Leveraging Value Chain Competencies & Resources on a ...

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

Malay Kumar Das & Prashant Salwan

Strategic industries companieswhich are 100% controlled byemerging economy governmentsfaced difficulties when these econo-mies opened up/liberalized. Thesecompanies faced all round competi-tion from international big players.This paper studies Hindustan Aero-nautics Ltd (HAL) during last tenyears from 2001 to 2009. Strategicindustries use the gap analysis intheir value chain by studying thedynamism of external forces in fu-ture time frames and internal re-sources. They successfully chooseand implement corporate strategieswhich minimize risks and help in fixthe resource gaps. The paper alsoanalyzed how HAL leveragedknowledge (marketing, politicalconnections) and resources (distri-bution channels, human resources,production facilities) for developingcompetitive advantages in their owncountry and also in internationalexpansion.

Introduction

A news which came in all the ma-jor financial news papers in the worldon 22nd October 2009 in absolute termschanged the image of an emergingeconomy state-owned aeronautics com-pany. In the history of Boeing this wasthe first time when the company hadsigned to supply a very complicated partcalled flaperons for the Boeing’s 777series commercial jetliners. The 777flaperon is a complex composite assem-bly that is instrumental in controlling theairplane’s and maneuverability in flight,referred to as a ‘control surface’,flaperons work both as an aileron tocontrol roll as a flap to control lift.Boeing had earlier signed a 10-yearmanufacturing contract ($1 billion or Rs.4,650 crore) in December 2007 withHindustan Aeronautics Ltd for makingsubsystems for its fighter planes suchas F-18 Super Hornets and Apachehelicopters. “HAL and Boeing share avery special relationship. ShowcasingHAL’s composite manufacturing capa-bility on one of the world’s premier long-haul commercial jets positions us foreven greater opportunities at the fore-front of technology,” said Soundara

Malay Kumar Das is a former Manager , HindustanAeronautics Ltd , Bangalore. Prashant Salwan isAssociate Professor, Indian Institute of Management,Indore. E-Mail: [email protected]

543 The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013



Rajan, Director, Corporate Planning &Marketing, HAL (Boeing, 2009). Boeing’srelationship with HAL dates back to 1991.Boeing India President Dinesh Keskar said“The composite 777 flaperon that HAL willproduce represents a significant leap for-ward in technological capability, and sup-ports Boeing’s strategy to work in partner-ship with India’s aerospace industry for thelong-term”. (Boeing, 2009)

It was a long way for a 100 % Gov-ernment of India owned strategic defenseindustry company to achieve. As on 2010,HAL has 19 production units and 9 researchand design centers in 7 locations in India.It has sold its products in more than 20countries. The company has total 26 typesof aircrafts. Out of which 12 types ofaircrafts have been manufactured using in-house R & D and 14 types produced un-der license. By 2010 March, HAL hadmanufactured more than 3550 aircrafts,3600 engines and overhauled over 8150aircrafts and 27300 engines. HAL is thelargest player in the Aerospace industry inIndia. HAL supplies its products to all the

three major defence wings in India namely,Army, Navy and Air force. To maximizeits resources usage, building synergies andminimizing risks and increase revenues,HAL entered Civil Aviation with launch ofDornier (14 seater) and civil versions ofAdvanced Light Helicopter.

How does an emerging economy com-pany, which is in a strategic industry, chartits global strategy, why and how? Wewould be looking at the outside in approach(PEST and industry forces) and inside outperspective (resource and value chainperspective). We discuss how an emerg-ing economy, strategic industry companyhas transformed itself and grew in the in-ternational arena. Government of India hasdefined all the institutions and governmentowned companies in Defence Departmentand Space Department as strategic insti-tutions and allowed 26% FDI in the de-fence production space with some restric-tions. There are around eight defencepublic units. As can be seen from table 1HAL is the largest public sector unit (PSU)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 436.58Bharat Electronics Limited Rs 4,624 Rs 80Bharat Earth Movers Limited Rs 3013.47 Rs 304.34

(including trading)Mazagon Dock Limited (MDL) Rs.2568.93 NilGoa Shipyard Limited (GSL) Rs 508.01 NilGarden Reach Shipbuilders & Engineers Limited (GRSE) Rs 672.69 NilBharat Dynamics Limited (BDL) Rs 465 NilMishra 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 )

Leveraging Value Chain Competencies & Resources

The Indian Journal of Industrial Relations, Vol. 48, No. 4, April 2013 545

It is clear that HAL is the largestdefense public sector and has exportsturnover of 4365 Million Rupees. Otherpublic sector units do not have any ex-ports and even if they have some exportsit is more of trading. The above are thereasons that we have taken HAL as thestudy point in industry international strat-egy in emerging economies.

