Sunday, 29 April 2007

Defence R&D loaded with IPR issues

(Concluding part of a 3-part series on R&D)

by Ajai Shukla
Business Standard, 28th Apr 07

The dusty collection of small sheds in Kushaiguda, outlying Hyderabad, hardly seems like a sensitive defence establishment, but this will soon be a highly-controlled air-conditioned facility. From September 2007, 65 highly trained workers of private Indian manufacturer HBL-ELTA Avionics will produce, entirely for export to Israeli defence major ELTA, high-tech radar components for which technology has been supplied by ELTA. In a phrase, HBL-ELTA Avionics is an export-oriented defence sector JV. 

Talking to HBL’s CMD, Jagdish Prasad, it soon becomes clear that HBL’s approach towards the technology it buys from foreign partners is radically different from that of the MoD’s production units. A defence PSU like Bharat Electronics Limited (BEL), which purchased night vision technology from Dutch major Delft just a decade ago, is already in the process of buying an upgraded version of the same technology, at a price that will exceed Rs 100 crores. In contrast, private sector HBL, having paid once for technology from ELTA, is absorbing that technology, and readying in-house R&D to improve on it. Like the IT industry, HBL plans to move up the value chain --- from technology absorption, to product improvement, to developing its own product that is technologically superior to what the foreign partner is offering.

Jagdish Prasad explains the difference, “Historically, in both IT and the defence field, the smaller companies have driven technology development. There’s a hunger to grow and an appetite for technology.”

This R&D hunger has already caused the MoD to shift policy gears, abandoning its exclusive reliance for R&D on its bloated public sector defence establishment. Instead, the MoD will also tap into the more nimble and tech-savvy private defence companies, subsidising their R&D in MoD-nominated projects to the extent of 80% of R&D costs.

The targets of this R&D opening, private Indian defence companies like HBL, Astra Microwave, Alpha Design Technologies, and Mahindra Defence Systems have learnt to walk without MoD crutches. Largely ignored by the MoD since they were first allowed into defence manufacturing in 2001, most have tied up with foreign defence majors that chose the JV route as a lever to crack the Indian defence market. The 26% cap on foreign equity in defence, and the MoD’s tendency to tilt the playing field in favour of the public sector, has not deterred international majors. The advantages of India’s manpower pool and vastly cheaper R&D, testing, and establishment costs provided sufficient incentives for tie-ups. With offsets having recently been made mandatory for defence deals of over Rs 300 crores, JVs in India also provide foreign majors with a way to “bank” offset credits for future defence contracts.

With JVs already in place and with private sector R&D already functioning because of a research-oriented attitude towards growth, there is only guarded enthusiasm for the MoD’s new policy of funding private R&D. If HBL accepts MoD funding for R&D, says Jagdish Prasad, it could create disputes over Intellectual Property Rights (IPR). Prasad says that “While an R&D subsidy seems attractive, I cannot second-guess what the government will want to do with the IPR. My company will have part-funded the R&D and I will worry about what happens afterwards on my product’s IPR.”

The real advantage of MoD-subsidised R&D, say private defence manufacturers, lies in the fact that the development contract will specify that the MoD will test the equipment or technology that is developed. Top MoD officials accept that the greatest deterrent to private sector R&D expenditure is the fear that the product will never make it into service. One reason for that is that the MoD has neither the obligation, nor the budget, to test every product that private companies develop. It is only the DRDO that is assured of every product being tested by the user. Now, in the case of subsidised R&D, private companies hope anticipate that MoD audit requirements will make it mandatory to test the products that come out.


Abhiman said...

Note :- The mention of the names of private companies in my post is not intended to endorse or commercially promote the companies or their products. It has been done only as a case-study to understand the dynamics of Transfer of Technology.

Hi Mr. Shukla. Sir, I think that the votaries of importing technology must know that NO Nation ever sells technology.
It only does so, when it percieves or anticipates that the reciever nation would develop the same technology on its own anyway, and hence it tries to "eke out" a further use of its technology by profiting from its sale to the reciever.
Also, as India is a low-cost manufacturing destination, no nation would endanger its own market-space by selling India its ToT---it would obviously like to keep its trade-secret in its own possession.

