Seller is king in defence as exporters aim to keep India as a key buyer

John Wanamaker, a pioneer in marketing, revolutionised business practices by making marketing management a core focus. He championed the “Customer is King” philosophy, emphasising customer-centric strategies that reshaped modern commerce. The concept underscores the power and centrality of the customer in driving business success and highlights how customers are the most powerful influence on market movements. However, this principle has little application in the defence market, where the seller holds the dominant position, dictating the terms of engagement—making it more apt to say, “The seller is king.”

 

In the defence market, sellers often maintain the upper hand despite the exceptionally high costs of their products. Unlike other sectors, where producers of expensive items invest heavily in marketing to attract buyers, defence manufacturers and nations not only control the availability of their technologies, but have also established extensive institutional frameworks to decide who gets to buy what.

 

For example, the United States employs systems like the International Traffic in Arms Regulations (Itar) and the Export Administration Regulations (Ear) to regulate the trade of defence and dual-use technologies. Under the Ear framework, export classifications include: No Licence Required — for unrestricted items and destinations; Licence Exception — permitting certain controlled items to be exported without a licence to specified destinations; General Licence — allowing approved exports without repeated permissions; and Validated Licence — requiring specific approval for each export. Additionally, Itar governs the export and import of defence and space-related articles, services, and technical data, further reinforcing the seller’s dominance in the market. As a result, buyer nations are often compelled to negotiate for favourable terms to gain access to advanced technologies.

 

This dynamic highlights the imbalance in the defence market, where sellers wield disproportionate power over buyers — even when buyers, like India, rank among the world’s largest defence importers.

 

In most industries, local manufacturing near major demand centres offers significant advantages such as reduced logistics costs, faster delivery times, enhanced supply chain resilience, and the ability to tailor products to local needs. However, the dynamics are starkly different in the defence sector, where local manufacturing under transfer of technology (ToT) agreements often leaves buyer nations at the mercy of sellers. ToT terms in defence are notoriously one-sided, heavily favouring the seller. For instance, the critical “know-why” is rarely transferred, with only the “know-how” being shared. Even this limited transfer often excludes key components or subsystems, particularly those involving critical technologies, ensuring that buyer nations remain dependent on the seller and cannot independently manufacture the platform.

 

This arrangement not only inhibits self-reliance in production, but also fosters long-term dependency on the seller for maintenance, repairs, and spare parts. Moreover, these agreements often impose restrictions on the number of units that can be produced, limit upgrades and improvements by withholding access to critical system interfaces, and enforce stringent export controls, requiring seller nation approvals for re-exporting locally manufactured defence equipment.

 

On top of this, ToT contracts frequently include provisions for perpetual royalty payments, regardless of the number of units produced. ToT fees are often exorbitant, with some estimates suggesting sellers recover profits equivalent to directly selling the equipment. This pricing strategy makes locally manufactured defence products costlier than the same platforms if imported, undermining the financial advantages of local production. These limitations collectively reinforce a seller-dominated market, leaving buyers constrained and heavily reliant on the original technology provider throughout the lifecycle of the defence platform. India, which has historically relied on the ToT-based model to develop its defence industry—until a recent strategic shift—has faced significant challenges and limitations due to the seller-dominated dynamics outlined above.

 

The dominance of sellers in the defence market is evident in the inflated pricing of arms and ammunition, which often far exceeds their bill of material  costs. These prices incorporate not just research & development expenses but also substantial profit margins, allowing sellers to recoup investments many times over. Additionally, the lifecycle costs of these platforms—including proprietary maintenance, spare parts, and upgrades—often surpass their already exorbitant initial costs, locking buyers into prolonged dependence on the seller.

 

Apart from huge economic benefits, the sellers in the defence market also wield significant strategic and political influence, which they use to further their national interests and geopolitical agendas. They directly or indirectly shape the foreign policies and military strategies of buyer nations. By controlling access to advanced weaponry and defence systems, sellers can determine the military capabilities of buyer nations, thereby creating dependencies that go beyond technology or economics.

 

Despite having the fourth-largest defence budget, India has long been at a disadvantage in the defence buyer-seller dynamic. In recent years, with increased defence exports and stronger indigenous capabilities, India has begun to gain some leverage. A key shift is the growing willingness of global defence original equipment manufacturers to manufacture in India, enhancing the negotiating power of Indian partners. Yet, India must further transition from a buyer to a seller. India’s defence innovation ecosystem, fuelled by initiatives like iDEX and the evolving nature of modern warfare—with a growing reliance on digital technologies, autonomous systems, space, cyber, and information warfare—aligns with its strengths. Government efforts to boost defence exports are accelerating India’s transition from a buyer to a seller.

 

However, this transition from a buyer to a seller is not easy. Traditional defence exporters like the US, Russia, France, and Israel have significant economic and strategic interests in keeping India as a buyer. These countries may employ diplomatic pressure, lobbying, and trade barriers to restrict India’s market access — both globally and within their own defence ecosystems.

 

Having long been at the receiving end of the buyer-seller dynamic, India’s growing defence innovation ecosystem must take the next leap — pursuing strategic initiatives that will accelerate its journey from buyer to seller in the global market.

The author is distinguished visiting professor, IIT Kanpur, and former defence secretary