Aeronautics Industry

In the commercial aircraft indus-try, the competition is immenselyintensive even though it is mainlybetween Boeing and Airbus.

In the commercial aircraft industry,the competition is immensely intensiveeven though it is mainly between Boeingand Airbus. Economies of scale in thecommercial aeronautics industry comesfrom the ability to spread fixed costs overa large output. Boeing is spending an es-timated $5 billion to develop its Boeing777 jetliner. Boeing needs to sell around300 aircrafts to get respectable amountof profit. The economies of scale hereare significant, with average unit costsfalling by $40 million as output expandsfrom 100 units to 500 units.

“In addition to economies of scale,learning effects also exist in this industry.Learning effects were first documentedin the aerospace industry where it wasfound that each time accumulated outputof airframes were doubled, unit costs de-clined to 80 percent of their previous lev-els. Thus the fourth airframe, typically 80% of the second airframe to produce,

the eighth airframe only 80 percent of thefourth, the 16th only 80 percent of the eight,and so on. This observation implies thatthe $80 million in per unit variable costsrequired to build a 777 will decline overtime as output expands, primarily becauseof gains in labor productivity. Thus, whilevariable costs per unit might be $80 mil-lion by the time 100 aircraft have beenmanufactured, by the time 500 aircrafthave been manufactured, they may havefallen to $60 million per unit”( FMBD2000). “World demand is large enough tosupport only a limited number of aircraftproducers at high output levels. Forecastssuggest that the global market for long-range aircraft with a seating capacity ofabout 300, such as the 777, will be about1500 aircrafts between 1997 and 2008. Ifwe assume that Boeing has to sell about500 aircrafts to make a decent return onits investment, this suggests that the worldmarket is large enough to support onlythree producers profitably!” (FAA, 2012).

Extensive aircraft portfolio is requiredto satisfy the requirements of customerairlines. Pressures from customers areforcing aircraft manufactures to developproducts which can be run by only onepilot. An aircraft producer has to giveleasing and financing services to custom-ers over and above other requirementsof customers. As airlines face financialdifficulties, financing terms become a keyselling factor. Alliances, joint ventures—especially with foreign governmentfunded programs—and extensive lobby-ing, political posturing in national and in-ternational forums. “Some 45 businessesin 6 Asia- Pacific Economic Cooperation(Apec) economies provide Boeing with



about 70 different parts and major as-semblies...” (Boeing, 2005)

As can be seen from a brief over-view of the commercial aircraft indus-try, political, financial, customer forceseffect the product development and saleof aircrafts. In defence aircraft sales thecompetition is more intense and politicalforces and costs are the major influenc-ing factors.

Political, financial, customer forceseffect the product developmentand sale of aircrafts.

Political, Economic, Social, Techno-logical (PEST) Analysis

Political Factors

Political factors include governmentregulations and legal issues and defineboth formal and informal rules underwhich HAL must operate. HAL, being apublic sector undertaking under the Min-istry of Defence, there is a large impactof political factors on its strategies. Fol-lowing are the examples:

• Government type and political stabil-ity: India is a democratic country withgovernments elected by the people.In recent years we have seen stabil-ity in the elected government. So thepolitical scenario may be consideredfavourable for industries.

• Freedom of press, rule of law andlevels of bureaucracy and corruption:In Indian democracy press has free-

dom of expression. As such it is apositive factor for any industry

• Regulating rules: HAL was createdto provide services to defence ser-vices specially The Air Force. Be-cause of high security involved, Gov-ernment favors procurement of ser-vices for defence from a public sec-tor company with its own control

• Employment laws laid down by thegovernment which provide for mini-mum employment to the people andjob security for its employees

• Environmental regulations that anycompany has to adhere to and thenecessary certifications to be ob-tained from various government cer-tified agencies like ISO, etc. For ex-ample HAL is ISO 14001 environ-mentally certified.

• India has a federal tax structurewhereby both the Central and theState governments impose a range oftaxes. The Central Government lev-ies income tax on both corporate andindividual incomes as well as indirecttaxes such as customs duties, cen-tral excise and service tax. The StateGovernment imposes other indirecttaxes such as Value Added Tax(VAT) and the like. The complex andmulti-tiered tax structure in Indiamakes domestic manufacturinguncompetitive in a range of situationsfor example in defence sector someimported supplies of defence goodsto MoD are subject to lower inci-dence of taxes than locally suppliedgoods.



• The civil aerospace industry is simi-larly disadvantaged. The tax incen-tives are available for R&D in onlySpecial Economic Zones (SEZs) butthese are limited and not broad-basedenough to provide meaningful relief.Particular mention needs to be madeof the indirect taxes on aircraft ser-vicing in India. customs duties, ser-vice tax and VAT. This does not cre-ate a very conducive environment forcompetitive development of technol-ogy.

