Interview with Mr. Lova Drori, Executive Vice President, Rafael Advanced Defense Systems

This interview is reproduced here from India Defence website. Original interview can be found here here.

Rafael Advanced Defense Systems is the Israeli authority for development of weapons and military technology and is a former sub-division of the Israeli Defence ministry. It is widely considered as the leader in defense innovation and development. In recent years, Rafael has developed an increasing presence in the Indian defense market.

Mr. Vishal Kansagra, Defense Analyst and Business Development Lead for India Defence recently spoke to Mr. Lova Drori, Executive Vice President for Rafael Advanced Defense Systems on a wide range of topics including Rafael's offerings to the Indian Armed Forces, Defense Offsets Policy, challenges faced before defense companies in India and the impact of global recession and economic downturn.

Vishal Kansagra: What are the products you are pitching to Indian armed forces?

Lova Drori: We have lot of products that would interest Indian armed forces and we are talking to them about that, but we can't share more specific details about those products or programs. All I can share is that we are offering Iron Dome and David's Sling to the Indian armed forces.

Vishal Kansagra: I remember that there were discussions about a joint venture with BEL to cater to Indian and global markets. What is the update on that joint venture?

Lova Drori: Joint venture with BEL needs more discussions as any such joint company will be under government control as BEL is a PSU.

Vishal Kansagra: Do have plans to form a joint venture with private defence companies in India?

Lova Drori: Definitely. We would like to form partnership with Indian private companies. Discussions are already going on with various private players for land systems. We already have a joint venture with an Indian company for electronics. I am sorry but I cannot reveal any more details due to commercial reasons

Vishal Kansagra: What is the update on SPYDER deal already signed between Rafael and Indian Air Force?

Lova Drori: As you might be aware, it was signed some time back. All I can comment is that SPYDER program is going on well. I cannot give out any more information.

Vishal Kansagra: What products will you showcase at Aero India 2011 to be held at Bangalore?

Lova Drori: Due to space constraints, we would showcase only a limited range of products. These would include air defense systems, communication systems, reconnaissance and targeting pods as well as tactical missiles including SPIKE family of missiles. 

Vishal Kansagra: Let us talk about Rafael products for security forces. As you are aware, India is affected by terrorism in various areas like Jammu & Kashmir, North-East and naxalism in many other states. What plans do you have for products for para-military and police forces?

Lova Drori: I feel that market for civilian security products is as big as those of military products as India faces a constant threat of insurgency in form of terrorism and naxalism. We have various reconnaissance and EO payloads for use in insurgency infested areas. But I admit that we are not experienced enough with activities of security forces in India. We are not familiar with procurement methods of para-military forces and it would require lot of effort on our part. 

Although the number of customers is large, number of suppliers in that field is also big. In many cases, due to budget restrictions and lower technology requirements, Rafael might find it tough to capture chunk of this market due to cutting-edge technology they offer and associated higher costs.

Vishal Kansagra: Since all defence deals above Rs. 300 crore have offset clause associated to them, what do you have to say about it?

Lova Drori: I feel that current offset regulations might be a big problem for companies involved in major defence deals. While offset clause only focuses on the value of the deal, there is no weightage given to quality of the technology provided. E.g. high-tech electronics system and machined components are assigned same value. There is no added bonus or incentive for companies to provide advanced technology when compared to mediocre components. 30% of deal amount actually comes out to be 50% of the actual hardware. 

Another factor affecting such offsets is that huge investment needs to be made to raise infrastructure within a short span of time which is next to impossible. Even if a company manages to do it, value is calculated in Indian currency. Taking varying exchange rates into account, effectively offsets would amount to 60-70% of the total equipment cost. This is practically impossible. Some low-cost equipment (under Rs 300 crore) does not invoke offset clause. 

Unfortunately systems offered by Rafael are high-tech with high acquisition costs. Alternately they could purchase Indian products, but their other customers also insist on offsets, making things tough for them. Another way out is JV with Indian companies where FDI is capped at 26% which is not encouraging. I hope that offset policy will be rationalized and if it is not then most of the major defence contractors will face similar problems not because they don’t want, but because they can’t.

Vishal Kansagra: Recently associations like US AIA, British ADS, French GIFAS, etc. got together and wrote to MoD to review defence procurement and offset policies. Do Israeli defence contractors have any similar association and have they raised same concerns?

Lova Drori: We do not have any such association of Israeli defence companies. Moreover as such corporations are bigger and their parent countries have more political influence, they can do much more. Rafael as a company has raised these issues at conferences and seminars and even in writing. Rationalizations in offset clause will eventually help Indian industry as it would allow infusion of latest technology.

Vishal Kansagra: What is the market scenario globally?

Lova Drori: Right now global market is in recession. US, EU and other developed countries are in recession and hence cutting budgets. Budget cuts affect new procurements in absence of any immediate threats. Some countries have their own programs and won’t spend little on such systems as interim measures. India and Israel have constant security threats and require such systems at the earliest. East Asian and Latin American countries are not adversely affected by recession or have security threats. 

Mid-east countries like UAE are on buying spree, but that is not our traditional market. India is not adversely affected by recession, has a big defence budget and security requirements, hence making it a lucrative market for Rafael.