Searching For Scale
New Delhi 27-Dec-2010
Sector-wise ranking of companies in India''s top 100 R&D spenders list
The second floor of the block that houses the engineering department at Maruti Suzuki''s campus in Gurgaon is a giant sprawl of workstations. If the young, diligent occupants of the endless rows of computer terminals, clad in the company's light-green livery, wore headsets with a microphone, the setting would be remarkably similar to that of call centres that dot the suburb.
When told about this impression, IV Rao, Maruti's genial and gangly managing executive officer in charge of engineering and research, recoils in mock horror, saying his team will not take that very kindly. That's understandable because its investments in building research and development (R&D) capabilities in India is a matter of pride for Maruti these days.
India's largest carmaker is straining every sinew to cut back its technology dependence on its Japanese parent Suzuki. As it is, the royalty that Maruti has to pay Suzuki is increasing due to the slew of new models it has launched in recent years, such as Swift, Dzire and SX4. Its dependence on Suzuki for new models and platforms is total. With the government removing the cap on royalty remittances, not just Maruti, but also other Indian subsidiaries of MNCs face the prospect of a higher royalty burden. Maruti paid Suzuki Rs 1,018 crore in royalty in 2009-10, compared to Rs 680 crore in 2008-09.
Maruti's aim is not merely greater technological autonomy. It also wants to become the innovation hub for Suzuki on a global scale, and produce a car by 2015 for the world on a platform built in India. Maruti has tripled its count of R&D engineers to nearly 1,000 over the past two years. Another 200 will be added once it cuts the ribbon on the country's largest automobile R&D centre at Rohtak, being built at a cost of Rs 1,500 crore, in 2012.
While Maruti's plans seem nobly ambitious, the present shows the carmaker to be a relative R&D bantam-weighter. For a company that controls nearly half of the Indian car market, Maruti spent a somewhat measly 173 crore on R&D in 2009-10. As a percentage of its Rs 32,746 crore revenues, it's an unedifying 0.53%.
The picture of R&D investments in other parts of India Inc is no different. While there's no dearth of companies paying lip service to the role of R&D in their business prospects, investments in this vital area are growing at a snail's pace. India's largest private company by market value, Reliance Industries, spent a negligible 0.16% of its Rs 2,11,727 crore revenues on R&D, while L&T, the bluest of blue chip engineering companies, invested 0.21%. By comparison, Petrobras and PetroChina, two companies from emerging markets in a comparable industry as Reliance, spent 1.3% and 1%, respectively. Siemens, the German engineering giant, spent 5% of its $5 billion revenues on R&D.
In 2009-10, the R&D spending of the 100 biggest Indian companies rose about 9% to about 11,500 crore. This just about covers inflation and is hardly in lockstep with their soaring sales or global ambition.
However, to be fair, India Inc in general and Indian subsidiaries of MNCs in particular had little economic rationale to invest heavily in R&D. Products, design and technology could easily be procured from the parent with limited royalty payments. But now, as the MNCs eye India as a frugal and efficient research base, not just as a low-cost outsourcing destination, R&D is beginning to get the attention it deserves. The R&D operating cost of MNCs has declined steadily over the last two years. According to a study by Zinnov, a consultancy firm, MNCs saved $14 billion last year by offshoring R&D to India.
There's also the legacy that companies have to fight. India's gross domestic spending on R&D as a percentage of its GDP was close to 0.7%, say figures from the Unesco Institute for Statistics. China: 1.5%; Brazil: 1.1%. These investments do pay off. Brazil is intent on positioning itself as the 'country of the future' based on its innovation investments. The flex-fuel engines developed in Brazil allow vehicles to run on an ethanol-gasoline mixture. As a result, it attracts millions of dollars of R&D investments from global oil and gas giants such as BP, Shell and ExxonMobil. Embraer, the niche, mid-sized, executive-jet maker is widely regarded as a pioneer of 'reverse outsourcing'. It designs and assembles fairly complex aeronautical products and components for several global biggies.
Worryingly, back home, the government still accounts for 77% of research spends in the country according to Thomson Reuters, a company that gathers industrial data. The central and state governments together spent about 30,000 crore on R&D in 2009. About a dozen government agencies, including DRDO, Department of Atomic Energy, CSIR and the ministry of non-renewable energy, corner almost 85% of the central R&D expenditure.
Will the government's dominance of R&D in India reverse anytime soon? “It should, because there's no other way out. Access to technology will come at a huge price, while Indian companies may not be sitting on huge cash reserves in perpetuity,” says Bijendra Nath Jain, vice-chancellor of Birla Institute of Technology and Science, Pilani. “Today a Reliance, any of the Tata group companies or almost everyone in the telecom sector have the cash to buy the best available technology off-the shelf. But 10 years hence, when they want to take the next big step, they wouldn't be able to do it without research backing their businesses.”
For brick-and-mortar companies such as Tata Motors, Tata Steel, Mahindra and Mahindra, and Ranbaxy, who have traditionally been big R&D spenders, why even for the laggards, now is perhaps an opportune time to make the big R&D leap.
