture the various components of large customer base of national and inter- aircrafts outside the HAL facilities. Over national organizations, governments and the past few years, HAL has been able companies. Indian customers include the to develop new vendors all over the coun- army, air force, navy, coast guard, and try and world. All the new projects have Border Security Force. HAL’s global cus- at least 15% of the value being contrib- tomer base includes those from Myanmar, uted by the outsourced vendors. HAL Nepal, Bolivia, Turkey, Surinam, Mauritius has been engaged in creating value for etc. Among civil operators in India are: the customers by controlling the entire ONGC, State Governments of value chain from research and develop- Chhattisgarh, Jharkhand, Karnataka, Geo- ment to the aftermarket overhaul and logical Survey of India, National Disaster services support, which is not feasible Management Authority etc. Among civil now in the new competitive environment. operators outside India includes Peruvian Health Services. Other customers are Assembly & Testing from UK, Philippines, France, Israel, USA, Maldives, Japan, Namibia, Peru, Assembly of aircrafts and testing is Oman, Malaysia, Thailand, UAE, Vietnam a task of great expertise acquired over etc. (HAL, 2010)

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 557 Research & Development Added Value Engineering Design

Manufacturing

Assembly & Testing Design

Aftermarket

Processes Marketing & Sales

A.1.1 Leveraging Value Chain Competencies & Resources

Cost, Quality & Efficiency Assembly, Aftermarket, and each customer segment, such analysis is carried Value chain of aircraft industry is out. This gives way to geography and ul- geographically spread based on various timately vendor (or self) selection for cost heads, quality and efficiency con- each activity. We intended to give these siderations. Few of these have been iden- metrics for each such activity, however, tified below. Now for each activity, viz. such data being confidential, indicative R&D, Design, Manufacture (each part), analyses framework is being suggested.

Cost Quality Speed Labour India Americas Japan Material Europe Americas Europe Skill Europe Europe Europe Inspection and Quality Control Americas Americas Americas Efficiency Japan Japan Japan Logistics/Transportation Americas Americas Americas

Global Strategy Formulation- industry because of the following Outside in Approach strengths:

HAL’s global strategy is undoubt- • Access to the required capital mak- edly based on the requirements of its ing a significant investment in pro- customers. However, the customer seg- duction assets; this investment rep- ment chosen is itself based and ex- resents a barrier to entry that com- tended on its core competencies. Hence, petitor firms may not overcome. its approach cannot be classified as en- • Skill in designing products for effi- tirely inside out or outside in. It follows cient manufacturing, for example, a modular strategy in this regard. Mod- having a small component count to ules based on core competence, and shorten the assembly process. served for customer preferences. HAL’s global strategy can be of the fol- • High level of expertise in manufac- lowing two generic strategies: turing process engineering. (Hoskisson, Eden, Lau & Wright, 2000; • Porter 1980; 1985; 1996) Efficient low cost supplier base.

Cost Leadership: Some of the ways Being in India, HAL has a unique thorgh which firms acquire cost advan- cost leadership. tages are by improving process efficiencies, gaining unique access to a large Being in India, HAL has a unique cost source of lower cost materials, making leadership. Worldwide the aviation manu- optimal outsourcing and vertical integra- facturing units are based and thrive in the tion decisions. HAL has the potential to developed world, where the cost is high. become the cost leader in the aerospace Due to the economies of scale and lack of

