TRAINING PROGRAMME ON TECHNOLOGY DIPLOMACY

JAIPUR11 – 15 July 2011

TECHNOLOGY SOURCING AND ASSESSMENT

BYDr. Vinay Kumar

Former Advisor/Scientist G, Ministry of Science and Technology

12 July 2011

MAJOR ISSUES CONCERNING INDUSTRY Shorter life cycles of technology Intense national and international

competition Global markets Quality, cost, delivery, after-sales

service, international standards Intellectual property rights High risks in investment

MAJOR ISSUES CONCERNING INDUSTRY (Contd.) Shorter time between innovation and

commercialization Research and development important Energy efficient technologies Environment friendly technologies Information and communication networks Socio-economic and socio-political factors Movement of capital across national

boundaries

SCIENCE AND TECHNOLOGY DIPLOMACY

It refers to provision of science and technology advice to multilateral negotiations and the implementation of the results ofsuch negotiations at the national level. It thus covers activities bothat the national and international levels pursuant to international commitments.

WHY SCIENCE AND TECHNOLOGY IMPORTANT IN INTERNATIONAL

RELATIONS? Emerging issues – infectious

diseases, environmental concerns, ICT, Biotechnology, use of electronics in crimes..

International trade in commodity and technology

International standard setting in the field of health, safety and environment

WHY SCIENCE AND TECHNOLOGY IMPORTANT IN INTERNATIONAL

RELATIONS? – Contd. International cooperation in

manufacturing and Research and Development

Foreign Direct Investments Intellectual Property Rights Issues

Receipts (R) and Payments (P) of Royalty and Licence Fee in US $ million

(Source World Bank –World Development Indicators 2008 and various Issues)

Country

2002R

2002P

2003R

2003P

2004R

2004P

2005R

2005P

2006R

2006P

USA 44,142

19,258

48,227

0,049 52,643

23,901

57,410

24,501

62,378

26,433

JAPAN

10,422

11,021

12,271

1,003 15,701

13,644

17,655

14,653

20,096

15,500

UK 7,701 5,993 10,245

7,382 12,019

8,368 13,303

9,069 13,588

9,962

China

133 3,114 107 548 236 4,497 157 4,398 205 6,634

India 12 350 29 356 25 421 25 421 112 949

Licensing Receipts and payments for Japan1950-1974 (in million US $)

Source: 1950-1970- Lyn (1985)-Contractor 1981

Year Receipts Payments

Balance Receipts/

Payments (%)

1950 0.0 2.6 -2.6 -1955 0.2 20.0 -18.2 11960 2.3 94.9 -92.6 21965 17.0 166.0 -149.0 101970 59.0 433.0 -374.0 141975 161.0 712.0 -551.0 23

Number of technology licensing agreements in Japan (1981-2001)

Source: Japanese Statistics Bureau 2004

Year Out-Licensing

In-Licensing Balance Out-licensing/In-licensing (%)

1981 4103 7248 -3145 571983 4738 6936 -2198 681985 5426 7316 -1890 741987 5469 7494 -2025 731989 6532 8356 -2004 761991 7163 8249 -1086 871993 8201 8126 75 1011995 9099 7618 1481 1191997 13194 7659 5535 1721999 9517 6687 2830 1422001 15067 6445 8622 234

CHANGING PARADIGM IN R&D NOTHING IT IS SAID, IS CERTAIN EXCEPT

DEATH AND TAXES – YET ANOTHER INESCABABLE CERTAINITY IS CHANGE

Market and buyers driven – organizations can get more out of their research by linking it more closely to market need and customers requirements rather than increased spending elsewhere

R&D on ‘business like’ footing

Changing paradigm in R&D (Contd.) Time and cost of R&D is important Expectations from R&D increased

manifold R&D is getting increasingly more

multi-disciplinary in nature Team orientation Creativity and innovativeness of

considerable significance

Changing paradigm in R&D (Contd.) Managerial skills in R&D personnel

increasingly required Borderless laboratories Intellectual property rights issues Changing from a strategy of ‘hope’

to a strategy of a more ‘systematic, disciplined and accountable’ R&D

Changing paradigm in R&D (contd.) Impact of Information and

Communication Technologies. These are impacting R&D management systems and practices in numerous ways, creating new threats and opportunities.

