Royalty payments by Indian companies to foreign intellectual property owners have trebled since 2009 when the Department of Industrial Policy and Promotion waived government approval for royalties and lifted the ceiling for lumpsum payments for technology transfer. In 2009-10, it was $4.44 billion — 13 per cent of FDI into India that year. In 2012-13, it increased to $6.99 billion — 18 per cent of FDI.
Nestle India, for instance, gets access to IP of its parent comprising 6,000 brands, 1,300 patents, and R&D support and training in return for royalty payments amounting to 4.5 per cent of sales value gradually in the next five years. While minority investors in Indian companies are aggrieved about the increasing rates of royalty in spite of falling growth and drop in dividend, the parent companies justify the higher payments as a share of the revenue that the subsidiary earns through access to global brands, technology and processes.
India is a net importer of technology. Most SMEs use imported technology acquired either under formal licensing agreements, or through informal channels. In larger entities formal licensing agreements become necessary as IP enforcement is stronger.
MNC IP owners benefit from the current model of technology collaboration. They retain tight control over the use and licensing of their IP, ensuring that the Indian subsidiary learns only what is required for production and delivery of the product. When the collaboration comes to an end, the Indian entity struggles to bring its own product to the market. In due course, these entities become completely dependent on imported technology.
Other options A few Indian companies make niche products using herbal ingredients,relying on traditional knowledge. Engineering companies that manufacture for brand name companies have mastered the art of mass-production, assembly, overhauling, repair and process innovation. Other companies have successfully transitioned from contract vendors into product companies, specialising in certain parts of the production process.
The successful metamorphosis of companies from original equipment manufacturers (OEMs) to original design manufacturers (ODMs) with a large number of patents on components that go into the brand name products ensures that the brand name company is tied to the ODM. Even at the height of the Apple-Samsung battle, Apple remained critically dependent on Samsung for the microprocessors and A5X chip that run its iPhone and iPad.
With the Nano, Tata Motors kept its energies focussed on the car itself, even filing a patent for “… the method of manufacturing it and the vehicle obtained thereby”. It has many lessons for us.
Nano lessonsIdentify the technical problem and apply a scientific solution to it :Established companies look for solutions based on extraneous considerations such as prestige, politics and competition. Tata Motors identified that material costs and assembly line fabrication raised the price, and found that a double layer of moulded plastic providing a hollow space would be the answer.
Disconnect the cost of the final product from the cost of developing it : To make the cheapest car on earth, Tata Motors hired one of the best and highest-priced designers to create it. Marcello Gandini-designed cars cost upwards of $200 million to create, and sell at around $250,000. The cost of an IP asset goes down only through usage in a large number of products and variants.
Use patent data to your advantage : Companies waste up to 20 per cent of the R&D budget on needless iterations and re-invention, only to find that they are unable to patent the result. Many important and valuable pieces of information lie hidden in patents across the globe. The Tata Nano team demonstrated their control over patent data during the development phase.
Build on their competencies : Tata Motors delinked the Nano team from the core Tata Motors group, thereby ensuring that the design team and the manufacturing team were in alignment. The new 120-member team was drawn from outside as well.
While the Nano’s commercial success is yet to be proved in the market, the inventions bolstering the product have created intangible value for the Indian economy, introducing a successful model of innovation and augmenting labour skills. Currently, India’s growth is proportional to investment. Already, the law of diminishing returns is placing a sharp limit on the growth of certain sectors. A technology shift is called for to restore the momentum.
(The writer is the CEO of IP Dome)