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Innovation from India: The next big wave

February 18, 2009 09:40 IST

A new portable electrocardiogram machine, the MAC 400, can take 100 EKGs on a single battery charge and weighs less than three pounds. This is appropriate for rural areas in emerging markets where electricity is not always readily available and where patients cannot easily travel to urban diagnostic centers. The product's roots are as remarkable as its capabilities: The MAC 400 was designed at General Electric's John F. Welch Technology Center in Bangalore by a team of Indian engineers.

Most of the early growth at this research and development centre, GE's largest outside the US, took place during the 2001-02 recession. Today, the 50-acre campus employs 3,500 scientists and engineers; they've created patents on aircraft engines and locomotives in addition to medical devices.

Many other companies are, like GE, turning to Indian talent for new product development. Technological innovation has powered the rise and the economic domination of the West for two centuries. With scientific research, technology development, and product innovations from the steam engine to the World Wide Web, the West has led the world in wealth creation. A vibrant and structured educational system coupled with a strong intellectual property regime has enabled the creators and owners of ideas to profit handsomely.

But the balance of power has begun to shift. Despite the current economic problems both countries face, we will soon witness a dramatic rise in the participation of India and China in global R&D. The first reason for this is the diminished role of corporate laboratories that were the birthplace of many of the ideas of the 20th century.

Bell Labs, Xerox Palo Alto Research Center, and IBM TJ Watson Center no longer enjoy the same preeminence that produced ideas such as the transistor and the mouse. Today's nimble companies rely on ecosystems of external innovation to drive new products to market; venture capital and private equity investors are eager to fund collaborative innovation for quick wins but have little appetite for long gestations for science.

"Distributed development"

In the drive to seek the best return on invested capital, important components of these ecosystems have moved offshore and away from the West, creating specialisation and disaggregation. Collaboration tools and disciplined design techniques make it conceivable for people who are not in the same building to work together as if they are neighbours.

The difference between being one building apart and two continents apart becomes less significant. Once this "distributed development" becomes a reality, it is natural for portions of such work to migrate to locations where large numbers of talented scientists and engineers are more readily available. India, for example, graduates more than 100,000 English-speaking engineers each year, so Western companies find it particularly attractive as a destination for this work.

On the other hand, first-world countries have declining populations and a lower percentage of students choosing technical careers. Distributed development is the second inexorable reason for the forthcoming rise of emerging company R&D.

Third, in many industries, increased competition has pressured companies to speed products to market as never before. Because profits from new technologies are highest before the technologies become commoditised, if a new product has a four-year life and you are one year late to market, you may lose not one quarter but rather half of the potential profit from the product.

Leaders in R&D, unable to hire enough qualified engineers in the West, turn to Asian resources to keep up with this faster pace of development. Time-to-market pressure continues to drive new product initiatives to leverage talent in India.

Finally, Western companies see the greatest potential for revenue growth among emerging economies such as India's and China's. In the 1960s, Indians accepted Jeeps with the steering wheel on the wrong side ("wrong" by local standards, since Indians drive on the left side of the road).

US designs were considered naturally superior. But today, these economies are unwilling to accept mature, hand-me-down product designs from the West. For products to enter these markets successfully, they must be designed to meet local needs. Smart Western companies have realized that such redesign is better performed in economies that are closer to the target markets.

These four factors have created the need for smart Western companies to globalise their product development. The difficulties of including an R&D team in India are not minor.

Corporate governance

Foreign companies operating directly in India are generally held to a higher standard of corporate responsibility than their domestic counterparts. Even companies with stellar social reputations, such as Tata Motors, are at risk of suffering local backlash: Protests about land acquisition for a new factory in West Bengal caused the company to relocate a proposed plant to Gujarat, at the other end of the country.

Moreover, if companies choose to outsource rather than operate directly, they need to choose their partners carefully. While Satyam Computer Services was not very active in outsourced R&D, recent admissions of creative bookkeeping by its former chairman have led Western companies to reevaluate any major outsource partner. In our experience, most new-generation Asian vendors maintain high standards of corporate governance.

Other subtle but important cross-cultural challenges make the transition to a global R&D team difficult. But smart and nimble companies that suffer the pain now in recessionary times will emerge much healthier when the economy turns around.

In our consulting work, we are frequently asked if Indians can design a complete product. The starting point is often: "Sure, they're good for lower-level or service tasks such as digitising old-fashioned paper blueprints or for performing esoteric finite-element analysis. But what I need is a complete product, and I don't think I have seen anything like that from India."

The rules are changing. Sometime this year, Tata Motors will ship the lowest-cost car in the world, the Nano. To us, it's not the low cost that is exciting, it's the innovation. In addition to developing a best-in-class design, Tata has extended the innovation to the design process and the supply chain by depending on suppliers to squeeze the best price-to-value ratio for an automobile uniquely designed for punishing Indian roads.

A rear-mounted pressure die-cast engine, wheels that sit at the very extremities of the body, and a single windshield wiper indicate that this is not your average cracker-box four-wheeler. Even the distribution model is innovative: The dealer will perform some final assembly on all Nanos just prior to sale.

Other innovations abound. Indian scientists have developed novel treatments for migraine and for psoriasis, a serious skin condition. These drugs are in advanced "Phase II" trials and show the potential of being blockbuster products should they meet global approval. Additional new chemical entities are in the pipeline, and it's only a matter of time until we see a pharmaceutical success from India that is based on intellectual property developed there.

Seek and you shall find

The vast majority of growth in product development and sponsored research in India is under the radar since it is conducted by external vendors on behalf of European and North American clients; nondisclosure agreements prevent public dissemination of much of this work.

But forward-looking executives ignore this trend at their own risk. In recent years we've helped R&D executives in consumer products, chemicals, industrial machinery, energy, medical devices, aerospace, video games, and other industries find and manage product development vendors in India and China.

It is natural to ask if the current economic slowdown will alter the rate at which innovation in India will grow. We believe there may be a temporary hiccup in R&D globalisation, caused primarily by companies freezing in their tracks as they reassess the new financial realities. But as soon as they rebuild their product road maps, nimble companies will actually accelerate their globalisation efforts, pushed harder by tight budgets and the realisation that the old ways can be disastrous.

We saw exactly this trend in the information technology business during the recession of 2001-03. IT vendors such as IBM, Tata Consultancy Services, Infosys Technologies, Wipro, Accenture, and others increased their India staff rapidly. In the current environment, TCS has expanded by buying Citi's India offshoring business for $1 billion, and Infosys CEO Kris Gopalakrishnan recently told BusinessWeek that his company "is hiring" and in fact "found there will be an increase in allocation for offshore work" by its clients.

We believe that the same is true for the outsourcing and offshoring of R&D. In fact we think such innovation will be the next IT and that companies that are proactive about R&D globalisation will gain competitive advantage over slothful competitors.

Gunjan Bagla is managing director of Amritt, a management consultancy based in Los Angeles. He is author of Doing Business in 21st Century India (Hachette/Business Plus, 2008). Atul Goel, a senior adviser with Amritt, earned a PhD from Yale University and has over 20 patents from his prior tenure at Hewlett-Packard and Agilent Technologies. Both are graduates of the Indian Institute of Technology Kanpur in India.

Gunjan Bagla and Atul Goel, BusinessWeek