Charging customers for nation-building?

Think of a private engineering company like L&T building a small passenger aircraft at a total development cost of $2 billion. The international market for such aircrafts is highly competitive and the domestic market is quite small. Based on the estimated product lifecycle for the model and projected domestic demand over that period, the company estimates that it should charge $25 million per plane to recover its costs.

But better equipped models from international manufacturers are priced much less. So the company talks a lot about its contribution to building indigenous capabilities and argues that it should be paid a higher price. The company lobbies hard with the government for a decree that domestic airlines should use only the L&T aircraft on short haul routes and the Air Force should buy a dozen L&T planes a year. Imagine the uproar that would follow!

Now, switch L&T for a public sector organisation like National Aerospace Laboratories (NAL) which is the premier aeronautical research agency in the country. There will be no furore. Instead, it will be celebrated as a shining example of supporting domestic R&D capabilities! In fact, this is actually happening for NAL and its 14-seater turbo-prop aircraft Saras.

NAL has priced the aircraft, which took nearly 2 decades to develop, at nearly $10 million apiece when similar aircrafts cost only half as much on average. The Air Force is said to have ordered as many as 40 planes and NAL estimates the total domestic market demand at around 200 planes over the next 15 years. If there are sufficient orders, NAL says it can bring down the price to around $8 million.

"It is easy to pull down an indigenous programme development on costs. Look at the contribution to aerospace development in India." This is what a NAL director said when someone questioned him on the pricing.

At $10 million, there is no chance Saras can compete with models from foreign manufacturers and private domestic buyers will not even consider it. The only buyer will be the Air Force, because it will have no choice. Saras will be a commercial disaster and NAL may never get sanction for similar projects in future. So much for the 'contribution to aerospace development'!

If this was such an important project for building domestic capabilities, NAL should get the government to subsidise part of the development costs and price the aircraft more competitively. Sales will obviously be higher at a lower price and manufacturing costs will come down. Private sector companies will be keener to partner NAL when they see a competitively priced product which will sell. This will help NAL to develop superior manufacturing capabilities and sufficient funds to further improve the product to make it even more competitive. More importantly, the Saras project will be seen as a success and NAL can easily propose even more ambitious projects.

An Indian Dreamliner or A380 to take on Boeing and Airbus, maybe!