HAL Analysis

Hindustan Aeronautics Limited has been operating in a monopoly market structure till date primarily due to the
following reasons:
1. It was the country’s sole seller to operate in the military plane and helicopter making business.
2. The government backed firm has exclusive rights to produce military planes and helicopters.
3. It has many customers including the Indian Air Force, Indian Army, Indian Navy, Indian Coast Guard, Indian
Space Research Organisation, Defence Research & Development Organisation, Ordnance Factory Board,
Border Security Force, Oil & Natural Gas Cooperation of India, Govt. of Karnataka, Govt. of Jharkhand, Govt.
of Maharashtra, Geological Survey of India and Bharat Heavy Electricals Ltd.
4. The demand curve that HAL has been facing till now is the market demand curve.
5. HAL is a price maker rather than a price taker and can charge a price which is higher than the marginal cost.
6. It also controls the output offered for sale.
7. There were barriers to entry in this market primarily due to high investment costs and economies of scale.
However, despite being the sole maker of military planes (inhouse as well licensed production partner for foreign
aircrafts) in India for many years its monopoly power and hence business is under threat. This position can be
further analysed using the following points:
1) We know, that if a monopolistic firm increases its price beyond the price corresponding to the profit
maximizing output, there are chances that the customers will stop purchasing the products from them.
Corresponding Situation: The Government had scrapped HAL’s project of making 108 Rafale jet planes
primarily due to cost escalations on HAL’s part and awarded it to the Anil Ambani owned Reliance Defence
and Aerospace to lead the execution.
2) In this scenario the demand curve is becoming elastic in nature and the firm is losing its monopoly power
and bending towards monopolistic/perfect competition.
Corresponding Situation: The demand for aircrafts manufactured by HAL was decreasing not only due to the
price factor but also due its quality (Lack of Technological Advancements)
3) Even if it has a high monopoly power or a high Lerner’s Index it does not mean that this will transpire into
higher profits. This can be due to low volume of sales and larger fixed costs.
Effect: Due to lower turnover, caused by low demand and lower profits, the jobs of 30,000 employees of HAL was in
the line and HAL had to borrow 1000 crore to pay them.
4) The low demand for HAL’s products (aircrafts and helicopters) can also be attributed to other factors beyond
price and quality, such as its inability to find customers beyond the comforts of government business and in
the global market.
Corresponding Situation: Out of HAL’s revenue of $3billion as on FY2017-18, exports only accounted for a mere 314
crores. Its only sources of revenue are the in-house aircrafts, helicopters and licensed production of foreign aircrafts
(all government engagements).
5) It is evident form the article that HAL loses out on many deals globally just on the basis of wrong pricing
strategy.
Corresponding Situation: Due to the wrong pricing strategies they are unable to negotiate properly in the global
market and hence lose out in many deals.
After analysing the above problems there are some recommendations for HAL:
1) The prime focus of HAL should be to revamp its technology. Here the government should pitch in with their
investments. If the product itself is not of supreme quality then HAL will find it difficult to save its business.
2) HAL should determine its marginal cost and elasticity of demand to develop a proper pricing strategy. If
demand is highly elastic, then the Price should be closer to the MC (Pricing as in case of PC). If the demand is
in-elastic they can afford to set a price relatively higher than the MC.
3) They should get out of the comfort zone of government only engagements and look to develop their
business across countries like Africa and Southeast Asia to expand their customer base and subsequently
increase their demand.
4) With the production capacity they have got (9 production and 11 research and development units) they can
focus on building customized products for their customers in order to increase their visibility.
5) Also, since they have already been enjoying monopoly power all these years, they can look at decreasing
their prices to some extent to make life hard for new competitors (foreign and domestic) who are trying to
enter the market.
6) HAL should also turn their attention to completing their projects on time and preventing cost escalations,
otherwise it may cause the armed forces to award contracts to private (foreign and local) players.
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Hindustan Aeronautics Limited has been operating in a monopoly market structure till date primarily due to the

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