Why it is time for Indian Product companies?

Please consider the table below. Infosys, the bellwether Indian tech company's numbers always look great compared to any other tech company in India. But, Company X, another well known Asian Tech company seems to beat Infosys is many key parameters (Ref: FI '05 Annual Reports). There in lies a story.

	Infosys	Company X
Revenue (FI '05)	$ 1.5 B	$ 5.9 B
% Export Sales	99%	58%
Y on Y Growth	51%	47%
R&D Investment (% of Sales)	1%	10%
Original Research (% of Sales)	0%	1%
Patents Filed	0*	11,000**
Process Maturity	CMM Level 5	CMM Level 5
Number of Employees	36,750	29,000
Annual Revenue per employee	$40,820	$206,276
Annual Profits per employee	$11,401	$23,483
No. of years to reach $ 1 B Rev.	22 Yrs	11 Yrs

* There is no mention of patents filed by Infosys in 2004 or 2005 Annual reports. And, 20 patents are filed as per FI 2006 AR.

** 11,000 filed till end of 2005 and 1,844 patents granted till then.

For all the technology talk in Indian entrepreneurial scene, there are hardly any innovative product companies of serious size, especially in the technology front. I mean innovative new tech product companies with annual revenue north of $ 100 Million, growing fast and blazing a new trail. Product companies in India have generally been technology transfer stories in the past with a few honorable exceptions. And, what is a product company worth if it has no serious R&D of its own! But, I have a strong suspicion that something is about to happen in this front. The time has really come for strong product companies to emerge from India and grow big during the coming decade.

Design services companies - a mature industry now; and no new path breakers.

The just published 3^rd quarter results (Dec ‘06) show that the IT services companies have done very well again. One wonders if their growth will stop at all and what they have next in store. Indian technology scene is dominated today by IT/design services companies developing and testing products and systems for the world. They have transformed India’s brand across the world. There are six IT companies with annual revenues in the range of $ 1 to $ 5 Billion and growing steadily at 35 to 40% year on year. And there are about 16 second rung companies with annual revenue in the range $ 100 M to $ 1 Billion. Some of the second rung names you won’t even recognize readily. That is the point. They are not so exciting any more! You are unlikely to read about another Infosys or Wipro or TCS being built ground up. Today, IT services Industry is a mature one in India. It is a done thing.

A couple of years back, Michael Marks, then CEO of Flextronics, made an observation after a day at NASSCOM leadership forum 2005. He was a bit puzzled that every company he listened to had a “strikingly similar story to tell”. He said, in the US, if he went to a forum of technology companies, he would listen to so many stories – each differing and unique from the other. CMM Level 5, efficient processes, great team of engineers, global deliver model, multiple core competencies – the usual ware presented by Indian IT services companies has the same common thread across all. Having founded and run a moderate-sized design services company for about a decade, I felt it was so because the key value proposition of all these companies is the same. In spite of a lot of talk of climbing up the value chain, building innovations, etc., if you peel all the layers, you will find at the core strategy is built around a common theme: labor cost arbitrage.

Why product companies?

I was always passionate about building a Billion $ Indian product company. Am I doing a wishful thinking because of that? No! Let me explain why I believe it is the right thing to happen and why it is surely going to happen. And now, let us consider the table at the beginning of this posting which gives an interesting comparison between the performances of two Asian technology companies at the end of FI 05.

Company X seems to have done better than Infosys in practically every parameter. X does far more original R&D and is building its own IPRs of sustainable value. Unfortunately, X is not an Indian company. If it was, it would be commanding one of the largest market caps in India. It is however an Asian company. Let me let the cat out of the bag. Company X is Huawei, China’s best tech company. And, Infosys is considered India’s best tech company. There are dozens of product companies in China with multi Billion $ revenues with emerging strong brand names. They are gradually getting better and their western competitors are beginning to get worried. And let me add, Infosys is respected a lot not just for its numbers, but its work culture, ethics, systems and processes. But at the end, numbers are the key. Innovation is the way to the future. You can’t overlook them.

This is not to undermine in anyway what IT services companies have achieved in India. They helped build an India brand, they brought global work cultures, took the standard of corporate governance to new heights. Probably that was the right thing to happen over the last decade. But, though they are globally successful companies, their revenue productivity is not global, and that gives away the core business model of labor cost arbitrage. And I am afraid they are not innovating enough. And imagine if there were a product company like Huawei in India with the same organizational ethics and work culture as Infosys! It will be a very diffuclt value proposition to beat.

I see the following advantages for the product companies compared to the IT services companies:

• Higher Revenue Productivity: Product companies can generate far higher revenue and profits per person using engineering talent far more efficiently. In a simplistic point of view, Engineers' effort is sold at "high end hourly rate laborers" by IT service companies, while product companies use them to build R&D innovation with sustainable advantages.The argument that the IT services companies generate more employment by lower revenue productivity does not hold much water. In fact, the flip side is, currently they are sucking in the entire engineering talent in the country, creating a serious crisis, and starving most other industries.

