The time is ripe for Indian product firms
Date: Wednesday , August 29, 2007
While the transformation of India’s economy over the last few years—fueled mainly by the burgeoning IT sector—has been heartening, our policy makers and companies have continued to focus on services rather than products. A slew of tax holidays and other sops have been extended to existing services firms and new players seeking to set up office in India, but there remains a clear lack of similar attention to the products arena. The services sector, which is showing healthy growth today, will face more challenges in the long term as Indian wages increase and the rupee appreciates in value. To continue India’s growth in the technology sector it is critical that corporate India starts taking the next obvious step: build end-products.
And the products argument is not just something that applies to the IT space; it is all-encompassing. There isn’t a single Indian brand today that has achieved global recognition. One can talk here of the rising M&As by Indian companies in the last one year—but even none of those have enabled the players to become household brand-names, like say Nokia, Samsung, or LG.
The fact is, the product space has the potential to generate far greater employment than services. While the latter has provided jobs for many, the opportunities have been limited to the technically-trained elite, a miniscule portion of the county’s population. Products and their design, development and manufacturing—whichever vertical or industry they are in—can create jobs on a mass scale. It has the potential to have a larger, and broader, impact on the economy and living standards of the people, reaching out to a much wider swath of Indians than the slice whose fortunes have been changed, arguably, by the IT boom.
There have been some efforts on the government’s part recently, in terms of setting up SEZs catering to manufacturing, but that in itself is not enough. The focus has to be on building Indian products, and not just manufacturing foreign-branded ones—the latter is not very different in its impact and role in the economy from providing services.
It is common knowledge in the industry that service businesses run at a 20-30 percent margin, while building and shipping products can offer margins of up to 60-70 percent. Also, a product company can succeed with a small team and setup—as you can see from the case of many Taiwanese firms that provide basic consumer electronic products to global markets.
Thanks to the boom in Outsourced Product Development (OPD), India stands well-prepared in the race to build products of our own. Engineers in India now have the necessary know-how, for example, for developing products, and need only step in and respond to market requirements on their own, and avail of market opportunities for themselves, rather than designing to someone else’s specifications, and benefiting their clients rather than themselves. As an industry, a culture needs to be developed that nurtures the development of innovative products. And this needs to be done at all levels: from college curricula, training courses, innovative workshops, internships, and the like, through to incentives like subsidies and preferential access to capital given to companies that develop products for the global market.
There are also things that must be done to leverage the assets that have been developed as the recipients of outsourcing business. Given the experience and expertise our services firms now have in developing intellectual property (IP), we need to try to retain as many rights as we can, to the IP that we develop, and then capitalize on it, either in the form of licensing and royalties, or in the form of building products ourselves. Similarly, the issue of product businesses eating into the services pie can be looked at as an opportunity, starting companies in areas where major clients do not have a presence.
My main point here is that, with the Indian economy in the position it is today, the time is right to take charge and define every aspect of a product. India no longer needs to be subservient to the demands of other global players. It’s time Indian product companies stepped up and became global players themselves.