According to Booz & Company, a global consultancy firm that tracks R&D, the total corporate R&D spending by the 1,000 biggest spenders declined 3.5% to $503 billion in 2009, a business year when they were crippled by the worst financial crisis of this generation. The recovery isn't expected to be robust and widespread enough for the figures to inch northwards in the short term.
Also, the western world and Japan, the traditional powerhouses when it comes to cutting-edge R&D and number of patent filings, are seeing their strength erode rapidly. In 1990, almost 95% of the world's R&D came out of US, Europe and Japan. Now, as the developing world, notably China, catches up with them, the developed world's share is down to about 70%.
As companies in developed markets grapple with rebooting growth and preserving profitability, they don't have the room to invest heavily in R&D as they did in yesteryears. They are looking at cheaper options like India — R&D offshoring by MNCs to their Indian subsidiaries has steadily increased and is worth close to $10 billion.
Zinnov expects a $20 billion figure by 2012. India houses about 650 MNC R&D centres —most of them clustered in Bangalore — compared to less than 100 at the turn of the century. Global technology firms such as Cisco, Motorola, General Electric, Microsoft, Adobe and Hewlett-Packard have thriving R&D centres in India. The expanding R&D ecosystem means even homegrown companies have access to well-trained R&D professionals.
The number of patents filed is good dipstick measure of the R&D health of a nation. At the turn of the century, Japanese firms filed four times as many patent applications as their Chinese counterparts. By 2009, the two were almost neckto-neck, and China looks certain to overtake Japan in the next couple of years. What better time to close the gap when the race leaders with cramped muscles start wearing out. Given the economic power shift eastwards to Asia, it will inevitably also become an R&D power centre. But can India be a part of the new nobility?
There are several positive indicators. The scientific research output has increased steadily, to above 30,000 papers today, from 16,500 papers in 1998. Pharma companies, by virtue of the business they are in, lead in patent filings, but other industries are slowly catching up. According to Thomson Reuters, PSU firms BHEL (433 patents between 2007 and 2009) and SAIL (230) are setting the pace in this area. L&T, Tata Steel, Tata Motors and TVS are also in the mix (See table: The Patent Leaders).
Vinay Singh, national manager for healthcare and science business, Thomson Reuters, attributes India's R&D standing to the economy's position in the evolutionary curve. “As customers become more demanding, and the business environment more competitive, companies will have no choice but to rely more on R&D,” he says. “There wasn't any market compulsion to take R&D seriously,” concurs BITS Pilani's Jain.
Jain is also unhappy with the automobile sector. He feels they could have altered the R&D landscape in India. “Auto companies were more than happy to do reverse engineering rather than R&D. Even in Nano, a lot of experimentation has gone in, but I'm not sure how much R&D was involved,” he says. “Indian entrepreneurs have proven themselves as great pricing innovators. Can they become genuine product and design innovators?”
Inadequate industry-academia collaboration is one of the many weak links in building up enough R&D steam. Internationally, this interface is often what differentiates the more successful research-driven companies. “MNCs are more proactive than homegrown Indian companies at Indian campuses for two reasons,” says Jain. “They want to be more acceptable in the academia and access quality manpower.” India's cost-efficient labour market, even in high-end science and technology research, has forced several MNCs to make India a significant research base — something homegrown Indian companies haven't adequately leveraged.
Surendra Kulkarni, chief technology officer at Dow Chemicals in India, says R&D perhaps hasn't been India Inc's cup of tea since it is extremely risky and expensive. “It is easy to get carried away by a large number of patent applications being filed,” he says. “Filing patents and maintaining them is very expensive. Some of the patents may just satisfy a scientific curiosity rather than find a useful application in a product.” As a rule of thumb, Kulkarni says he'd be happy with one patent application a year for every three scientists employed.
The R&D investment patterns in India more or less mirror global trends. The computing, electronics and semiconductor industries account for almost a fourth of global R&D spends, followed by pharma, healthcare and auto. In the absence of a large manufacturing base for semiconductors or high-end electronics, pharmaceutical companies account for one-third of India's R&D spend, followed by the auto sector.
But lack of scientific talent may be the biggest impediment for R&D progress in the world's second most populous nation. “The situation is pretty dire,” says Naresh Gupta, managing director, Adobe Systems India. “There may not even be 100 PhDs in computer sciences across India. That's less than what you will find in one university in the US, and most of their research is fairly worthless.” Software giant Adobe is renowned globally, and envied by the likes of Microsoft and Google for its R&D prowess. Its Indian R&D centre has made about 200 patent filings in the last couple of years, with Gupta personally leading the patent process for an software application that reduces red-eye distortion in images.
Maruti's Rao says that the lack of talent was so acute that it had to bend its rule of not hiring experienced engineers from rival carmakers. Hiring “outsiders” hasn't been a very happy experience for Maruti so far. “Finding talent will be the biggest challenge for us.” He says. “The salaries we have to pay to acquire talent have also increased substantially.” Running a call centre in India is indeed easier.