Increased expectations of Head of the Institution

Changing paradigm in R&D (Contd.) Success now requires strong competitive

advantage in the form of innovation, quality, agility, and or productivity – cost leadership alone is not sufficient

Measurement of performance is being emphasized for every organizational activity. Individuals are required to add value at every level.

Demographic shifts in customer and employee base has directly or indirectly influencing the way managers think and act.

OPTIONS FOR TECHNOLOGY Acquisition In-house development To get developed Joint development

Acquisition preferred where Too expensive/ too long to develop

or get developed New technology on attractive

terms Customers preferences Many technology gaps

In-house development preferred where In-house capability exists Time and cost effective Technology not available from

outside sources High cost of technology acquisition

TECHNOLOGY SUPPLIERS AND TECHNOLOGY

RECEIVERS -A FEW EXAMPLES

A manufacturing or service Unit

An R&D Organisation

A Technical Institute/University

A Consultant TECHNOLOGY

SUPPLIER

A manufacturing or service Unit

An R&D Organisation

A Technical Institute/University

A Consultant TECHNOLOGY

RECEIVER

TECHNOLOGY SOURCING Exhibitions and Conferences International Organizations Industry/Technical Journals Directories Industry Associations Government Sources Patent Literature

TECHNOLOGY SOURCING (Contd.)

International Agreements Foreign Embassies/ High

Commissions in India Data banks/ bases Experts and consultants Informal meets Indian Embassies/High Commissions

Assessment of technology supplier/partner Manufacturer/R&D

organization/Technical institute Market share – National and international Financial health R&D set up Ownership of technology Authority to transfer Reputation amongst other technology

acquirers

Assessment of Technology Suitability to locally available raw

materials Skill levels required Stage in Technology life cycle Input-output ratios Laboratory scale, pilot plant or

commercially proven Safety considerations

Assessment of Technology (Contd.) Environmental aspects Status of IPR, Trade Marks etc. National Policy Issues Quantitative Approach

Capacity building for identification of technology

sources Awareness of new technologies Identification of technology needs Evaluation of technology and

technology supplier/ partner Net working International Agreements

Advantages of new technologies

High financial returns Can stay longer in market Name recognition First mover advantage Enhanced value for customers Leveraging organization's capabilities ---

Disadvantages of new technologies

May not be commercially proven Normally not market tested Risks of failure and commercial returns Safety risks in operation IPR related risks Competitors may bring better products

after watching the performance of new technology

----

TECHNOLOGY ACQUISITION

TECHNOLOGY PACKAGE Specifications of the product/output List of components/parts Details of each component/part Details of assemblies and

subassemblies Operation process parameters Quality parameters

TECHNOLOGY PACKAGE – Contd.

List of purchased items Details of Plant and Machinery Plant Layout Plant Maintenance Guidelines Safety Precautions ---

Technology Acquisition Process – Complexities Technology package has many

components Not like buying equipment or raw

materials or components Technology has cost and prices Generally no price list Long term relationship Technology absorption

Technology acquisition Process – Contd. Technology Assessment and

Evaluation Negotiations Agreement Implementation Technology is very dynamic Intellectual Property Rights Issues

MODES OF TECHNOLOGY ACQUISITION

INFORMAL General Hiring of Engineers Reverse Engineering

FORMAL Licensing Outright purchase Joint Ventures Turnkey Projects Acquisition of the

company Training and Experts Consultants Purchase of equipment

with embodied technology

Price variance – technology life cycleSTAGE PRICE RISK IN

OPERATIONDevelopment Low High

Ascent High Medium

Maturity High Low

Decline Low Low

Price variance – technology statusSTATUS PRICE RISK IN

OPERATIONLaboratory scale

Low High

Pilot plant Medium Medium

Commercial scale

High Low

FACTORS FOR SUCCESSFUL ACQUISITION OF

TECHNOLOGY Good Agreement and Documentation Mutual Trust Competence of Technology Supplier Competence of Technology Acquirer Training Mutual Interest

FACTORS FOR SUCCESSFUL ACQUISITION OF TECHNOLOGY –

Contd. Planning Appropriate channel --- ---

WHAT IS A GOOD AGREEMENT Should be comprehensive in point

of substance and content Should be written in simple

language with short sentences Ambiguity and multiple

interpretations to be avoided Should be in conformity with law

WHAT IS A GOOD AGREEMENT (Contd.) Should avoid disputes In case disputes arise, should

provide for a satisfactory settlement mechanism

Important clauses in Technology Transfer

Agreements Definitions Coverage Territory and Exclusivity Scope of documentation Language Training Terms of Payment Currency of Payment

