Power Plays: Business Implications of the Indo-U.S. Nuclear Deal
From: India Knowledge@Wharton Article , Aug 09, 2007 http://knowledge.wharton.upenn.edu/india/india/article.cfm?articleid=4217
On a flight to India five months ago, Wharton management professor Saikat Chaudhuri's co-passenger was a U.S.-based executive from General Electric, who was headed for talks with government officials in New Delhi. The executive had made numerous trips to India in the previous year, and he was also talking to several Indian states to explore deals to build nuclear and other power plants. "He was preparing for the market that would open up with the Indo-U.S. nuclear deal," says Chaudhuri.
That executive may have congratulated himself earlier this month when the two countries finally signed the deal -- called the "123 Agreement" because it falls under the U.S. Atomic Energy Act section of that number. Others may be cheering as well: Two big U.S. delegations -- representing 180 companies and 38 companies respectively -- visited India in the past year, looking to sell items such as Westinghouse nuclear reactors, uranium from South Dakota and Lockheed Martin fighter jets.
The agreement aims at ensuring U.S. support for India's civilian nuclear power program, with the promise of a significant jump in trade and business relations between the two countries. India will open its 14 civilian nuclear plants -- eight others are for military purposes -- to international inspection. Still, political groups in both countries threaten to block the deal, even as the emerging geopolitical realities and the economic benefits appear to outweigh the concerns. India Knowledge@Wharton spoke to corporate executives, analysts and Wharton faculty members to understand the business ramifications of the deal.
Staying Below the Radar
Initially, it appeared that most of the debates about the U.S.-India nuclear agreement were largely political. A deafening silence marked the business implications -- and with good reason: Many senior executives were waiting for the political clouds to clear and for the final terms of the agreement to be revealed. As GE India's CEO T.P. Chopra told India Knowledge@Wharton in an interview, the final form of the agreement would affect GE's nuclear power strategy in the country. Some business leaders point to other challenges. "First, some hurdles still remain," says the CEO of an Indian company that has been negotiating with U.S. firms for defense joint ventures. "The last thing we want is to give ammunition to the Left-wing parties. They would love to project the U.S. as greedy capitalists selling the country for a few dollars more. Business will keep silent until it's all signed, sealed and delivered." (The Congress Party-led Indian government depends on support from the Left, which has rejected the deal.)
Although the agreement is in its last lap, the consent of lawmakers in both India and the U.S. has to be secured. That is regarded as a formality, but adverse publicity could still affect the outcome. Also, an additional India-specific safeguards protocol will need to be signed with the International Atomic Energy Agency (IAEA) and the 45-nation Nuclear Suppliers Group (NSG) will need to approve the deal as well.
By the second week of August, however, a flurry of business moves has become evident. According to an August 9 Bloomberg News report, "Areva, the world's largest maker of nuclear power stations, and General Electric, are among four companies poised to share $14 billion of orders from India as nations led by the U.S. prepare to lift a 33-year ban. Toshiba's Westinghouse Electric and Russia's atomic energy agency Rosatom will probably also win contracts to each build two 1,000 megawatt reactors, according to Nuclear Power Corp. of India chairman S.K. Jain." The report noted India can begin purchasing equipment following NSG approval of the agreement.
Bloomberg added that "the orders will form the first phase of Prime Minister Manmohan Singh's plan to build 40,000 megawatts of nuclear capacity by 2020, equivalent to a third of current generation. India needs to add to the 3% of electricity that comes from Russian-designed reactors to meet soaring energy needs and reduce its reliance on coal-fired power plants." The report also quoted one source who said India would "try to diversify its suppliers and it's highly likely all four [Areva, GE, Westinghouse and Rosatom] will win the contracts."
Even so, the going will hardly be easy. Wharton management professor Jitendra Singh says one of the main hurdles the U.S. government faces is to ensure the deal survives any opposition from legislators. "Congress is on a collision course with the Bush administration right now," he says. "The odds are that they are not in a very cooperative state of mind." He feels the Democrats may not support the deal beyond a point. "That still leaves the challenge of getting the NSG to cooperate, and that may prove difficult as well."
A Symbolic Cachet
Notwithstanding the political test, Singh says the deal has "symbolic significance" and that "it may be remembered in time as a watershed event for India." He notes that for all the rhetoric about Pakistan being a major ally in the United States' war on terror, "the U.S. has refused point blank on any kind of parity between Pakistan and India in the nuclear domain." He attributes that stance to the fact that "India has always played by the rules, even though it was not a signatory to the NPT (Nuclear Non-Proliferation Treaty), whereas Pakistan has been a nuclear proliferator with supplies to Iran, Libya, North Korea and perhaps others."
