Inaugurating a three-day international seminar on aerospace technologies in Bengaluru on 07 February 2011, Defence Minister Antony admitted that India had not benefitted much from the technologies transferred to it in the past. It was a candid admission of the failure of the procurement regime to ensure infusion of meaningful technologies and accretion of desired benefits to the Indian industry.

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India has been obtaining technologies under ‘Buy and Make’ route wherein a limited quantity is purchased from a foreign vendor in fully built condition and the bulk quantity is manufactured in India under licence through transfer of technology (ToT). Despite the fact that India has been following this route for decades for all large scale purchases like tanks (T-55, T-72 and T-90) and aircraft (MiG series, Jaguar, Sukhoi and Hawk), no genuine and substantial technology has been transferred to India. Worse, foreign vendors have been charging India hefty amounts for allowing licensed production.

Indian policy makers have been using the term ToT in a highly misleading manner. Under the taxonomy of ToT, they have been seeking know-how to assemble systems in India. Whereas technology implies total know-how for product manufacture from component level, indigenous production remains limited to assembling of sub-assemblies.

‘Technology’ is one of the most commonly used yet variously interpreted terms. Although a number of definitions exist, the World Intellectual Property Organisation provides the most comprehensive definition. According to it, technology pertaining to industrial production is ‘systematic knowledge for product manufacture and service provision’. There are two vital components of the definition. One, it is knowledge that is systematic in its evolution, delineation and description. It is only then that it can be intelligently implemented and purposefully exploited. Two, it should facilitate product manufacture and service provision. For that it must cover the complete gamut to include engineering and manufacturing details for fabrication, assembly, test and maintenance.

As seen above, technology is knowledge that is all-inclusive and fully caters for all requirements for product manufacture. There can be no gaps in the knowledge that may impede implementation. Although knowledge is essentially an intangible attribute, when transformed into technology it becomes a tangible asset. Therefore, conversion of knowledge into technology entails preparation of engineering and manufacturing documentation to enable production of the article from component level and its subsequent operation and maintenance.

ToT under ‘Buy and Make’ Procedure

As every product entails integration of multiple sub-systems, every technology package consists of a number of sub-technologies. Therefore, negotiation of technology for the manufacture of a defence system/product has to factor in all sub-technologies that go into it.

Unfortunately, Indian policy makers have been using the term ToT in a highly misleading manner. Under the taxonomy of ToT, they have been seeking know-how to assemble systems in India. Whereas technology implies total know-how for product manufacture from component level, indigenous production remains limited to assembling of sub-assemblies to deliver fully built units to the services. Worse, Original Equipment Manufacturer (OEM) retains exclusive right to supply sub-assemblies.

...not a single imported technology during the last three decades has provided a springboard for the development of superior technologies testifies the total failure of the current dispensation.

Although the Defence Procurement Procedure (DPP) provides detailed guidelines under ‘Buy and Make’ procedure, these have been evolved purely to cater to the interests of public sector entities who are always nominated as Indian recipients. DPP delineates the following four phases for indigenous production:-

• Phase 0 – Receipt of fully assembled and tested product from OEM.
• Phase 1 – Receipt of ‘Semi Knocked Down’ (SKD) kits provided by OEM. Kits to consist of sub-systems, assemblies, sub-assemblies and modules assembled and tested by OEM and/or his vendors/sub-contractors. Recipient to carry out final assembly and testing of the product.
• Phase 2 – Receipt of ‘Completely Knocked Down’ (CKD) kits provided by OEM in the form of unassembled Bill of Materials. CKD kit may include certain components/sub-assemblies available ‘Commercially Off The Shelf’ (COTS) from multiple vendors as fully finished items. Recipient to carry out assembly and test of individual PCBs/modules/sub-assemblies/assemblies/sub-systems from component level and then carry out final assembly and testing of the product.
• Phase 3 - Shall be based on supply of proprietary items as Indigenous Manufacture (IM) kit by OEM. Recipient to procure all components or raw materials and carry out complete fabrication, assembly and testing of the product.

As can be seen, Phase 0 entails outright purchase of fully built product and it is incorrect to count it as a stage in ToT process. Similarly, Phase 1 relates more to screw-driver technology of assembling major sub-assemblies and means little in terms of infusion of technology. Even Phase 2 has limited value as regards ToT unless it culminates in Phase 3. It is only in Phase 3 that a recipient receives detailed know-how through engineering and manufacturing documentation to enable production from component level.

