MC Interview | Govt should consider PLI schemes for aerospace manufacturing: Melligeri of Aequs

Aravind Melligeri

Aequs, a contract manufacturer of aerospace components, toys, and consumer durable goods, is betting big on the growth in India but said that the government needs to consider more policy changes for India to become a global aerospace manufacturing hub.

The government can consider production-linked incentive (PLI) schemes for the sector to encourage companies to invest in R&D and build capabilities, Aravind Melligeri, chairman of Aequs, told Moneycontrol in an interview.

The government should also encourage more transfer of technology deals for high-value items and larger offsets to local manufacturers. Edited excerpts:

Aequs recently raised Rs 225 crore. How do you plan to use this capital, how much will be used for aerospace manufacturing?

Most of these funds will be used to support existing operations and the expansion of our toys and consumer durables businesses. Our aerospace division is self-sufficient and experiencing steady and sustainable growth.

Our existing capacity in aerospace was already established prior to the pandemic and is currently one of the largest in the country, particularly for machining a capacity of over 1 million hours per year. We have the flexibility to raise capital in the future if the need arises, be it to tap new opportunities or to accelerate growth in aerospace manufacturing.

Historically, India has not been a major market for aerospace manufacturing. Why is Aequs so bullish about aerospace in India?

It is a process of evolution requiring the right mix of market opportunity, capability, and talent availability. I am bullish on aerospace manufacturing in India with the market being favourable for Indian manufacturers like Aequs.

Our customers have been steadily booking orders for the next seven to 10 years, providing us with good visibility and growth prospects. We have already secured contract extensions through 2030 for most of our agreements, which adds to our confidence in the future.

Global economic challenges confronting Western companies, such as inflation and resource constraints, are working in our favour.

During the pandemic, many resources retired or migrated, resulting in difficulties for other companies in meeting production requirements and recruiting talent. However, we have been able to absorb new work due to our capacity and ability to onboard fresh talent, thereby facilitating our growth.

The government has tried to expand aerospace manufacturing. What does it need to do to make India a global aerospace manufacturing hub?

Government policy, to a considerable extent, has been supportive of aerospace manufacturing in India even though its approach has been more on self-reliance and skewed towards the defence sector.

At the same time, the offset clauses in the government’s defence procurement policies have attracted several global OEMs that have set up JVs in the country. This has also helped in developing the talent and the base for the commercial aerospace industry in India.

The ‘Make in India’ and Aatmanirbhar programmes are good as they signal to the world that India is ready to manufacture. But beyond that, there is more to be done where Indian aerospace manufacturing is concerned…

Today, we can confidently say that Indian companies have the capability to deliver quality products to the world. But can they be competitive? Yes, to a great extent, when it concerns some Western companies.

But no, when it comes to players from countries in South Asia and the Middle East, which have extremely attractive incentive mechanisms for domestic players, coupled with offset policies that make OEMs outsource work directly to those countries. The prohibitive cost of capital that they have to foot is another issue that Indian companies face.

India today is the biggest market for commercial aircraft with just two airlines accounting for over well over 1,000 aircraft costing well over $120 billion at list prices over the next 10 years. Perhaps there is a case for the government to consider changes to derive spinoffs from this.

Policies to encourage more transfer of technology deals for high-value items and higher offsets to local manufacturers in return for access to the booming market can be looked into. And then the government can consider something like PLI for the aerospace sector to encourage companies to invest in R&D and build long-term capabilities to emerge as a strong global player.

How do you see the aerospace manufacturing sector evolving in India and what are your plans?

India has emerged as the biggest market for commercial aircraft and with an abundance of talent and improving manufacturing capacity and capability, the country is clearly the destination for everything aerospace.

As the opportunities increase, we will see more companies investing in capacities and technologies, apart from pursuing JVs with OEMs and supply chain partners.

We will continue to invest in manufacturing capacities as per requirements and leverage the world-class manufacturing ecosystem offering the entire manufacturing value chain, from forging and machining to specialty treatment and aerostructure assembly. There are currently 31 manufacturing units at the Belagavi Aerospace Cluster run by Aequs.

We anticipate more participants will get added in the coming years, the latest being BIKAR Aerospace of Germany, a materials supplier, which we announced at the Paris Air Show in June.

Will India become a hub for aerospace manufacturing for foreign and domestic carriers? How much capacity expansion will make this a reality?

India is surely emerging as an aviation hub and that opens more opportunities for aerospace manufacturing. At the same time, is it encouraging that the government is talking of a ‘Made in India’ commercial aircraft in the not-too-distant future. While it is a long shot, the foundations for this are getting stronger. Some of the large defence deals for aircraft that have been struck recently auger well for this.

However, to achieve the scale and speed, manufacturing ecosystems are the key. At the end of the day, commercial aerospace manufacturing is more a supply-chain play, and the industry primarily caters to OEMs.

Therefore, it is important to be a part of the global supply chain and have all the elements in place. With the ability of Indian manufacturers to absorb more work from OEMs, more work will flow here.

According to some estimates, the global aerospace parts manufacturing market, estimated at close to $900 billion in size in 2022, is expected to be $1 trillion by the end of this year. India is said to account for close to $70 billion of this.

Boeing and Airbus have started making parts in India. Will you tie up with these companies? If so, what main components would you manufacture?

We already have relationships with both Boeing and Airbus. We are the single source supplier for several components for Airbus from India. We are continuously expanding our portfolio of components by adding around 80 to 100 new parts every month.

What are the main challenges faced by the aerospace manufacturing industry in India?

The supply chain disruption on account of the Russia-Ukraine war – and the Covid-19 pandemic previously – is the biggest challenge the industry is facing. This has prompted a restructuring and re-evaluation of material availability, particularly for titanium sourced from Russia. Shortages of raw materials like steel have also resulted in capacity shrinkage that cannot be resolved overnight. It has taken time to restore the capacity.

Speaking of the long term, however, I would say the availability of ready talent is a major challenge… Aequs employs one of the largest core aerospace engineering teams in India. We have been able to address this challenge by putting the talent that we pick up straight out of college through an intensive two-year on-the-job training programme. After this, they emerge as world-class aerospace engineers.

How are taxes/GST affecting aerospace manufacturing in India?

Aequs, being in a special economic zone, is exempt from GST and as such it is not a major concern. However, on other fronts, the move to reduce the GST on MRO services in the country from the previous 18 percent to 5 percent is bringing Indian service providers almost on par with those in neighbouring countries like Sri Lanka and Singapore.

What is being done to attract talent to the aerospace manufacturing sector in India?

Our engineering education system is not specifically tailored to the needs of the aerospace industry. Therefore, fresh talent needs to be made industry-ready and put through a rigorous training process.

Do you expect a PLI scheme for aerospace manufacturing in the coming few years? If so, what is the quantum of the PLI scheme that you expect?

Something akin to PLI for aerospace manufacturing will surely be welcome if nothing else, at least to level the playing field for Indian manufacturers. How and what the contours need to be will have to be thought out carefully as the aerospace industry is not like many other sectors that have been accorded this incentive currently.

International companies like Safran are looking at India to expand their MRO operations. Do you plan to provide services to these companies?

Aequs is primarily an aerospace components manufacturing company making parts to the specifications provided by OEMs. There is no thought of getting into the MRO segment, but if we will in the future, one cannot say.