‘Time to Disrupt’ for Indian Defense Start-ups

India is the third largest defense market in the world and probably the most peculiar one. India closed its defense sector from private participation for decades, leading to large scale inefficiencies creeping into defense technology research and production. Like everything touched by the cursed hands of the bureaucracy turns to ashes, so did this, turning India into the largest importer of arms in the whole world. As one can imagine, no country wants to be in this position, this means India depends on a foreign nation for its own safety, stripping India of its strategic autonomy.

The government realised this and started making policy changes since 2014, overtly pushing for greater private participation in defense, at least at the policy level. These changes have not caused a deep an impact, but it has got the ball rolling.

I argue that the time is ripe for Indian private industry to take bolder steps, even-though the response by the Indian armed forces and bureaucracy don’t commensurate the scale of boldness I argue the private industry should exhibit. This is because the global defense industry is undergoing a major transition and the window to act on this and position oneself to benefit from this change is limited. The technology transition I speak of is clearly exhibited if one looks at the Armenia-Azerbaijan conflict. A lot is written about how effective low cost combat drones proved to be in this conflict, it is already becoming clear that this event is going to have an enduring impact on global defense ecosystem.

Let us see what business prospects an Indian start-up has in the defense sector. Of course it has a relatively favourable policy ecosystem that is gradually getting friendlier. This does give some edge to start-ups for example the DPP (defense procurement procedure) that lays down the framework for procurement mandates the government to prioritize a vendor with an IDDM (indigenously designed developed and manufactured) product. This gives any start-up an edge not just over their foreign competitors but also over Indian companies that have offerings from a JV with a foreign defense major.

But there is a subtle but far more important opportunity that Indian companies, especially start-ups need to take notice of, ie, a possibility to engineer a low end disruption of global defense market. A bit of background to clarify the context in which I use the term ’low end disruption’: The perennial bane for a start-up is the question of ‘ how do I outsmart an existing market leader who has far greater resources, brand recognition, larger engineering team and so on’. An attempt to answer this was made by Clayton M. Christenson in his paper ‘Disruptive Innovation: How can we beat our most powerful competitors?’ An oversimplified version of the answer given in the paper is that large companies by design tend to focus on meeting the demands of the upper segment of their market which is more lucrative, leaving the lower segment of the market open to competitors (the lower segment of the market represents customers who would settle for a cheaper product with fewer features, if available, and is therefore dissatisfied with the current offering). And when a competitor comes with such an offering targeted towards the lower segment of the market the large companies are least bothered as the customers they take away are the least profitable ones. However this gives the start-ups much needed time to build upon their technology and improve their product to gradually conquer the market from below and typically it will be too late for the large companies by the time they realise their mistake.

Now let us apply this lens to the case of global defense markets. It is pretty clear that the top tier of the market is formed by the advanced nations with a major focus on the United States followed by western European countries and the lower end of the market is formed by the developing nations like India. If we analyse the lower end of the market then it is clear that the countries like India are forced to buy the overpriced defense products from foreign companies and these products are not even designed to meet the operational needs of these developing countries. So these countries are looking for options that could meet their exact needs at a lower cost. Thus the global defense market is ripe for a low end disruption. And a start-up that has the right technology can leverage the low cost manufacturing capabilities of India to build a targeted solution for the lower end of the market. Use the favourable policies of India to sell its product and gradually build its capabilities to slowly conquer the global defense market from below.

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