s 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 capa- bility 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 543 The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 Malay Kumar Das & Prashant Salwan 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 ) 544 The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 Leveraging Value Chain Competencies & Resources 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 custom- ers 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 cer- tified 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.