Days ago we heard ACM V R Chaudhari sir talking about unsurety of Tejas MK2 Order number. But due to a lot of backlashes from Social media, a new statement was issued the next day that IAF has actually committed 6 Squadrons of Tejas MK2 and further numbers will be decided on performance. Today we won’t be discussing why Tejas Mk2 is important, instead, we will be discussing, why order number matters for any Aircraft. What are the reason and basics behind the Minimum order, Production rate, and order commitment and how do they relate to each other? Let’s understand these basics today
Preface
From the above example, we all understand there is something that actually depends on these aircraft numbers. What if said, the Research & Technology cost, Number of assembly lines, production rate, Indigenization, ToT, and Private participation all of these things depend on the Order number?
Let’s understand a few basics first
Minimum Order Quantity:– Rather than going to the textbook definition, in normal terms it would be said as:-
The number of minimum products/Aircrafts needed to be ordered during a particular order placed.
Eg:- Sukhoi 30 MKI has a minimum order quantity of 12 Aircraft. Here is the reason why earlier India was going to order 12 Sukhoi instead of 11 Sukhoi which crashed.
Assembly line:- A Division which is made to assemble the aircraft. Eg:- Nashik facility for Sukhoi 30 MKI
Production Rate:- The number of Products/Aircraft that can be churned out per year
Eg:- The single assembly line of Tejas Mk1 makes 8 Aircraft per year
Here, if the order of 40 aircraft is given and an Assembly line makes 8 aircraft per year. Then the company only makes one assembly line and the aircraft will be delivered over a period of 5 years. This is the Thumb rule which is mostly followed. The main reason for this is fix cost of the Assembly line which includes Land, Labour, material, Inventory, facilities, maintenance, etc. So basically more assembly line brings more cost for Land, Labour, material, Inventory, facilities, maintenance, etc. The break-even only comes out best when assembly runs for at least 5 years.
The Hesitancy of Private Players
Unlike DPSU, the private players are more profit prone and would never make a dubious investment. No private sector likes to invest in Assembly lines that remain dried after things are made. One knows that the private sector generally takes deadlines seriously and delivers on time compared to PSU. But once the item is made if the assembly line remains dry, it is directly shown on the balance sheet. If the private player is listed then the opportunity cost lost would also reflect in the market. Not only this, over the years, the labor which has been intensively trained and has the know-how for making is also lost.
The best example of this is the K-9 Vajra Assembly line running dry after delivering the guns before schedule. Vajra already as an additional requirement and a repeat order of at least 50 guns was to be there. Still, the ministry doesn’t seem to buckle even after this level of necessity. Here, one can see that even private player indulging in defense and delivering ahead of schedule with all quality is not getting repeat orders which are required. But the Public sector almost never delivers on time, has cost overruns, and also doesn’t give quality is given orders gets orders.
In India number hesitancy is foremost. When LCH, Tejas, etc were being made no number was committed from forces due to which each private player fears going in the competition. Also, delays and cancellations of the whole procedure block a significant amount of funds for the private player.
Projects are given in which all research is to be done by Private companies. Along with also all development cost is to be borne by private players. All of this after that order “might” be given. This shows uncertainty and this is what is feared by private. This is because research is very costly and if the government is not ready to bear some cost i.e. if that doesn’t come under the Make-I category, then the cost is really high. Generally, this cost is covered in manufacturing but if the order is not given, the cost becomes unjustified. And without order commitment everything is useless.
Not only this restarting the assembly line is a whole new headache in itself. Currently, the Production of Vajra has been stopped. Restarting F-22 production would cost the United States $50 billion just to procure 194 more fighters. Hence costing it almost 216 million USD which was earlier up to 138 million USD per aircraft. Not only this it would Lockheed martin stated that restarting the production line itself would cost about $200 million.
That’s why HAL doesn’t make more assembly lines and uses the same assembly line for making other aircraft. Like the current Nashik line of Sukhoi could be converted for Tejas Aircraft. In the future also until the solid number commitment comes HAL wont be making any new assembly lines. They would be using the Current line only, modify them to need, and deliver all Tejas MK1A by 2028-29. By the time they might receive orders for Tejas Mk2, they will manufacture them and then go for AMCA.
It is understood that here the comparison is between Artillery and aircraft but the cost of land, labor, and opportunity can be vertically extrapolated and can be understood. L&T might not have that much cost to suffer but in end, they have to suffer from the dubious fixed cost that no private sector likes.
However the calculation of Lead time is not even considered here, e.g. Re-order during full swing production takes less time. This is because the whole Supply chain is figured out and each component comes at the right time decreasing inventory cost. But if the order is given after the assembly line is stopped, the time of each component starts from zero, and the time to get back to optimum production rate also comes into the picture which indirectly increases the time frame of delivery. For more on private player, hesitancy click here
Who Decides The Number?
When deciding on the number not one single party is responsible. The Indian Air force & the government decide on it. How much is needed, which places(location) it is to be placed, what is the budget, which technology to be replaced, which category it belongs to etc. Coming to aircraft, it is generally known what number is required as India has a final goal of 42 squadrons.
The number mainly comes from the Indian Air force, the RFI doesn’t reveal actually numbers but nearby can be revealed. The actual number comes out in AON and RFP brings out the final number. Coming back, each year rate of delivery is decided in L1 or can be decided in final negotiation talks.
More aircraft are demanded each year, indirectly the cost increases but this relation is only true if the number is less. If the number is higher other variables kick in and the cost of producing fewer aircraft per year brings out the higher cost. The best variable for example is Inflation.
Let’s say given an order of 80 aircraft and only 8 aircraft are manufactured per year. Taking inflation rate at standard 4 %, then the last aircraft cycle i.e. 10th year the cost would be much higher. The same could be done at less cost if 24 aircraft are made since it would only take 3 to 3.5 aircraft cycles. But here the cost of making the 3rd assembly line comes up. So, it is a give and takes of variables through which cost comes down & delivery isn’t affected.
The Step Ahead
Some things are changing day by day. The New Defence procurement policy, Drone Mahotsav, and Atmanirbhar Bharat all this is boosting the morale of the Indian Private sector. The C-295 deal, Private participation in Tejas. Gurutvaa systems, Zen technologies, Sagar defense, Raphe Mphibir, New space research, Switchblade, and Adani-Elbit in the drone market running and trying to make India a drone hub
ToT for Helicopter manufacturing from HAL can also be given to private. There are also chances of AMCA and Tejas Mk2 Private assembly line. Along with this recent Carbine Deal cancellation, ATAGS orders, APV orders, and Next Generation missiles all of this are seeing private participation. Currently, only the L&T shipyard is working mainly in ship manufacturing in the future we can also see more players.
But all of this can be increased by several folds if the number of commitments are given by forces. IAF recently committed for 6 squadrons of Tejas MK2 and more than 6 squadrons for AMCA and this could even increase. This is the budding step and similarly, other forces would also be giving the commitment leading to more participation.