On the whole, the Government en-courages private investment in both thecivil and defence aerospace sector withthe goal of encouraging technology trans-fers and achieving indigenization only. TheIndian Government has significantly lib-eralized the civil aviation sector. It wel-comes domestic private participation inmanufacturing and R&D in the aerospacesector with 100 percent foreign direct in-vestment (FDI) allowed on the automaticroute in most areas, the exceptions beingair traffic services. The defence sectorhas more restrictions: while 100 percentdomestic private investment is allowed,subject to licensing, in the manufacture ofdefence equipment, there is a cap of 26percent on FDI (which is also subject tolicensing requirements, and there are otherrestrictions as well).( PWC, 2009)

Economic Factors

Economic factors affect the purchas-ing power of potential customers and thefirm’s cost of capital. The following areexamples of factors in the macro-economythat affect the aircraft industry:

• Economic growth: India has beencharacterized with a positive growthrate throughout the next decade. Assuch the aircraft industry is expectedto grow.

• Interest rates: Interest rates will helpdetermine the availability of funds forexpansion and growth. Stable inter-est rates will ensure stable growth inthe aircraft industry

• Exchange rates: Since aircraft indus-try is a complex and capital intensiveindustry with a large number of partsof the supply chain in foreign lands,it is undoubtedly affected by the fluc-tuations in the exchange rate.

• Inflation rate: In the recent days wehave seen huge rise and fall in theinflation rates. This creates lot of un-certainty in the industry. The reces-sion has largely impacted the aircraftindustry.

• Unemployment and labor supply: In-dia is in a favorable spot for good fac-tor conditions and skilled labor. Un-employment is quite high comparedto developed nations. As such it isan ideal place to locate a major partof the value chain of the aircraft in-dustry in India

• Labor costs: Labor costs are com-paratively low and education levelsare high which is favorable for an air-craft manufacturer. R&D in Indiacosts 50% lower than in developedcountries.

• Levels of disposable income and in-come distribution: In India air travelis still considered a luxury and the



amount of disposable income availablefor air travel is low. But with thegradual increase in the income levelsof the average Indian, the aircraft in-dustry may hope to grow in future.

• Impact of globalization: Globalizationhas opened new doors and hasbrought all companies in level play-ing field although not without certainrestrictions. Components and assem-blies can now be outsourced andtechnologies licensed from othercountries. (Barney, 1997)

Components and assemblies cannow be outsourced and technolo-gies licensed from other countries.

Socio-Cultural Factors

Social factors include the demo-graphic and cultural aspects of the ex-ternal macro-environment. These factorsaffect customer needs and the size ofpotential markets. Some social factorsthat affect the aircraft industry include:

• Population growth rate

• Age distribution (demographic pro-file)

• Career attitudes

• Emphasis on safety

• Health, education and social mobilityand attitudes

• Employment patterns, job marketfreedom and attitudes to work

• Press attitudes, public opinion, socialattitudes and social taboos

• Lifestyle choices and attitudes

• Socio-Cultural changes

Technological Factors

Technological factors can lower bar-riers to entry, reduce minimum efficientproduction levels, and influenceoutsourcing decisions. Some technologi-cal factors that affect the aircraft indus-try include:

• Research & development activity

• Automation

• Technology incentives

• Rate of technological change

• Impact of emerging technologies

• Impact of internet, reduction in com-munications costs and increased re-mote working

• Impact of technology transfer

Strengths

• Capabilities- HAL uses high tech-nologies in its manufacturing pro-cesses.

• HAL has a diversified product baserelated to aircraft industry.

• Competitive advantage - only manu-facturer of aircrafts in India.

• Unique Selling Point- Quality PoliciesISO 9001:2000, prestigious custom-ers like IAF, Boeing, Airbus, etc.

• Resources, assets, people- highlytrained professionals from elite insti-tutions.



• Experience- More than 60 years ofexistence in the aviation sector. 12types of aircrafts have been manu-factured with in-house R & D and 14types produced under license. Thecompany has manufactured over 3550aircrafts, 3600 engines and overhauledover 8150 aircrafts and 27300 engines.

• Financial reserves- Company has anet worth of Rs 10260 crores.

• HAL has 19 production units and 9research and design centres in 7 lo-cations in India. This covers most ofthe Indian geography.

• Company has implemented Leanmanufacturing processes and Kaizenon shop floors which helps manageproduction activities better.

• Location and geographical spread-various divisions are located in primelocations in various cities in India.

• HAL policies entail a high securityof job and financial benefits.

• The company provides an environ-ment, which allows freedom to inno-vate and experiment various ideasand thoughts.

• Better employee satisfaction may beachieved by providing better facilities.

• Technology development and innova-tion- advanced technologies; CNCmachines, etc. will boost productionactivities.

Weaknesses

• Gaps in capabilities- Old and wornout machines and poor infrastructurelead to slow production processes.

