Kaushik Gala: Technology enterprises in India

galatime.com - Kaushik Gala

Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.

Technology enterprises in India - 3 avatars

(Last revised 6-Aug-2010, Send comments to galatime@gmail.com)

In her book We Are Like That Only, Rama Bijapurkar quotes writer Arundhati Roy: "India lives simultaneously across 400 years". I think this nicely captures the challenge in thinking about technology entrepreneurship in India.

We are a nation of more mobiles than toilets, broadband connectivity as fast & reliable as a babu, BPOs (KPOs, LPOs, CROs, ...) with as many program managers as programmers, venture capitalists who invest in food & textiles and banias who could give MBAs & PhDs a few tips on entrepreneurship.

So, will hi-tech entrepreneurs & startups drive economic growth & wealth creation in India? Consider this assertion by economist John Kay:

Advancing technology is the principal determinant of economic growth for the twenty or so rich countries of the world. However most of the world is well inside that technological frontier. For these countries, prospects of economic growth depend little on technology and principally on advances in their economic, political and social infrastructure.

Over the two centuries of rapid economic growth in rich states, the pattern has been for one or two countries to join the group of advanced states every decade or two. In the last fifty years or so these new members of the rich list include Italy, Finland and Ireland within Europe and the first Asian economies (Japan, Hong Kong, Singapore) to operate at this technological frontier.

Entrepreneurs, investors, government agencies, domestic companies & MNC executives need to think beyond hi-tech (IP-rich) ventures. Innovative business models based on adoption of existing technology and sheer imitation offer much larger opportunities.

Think of the landscape of technology enterprises in India as consisting of 3 avatars of companies:

1. Technology innovators

These are the standard issue 'tech' startups, based on cutting edge science & technology. Think Cambridge Display Technology, Genentech, A123, eSolar, Calera, NanoH2O, etc. This is the world of 'scalable' (see Steve Blank's slides for context) startups backed by professional risk capital that target large markets, go IPO and become billion-dollar companies.

In India, these are few & far between, given that:

Aggregate domestic R&D spend in India hovers ~1% of GDP (vs. 3-5% for advanced economies)
Of the above, a majority (probably over 75%) occurs at government funded R&D institutions. Domestic companies' R&D budgets are miniscule, while MNCs are only recently shifting from an outsourced (low cost, backend) R&D model to true product R&D.
The talent pool of scientists/technologists/managers who can translate a success in the lab into a commercially relevant product is woefully inadequate.
Awareness, protection & enforcement of intellectual property rights in India is limited.
The ecosystem for science-entrepreneurship & technology commercialization is quite poor. This includes a dearth of early-stage risk capital, lack of accountants/lawyers/advisors who understand tech startups, risk-averse PhD students/post-docs, poor tech-transfer mechanisms, etc.

While there are several ongoing efforts to address this (eg. government funding schemes, technology business incubators, business plan competitions, IPR training, etc.), it is unlikely that we'll see a material impact anytime soon. Moreover, how feasible is it to create a large number of such companies, especially in the current Indian (economic/social) context?

While talking of Indian technology innovations, it is obligatory to mention Tata Nano. And now, Tata Swach. And how GE Healthcare R&D in Bangalore is making innovative products for Indian markets. But I think all of these - across India, in a given year - add up to fewer innovative products than what comes out of Silicon Valley. In a week.

By the way, how many of top 100 publicly traded companies in India fall in this category? None!

2. Technology imitators

These are technology enterprises who appreciate the advantages of imitation over innovation. A simplistic model of such enterprises goes like this: "import -> reverse engineer -> localize -> manufacture -> sell at a fraction of the imported price -> repeat". I'm sure that the post-independence import substitution wave in India helped refine this model. The most recent example I came across involves orthopaedic implants made by Indian manufacturers at one-tenth the price of imported ones.

Of course, this is not limited to hi-tech products. Look at the Indian versions of various e-commerce businesses: Rediff (~ Yahoo), MakeMyTrip (~ Expedia), Flipkart (~ Amazon), etc. They have successfully managed to replicate US business models with minimal expenditure on innovation/R&D.

But where are the Indian imitators of Apple? Google? Intel? Tesla Motors? Well, we do have Micromax. And Reva.

3. Technology adopters (& adapters)

These are by far the most interesting & high potential technology enterprises. My favorite example is Sarvajal. They sell clean drinking water - but with many twists:

They've developed a (patent pending!) device called Soochak which combines existing water purification technology with cloud computing.
Their innovative 'distributed' business model uses pre-payment, franchising, branding, etc. to make it profitable to sell relatively affordable water to remote rural areas.
Success for Sarvajal is as much - or more - dependent on understanding the psychology of rural customers and village entrepreneurs (franchisees) as it is on the technology.

Other examples that come to mind:

STD/ISD/PCO: Sam Pitroda combined existing technology with a unique business model to give India our first telecom revolution.
BPOs/KPOs: would call centers exist without affordable PCs, email & broadband?
Rs 10/- mobile recharge: without billing software, how could Airtel & Vodafone profitably sell to the BoP?
Redbus.in/Shaadi.com: Global e-commerce models adapted for unique Indian needs.

Note the difference between imitators & adopters: In the latter case, there is usually a key piece of innovation, just not necessarily in technology. It could be in how the product/service is delivered, branded, financed, serviced, customized, recycled, etc.

It may not always be possible to protect this innovation using intellectual property rights such as patents or copyrights. But the best of such companies will build wide 'moats' (Translation for MBAs: strategic & sustainable competitive advantages). This can be via customer loyalty, massive market share, monopolistic rights, large capex requirements, information economics, savvy branding, etc.

I think being an adopter/adapter in India offers far more opportunities to excel as a technology enterprise, in spite of the gods! Savvy investors are already riding this 'technology adoption curve'. They seek to benefit from technology-adoption that results in productivity gains, access to new (large) market segments, drastic reductions in transaction costs, network ('winner-take-all') effects, etc.

Of course, all 3 avatars of enterprises are key to wealth creation across the Indian society. But for investors, entrepreneurs & especially policy makers to focus solely on hi-tech/high-science startups would drastically limit the economic & social benefits of technology.