Civil Aviation Minister Praful Patel's plans to make India a maintenance, repair and overhaul hub for aircraft in Asia are set to crash.
China, once again, has left India way behind. While over 300 MRO companies are in operation in China, only three have set up shops in India - Max Aerospace, Airworks and Indamer.
Though the entry of Lufthansa Technik, Boeing and Airbus will double the number of MRO centres in India, the numbers will still fall way short of China. So far, ten companies have shown interest in getting into the business. Not all, experts expressed fear, may see the light of day.
Some of them like GoAir's venture with SIA Engineering have already been shelved, while others like Kingfisher's joint venture with GAMCO are still under consideration.
In fact, such has been the growth of China that it now challenges the dominance of Singapore. Boeing has announced a new MRO unit in Shanghai, which will turn the city into an international hub by 2010.
Aviation industry experts said China offers serious tax breaks for MRO centres. Coupled with better infrastructure, cheaper labour and a bigger market, nobody is surprised that MRO companies have decided to make a beeline for China and skip India.
China has around 100 operational special economic zones, free trade zones, state-level economic zones and high tech industrial zones, which offer substantial tax incentives. Many of these SEZs have airports, which makes it convenient for an MRO company to set up shop.
In comparison, it seems that only two Indian SEZs will house MRO facilities - Nagpur for Air India-Boeing and Hyderabad for Lufthansa Technik-GMR. "An MRO ideally has to come up near an airport. Since most SEZs in India do not have an adjoining airport, it is difficult to set up an MRO there," said an executive from Air India's MRO business unit.
If located outside an SEZ, an MRO operator in India would have to pay service tax of 12.5 per cent. Importing spares involves customs duties of up to 50 per cent plus value-added tax of 12.5 per cent and octroi of 4 per cent. Due to these taxes, servicing an aircraft in India could become 50 per cent costlier than global standards.
"The future of Indian MROs is riddled with a tax structure which might impact the growth of the industry. Many MRO operators coming to India are realising this and are wary of the scenario," said a Boeing executive.
Only too aware of the problem, a top officer in the Union Civil Aviation Ministry said: "We are very hopeful that as the volumes expand, the central government will offer some sops to the MRO industry as well."
Till that happens, India will lose business in large volumes to China. "We currently have around 5,000 employees working in China, whereas we will employ around 400 employees in the Hyderabad MRO," said a Hamburg-based spokesperson for Lufthansa Technik.
The reason for the disparity in numbers is simple - China offers a far bigger market than India. China's fleet of aircraft stands at 1,060 - almost three times India's 380. According to a forecast by Airbus, China will have 3,238 aircraft by 2026 as against India's 986.
According to studies conducted by Aerostrategy, an aviation consultant, China currently generates $1.3 billion in MRO activities, while India generates only $410 million.
Also, China has a strong industrial base for manufacturing aircraft spare parts, which India does not have. Both Boeing and Airbus source parts in large numbers from China, including components for their ambitious A380 and Dreamliner aircraft, respectively.