• HAL follows time consuming proto-cols for meeting requirements of pro-duction.

• Lack of basic facilities like drinkingwater, poor canteen services, etc.leads to employee dissatisfaction.

• Poor work culture due to the inher-ent built-in job security in the com-pany.

• Interference of labor unions into pro-duction activities lead to delays in pro-duction plans.

• Deadlines not taken seriously bymany employees due to lack ofknowledge.

• Poor remuneration or incentivescompared to competitive counter-parts.

• Technologies in HAL are less ad-vanced compared to those in devel-oped nations. As such heavy compe-tition is faced in export performances.

• Plan predictability- Poor planning ofproduction activities leads to loss ofvaluable production time.

• Morale, commitment, leadership-Poor HR policies and low employeemorale resulting in high attrition.

Opportunities

• Market developments- Good marketgrowth opportunities within the coun-try and abroad.

• Export to other countries like otherdeveloping nations.

• New markets, vertical and horizon-tal- Diversification into other related



products like passenger aircraft seg-ment may help HAL grow.

• New target markets- Exploring newtarget market in the South Asian andAfrican countries will build betterprospects for the company.

• New Unique Selling Point-Customization of products as per therequirement of the customer for bet-ter customer satisfaction.

• Major contracts from customers likeBoeing and Airbus.

• Business and product develop-ment. More research and devel-o p m e n t i n t o f i f t h g e n e r a t i o naircrafts and steal th technolo-gies.

• Partnerships- Outsourcing its ac-tivities to vendors in and outsideIndia helps in reducing costs in-volved.

• As the Indian market, specially de-fence is opening up, foreign playerswill require the help of local produc-ers for localization and maintenancerequirement.

Threats

• Political effects- Changes in govern-ment policies from time to time mighthamper the smooth running of thecompany.

• Competition- Other external com-petitors like Boeing, TATA, etc. mayeat-up prospective market share.

• Limited customer base because ofthe high cost of the products.

• Vital contracts and partners- Noncompliance of production sched-ules may lead to liquidation of con-tracts and loss of important cus-tomers.

• Loss of competent professionals-Brain drain of highly trained techni-cians and engineers.

• International Relations- As most ex-ternal customers are governments ofother countries, international relationsmay affect the growth prospects ofthe company.

• World Economy - Recession in theworld economy may lead to lowerexpenditure on defence.

• Inability to attract skilled techniciansor professionals.

• Changing government policies andthe influence of government agenciesaffect the smooth functioning of thecompany.

This SWOT analysis brings out thevarious internal and external factors thatneed to be considered while preparingthe Strategic Plan for the company.

The Bargaining Power of Buyers

HAL’s main buyers being thearmed forces, government agen-cies retain considerable power.

HAL’s main buyers being thearmed forces, government agenciesretain considerable power. The custom-ers’ power becomes more visible dur-ing downturns in the economy, as dur-



Fig. 1 Industry Analysis Porter’s five forces analysis

• • •

• • •

Engine ManufacturersElectronics, semiconductors, etc.Other material suppliers, speciality metals,

composite materials, etc.Government InstitutionsCapital sources, banks, investorsDGCA, DGAQA, RCMA, CEMILAC, etcOther regulating bodies•

• • • •

Taneja Aerospace & Aviation LtdTATAL&TGodrej Aerospace

Other small aircraft manufacturers

• • • • • •

Armed Forces (Air Force, Army, Navy)Other forces (Coast Guard, BSF)Government InstitutionsState governmentsOther regulating bodiesRCMA, DGCA, DGAQA, CEMILAC, etc

Foreign country government agencies

• • • • • •

Unmanned air vehiclesAdvanced fifth generations fightersAdvances in Automotive industry infrastructureFast trains for shorter distancesAdvances in telecommunication, video-conferencingLatest technologies like stealth

•••

EurocopterRussian manufacturersChinese spares Manufacturers

•Dassault Aviation

(Source: Porter, 1985)

ing these times the armed forces opti-mize their operations and cut their in-vestments due to the defence budgetpressures. But this power is exhibitedby the customer while considering pur-chase of new equipment. In the caseof services and spare parts, HAL hasa competitive advantage and the cus-tomer has no option but to buy the ser-vice and parts. HAL is bringing this tobalance by seeking more orders likeOEM orders from aerospace compa-nies and also international orders fromdefence forces of other countries. Thebargain power of the buyers is moder-ate to strong.

