Major Shaitan Singh
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Make M777 Guns In India, Offers BAE Systems In Renewed Sale Bid
By Arming India Correspondent
NEW DELHI: BAE Systems has sought to revive the stalled sale of 145 M777 Ultra-Light Howitzers (ULHs) to India with a more compelling offer of shifting the artillery guns' assembly line from the U.S. to India.
The earlier proposal involved direct import of the howitzers from the U.S. in a government-to-government deal under the Buy (Global) category of the Indian Defense Procurement Procedure (DPP).
This renewed sales offer, flavored with India's Prime Minister Narendra Modi's 'Make in India' push, comes ahead of American President Barack Obama's visit here to be the chief guest at the Republic Day parade on Jan 26, 2015.
Obama, during his stay in India and in meetings with Modi, is expected to pitch for scaling up India-U.S. defense trade and push for Defense Trade and Technology Initiative (DTTI) that was previously steered in 2012 and 2013 by his new Defense Secretary-nominee Ashton B. Carter.
Significantly, trade estimates of the total Indian requirement for the guns is 450, to meet the needs of a newly-raised year-old China-focused Mountain Strike Corps of the 11.3-million-strong Indian Army. "We have offered to bring the gun's assembly, integration and testing to India," confirmed John Kelly, BAE System's Vice President for Business Development and Strategic Planning Platforms and Services Land Systems and Armament in an interview here on Jan. 13, 2015. Kelly is spearheading the renewed campaign for sale of the M777 guns to India.
The proposal also involves increasing the indigenous component of the gun. But the quantity that India orders should be significantly larger for this offer to be more attractive. "If the quantity is higher, then we have more opportunity for indigenisation and that's what we are working through at the moment," he said.
The earlier campaign, which was thought to be close to maturity, hit an impasse last year over offsets and price issues. "The case for procurement of ultra-light howitzer guns through the US government has not progressed due to cost issues and because the vendor has not been able to come up with a proposal fully compliant to the offset requirements," the then Defense Minister Arun Jaitley had told the Indian Parliament in July 2014.
India's Ministry of Defense (MoD) declared that the earlier offsets proposal from BAE Systems was non-compliant because the BAE Systems-owned US subsidiary, which manufactures the gun at Watervliet, New York, was not taking responsibility for the mandated 30 per cent offsets.
The stalled proposal involved sister companies under the BAE Systems' group umbrella for fulfilling the then $209 million offsets on behalf of BAE Systems, Hattiesburg, Mississippi. But the Indian MoD insisted on offsets being implemented by the prime for the contract.
BAE Systems now believes this problem has been sorted out. "With regards to the possible Foreign Military Sale of the M777 Ultra-Lightweight Howitzers between the U.S. and India, the U.S. government will contract with BAE Systems Global Combat Systems Limited and with other wholly owned subsidiaries of BAE Systems for the purposes of supporting our offset obligations," a BAE Systems official later clarified.
This suggests that under the fresh bid, BAE Systems Global Combat Systems will be the prime for the contract, which will actually be signed by the US Department of Defense (DoD). "The issue over legal entities mostly involved clarifications to the Indian MoD," said Kelly, of the resumed dialogue to sell the gun, post the April-May 2014 parliamentary polls in India that propelled Modi to power.
The U.S. DoD, which underwrites the deal with India, has also accepted the "clarifications" and BAE Systems has identified 40 Indian Offsets Partners with a wide geographical spread to execute the offsets obligations, he said.
The other problem over “cost issues” appears exaggerated due to a misunderstanding. The first offer, which stated a $697-million price, expired in October 2013. This necessitated the matter being referred to the U.S. Congress for the second time for approval, which was done in August 2013. This Congressional notification provides a five-year validity to the offer, a BAE Systems official said.
"The Congressional approval left a generous headroom by stipulating a price ceiling of $885 million. This was wrongly seen as the new price, which is unlikely to hit that ceiling. We'll keep the price within the 6-to-8 per cent boundary,” said Kelly, suggesting a new price to be close to $750 million.
The M777 assembly line in the U.S. shut down in mid-2014 after producing 1,100 guns, primarily for the U.S., but also for Canada and Australia. The renewed offer to shift the assembly line to India involves Transfer of Technology to a chosen local partner, Kelly said.
All local players, including the Ordnance Factory Board (OFB), could be considered. The technological challenge involves the use of Titanium. The FMS proposal does not envisage a joint venture, he said.
Significantly, the gun barrel of the American gun cannot be made in India. This is barred by the Berry Amendment, a Congressional Act in the U.S.
The U.S. supplies 25 per cent of the parts and components to build the M777 guns, while the rest 75 per cent is supplied by BAE Systems, Kelly said.
The gun has been extensively tested and evaluated in India previously. The proposal has been scrutinized in nine meetings of the Defense Acquisition Council (DAC) and eight versions of the offsets proposals have been submitted to the Indian government for approval till October 2013.
BAE System's impression is that the bid is very mature and close to contract. What has been done now is the "clarification" of the legal entity, which would implement offsets complying with the Indian DPP, and also the price. The 'Make in India' spin only sweetens the deal for the Modi government.
Kelly said the company can hold the price on the offer for a year, which is an indication of the timelines for closing the deal.
The ULH is a vital requirement of not just the offensive Mountain Strike Corps, but also the defensive troop deployment spread across India's vast unsettled mountainous boundaries with China and Pakistan. Kelly estimated that the total requirement of these howitzers in India is over three times the first tranche of 145 guns.
The next step in the pending deal is dependent upon a Letter of Request to the U.S. Department of Defense by India's Ministry of Defense, should it be satisfied with the new proposal.
NOTE: India's offsets clause in the DPP mandates that in any defense deal worth over Rs.300 crore (Rs.3 billion/$50 million), 30 per cent or more of the cost should be invested back in the Indian defense and aerospace market by the contract winner through direct purchases or technology transfer. The offsets clause in a standard practice in defense deals world over, primarily aimed at energizing the domestic arms and aviation industry.