Hence due to the above reasons, ToT is never sold as a commodity; for if it were, then even third world nations like Bangladesh and Nigeria would have launched their own satelites.

This may infact be the fundamental principle of ToT.
It was witnessed when the technology of the F-35 JSF was refused to UK by the USA, despite UK being its closest ally.

Sir, the HBL facilities only manufacture some non-critical peripheral components only; it is similar to the outsourcing of auto ancillaries to India by Western auto majors like Mercedes and Ford. It is likely that HBL's machinery/equipment has also been installed by Israel, and that before selling their produce to any third-party other than Israel, Israel's permission would have to be sought.

Case study : In the 1980s, Japanese corporations Suzuki and Toshiba set-up in a JV with Indian companies Maruti and Videocon, to manufacture cars and Television sets respectively. This was NOT a ToT, but in "blunt" terms it was only Japanese manufacturing equipment on Indian soil, and partly funded by Indian corporates.

It was only after technology advanced that their acquisitions became dated, and whose underlying tech. was finally absorbed into Maruti and Videocon. After that, they started to build further on them; Videcon has its own patents in ACs, and plasma TVs. This is similar to how India was tutored to make sounding-rockets in the 1960s and went on to make PSLV and GSLV vehicles besides Agni-3, using the sounding-rockets as a base. Today, Videocon holds uniquely developed patents in AC and microwave.
Now as a postlude to the fundamental "law" of ToT, Videocon has acquired the entire global CRT manufacturing lines of Thomson of France, along with over 2000 patents for the same. This makes it the largest manufacturer of CRT televisions in the world.

But, the reson why Thomson sold its patents and CRT facilities to it was because they predict that the market of CRTs shall cease whereas that for LCD and plasma TVs shall increase. Thus, it sold what it percieved as obsolete.

This is exactly the reason why the technology for 2nd generation NVDs was sold to BEL by Delft :- It was increasingly getting obsolete AND besides it was likely that BEL would have developed the same indigenously anyway.

Sir, I completely agree with your view that BEL should have dwelt on understanding the 2G NVD technology as a springboard to further it and develop 3rd generation NVDs. That they did not do so or could not do so is a matter of debate.
But I think that if 3rd generation NVDs have not yet become obsolete, and if BEL has not got the requisite base to develop the same on its own indigenously, then no foreign company shall sell the technology of 3rd generation NVDs to BEL at all.

In my view, the same reason will never permit India to acquire the ToT for such sensitive equipment like AESA radars (India has unfortunately yet to make a basic pulse-doppler fighter radar indigenously), and avionics, even though it may engender the forfeit of the estimated $9 bn contract to one of the other 5 rival contenders.

Thank you.


Broadsword said...

Dear Abhiman,

Thanks for that very revealing case study. I agree with the basic argument that you make.

That is also the reason why the MoD believes it can buy SuperGen or HyperGen technology for the indigenous manufacture of II tubes for NVDs. The technology is growing old, the vendors are close to developing Gen-3 technology, so they believe they can make a packet by selling it to India. Where your logic doesn't hold good is... that India is nowhere near developing SuperGen technology because BELOP just sat on the Gen-2 technology that it received from Delft and did nothing to absorb it and take it further.

Your logic also explains why the companies who hold Gen-3 technology --- like ITT of the USA for example --- are completely unwilling to sell it to India.

But the broader point that I make is the really important one. That private companies are more likely to make efforts to absorb technology and take it forward, than the defence PSUs like BEL.



Abhiman said...

Hi again Mr. Ajai Shukla. Thank you for your reply to my comment. (In that, I inadvertently mentioned one statement twice in 2 places that Video'n has patents in ACs etc; it was an overlook while editing).

I doubt whether small private companies who have just begun to manufacture components for Israel will be able to take a lead in developing 3rd generation NVDs. So, BEL's guidance (though glacially slow and beureaucratic), might have to be taken as they have the trump-card of experience and vast technical data.

Speaking of ToT other than NVDs, in my view, the ToT for AESA radars will also not be provided to India by any contender of the 126 MRCA contract, because I remember reading an interview of either the head or some other very high ranking individual of Boeing, who mentioned that the technology of AESA radars will not be released to India along with the MRCA contract. I will try to search for that interview and post it.

Thank you.