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 559 Malay Kumar Das & Prashant Salwan domestic market, it is very difficult for any factors are missing. Flying to meet the small company (despite being backed by customers is affordable and preferred. the government of the country) to enter the Under such circumstances HAL chooses industry on its own in developing world. In a mode of direct export or through part- fact even Airbus is promoted and supported ner who add value in relationships, secur- by the entire EU. The main possibilities of ing local approvals and liaisoning. HAL competition could come from China. But pursues exports and contractual agree- due to its communist background, politics ments in its markets in Vietnam, Nepal, and language it has much less acceptabil- Burma, Africa and Latin America. ity. Under these circumstances HAL has a competitive advantage on its input costs Conclusions compared to Western companies without a threat of local competition which can be The aerospace industry is rapidly becoming global for the following reasons: leveraged for its global strategy. • There are very few players, but in- HAL has chosen its segment very tense competition and very high capi- well. tal requirements drive the need to maximize volume and tap all possible markets. It is unthinkable to have a Focus: HAL has chosen its segment national or regional strategy and ex- very well. It understands that it can not pect to succeed in this industry. be a main stream supplier of large civil aviation planes. But due to its associa- • As many customers—including vari- tion with IAF it has created inimitable ous governments across the world— knowledge in small fighter planes such consider the aircraft industry strate- as LCA. Therefore HAL is focused on gic, they want a share of the action. making small aircrafts of less than 8 As a consequence, partnerships, joint seats only which are light and have to fly ventures are aplenty. In fact such only small distances. Such products are deals, mergers and joint ventures be- suited to customers in Africa and Latin come a must in order to remove trade barriers. America in addition to India. HAL has grown internationally by: HAL has its customers located glo- bally. While it has users of parts and ser- 1. Leveraging India as a low cost hub vices located in Asia, South America and 2. HAL is leveraging knowledge of In- Africa its contract manufacturing custom- dia and its production facilities by ers are located in US, Europe and MEA. having joint ventures with foreign Aerospace being a small well knit com- companies in India and abroad. munity is well aware of the activities of every player in the field. The customer 3. HAL used international licensing contacts are established through personal deals for technology absorption and relations and typical sale and marketing product development.

560 The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 Leveraging Value Chain Competencies & Resources

4. HAL developed its resources and Boeing( 2009), http://www.boeing.co.in/News- capabilities through licensing and joint and-Media-Room/News-Releases/2009/ production strategies. October/Boeing-HAL-Sign-Agreement-for- 777-Flaperon-Assembl

5. HAL entered into more related air- Boeing (2005), (http://classes.soe.ucsc.edu/ craft product lines. ism158/Winter05/boeing.htm) 6. Used Indian diplomatic relations with FMBD (2000), Book on International Business friendly countries for exports. and Trade, Free Market Business Devel- opment Institute, Portland State Univer- 7. HAL implemented international sity outsourcing strategies for managing FAA, (2012), https://www.faa.gov/about/ cost and international building brands. office_org/headquarters_offices/apl/ aviation_forecasts/aerospace_forecasts/ Global value chains and associated 2012-2032/media/ production networks offer significant 2012%20FAA%20Aerospace%20Forecast. opportunities for HAL. Hamel, G, Y.Doz & C. K. Prahalad, (1989), “Col- laborate with Your Competitors and Win”, Defense public sector companies Harvard Business Review, 67 (1): 133-39. which come under strategic industries can grow internationally by: HAL Annual Report (2010) Hoskisson, R., L.Eden, C. Lau & M. Wright a) First having a clear process of stra- (2000), “Strategy in Emerging Economies”, tegic planning Academy Of Management Journal, 43: 249- 67: b) Finding gaps in resource and capa- Ito, K. & V.Pucik, (1993), “R&D Spending, Do- bilities and filling them through licens- mestic Competition, and Export Perfor- ing, joint ventures strategies. mance of Japanese Manufacturing Firms”, Strategic Management Journal, 14:61-75; c) Using International outsourcing and supply chain strategies for develop- Khanna, T. & J. Rinikin (2001), The Structure of ing competitive advantage. Profitability Around the World, Working Paper, Harvard Business School. d) Leverage country advantages in pro- Kurt, Guthe (2008), “Ten Continuities in U.S. duction and marketing. Nuclear Weapons Policy, Strategy, Plans, and Forces”, National Institute for Public References Policy, http://www.globalvaluechains.org/ concepts.html Barney, J. (2002), Gaining and Sustaining competitive Advantage, 2nd ed., Upper Saddle Miles,G., C. Snow & M. Sharfman (1993), “In- River, NJ: Prentice Hall. dustry Variety & Performance”, Strategic Management Journal, 14: 163-77. Barney, J (1997), Gaining and Sustaining Com- petitive Advantage, Reading, MA: Addison- Nusasa, Andrew (2012), http:// Wesley; www.smartplanet.com/blog/smart-takes/ china-developing-600-mph-airless-maglev- Black, J & K. Boal (1994), “Strategic Resources”, high-speed-train/9594, August 9. Strategic Management Journal , 15:131-48

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