Chaudhuri also feels the symbolic value of the deal is significant for long-term planning between the U.S. and India, "whereas in earlier years you had to always include a caveat" about how the relationship would evolve. "In the past, there has always been a certain amount of mistrust between the two countries, which has perhaps prevented closer ties and led to some political uncertainties over the last 20 to 30 years," he says. He now sees clear signals from the U.S. that it "wants to engage India" for both economic and geopolitical reasons.
For U.S. companies, multi-billion dollar opportunities are opening up. "It is not just in the nuclear area," says Shivanand Kanavi, a commentator on technology issues who is currently writing a book on India's nuclear program and is the author of Sand to Silicon, a book on the digital revolution. "There are opportunities at several levels and in several sectors."
One obvious opportunity is that U.S. companies will be allowed to sell both nuclear reactors and technology to India. This is big business -- roughly $150 billion worth, according to estimates from the U.S.-India Business Council (USIBC). The numbers are extrapolated from the Indian nuclear industry's plans to increase nuclear power output from around 3,500 MW now to 60,000 MW over the next three decades. The Atomic Energy Commission has doubled its target for 2024 from 20,000 MW to 40,000 MW. Nuclear energy today accounts for barely 3% of India's total generation of 120,000 MW.
A clear beneficiary of the new regime is the public-sector Nuclear Power Corporation of India (NPCIL) -- the entity negotiating the deals with Areva, GE, Westinghouse and Rosatom cited in the Bloomberg report.
Chaudhuri says that unlike telecommunications, roads and airports where India has been aggressively forging ahead, its energy sector "has not quite had that radical transformation yet." He expects the ramifications for Indian industry to be huge, by lowering infrastructure costs with increased supply of power.
At the recent annual general meeting of Tata Power, the group's chairman, Ratan Tata, told shareholders: "If the government opens the sector for private investment, Tata Power would be certainly interested in operating a nuclear power plant." A critical challenge for businesses, however, will be securing the government's green light. Today, only companies with a 51% government stake are allowed to generate nuclear energy. In practice, this has boiled down to only NPCIL. Two years ago, the 89.5% government-owned National Thermal Power Corporation (NTPC) had approached NPCIL with a proposal that it enter the nuclear generation arena. But the talks have not made much headway. (Incidentally, NTPC shares rose on the release of the text of the 123 Agreement; NPCIL is not listed.)
For the private sector to enter the fray, the regulatory environment will need to change. In May, Atomic Energy Commission chairman Anil Kakodkar told a meeting in Kolkata (formerly Calcutta) that the Atomic Energy Act would be amended as soon as possible to allow private-sector participation. Draft legislation has already been circulated.
Apart from the Tatas, other interested parties will likely include the Anil Ambani-controlled Reliance Energy, the Essar Group and the GMR Group. Reliance has set up a "New Power Initiative" including senior executives from NPCIL. The Tata Group has also taken on board people with nuclear domain expertise.
Kanavi points out that U.S. companies helping to set up these plants will be looking to work with Indian contractors. Some of the contenders include: Larsen & Toubro (L&T), Hindustan Construction Company (HCC) and Gammon India in civil construction; L&T in reactors; Bharat Heavy Engineering Ltd (BHEL) in boilers; KSB, Kirloskar Brothers, Mather & Platt, Jyoti Ltd. and Bharat Pumps in boiler feed pumps; Alpha Laval, GEI Hammon Pipes, Maharashtra Seamless and Ratnamani Metals in heat exchangers; Honeywell Automation in panels; and Rolta India in consulting and engineering services. Some industry watchers also include Walchandnagar Industries, Godrej & Boyce, Bharat Heavy Plates & Vessels, the Hyderabad-based MTAR (which produces assemblies and precision components for use in space and nuclear applications), and Crompton Greaves.
Over the years that the Indian nuclear industry was shunned by the Western world, many of these companies have built up a good deal of expertise. HCC, for instance, was the first Indian construction company to undertake civil engineering works for pressurized heavy water reactor power projects in India. "HCC has constructed four out of the seven nuclear power plants in India," says chairman and managing director Ajit Gulabchand. Four new plants are under construction, with HCC building two of them.
"It is fast becoming accepted that nuclear energy is 'green' compared to conventional energy sources, and it is also quicker to implement," says Gulabchand. "There is a renewed global focus on building new capacities."
M.V. Kotwal, who heads the heavy engineering division of engineering giant L&T, now sees openings to set up "light water nuclear reactors of the boiling water type or the pressurized water type." He says the technology for such reactors, which need enriched uranium as fuel, is available with the U.S., France, Japan and Russia. Whereas L&T is equipped to manufacture the main reactor vessels as well as steam generators, pressurizers and other critical equipment for such nuclear power plants, "it is a problem at times to source some of the raw material which is manufactured by European, Japanese and Russian companies," says Kotwal. "After the clearance of the agreement, it will be easier to source such material and hence to speed up the Indian program."
