Factoring in economies of scale and offsets, and improving the simulation from last time, this time I’ll explore the benefits that would accrue if the Indian Army purchased Tata WhAPs instead of ICV Strykers (ignoring the Humvee because it doesn’t make sense to me as a competitor to these two).
Each battalion requires 70 vehicles, and the simulation begins with the aim of equipping two battalions a year over a duration of 10 years. The WhAP is assumed to cost 20% less than the Stryker, and is 75% indigenous at the beginning of the simulation. I think this is a pessimistic assumption for WhAP because of how expensive labour is in the United States as compared to India.
Image source: ANI
Summary
At the end of 10 years, after procuring 1,400 vehicles:
The WhAP programme costs $2.96 billion less than the Stryker.
WhAP: $5.63b
Stryker: $8.59bWhen taxes are factored in, the government spends $3.25 billion less on the WhAP programme than on the Stryker.
The WhAP costs an average of $4.02m per unit. The Stryker costs $6.14m.
Economies of scale help keep the WhAP’s per unit cost low despite a 4% annual cost increase baked into both products. It goes from $4.08m in year 1 to $4.85m in year 10. See graph below.
The Stryker is a mature product, so economies of scale are already baked into its initial per unit cost. The 4% annual price increase takes its per unit cost from $5.11m in year 1 to $7.27m in year 10.
The average cost per unit is $2.11m lower for the WhAP over 10 years thanks to economies of scale and the benefits of incremental indigenisation.
This reduction in per unit cost has significant implications for exports, but those have not been factored into this exercise.
Since taxes earned from the domestic supply chain are higher for Tata WhAP than for the Stryker, the government ends up spending $3.25 billion less over 10 years.
The total revenue earned by Indian entities is $4.89 billion greater in case of the Tata WhAP than in case of the Stryker.
This also results in almost $300 million more in taxes contributed by the WhAP supply chain than the Stryker supply chain.
Since the supply chain earns 128% more revenue from the WhAP than the Stryker, the economic activity stimulated by the former will also be 128% greater.
The numbers
Tata WhAP Stryker Delta
Total Budget $5,631.94m $8,589.17m $2,957.23m
Average Per Unit Cost $4.02m $6.14m $2.11m
Total Units 1,400 1,400 0
Total Actual Spend $4,710.10m $7,964.24m $3,254.13m
Total Taxes $921.83m $624.93m -$296.90m
Total Flow to Budget $221.24m $149.98m -$71.26m
Total Flow to R&D $46.09m $31.25m -$14.84m
Total Domestic Revenue $8,693.52m $3,805.23m -$4,888.28m
Tables appear properly formatted when viewed in landscape mode on mobile devices.
Per Unit Cost - Impact of Economies of Scale and Incremental Indigenisation
Tata WhAP - Amount spent is lower that amount budgeted as the domestic supply chain returns a certain amount back in taxes the next year.
A similar impact is seen for the Stryker, but the magnitude is lower because the OEM does not pay taxes in India. Only offset partners do.
Assumptions
Number of battalions to be equipped
We’ll begin with the entirely reasonable assumption that 20 battalions of the Mechanised Infantry need to be equipped with one of these vehicles over the next 10 years. Each battalion requires 70 vehicles. The total requirement is 1,400 vehicles.
Per unit cost
The Stryker’s cost in 2016 was $5.11 million. In the absence of a more recent value, that will have to do. I couldn’t find an estimate for the Tata WhAP’s cost. The Tata Kestrel’s cost can be guessed from an executive’s statement that an equivalent vehicle costs ₹23 crores or $3.07 million. In the absence of a direct estimate, we’ll assume that the WhAP initially costs 80% of the cost of the Stryker, or $4.08 million.
Economies of scale
There are already 4,900+ Strykers built, so it’s unlikely that further orders will result in incremental economies of scale.
The WhAP, on the other hand, will benefit from significant economies of scale, so we’ll taper them off over 10 years. Refer to this post for details about the model used for estimating economies of scale.
Indigenisation
The WhAP starts at 75% indigenisation and, because we want a worst-case scenario for the WhAP, indigenisation improves at only 50 basis points or 0.5% each year.
In case of the Stryker, indigenisation is not directly relevant since we’re assuming the products come to us from the US. It becomes relevant when computing the benefits of offsets, and for that purpose we will assume 50% indigenisation as a constant.
Offsets & indigenisation
In case of the Stryker, offsets will be 30% of the procurement budget each year. These will go to the L1 supplier. 47% of that amount will be COGS for the supplier, and 50% of that will go to L2 supplier because we’re assuming that even in case of offsets - say Subsystem X - the level of indigenisation is 50%. Of the amount that comes to the L2 supplier, 47% will again be COGS and 50% of that will percolate down to the L3 supplier.
Taxes
All components procured from domestic sources have GST levied on them at 18%. All domestic entities are assumed to generate profits at a margin of 20%, and pay corporate tax @ 25%. This does not include the OEM for the Stryker, but it does include its offset partners.
All domestic entities are assumed to spend 17% of their revenues on employee salaries, and income tax is levied on salaries @ 15%. Doesn’t apply to Stryker OEM but does apply to its offset partners.
Other parameters
The government spends 24% of its budget on Defence, and 5% on R&D. Taxes generated by the WhAP program (and those generated by offset partners for the Stryker) flow back into the program in the same proportion.
NB: I reran the simulation with even harsher initial conditions for the WhAP, which still works out substantially cheaper and more beneficial to the Indian economy than the Stryker.
Gratitude to Brig Karan Rathore (Retd) for clarifying the requirement and validating certain cost assumptions. Errors are entirely my responsibility.
Shaunak Agarkhedkar writes spy novels. His first two - Let Bhutto Eat Grass & Let Bhutto Eat Grass: Part 2 - deal with nuclear weapons espionage in 1970s India, Pakistan, and Europe.
As I said before, I will engage with you upto a point and no further.
The major concern with " made in India" is reliability. One cannot afford break downs in battle