The Bargaining Power of Suppliers

Engine manufacturers represent thesingle most significant group of suppli-ers. There are only a few of such manu-facturers like General Electric, Pratt &Whitney (US), Rolls Royce (UK), CFM(Europe) who compete to supply the en-gines. Each of them has their advantagesand disadvantages. Even when planesare usually designed for more than oneengine types and the fact that customersenter in separate negotiations with theengine suppliers to determine the choiceof the engine for their planes based ontheir prices, engine manufacturers yield



considerable power. This is because theirmanufacturing capacities are limited andbooked in advance. Yet in case there isspare capacity engine manufactures canoffer huge discounts. The game is purelybased on advanced and accurate fore-cast. In future, the need for higher fuelefficiencies, increased reliability —espe-cially for twin engine transatlantic widebodies—and more power for the newlarge body aircraft is forcing enginemanufacturers to enter in joint develop-ment programs. Therefore it can be as-sumed that their bargaining power is go-ing to significantly increase as they un-dergo concentration

Regulating bodies, such as the DGCA,CEMILAC, RCMA, etc., may be consid-ered as suppliers to the industry as theydetermine the constraints that the indus-try has to deal with. The bargaining powerof these institutions is considerable andthey can create major obstacles for thefinal approval of the aircrafts.

There are large number of suppliersfor other material and parts with amplecapacities. Therefore they do not yieldsuch high power. But while the optionsare available galore, the specificationsand design may leave a manufacturer lim-ited on the choices and hence increasingthe power of the supplier.

The bargain power of the suppliersis moderate to strong.

The bargain power of the suppli-ers is moderate to strong.

Threat of New Entrants

At first look, any new entrant in thismarket faces a steep, uphill battle. Someof the very high barriers to entry that andnew entrant has to deal are:

• Local government and internationalregulations

• Capital requirements

• Extremely skilled labor needs

• Sophisticated support industries

• Need to have proven track recordbefore getting orders

• Long breakeven cycle

However, one cannot completely ex-clude this possibility. Just as Europe did,Japan or China may decide that this in-dustry is strategically vital for their long-term well being and encourage a highlysubsidized entry in the market by theirnational champions. In the case of Ja-pan, subsidies may even not be neces-sary as the sophisticated industrial infra-structure and naturally protective tradepolicies may very well encourageMitsubishi or another firm to engage inthe battle.

The former Soviet Union representsa significant growth potential for the bigthree, but also has its own national air-craft industry. While this market may beopen to competition, it is also possible thatthe Russian Tupolev enhances its capa-bilities, rationalizes its operations andsucceeds in entering the market with alow cost, no frills product strategy, espe-cially in emerging countries. Indian manu-



facturers of smaller aircrafts like TanejaAerospace & Aviation Limited and com-ponents manufacturers like DynamaticTechnologies Limited are fast gainingaccess to the technologies that will en-able these companies to stand competi-tion to HAL. Finally, although highly un-likely, existing defence aerospace com-panies may be tempted by a late entry orre-entry—such as Lockheed—as theysee their traditional military marketdwindle. We would rate the threat of newentrants to be moderate (Porter, 1990).

Threats of Substitute Products orServices

It is difficult to imagine, for the fore-seeable future, a direct substitute forcommercial or military aircrafts. Airtravel is the most effective, secure, con-venient and economic transportationmethod. However, a few threats exist,especially in the low end:

Fast trains offer between citiesless than 600 kilometers a veryattractive solution.

Fast trains offer between cities lessthan 600 kilometers a very attractive so-lution. As their speeds approach and ex-ceed 200 kmph, they bring such travelbelow three hours from one city to an-other; a performance that hardly any air-line can match. After the start of TGVservice between Paris and Lyons, AirInter faced a 50% reduction in air travelbetween the two cities (Andrew 2010).If such solutions are implemented widelyin India—a very speculative assump-

tion—for instance, a great many airlinesmay lose market share and as a conse-quence reduce their fleets, which willdirectly affect the aircraft manufactur-ing industry. Likewise, advances in au-tomotive industry, such as cars capableof very high speeds, under electroniccontrol on specially equipped highwaysmay have an impact on aircraft industry.Due to the highway development initia-tive of the government, the roads areposing a serious threat as an alternatemode of travel than air (Osborne,Stubbart & Ramaprasad, 2001). InterContinental Ballistic missiles and suchother advancements in the long-rangeattack weapons also pose as substitutesto military aircrafts. Finally, advances intelecommunications techniques, collabo-rative computing, and desktop video-conferencing based on broadband, cabletype services may reduce business travelrequirements and impact the aircraft in-dustry. We would rate the threat of sub-stitutes to be low (Kurt, 2008).

Global Value Chain of HAL

“The value chain describes the fullrange of activities that firms and work-ers do to bring a product from its con-ception to its end use and beyond. Thisincludes activities such as design, produc-tion, marketing, distribution and supportto the final consumer. The activities thatcomprise a value chain can be containedwithin a single firm or divided among dif-ferent firms. Value chain activities canproduce goods or services, and can becontained within a single geographicallocation or spread over wider areas”(http://www.globalvaluechains.com).



