HAL: In urgent need of restructuring

HAL: In urgent need of restructuring

Mon, 02/18/2019 - 18:58
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By M Matheswaran

The Indian Air Force lost two highly accomplished Test Pilots in a Mirage trainer aircraft crash, early this month, at the Bangalore complex of Hindustan Aeronautics Limited. The aircraft was on an acceptance test flight by the two pilots after HAL had completed its upgrade modification on the aircraft. The aircraft reportedly had a major malfunction on the take-off role, forcing the pilots to eject, which resulted in their unfortunate fatalities. The accident has brought into focus HAL’s track record of poor quality control, unreliable safety practices, poor work culture and low production efficiency, even as the Indian Air Force indicated its unhappiness with HAL. Loss of lives by itself is unpardonable, but when it relates to the loss of highly trained and accomplished pilots, it is a huge loss that any nation and it's Air Force can ill-afford. The fact that the accident is possibly linked to poor quality control rankles everyone even more.

A month before this accident HAL announced that it will need a loan of nearly Rs 1000 crores to ensure it is able to pay for its routine functioning and its employees. This was shocking as just a few months earlier HAL declared the highest turnover in its history. These contradicting statements indicate that there are serious issues with the DPSU. HAL is India’s largest and only major aerospace company that ranks as one of the largest aerospace companies in the world. The government, which nationalized the Hirachand-Walchand company after independence, began expanding it in the aftermath of the India-China war of 1962. India’s humiliation in this war forced the government to invest in defence production by expanding infrastructure for license production of aircraft, engines and accessories.

IAF’s Issues with HAL

    Indian Air Force has continued to depend on HAL for most of its aircraft, MROs, product support, and joint developments. HAL produced aircraft have been the backbone of IAF’s firepower. Starting with Vampires in the late forties, fighters, trainers, helicopters, and transport aircraft manufactured by HAL have spanned many fleets such as Su-30s, MiG-21s, HF-24s, Jaguars, MiG-27s, Kiran, Hawk, HT-2, HPT-32, Alloutte Mk III ( Chetak), ALH, and Dornier. These have been supported by HAL manufactured engines, systems, avionics, and accessories. In addition, HAL has contributed to major upgrades in aircraft such as Jaguar, MiG-27, and MiG-29. Mirages were partly overhauled by HAL. The LCA Tejas will now form the main production aircraft for another two decades. Despite such vast quantity and type of aircraft produced and supplied, HAL has repeatedly faced problems due to its poor quality of manufacturing and delayed deliveries. Over the years there has been an unacceptable number of accidents resulting in loss of lives and aircraft. 

Indian Air Force has repeatedly raised issues of poor quality and unacceptable delays in delivery, all impacting severely on the operational capability of the Air Force. HAL’s high costs have been a major irritant in the relationship. None of IAF’s complaints has really been addressed seriously by the government. This is because the government is not ready to deal firmly with the PSUs primarily due to problems posed by various unions of the employees. For all parties in power, this also becomes a major vote bank issue. As a result, any reform or restructuring effort remains merely superficial. The management cannot be blamed entirely as they have very little power to deal firmly with the labour unions. The net result is that although HAL is overstaffed, its human resources exhibit extremely poor skill levels, very poor ability to absorb technologies, poor innovation culture, and all this resulting in extremely low production efficiency. Quite naturally, these result in very high overheads and delayed deliveries. These issues finally exploded into the open in the case of the scrapped MMRCA negotiations wherein the French manufacturer Dassault expressed grave misgivings on HAL’s ability to manufacture the Rafale.

HAL’s Problems are complex

The blame for all problems of HAL must squarely lie on the government. The government, Department of Defence Production, in this case, must accept the fact that almost all the issue emanates from the government’s close control of the PSUs and lack of professional approach to their management.The foremost issue is the fact that as the economy, industry and technology develops in the country, the need for state-owned enterprises diminishes. In the initial stages, India was right in creating DPSUs like the HAL, as it is only the state that makes huge investments and creates such huge infrastructure and capabilities. But very soon the state should enable the entity to become competitive and start withdrawing. This is applicable even for strategic industries where national security is often cited for continued state control. This has have been folly, as the state can minimize its role without diluting its ability to take control when strategic interests demand. Unfortunately, in India’s case, political expediencies have overridden national interests. Various governments have continued to treat PSUs and DPSUs as a milch cow for their short-term financial and political interests.

HAL has remained stuck in a license production model for too long. With the Indian military as its captive customers, the government ensured, through cost-plus pricing,  that HAL always made profits and employees were paid their bonuses and overtimes despite poor performance and delayed deliveries. HAL’s export performance is minuscule, of the order of Rs 600 crores out of its turn over of Rs 18000 crores. Its production efficiency per employee is five times worse as compared to international standards. For all its manufacturing, HAL is import dependent to the tune of 95% ( it has become worse from 2001 when it was 80%). Quite naturally HAL products are more expensive. Although economies of scale do play a part, which is one of HAL’s own making, it cannot be an excuse as it does not focus on exports. Even its limited export performance has been poor: eight ALH helicopters exported to Ecuador were scrapped by that country as four of the helicopters crashed within two years. German enquiries for Dornier aircraft, with potential orders for dozens of aircraft, was not even responded to in 2013-15 time frame.

HAL’s problems also emanate from over centralized control, with multiple divisions located all across the country, with little thought to cluster development. Locations like Amethi in UP and Koraput in Orissa were dictated by political expediency rather than select an area that would naturally enable clusters of ancillary industries to develop. In today’s environment, this structure poses major problems for HAL and the government.

Way Forward

The government is now at a critical stage where it has no alternative to complete restructuring of HAL. With a significant emphasis on ‘Make in India’ and encouraging privatization, enabling competition and encouraging exports, one can see real opportunities to revamp HAL. Government’s objectives for defence exports can only be achieved if it creates a very competitive, export-oriented capability build up. The solution lies in looking at each of the divisions of HAL as an independent entity. For example HAL-Bangalore division, with its fighter and trainer aircraft, manufacturing and Helicopter manufacturing assets can be made as an independent industry, with complete financial and strategic decision making. Similarly, engine divisions in Bangalore and Koraput could be integrated as a single engine industry. HAL – Nasik could become the second fighter aircraft manufacturing industry in the country. Similarly, accessory division and electronics division in Lucknow and Amethi could be integrated as one industry, while HAL Hyderabad and HAL Kasaragod could be integrated as one industry.

In all these independent setups private investment needs to be brought in as risk-sharing partners. The entire management must be made accountable and set up entirely on a private corporate model. There should be no direct government representation in the board of directors, as that would be both interference and conflict of interest. Each of these entities would become ideal candidates as strategic partners. They have to be made competitive and export driven. Each entity should be made to survive on its own financial performance. Unless such radical restructuring is resorted to there would be little chance of any improvement. Countries like Israel, France, and Brazil have already proven successfully such restructuring in their aerospace majors like Rafale, Dassault, and Embraer. Hopefully, the government will be bold enough to take such major restructuring of HAL in the near future.

Air Marshal M Matheswaran AVSM VM PhD (Retd) is the former Deputy Chief of Integrated Defence Staff from 2012 to 2014.