India's Tata Motors and Mahindra Defence Systems have secured a landmark $1.5 billion defence contract from Indonesia, marking a significant breakthrough for Indian automotive exports in Southeast Asia, reported Financial Express.

The deal encompasses the supply of 35,000 TATA Ultra T.7 trucks, 35,000 TATA Yodha vehicles, and 35,000 single-cab Mahindra Scorpio Pik-Up units, primarily for military logistics and troop transport.

The first consignment of 1,000 vehicles has already arrived in Indonesia, signalling the project's momentum despite ongoing challenges. This order underscores India's growing prowess in affordable, rugged military-grade vehicles, tailored for diverse terrains from Indonesia's archipelago to potential regional exports.

However, the agreement has sparked fierce domestic opposition in Indonesia, centred on the absence of local manufacturing. Critics argue that importing fully built units undermines national industry and job creation, fuelling protests from local suppliers and politicians alike.

Jakarta Globe highlighted comments from Agrinas CEO, who revealed that negotiations assessed domestic capacity at just 45,000 units total. This included 20,600 Mitsubishi Fuso trucks, 13,500 Foton Aumark units, 10,000 Hino trucks, and a mere 900 Isuzu Canters, exposing Indonesia's production constraints.

The CEO's stark assessment—"If we can get something stronger and cheaper, why should we buy something weaker and more expensive?"—captures the tension. Indonesian stakeholders view Indian vehicles as costlier and less robust compared to entrenched Japanese rivals, despite Tata and Mahindra's competitive pricing and proven durability in harsh conditions.

For TATA Motors, the Ultra T.7 offers a 7-tonne payload with advanced fuel efficiency and modular design, while the Yodha provides lightweight, 4x4 versatility ideal for rapid deployment. Mahindra's Scorpio Pik-Up, with its robust single-cab configuration, excels in off-road reliability, drawing from decades of Indian Army usage.

This deal arrives amid Indonesia's military modernisation drive under President Prabowo Subianto, who prioritises self-reliance via the 'Minimum Essential Force' (MEF) program. Yet, the procurement highlights a paradox: ambitious localisation goals clashing with immediate capacity shortfalls in the automotive sector.

Indonesia's defence market, valued at over $8 billion annually, represents untapped potential for Indian firms. With a population of 280 million and strategic Indo-Pacific positioning, it could serve as a hub for ASEAN exports, especially as regional tensions with China escalate.

TATA and Mahindra stand to gain immensely from this foothold. Tata's prior successes in Africa and Latin America demonstrate scalability, while Mahindra's armoured variants have impressed global militaries. Combined, their order book now rivals larger players, bolstering India's 'Make in India' narrative on the world stage.

Opposition stems partly from protectionist policies like the 40% local content rule for defence imports, which this deal skirts via government-to-government negotiations. Local firms, dominated by Japanese alliances, lobby for extensions, but data shows their output lags behind Indonesia's 70,000-unit annual requirement.

The contract injects vital foreign exchange into India while aiding Indonesia's logistics backbone for the archipelago's 17,000 islands. Vehicles like the Yodha, with low lifecycle costs, could outperform pricier alternatives in maintenance-scarce environments.

Strategic implications abound. Indonesia's order aligns with Quad partnerships, enhancing interoperability with Indian forces amid South China Sea disputes. For India, it diversifies export markets beyond traditional allies, reducing reliance on volatile regions.

Yet, sustainability demands adaptation. Establishing Maintenance, Repair, and Overhaul (MRO) centres in Indonesia would address upkeep concerns for the current fleet and future exports, creating jobs and building goodwill.

Longer-term, shifting to Completely Knocked Down (CKD) or Semi-Knocked Down (SKD) assembly lines offers a pathway to localisation. Indonesia's scale—projected 10% CAGR in defence spending—positions it as a regional hub, where Tata and Mahindra could leverage pricing advantages over high-cost Japanese incumbents.

Local partners like PT Pindad or state-owned enterprises could facilitate joint ventures, mirroring successful models in the Philippines and Vietnam. This would neutralise 'weaker and more expensive' critiques by customising vehicles with Indonesian components.

Policy-wise, India could support via lines of credit from EXIM Bank, akin to $500 million deals with African nations, easing technology transfer. Indonesia's recent ASEAN chairmanship amplifies its hub potential for exports to Malaysia, Thailand, and beyond.

This $1.5 billion triumph validates Indian defence manufacturing's competitiveness, but localisation via MRO and CKD/SKD is essential for enduring growth. By addressing opposition head-on, Tata and Mahindra can transform Indonesia from a one-off buyer into a strategic partner.

FE