Nov

21

Indian Companies Still Lagging in R&D- Why?

Filed Under E-Business, Emerging Sectors, India Business, India Investment Opportunities, Indian Companies, Intellectual Property, Internet in India, Mobile Telecom, Research & Development 

Innovation remains a key business growth driver and companies worldwide are pouring in millions of dollars each year to stay ahead of the global competition. There is growing evidence to show that the more a company spends on R&D, the better they tend to perform on sales and profit growth. The UK Department of Trade and Industry started a project for making an R&D scoreboard in 1991, with the belief that British Companies were suffering from under-investment in Science and Technology. Today they give scores to a Global top 1250 companies (referred to as G1250).

An example of the benefits of R&D spending for share prices is the performance of the Scoreboard’s “R&D Portfolio”, comprised of companies in the FTSE100 on the London Stock Exchange that spend more than 4% on R&D. Since August 1997, the portfolio has increased in value by 73%, while the FTSE100 has risen only by 16%.

While global R&D spend by G1250 rose by 10% to £244 billion (or nearly $500 billion), it is dominated by companies from just five countries – USA, Japan, Germany, France and UK – which contributed 81% of R&D by the G1250. Firms from India and China have yet to establish themselves as significant players in the G1250, although both countries are increasingly important locations for R&D outsourcing. The pharmaceutical sector has replaced the technology hardware sector as the largest global R&D sector. Pfizer is the global leader in R&D spend, replacing Ford Motors as the highest spender on R&D from 2002. The top 10 list has 4 Automobile Companies (Ford, DaimlerChrysler, Toyota and GM) and 3 Pharmaceutical companies (Pfizer, J&J and GSK). Apart from interchanging positions, the top 10 spenders remained more or less the same.

Talking specifically about Indian business: in 2006, only 3 Indian companies made it to the Global top 1250 – Ranbaxy, Dr. Reddy’s and Tata Motors. Infosys, Wipro and Biocon had not even made it to the cut off limit ($33 million) for the G1250 in 2006. In 2007, 9 Indian companies made it to the list, with Tata Motors as the top Indian Company at 91st place in the G1250 with a net R&D spend of £92 million ($180 million). Mahindra & Mahindra, Ranbaxy, Dr. Reddy’s, Sun Pharmaceuticals, KPIT Cummins Infosystems and Mindtree Consulting were the other Indian Companies to make it to the G1250. Tata Iron & Steel Co. with the acquisition of Corus, and Hindalco thanks to Novelis also appeared on the scoreboard.

The Indian list leader, Tata Motors, has increased its R&D expenditure both in volume and as a percentage of revenue and the profits have been growing at an excellent pace. And with Tata Motors devoting further R&D to the dream project of the Rs. 100k ($2.5k) car, both topline and bottomline should go up.

With an ever-growing middle-class consumer base, India is now in a position to create its own profitable innovations. But then innovation just doesn’t happen because you have a billion of cash in bank. Innovation needs executive level commitment to identify a profitable niche and go for it, and be willing to take the risk of failure at the first attempt. Just like Tata Motors is trying out a low cost car, what prevents Reliance Telecom/ Airtel from creating a very low cost mobile device with an Internet connection (agreed Reliance made a start with low cost handsets in 2002, but a lot more is possible today)? What prevents Wipro from creating the lowest cost laptop? Nothing really.

About the Author: Ishan Sethi is a Sales & Marketing professional with keen interest in emerging sectors and India business opportunities. He is an alumnus of Indraprastha University and IIM Lucknow. He can be reached via the Contact page.

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