• Rapid Growth: Product companies can grow much more rapidly than the Services companies. They can grow non-linearly with time and staff strength and generate wealth much faster. Successful ones grow exponentially – “hockey stick” style.

• Higher in Value Chain: Product companies are much higher in the value chain.

• Better wealth distribution: Product companies produce better wealth distribution. They create employment to a more diverse set of people. In addition to engineers and scientists, a product company uses an army of manufacturing, installation, sales and support staff, who include school pass, diploma holders and general graduates. IT services companies on the other hand employ largely BTechs, MTechs and PhDs and poorer families can’t easily produce these qualifications.

• Large Home market: Product companies can feed into a huge domestic market with its inherent advantage. And the economy will get more stability.

• Own job creation: However much they defend it in a so called “Flat world”, IT services companies continue to get accused of stealing jobs from other economies that created the jobs in the first place. It is a touchy issue. There is a consequent fear of backlash. Product companies create their own jobs in this economy. They can’t be accused of taking away jobs from other economies.

• All round competence: Product companies build an all round competence like customer requirement anticipation, full life cycle design, branding, marketing, sales, packaging, distribution, support, and in case of boxes - mechanical, plastics, thermal, manufacturability, testability, supply chain management and scores of other disciplines that are very useful for the gene pool of any large and growing economy.

Why do I feel the time has come for Indian Product companies?

• Funding: There are many VC funds chasing India today. While it is still not easy to get a new product company funded and we are a long way to build a Silicon Valley type funding environment, things have improved significantly over the last 10 years. Now, for a good idea, there are funds available. And it is getting better by the day.

• India Brand: India is a hot brand today. Indian products have much higher chance of being accepted in international markets than ever before.

• Core capabilities: Indians have proved to be excellent entrepreneurs. There is no license raj to hold them back now. Indian design services industry has helped build strong of design skills in the country. Indians with rich product design experience around the world are returning home.

• A booming stock Market: The Indian stock market is booming. While there is some nervousness of overheating, the fundamental story seems sound. Quarter after quarter, the corporate performance is impressive. And the market is keenly looking for emerging new stories.

• It is a wide open space: There is no dearth of opportunities. The ground is empty. Telecom, Consumer Electronics, White Goods, Industrial systems, Capital Equipment, Non-conventional Energy, Software systems and tools, Food processing, Financial systems, Instrumentation, Automobiles… the list is endless for building strong branded goods from India and selling to the world.

• Large home market: One of the problems till recently for an Indian product company was a small home market. With a swelling middle class with increasing disposable income, a huge captive home market gives a big advantage for a new product venture. For example, Indian telecom market is the fastest growing major market in the world today. Indian cellular subscriber base grew by 98% between 2005 and 2006. For the same period, the broadband connections grew by 133%. And there is hardly any Indian Telecom product company larger than $ 100 Million in revenue. There is easily space for four or five with Billion $ plus revenue.

• World class manufacturing: Slowly and steadily, over the last two years, all the global manufacturing giants are setting up shops in India. Flextronics, Foxcon, Jabel, Solectron, Selestica, all the world leaders in manufacturing are here now. They come with their global experience. For example, Flextronics manufactures most of HP’s printers and Nortel’s Telecom equipment in their plants worldwide. And Foxcon manufactures all the DELL Laptops and Apple IPODs. So, you now have as next door neighbors global EMS leaders who can deliver world class manufactured products if you give them a good design. Yes, supply chain is still not fully there; but it is beginning to build up. And for what you don’t get, just call up a vendor in East Asia and they will deliver your components in good time.
  

• All successes from developed economy are getting played out here one by one: Twenty years back we would have never imagined Indian IT and Telecom would reach this size today; The automobile industry is transformed and is on the run up; the airlines industry is booming; the steel and infrastructure industries and growing fast; Even the railways is beginning to look good. And it is time for big branded product companies. It is waiting to happen.

But one can argue that product companies are risky. They need a higher level of innovation. They need better branding and selling skills which we lack. Yes, they are difficult. It is not my case that it is easy. But bigger risks always leads to bigger rewards. And conquering IT was not easy either. We learnt our IT processes from the west – Carnegie Mellon University’s DOD funded program to improve software process maturity actually helped build India’s software process maturity. The same way, we will learn what is required. We are already doing that. And Indian entrepreneurs are building an good reputation for themselves.

And, one thing is still missing - the early leaders! Any phenomenon is triggered by a few. Then, slowly many others follow to set a new trend. I see a number of young entrepreneurial ventures focusing on R&D, trying to build innovations and IPRs; and not taking the easier path of just selling intellectual labor. They are building innovative Indian technologies – whether products or solutions. I am impressed with what I see. A few of them will break out and succeed, get noticed, set a new trend and become a leader - “Infosys of a new space”. And once there are a few early successes there will be more followers. I think the world is ready to accept an Indian branded product. Now is the time! It is time for an Indian brand in the lines of a Motorola, Toyota, or Oracle coming out of India.

Malcolm Marshal in his best selling “Tipping point” demonstrates that when a set of favorable parameters fall in place, something dramatically new happens “all of sudden”. I think the Tipping Point has come for Indian Product companies. And, it is about time!