Important clauses in technology transfer agreements (Contd.) Schedules Delay in payments Taxation Confidentiality Guarantees Language Third party IPR infringement Governing Law Dispute settlement mechanism

Important clauses in technology transfer agreements (Contd.) Price escalation Improvements Environmental, Safety and other harmful

effects Sub-contracting Mergers Expiry and renewal Status after expiry Force Majeure

ARBITRATION CLAUSE - An example

ICA Arbitration clause :“Any disputes or differences whatsoever arising between the parties out of or relating to the construction, meaning and operation or effect of this contract or the breach thereof shall be settled by arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration and the award made therein shall be binding on the parties.”

Arbitration Clause (Contd.) Alternative Clause : Any dispute and

differences whatsoever arising under or in connection with the contract will be settled by arbitration in accordance with the Rules of Arbitration of UNCITRAL/The Rules of Conciliation and arbitration of the International Chamber of Commerce (ICC) – (to be retained whichever is agreed to and delete the other)

UNCITRAL – United Nations Commission on International Trade Law

Arbitration Clause (Contd.) The venue of arbitration will be in India

and arbitration proceedings will be administered by the Indian Council of Arbitration (ICA). The applicable law to the contract will be laws of India or such other as may be agreed to.”

Arbitration and Conciliation Act 1996 (Based on UNCITRAL Model Law of Arbitration)

OFFER FOR TECHNOLOGYAN EXAMPLE

Technology : Manufacture of Xylitol from bagasse

Process: Bagasse hydrolysis – purification – hydrogenation – concentration – crystallization – drying – packaging

Areas of application- Food industry as sweetener- Pharmaceutical industry-Light industry: as raw material

OFFER FOR TECHNOLOGY (Contd.) Advantages

-Safe and flexible process line-Simple operation- Low investment-Clean production-Effluent can be easily treated- Waste can be utilized-Discharge as per international standards

Offer for Technology (Contd.) Payback period : 5-6 years Stage of development:

Commercialised Infrastructure required : Land…,

Building…, Water…, Power… Manpower required : … Production Capacity …. Byproducts ….

Offer for technology (Contd.) Main raw materials required …. Economic date : Project cost…, Working

capital requirement…, ……, IRR… Content of technology package … Export possibilities …. Technical document language …. Technology supplier’ profile… Contact ….

Technology pricing- a case Zeolite ‘A’ – A by-product from

Aluminum industry used in detergents industry

Technology developed by a laboratory in 1990

Technology licensed to two small units in 1991

Price charged Rs. 0.2 million per license

Technology pricing – a case (Contd.) After a year, one unit returned the

technology, the other could not make any significant progress

During 1993-95, a consultancy firm, up scaled design and engineering from laboratory scale plant

In 1996, technology licensed to a large aluminum manufacturing unit (10,000TPA Capacity) for a license fee of Rs. 13.5 million

Causes of disputes in Technology transfer Different interpretations of a clause Any one party unable to operate any part

of the agreement for any reason Bad drafting of the agreement Change of ownership Change in business interests Force majeure reasons Delay in project implementation/technology

getting obsolete

Causes of disputes in Technology transfer (Contd.) Lack of mutual trust Low technology capability of the receiver Non adherence to specified time schedules Non achievement of specified

quality/outputs Delayed payments Unproven/untested technology Exclusivity/non exclusivity Incomplete documentation

SALIENT FEATURES OF POLICY FOR FDI/TECHNIOLOGY IMPORTS AUTOMATIC APPROVAL: - FDI up to 100% allowed in all

activities/sectors except in the following:(a) Activities/items that require an Industrial

License(b) Proposals in which the foreign

collaborator has a previous/existing venture/tie up in India in the same field (Press Notes 1 and 3 of 2005 Series refer)

Technology Import - Contd.(c) Proposals relating to acquisition of

shares in an existing Indian company in the financial services sector and where SEBI regulations are attracted

(d) Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted

(e)Lump sum payments not exceeding US $ 2 million

Technology Import - Contd.Royalty not exceeding 5% for

domestic sales and 8% for exports, there is no restriction on the duration of royalty payment