Unfortunately, in all deals concluded by India under ‘Buy and Make’ procedure, Phase 3 is never reached. At best, indigenous manufacture is restricted to assembly under Phase 2. This arrangement suits both OEM and public sector units ideally. OEM does not transfer any know-how but keeps getting orders for continued supply of sub-assemblies and critical components. Concomitantly, public sector units remain assured of confirmed orders from the services and earn huge profits without any sweat. Apparently, no meaningful technology is sought and obtained. The fact that not a single imported technology during the last three decades has provided a springboard for the development of superior technologies testifies the total failure of the current dispensation. This is the prime lacuna of seeking technologies under ‘Buy and Make’ procedure.

Analysis of Range, Depth and Scope of Technology on Offer

For effective negotiation of ToT, it is essential to break down the overall technology package into sub-technologies to ascertain true range, depth and scope of technology being offered. Therefore, DPP mandates that OEM should be asked to identify each item (system/sub-system/assembly/sub-assembly/module/part) in the product structure under the following five categories:-

It has been seen that every single ToT contract signed by India runs into trouble and it is always India whose interests suffer. Indian negotiators consider drafting of contracts to be drudgery...

• Category 1. Items for which complete technology to enable the recipient carryout fabrication, assembly and test of the item is being provided by OEM. Such items should be classified under the head ‘Complete Transfer of Technology’ or C-ToT.
• Category 2. Items which are manufactured by OEM’s sub-contractors based on the engineering documentation provided by OEM and the said documentation is made available to the recipient. Such items should also be classified as C-ToT.
• Category 3. Items whose development and manufacture has been sub-contracted by OEM to his vendors/sub-contractors based on the procurement drawings/specifications provided by OEM. Apparently, OEM can only provide the same drawings/specifications to the Indian recipient and nothing else. For the purposes of evaluating the depth of technology being transferred, it should be presumed that the technology in respect of such items is not provided. In case OEM, in collaboration with his vendor/sub-contractor, is able to provide maintenance documentation and training, the items should be classified under the head ‘Limited ToT for Maintenance Support’ or M-ToT.
• Category 4. Items sourced by OEM against his procurement specifications as ‘Fully Finished’, may be considered as bought-out. OEM will only be able to provide the procurement specifications and the sources of supply to ensure availability during the life cycle of the product. In case OEM, in collaboration with his vendor, is able to provide documentation for maintenance and training, such items should also be classified under the head M-ToT.
• Category 5. Items for which OEM is not willing to transfer technology (despite having the ownership of design and manufacturing documentation) should be classified as ‘Proprietary’ items. These items are generally not included in the scope of ToT. Needless to say, the list of such items should be as small as possible.

Further, DPP stipulates that OEM not offering the key specified technologies under C-ToT (categories 1 and 2) and maintenance technologies under M-ToT (category 3 single source vendor assemblies) should not be considered for ‘Buy and Make’ order.

Value Addition

As ToT has to result in indigenous production and carries a cost penalty, it is equally essential to procure cost-wise breakdown of various categories of items from OEM. It is only then that true extent of value addition can be commuted. DPP provides guidelines as regards limits of relative percentages both for CKD kit and IM kit based ToT. These have been shown below in a tabulated form.

DPP further stipulates that no item which is critical either from the technology point of view or which constitutes a significant relative percentage of the product cost (say>10%) should be accepted as a ’Proprietary’ item. In addition, no single item, which constitutes more than 10 percent of the cost of the product, should be kept outside the scope of ToT. In case such an item belongs to the ‘bought out’ category, OEM should bid in consortium with the concerned sub-contractor/vendor for ToT assurance.

Finally, depth of technology should enable the recipient to achieve value addition of a minimum of 60 percent of the relative cost of the licensed product through indigenous manufacture. Undoubtedly, the exact percentage of value addition would vary based on the product. Unfortunately, no records are made available in public domain to indicate details of value addition achieved at various stages of indigenous production under licence.

Negotiating ToT Contracts

It has been seen that every single ToT contract signed by India runs into trouble and it is always India whose interests suffer. Indian negotiators consider drafting of contracts to be drudgery and prefer to ask foreign OEM for draft contracts. Needless to say, draft contracts are always loaded in their favour. Perfunctory scrutiny is carried out by Indian officials for major issues. Small print that escapes Indian notice invariably proves detrimental at a later stage.