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November 26, 2011

Large orders can make Arjun tank cheaper

(Business Standard) : The army could clear the indigenous Arjun Mark II main battle tank (MBT) for frontline service after trials next year, but a question mark hangs over the Arjun’s prohibitive cost. Heavy Vehicle Factory, Avadi (HVF) has already built 124 Arjun Mark I tanks for the army at Rs 18 crore per tank. But on 29th August, Defence Minister AK Antony sprung a bombshell when he announced in Parliament that, “The likely estimated (sic) cost of each MBT Arjun Mark-II… will be approximately Rs 37 crore.”
This is twice the price of the Russian T-90 and not much cheaper than USA’s M1 Abrams, the world’s most advanced MBT. On 1st July 11, the US Congress was notified that Egypt would buy 125 Abrams tanks for $1.3 billion — i.e. $10.4 million, or Rs 54 crore, per tank.
 During a visit to HVF and to the Central Vehicles R&D Establishment (CVRDE), which has developed the Arjun, Business Standard was explained that the cost of the Arjun is easily reduced. If the army places a larger order the price will drop by 30 per cent.
P Sivakumar, Director of CVRDE, explains that 50 per cent of the cost of the Arjun Mark I went on three imported components —the gunner’s main sight (GMS) from OIP Systems, Belgium; the gun control equipment (GCE) from Bosch, Germany; and the power pack (engine and transmission) from Renk, Germany — which together cost Rs 12 crore. Ordering just 124 pieces left little leeway to beat down that price.
“If you are talking just 124 tanks, there is a problem. Bring an order for 500 tanks. We will go for ToT (transfer of technology) for the foreign parts… The cost of labour in Germany is the highest in the world. We will build 70 per cent cheaper in India. If we buy the power pack of the Arjun for Rs 7.5 crore on Friday… I will produce it in India for just Rs 4-5 crore,” says Sivakumar.
For an army with more than 3,500 tanks, including 2,400 obsolescent T-72s that are crying out for replacement, ordering just 124 Arjun Mark IIs seems unduly cautious. But the army has little incentive to reduce cost. Though the generals are now willing to order more Arjuns, they are placing their orders piecemeal.
Since most of the Arjun’s 10,000 components are outsourced, the size of the order is a crucial determinant of what price they are supplied at. Says RK Jain, Additional DG of the Ordnance Factory Board (OFB) who oversees HVF: “If the army’s indent is for just 124 tanks, the vendors charge higher prices. Besides, the amortisation cost of jigs, tools and equipment is reduced over a larger order. HVF and CVRDE have been jointly requesting the army to confirm an order of at least 250 Arjun Mark IIs so that we can negotiate from a stronger position,” says Jain.
Another reason for the Arjun Mark II’s rising cost becomes obvious at the Arjun production line at HVF, where the army is collecting the last of 124 Arjuns that were cleared for production in 2008. Just as the Rs 50 crore Arjun line has hit its stride, it must shut down for at least two years since another order can come only after the Arjun Mark II trials next year.
I walk through the giant workshop, now almost empty, with the HVF manager who oversees Arjun production, HR Dixit. “Even if the army clears the Arjun Mark II next summer, and indents for 124 more tanks by October 2012 (an optimistic time-frame), we require at least 12 months for obtaining the items that go into the Arjun. So end-2013 is the earliest that the Arjun assembly line can restart,” says Dixit.
The skilled workers on the Arjun line, who have developed invaluable expertise while building 124 Arjun tanks, will be distributed to other parts of HVF, Dixit tells me.
“We can send our workers to HVF’s other lines. But what can we do about the dislocation of our sub-contractors, many of them small enterprises around Chennai, who supply thousands of Arjun components like fuel pipes and bearings. They will seek other work because they know they will get no orders until an indent is placed for the Arjun Mk II. And, when we need them again, they might not be available,” says Ashutosh Kumar, works manager.

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