What forced HAL onto a downward spiral and how it can overcome the turbulence
When an organisation is on a slippery slope, the first to bail out are the employees. But this isn’t a viable option for the nearly 30,000 employees of Hindustan Aeronautics Limited (HAL). After all, they have coveted government jobs.
The employees of the country’s sole military plane maker, however, did clarify what they thought was the prospects of the government-owned company. When the government decided to divest 10% of its holding in HAL in March 2018, it reserved 6,68,772 shares for employees of the Bengaluru-headquartered company. But HAL employees only subscribed to a fifth of the reserved shares. They probably saw the writing on the wall. The response of retail investors was also poor to the government’s bid to raise Rs 4,200 crore via the share sale. Finally, Life Insurance Corporation came to the rescue and purchased 70% of the shares on offer for about Rs 2,800 crore.
HAL hit a new low in January when Chairman R Madhavan said the company had taken a loan of Rs 1,000 crore to pay salaries. The fact the aerospace company was gasping for cash would not be surprising, given the central government had taken Rs 11,000 crore through buybacks and dividends from it in the past four years.
A stall in new business projects compounded HAL’s problems.
The National Democratic Alliance government had scrapped two crucial projects of HAL — the co-development of the fifth generation fighter (FGFA) with Russia and the licensed production of medium multi-role combat aircraft, in this case, a contract to make 108 Rafale jets. The defence company was banking on these to keep itself busy. Instead, employees at the public sector giant now find themselves with little to do, as only the helicopter unit is working at some pace. Most other lines are almost idle.
Critics aren’t surprised at the turn of events. The FGFA programme did not take off despite being in the works for a decade. The government was unhappy with the cost escalation and technological capabilities and asked Russia to go alone with the project. When the government decided to truncate Rafale order to 36 jets, Anil Ambani-owned Reliance Defence and Aerospace was chosen to lead the execution of offsets of over Rs 30,000 crore, half the value of the deal. This was another blow to HAL, both financially and technologically.
One hope for HAL is the request for proposal the government had sent out for 83 Tejas light combat aircraft in December 2017. But officials say this deal will take time as the final price has not been negotiated with the Indian Air Force.
A HAL spokesperson declined to comment. Suryadevara Chandrashekhar, general secretary, HAL Employees Association, was more forthcoming with his views. “We have appealed to the government to give us firm orders. Pay advance and we will procure the raw material,” says Chandrashekhar, also the chief convenor of the All India HAL Trade Union Co-ordination Committee.
Observers also say HAL may be a victim of timing and circumstance. Built during the socialist era, the aerospace firm has 20 units — nine production and 11 research and development — spread across seven states and nine locations. The organisation was created when India did not have homegrown aerospace capability and it had to build all components and systems in-house. It also has largely served as a licensed production partner for foreign aircraft that the government has bought over the decades. HAL has built expertise in developing helicopters — Dhruv, Advanced Light Helicopter and the light combat helicopter. It is also the production partner for Tejas, the light combat aircraft being designed by the Aeronautical Development Agency. But HAL has struggled to find growth engines outside the comfort of captive government business. Bogged down by poor work culture and willingness to subsist on government handouts, there has been little incentive to push for change.
“HAL was comfortable… it did not have to export, did not have to be competitive internationally,” says retired Air Marshal M Matheswaran. “The government never questioned it as long as it did licensed production. But how can one make a business case for a company with a revenue of $3 billion and exports of not even Rs 500 crore?” HAL exports were worth Rs 314 crore in 2017-18, according to its annual report.
The plane maker has a long history of licensed production — the MiG from the erstwhile USSR, the Jaguar, Hawk advanced jet fighter and the Sukhoi 30MKI. But all these were government-to-government engagements. This limited HAL’s activities, as it was given the assembly knowledge and not the technology.
A HAL executive who has negotiated such deals says they also don’t have the capacity internally to negotiate deals. “We are outnumbered by lawyers and technical people from global manufacturers during talks. We almost surrender to their whims,” says the executive.
The government has hindered the firm’s prospects, say some. “More than blaming HAL, the government has to take the blame because for its indifference,” says Matheswaran, former deputy chief of the Integrated Defence Staff, who was the adviser of strategy to Hindustan Aeronautics Ltd and its CMD in 2014.
The veteran IAF officer had submitted a report to the government in 2014, recommending that HAL be corporatised, split into multiple companies, sold or made to increase its focus on exports. Nothing has come of these recommendations.
Critics use the example of Dassault Aviation that was owned by the French government. It was corporatised and asked to focus on exports. “If we are competitive, there are enough markets for us in Southeast Asia and Africa,” says Matheswaran.
Deba Mohanty, a defence expert and Director of Indike Analytics (OPC) Private Limited, says HAL suffers because it is run by the government. This limits its capacity building. “If HAL can assemble Sukhoi 30, there is not much difference in assembling Rafale,” says Mohanty.
India is the only country in the world where defence R&D is divorced from production. “The Pentagon doesn’t do research & development. Lockheed Martin does the R&D and also makes the planes,” he adds.