Examining the Case for Complete Transfer of Technology
(Source: Institute for Defence Studies and Analyses; issued March 21, 2017)
By Kevin A. Desouza
A common refrain in the Indian defence sector is that all defence procurement contracts should contain the clause for full Transfer of Technology (ToT).1 India’s Defence Procurement Procedure (DPP) itself mentions “comprehensive” ToT and “complete” ToT as a requirement in numerous places.2

The fact remains that full ToT has remained elusive. As a case in point, while the Russian T-90 tank contract in 2001 was touted as a successful example of full ToT, a few years later reports surfaced that the ToT was incomplete.3 In tune with this Indian experience, Brazil has been facing similar problems with its insistence on full ToT.4

These facts raise several questions. What exactly is full ToT and why is it that it cannot be ensured, even from friendly nations? Is it correct that foreign Original Equipment Manufacturers (OEMs) intentionally and maliciously deny the technology of the most critical parts of their equipment to Indian recipient agencies? Why is it that these requirements cannot be brought under contractual obligations enforceable by law?

With very little information available on the details of troubled ToT contracts, not much can be said on what has gone wrong. However, in the interest of future contracts, it is incumbent on us to dig a little deeper into these issues, beginning with the question of what exactly amounts to “full” ToT, and why is it so difficult to implement.

To start with, we need to accept that ToT contracts, as described in the DPP, basically deliver only the capability to manufacture the said equipment. Though design and development of the next upgrade is a greatly desired capability, it is not provided for established reasons, nor purchased due to huge cost.5 So, the argument that ToT is not complete because design and development capabilities have not been delivered really does not hold good.

Within the manufacturing domain, we need to understand that foreign OEMs supplying defence systems typically integrate parts, of which only a limited portion is manufactured by themselves. Other parts are outsourced from subcontractors who manufacture or even develop the parts to meet the specifications desired. Some parts are commercially available and are hence purchased outright. Providing ToT for these outsourced parts is invariably difficult and costly, and in some ways, not even desirable, as we shall see. And then, there are critical “proprietary” parts, which give the system its USP and sets it apart from others. These are invariably designed, developed and manufactured under very secure arrangements to ensure that the know-how and know-whys are not leaked.6

To enable graded and effective absorption of the technology, a phased manufacture programme is followed by the recipient firm, where systems are initially received (from the OEM) fully formed (FF), then assembled using Semi Knocked Down (SKD) kits, integrated using Completely Knocked Down (CKD) kits and, in the final phase, Indigenously Manufactured (IM) using indigenous raw materials and parts along with some proprietary parts supplied by the OEM. The DPP provides for such an arrangement with the added flexibility of deciding how many systems are to be produced at each stage. Executing the IM stage successfully is clearly the end goal.

With an understanding of the distributed manufacturing arrangement of the OEMs in general, the drafters of the DPP have laid down an optimal mix of the five categories of parts described above so that ToT expectations on foreign OEMs were realistic and implementable.7 The deliverables for each category are detailed below:

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