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 mostManagement training and of the best brains training and effective

compensating the to the firm and compensating communicatorsstaff. they stay abreast the staff. are hired who

about the latest can doin the field. techno-sales.

Technology Train and help Indigenously deve- Reduce Help makeDevelopment the company to lop technology transportation technological

identify the best to create the parts cost at highest presentationstechnologies locally for a longer security. specially foravailable and time and at cheaper comparisonssuitability of the rates. Evaluate and with othersame for HALs use. suggest the vendors

technology partnersfor manufacturing.

Software Develop software Develop software Software for IT enabled Logging andDevelopment for cost and quality for quality control quality control Marketing maintaining

regression for during assembling. research database ofvendor selection Software for issues and fixes.Software for engineering Mechanism ofQuality control design and aids query registrat-and monitoring to assembly services ion and

resolutionProcurement Negotiation of Procure best-suited Procure most Procure most Economies

contracts for technology and economical economical service,technology. site at cheapest means means ofMaterial and price. Insure of distribution. communi-components from continuous and cationIndian and economical supplyinternational of services andcompanies. 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 andfinalization of developing new for exports) to defense, repair planestechnologies, models for better Ensuring delivery civil and of all Indianmaterials and efficiency, speed, of its products foreign defense servicescomponents. passenger comfort and services customers. irrespective ofVendor selection etc.Develop and in an efficient Liaise with its make and- Evaluation and manufacture parts and discreet Govt. and kind.Repairfinalization of of the planes manner. Defense and maintena-suppliers (includes owned by Indian agencies to nce services forcountry decision) during their lifetime. understand its products.

Manufacture new their policies Customerwith the defense and interaction forpartnersDesign requirements its services.and manufacturesplanes itself.

In Bound Operations Outbound Marketing ServicesLogistics logistics



HAL is in the capital-intensive aerospacemanufacturing industry and is character-ized by a high focus on technology.

(Variable taken from Prahalad & G.Hamel, 1990; North, 1990; Barney, 2002)

The aerospace value chain is com-plex and is characterized by a long projectlife cycle spanning R&D, engineeringdesign, manufacturing, assembly and af-termarket (spare parts, overhaul and ser-vice).

Research & Development: HAL hasnine Research & Design Centres en-gaged in the design and development ofcombat aircraft, helicopters, aero-en-gines, gas turbines, engine test beds, air-craft communication and navigation sys-tems and mechanical system accessoriesspread across the country. These are:

• Aircraft Research and Design Cen-tre

• Rotary Wing Research and DesignCentre

• Aircraft Upgrade Research and De-sign Centre

• Transport Aircraft Research andDesign Centre

• Engine Test Bed Research and De-sign Centre

• Strategic Electronics Research andDesign Centre

• Aerospace Systems & EquipmentResearch and Design Centre

• CM and PL Research and DesignCentre

HAL has so far undertaken its ownresearch and design activities. This be-ing a very high value addition activity isundertaken by HAL. Various upgradesto aircrafts like MiG 27M, Jaguar, etchave been carried out to make theseaircrafts more capable for Indian Airforce.

Since 1980s, HAL has started tomove up the value chain.

Engineering Design: Since 1980s,HAL has started to move up the valuechain. Its operations saw a rapid increasewhich resulted in the development of newindigenous aircrafts such as HAL Tejasand HAL Dhruv. HAL also developed anadvanced version of the MiG-21, knownas MiG-21 Bison, which increased itslife-span by more than 20 years. It hasbeen developing designs for Lightaircrafts and Helicopters. The two wellknown examples of its success in designand development are:

1. Design and development of the com-pletely new Advanced Light Helicop-ter, which was designed in collabo-ration with Messerschmitt-Bölkow-Blohm now EurocopterDeutschland), Germany.

2. Design and development of LightCombat Aircraft, with Dassault Avia-tion of France as a consultant to re-view the Project Definition and pro-vide advice based on its extensiveaviation expertise.

Manufacturing: The number ofcomponents and subassemblies in any



aircraft may vary from 12000 parts to30000 parts. All these parts and subas-semblies have to be manufactured beforebeing assembled into the aircraft. In themanufacturing realm, most value is addedto the raw material. The various compo-nents and subassemblies are at presentbrought from following sources:

In-house manufacturing: HAL hasfacilities and manufactures most of thevery critical components in house like theundercarriages of aircraft, many specialrubber components, very critical Titaniumcomponents and sub-assemblies, etc.These are state of the art facilities andmatch international standards. The loca-tion in India coupled with the long expe-rience provides it a competitive advan-tage in costs. Therefore HAL has alsoobtained several multi-million dollar con-tracts from leading international aero-space firms such as Airbus, Boeing andHoneywell to manufacture aircraft spareparts and engines.

