The dusty collection of small sheds in Kushaiguda, outlying Hyderabad, hardly seem 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 high-tech radar components for which technology has been supplied by ELTA, the Israeli defence major.
The components are meant exclusively for export to ELTA. In a phrase, HBL-ELTA Avionics is an export-oriented defence sector joint venture (JV).
Talking to HBL's Chief Managing Director, 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 crore.
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 per centof 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 per cent 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 crore, 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 guarded enthusiasm for the MoD's 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.
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.
Now, in the case of subsidised R&D, private companies hope that MoD audit requirements will make it mandatory to test the products that they develop.