Because of their extensive domestic experience and cost advantages, companies like L&T also plan to export nuclear reactor building skills and associated operation and maintenance services once the agreement is finalized.
Meanwhile, the perestroika in the nuclear arena will extend to exploration. The public-sector Uranium Corporation of India will be bidding for mines abroad. Meanwhile, at home, the private sector is being allowed into uranium exploration. For starters, the Department of Atomic Energy (DAE) will outsource areas like data collection and analysis.
Mega Defense Deals
All of this is, however, small change compared to defense deals, which have U.S. companies waiting anxiously. A conservative estimate says that India will spend $70 billion in defense procurement over the next five years. (The $150 billion estimated for nuclear power projects is spread over 28 years.)
Take just one component: fighter jets. India is in the market for 126 multi-role combat aircraft. At $10 billion, this is one of the world's biggest single-supplier contracts. New Delhi-based defense commentator Siddharth Srivastava wrote in an Asia Times article that the contenders are Boeing's F-18 Super Hornet, Lockheed Martin's F-16 Fighting Falcon, the Russian MiG-35, the Swedish SAAB Group's Jas-39, the Typhoon Eurofighter (the combined effort of British, German, Italian and Spanish firms), and the French Dassault Rafale.
The agreement will have spin-off benefits for Indian companies, as government regulations require foreign suppliers to invest 30% of deal values above $66 million in India's defense industry, wrote Srivastava. He points to Boeing's recent win of a $11 billion order for 68 aircraft from Air India, and its announcement that it would invest $1.7 billion to buy goods and services from Indian companies. Lockheed Martin has approached Hindustan Aeronautics, Bharat Electronics, BHEL, and the Tatas for joint defense projects, he adds.
Today, Russia is India's biggest defense supplier. Israel stands at No. 2, having overtaken France, the U.K. and the U.S., who had been hamstrung by various restrictions but now want part of the action. India this year expects to spend $10.5 billion on military equipment, including $4 billion for the air force, $2.8 billion for the army and $2.5 billion for the navy. Some 70% of those capital needs are met though imports.
The big Indian houses of Tata, Mahindra and Godrej are cobbling together consortia to bid for defense projects that may open up once the nuclear deal takes effect. L&T has already signed up with European aerospace and defense group EADS. Incidentally, L&T is planning to build submarines for the Indian Navy and has produced prototypes of products including missile launchers.
Indian business groups with defense expertise include Tata (electronic warfare systems, embedded software), Mahindra (simulators, surveillance systems), Ashok Leyland (transport/passenger vehicles, light armored trucks), Kirloskar (naval engines) and Bajaj Tempo (armored vehicles, components). Mahindra recently announced a marketing and support deal with Seabird Aviation Jordan to supply Seabird seeker aircraft to India. "This is a natural extension of our activities in the field of surveillance for which we have obtained a license from the government of India," says Brigadier (Retd.) K.A. Hai, CEO of Mahindra Defense Systems.
Another area where the nuclear agreement will make a difference is in space. "The deal will pave the way for lifting technology restriction regimes," says Kanavi. "One example: U.S. satellites or even satellites carrying U.S. components are not allowed to be launched by the Indian Space Research Organization. This might change and lead to India entering the business of space launches and satellite fabrication as a serious player. It has a price advantage of about 30% here due to the availability of high-skilled talent at low cost."
"Ultimately, economics determines everything," says Chaudhuri, who feels those compulsions will override political opposition to the deal. To support that point, he says that despite widespread criticism of China's political system and its human rights issues, the U.S. business community is "very close to China." He says the Chinese government's investment in New York City-based private equity firm Blackstone "is very telling," as is also the recently embattled financial services giant Bear Stearns's attempt to rope in Chinese partners.
Chaudhuri adds that it is impressive that India "stuck to its guns" in the negotiations leading up to the nuclear deal, and also won the endorsement of its scientific establishment. "What's also interesting is that India is going to keep its options open and engage various countries, including Russia and China, at the geopolitical level," he says. "That's a new reality that has to be accepted by the rest of the world." The deal also sends a clear message to the U.S. that its "unilateral actions are probably bound not to be as effective any more," he says.
"There are some people who look askance at the 'sudden' emergence of India," Singh says. He argues that a longer-term historical perspective is needed, citing William Dalrymple's article in Time magazine's Asian edition on August 13, in which he says the notion of India as a poor country is of relatively recent origin, and that as late as 1700, it was one of the wealthiest regions of the world.
"It may be worth reminding ourselves that at one time India was called Sone ki Chidiya -- the Golden Bird," says Singh. "Maybe that was not just a flight of fancy after all. And India and China are simply heading back, in this post-Cold War, post-imperialism era, to their historically handsome share of world GDP and trade."