Outsourced to Indian Vendors: Nocompany in the world can make all theparts of a final product itself. HAL hasalso developed a healthy list of vendorswho manufacture the parts for its currentprojects like Su-30 MKI, ALH, LCA, etc.The outsourcing helps HAL to make bet-ter use of its resources (skilled manpowerand finance). HAL establishes a win-winrelationship with these vendors. HAL sup-plies the design, technologies, raw mate-rials and other necessary support. Thesecompanies learn latest technologies andsupply aircraft components to HAL. HALgains from these vendors in terms of lowcost of fabrication. At the same time qual-

ity of components is ensured by final in-spection by HAL Quality department.HAL has out-sourced manufacture ofcomponents ranging from Wing stiffenersto sub-assemblies like the vertical fins ofaircraft and these vendors have been ableto successfully meet the requirements ofHAL to a great extent.

HAL gains from these vendors interms of low cost of fabrication.

Analysis

1. HAL is good in quality managementand process management

2. Has an excellent resource distribu-tion structure

3. Competencies are strong, equal tointernational standards

4. Indian factor of production advantage

5. Does not have cutting edge new tech-nologies, special in materials and partmanufacturing

6. The investment required in develop-ing the material science and compe-tent advance parts manufacturingvery high.

Global Outsourcing

HAL has been integrating variousaircrafts to the customers’ requirementswith some very high technology systems.For example ALH is flying with twin1000 shp Turbomeca TM333-2B turbo-shaft engines supplied by Turbomeca,France while the THL 20-20mm gun tur-ret is supplied by Nexter Systems (formerly



Giat), France. The Light Combat Aircraft(LCA) comes fitted with Israeli avionicsand radar. These are the multi-function dis-plays (MFDs) by Sextant (France) andElbit (Israel), the helmet-mounted displayand sight (HMDS) cueing system by Elbit,and the laser pod supplied by Rafael (Is-rael). The ejection seat of LCA has beensourced from the Martin-Baker. The soft-ware used in the design and developmentof 3-D laminated composite elements,Autolay Integrated Automated SoftwareSystem has been licensed to both Airbusand Infosys. The LCA is powered by Gen-eral Electric F404, F404-GE-IN20 engineat the prototype stage. General Electricwas awarded US$105 million contract inFebruary 2004 for development engineer-ing and production of 17 -IN20 enginesfor LCA.( HAL 2010)

To compete with global competitorslike Boeing, Airbus, Eurocopter, etc.HAL started to look at alternatives tomanufacture the various components ofaircrafts outside the HAL facilities. Overthe past few years, HAL has been ableto develop new vendors all over the coun-try and world. All the new projects haveat least 15% of the value being contrib-uted by the outsourced vendors. HALhas been engaged in creating value forthe customers by controlling the entirevalue chain from research and develop-ment to the aftermarket overhaul andservices support, which is not feasiblenow in the new competitive environment.

Assembly & Testing

Assembly of aircrafts and testing isa task of great expertise acquired over

years of training and practices. It is thehighest value addition activity for HALfor manufacturing under collaboration.Even for indigenously designed productsthe value addition is very high. Withoutthe proper assembly all the parts are aheap of metal and electronics. A small-est mistake can make a loss of millionsof Rupees and lives even at the test stageor even later. HAL undertakes assem-bly of the aircrafts in its various facili-ties in Bangalore and Nasik factories.The flight testing of the aircrafts is alsocarried out at these locations before theaircraft is handed over to the customer.

Marketing & Sales

HAL has also formed agreementswith global companies for promotion ofaircrafts developed in India. For example,HAL and Israeli Air Force are jointlymarketing the Israeli avionics fitted ex-port versions of ALH. HAL has a verylarge customer base of national and inter-national organizations, governments andcompanies. Indian customers include thearmy, air force, navy, coast guard, andBorder Security Force. HAL’s global cus-tomer base includes those from Myanmar,Nepal, Bolivia, Turkey, Surinam, Mauritiusetc. Among civil operators in India are:ONGC, State Governments ofChhattisgarh, Jharkhand, Karnataka, Geo-logical Survey of India, National DisasterManagement Authority etc. Among civiloperators outside India includes PeruvianHealth Services. Other customers arefrom UK, Philippines, France, Israel,USA, Maldives, Japan, Namibia, Peru,Oman, Malaysia, Thailand, UAE, Vietnametc. (HAL, 2010)

A.1.1

Processes

EngineeringDesign

Manufacturing

Aftermarket

Marketing & Sales

Assembly & Testing Design

Research & Development

Added Value



Assembly, Aftermarket, and each cus-tomer segment, such analysis is carriedout. This gives way to geography and ul-timately vendor (or self) selection foreach activity. We intended to give thesemetrics for each such activity, however,such data being confidential, indicativeanalyses framework is being suggested.