Proposal does not attract compulsory licensing

Item of manufacture is not reserved for the small sector

Technology Import - Contd, NON AUTOMATIC ROUTE- All cases

which do not fall under Automatic Route

For details refer ‘INVESTINGIN INDIA’ http://www.dipp.nic.in

SECTORAL FDI LIMITS(As on 12.2.09)

74% in Private Sector Banks 20% in FM Radio 49% in DTH television 26% in TV News channels 26% in newspapers and current

affairs periodicals

SECTORAL FDI LIMITS(As on 12.2.2009)

74% in Telecom 74% in ISPs with gateways 26% in Defence production

CASE STUDY

Discussions in the Sessions

VISION

Vision statements should be designed to be vivid, memorable, inspiring,meaningful, and brief….It is the part that gives direction, helps focus effort and stays etched in one’s mind.

A FEW VISION STATEMENTS ITC : A commitment beyond the market Dr. Reddy’s Lab : To transform themselves

from change followers to change leaders DRDO : DRDO will get transformed into a

technological leader of world class with corporate structure and with a mission of making the nation independent of foreign technology in critical spheres

A FEW VISION STATEMENTS –Contd.

CSIR - To provide scientific and industrial R&D that maximizes the economic, environmental and societal benefits for the people of India (Mission statement)

A FEW VISION STATEMENTS (Contd.)

NTPC VISION: A world class integrated power major, powering India’s growth, with increasing global presence

MISSION: Develop and provide reliable power, related products and services, integrating multiple energy sources with innovative and eco-friendly technologies and contribute to society

A FEW VISION STATEMENTS (Contd.)

NTPC CORE VALUES Business Ethics Customer Focus Organizational & Professional Pride Mutual respect and Trust Innovation and speed Total quality for excellence

A FEW VISION STATEMENTS(Contd.) IIT Delhi : To contribute to India

and the world through excellence in scientific and technical education and research;to serve as a valuable resource for industrial and social; and to remain a source of pride for all Indians

A FEW VISION STATEMENTS(Contd.) Merck : To preserve and improve

human life Walt Disney : To make people happy Walmart : To give ordinary folk the

chance to buy same things as rich people

Stanford (1940s) : Become the Harvard of the West

SIMULATION EXERCISE ON TECHNOLOGY ACQUISITION

TECHNOLOGY ASSESSMENT

-A FEW PARAMETERS SAFETY STAGE IN TLC CLEANING CAPACITY WATER REQUIREMENT POWER REQUIREMENT TIME REQUIRED FOR CLEANING DETERGENT BIODEGRADEABLE, SCALE

DEPOSIT,PHYSICAL ABRASION …

TECHNOLOGY ASSESSMENT

-Contd. ENVIRONMENTAL IMPACT ITEMS UNSUITABLE FOR

DISHWASHER IPR ISSUES … ….

ESTIMATION OF PRICE SALES REVENUE OF TECHNOLOGY

ACQUIRER IN 5 YEARS= Rs. 400 crores EXPENDITURE OF TECHNOLOGY

ACQUIRER IN 5 YEARS = Rs. 300 crores. IF ROYLTY RATE IS 8% ON SALES, COST

OF TECHNOLOGY = Rs. 32 crores. AMOUNT AVAILABLE TO TECHNOLOGY

ACQUIRER = 400-(300+32)=Rs. 68 crores IN % TERMS = 68/400 x100=17%

ESTIMATION OF PRICE – CONTD.

AMOUNT RECEIVED BY TECHNOLOGY SUPPLIER = Rs. 32 crores

EXPENDITURE AND LOSS ON ACCOUNT OF NON SALE = Rs. 5 crores

NET AMOUNT GAINED BY TECHNOLOGY SUPPLIER = 32-5=Rs. 27 crores

AMOUNT GAINED AS A % OF SALES=27/400 x100 = 6.75%

ESTIMATION OF PRICE – CONTD.

Royalty rate %

Gain of tech. acquirer(Rs. Crores)

Gain of tech.Acquirer (%)

Gain of tech.Supplier(Rs. Crores)

Gain of tech.Supplier (%)

8 68 17 27 6.75

5 80 20 15 3.75

3 88 22 7 1.75

THANK YOU