Cost Quality Speed

Labour India Americas JapanMaterial Europe Americas EuropeSkill Europe Europe EuropeInspection and Quality Control Americas Americas AmericasEfficiency Japan Japan JapanLogistics/Transportation Americas Americas Americas

Cost, Quality & Efficiency

Value chain of aircraft industry isgeographically spread based on variouscost heads, quality and efficiency con-siderations. Few of these have been iden-tified below. Now for each activity, viz.R&D, Design, Manufacture (each part),

Global Strategy Formulation-Outside in Approach

HAL’s global strategy is undoubt-edly based on the requirements of itscustomers. However, the customer seg-ment chosen is itself based and ex-tended on its core competencies. Hence,its approach cannot be classified as en-tirely inside out or outside in. It followsa modular strategy in this regard. Mod-ules based on core competence, andserved for customer preferences.HAL’s global strategy can be of the fol-lowing two generic s trategies:(Hoskisson, Eden, Lau & Wright, 2000;Porter 1980; 1985; 1996)

Cost Leadership: Some of the waysthorgh which firms acquire cost advan-tages are by improving process efficien-cies, gaining unique access to a largesource of lower cost materials, makingoptimal outsourcing and vertical integra-tion decisions. HAL has the potential tobecome the cost leader in the aerospace

industry because of the followingstrengths:

• Access to the required capital mak-ing a significant investment in pro-duction assets; this investment rep-resents a barrier to entry that com-petitor firms may not overcome.

• Skill in designing products for effi-cient manufacturing, for example,having a small component count toshorten the assembly process.

• High level of expertise in manufac-turing process engineering.

• Efficient low cost supplier base.

Being in India, HAL has a uniquecost leadership.

Being in India, HAL has a unique costleadership. Worldwide the aviation manu-facturing units are based and thrive in thedeveloped world, where the cost is high.Due to the economies of scale and lack of



domestic market, it is very difficult for anysmall company (despite being backed bythe government of the country) to enter theindustry on its own in developing world. Infact even Airbus is promoted and supportedby the entire EU. The main possibilities ofcompetition could come from China. Butdue to its communist background, politicsand language it has much less acceptabil-ity. Under these circumstances HAL hasa competitive advantage on its input costscompared to Western companies withouta threat of local competition which can beleveraged for its global strategy.

HAL has chosen its segment verywell.

Focus: HAL has chosen its segmentvery well. It understands that it can notbe a main stream supplier of large civilaviation planes. But due to its associa-tion with IAF it has created inimitableknowledge in small fighter planes suchas LCA. Therefore HAL is focused onmaking small aircrafts of less than 8seats only which are light and have to flyonly small distances. Such products aresuited to customers in Africa and LatinAmerica in addition to India.

HAL has its customers located glo-bally. While it has users of parts and ser-vices located in Asia, South America andAfrica its contract manufacturing custom-ers are located in US, Europe and MEA.Aerospace being a small well knit com-munity is well aware of the activities ofevery player in the field. The customercontacts are established through personalrelations and typical sale and marketing

factors are missing. Flying to meet thecustomers is affordable and preferred.Under such circumstances HAL choosesa mode of direct export or through part-ner who add value in relationships, secur-ing local approvals and liaisoning. HALpursues exports and contractual agree-ments in its markets in Vietnam, Nepal,Burma, Africa and Latin America.

Conclusions

The aerospace industry is rapidlybecoming global for the following reasons:

• There are very few players, but in-tense competition and very high capi-tal requirements drive the need tomaximize volume and tap all possiblemarkets. It is unthinkable to have anational or regional strategy and ex-pect to succeed in this industry.

• As many customers—including vari-ous governments across the world—consider the aircraft industry strate-gic, they want a share of the action.As a consequence, partnerships, jointventures are aplenty. In fact suchdeals, mergers and joint ventures be-come a must in order to remove tradebarriers.

HAL has grown internationally by:

1. Leveraging India as a low cost hub

2. HAL is leveraging knowledge of In-dia and its production facilities byhaving joint ventures with foreigncompanies in India and abroad.

3. HAL used international licensingdeals for technology absorption andproduct development.



4. HAL developed its resources andcapabilities through licensing and jointproduction strategies.

5. HAL entered into more related air-craft product lines.

6. Used Indian diplomatic relations withfriendly countries for exports.

7. HAL implemented internationaloutsourcing strategies for managingcost and international building brands.

Global value chains and associatedproduction networks offer significantopportunities for HAL.

Defense public sector companieswhich come under strategic industriescan grow internationally by:

a) First having a clear process of stra-tegic planning

b) Finding gaps in resource and capa-bilities and filling them through licens-ing, joint ventures strategies.

c) Using International outsourcing andsupply chain strategies for develop-ing competitive advantage.

d) Leverage country advantages in pro-duction and marketing.

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