In pharma manufacturing, research is aimed at developing better processes

In the dog-eat-dog world of optical media storage, Moserbaer follows a simple strategy to stay relevant. It relentlessly innovates. To do that, the Noida-based manufacturer of CD-ROMS and DVDs has tie-ups with top companies across the world, including HP and IIT Delhi. The alliances allow Moserbaer to not just develop new products, but also proprietary processes and equipment. The IIT tie-up, for instance, is aimed at finding a breakthrough in media storage capacity. The deal with hp resulted in the development of a "LightScribe" technology, which enables labels to be written on the disc surface with the same drive that reads and burns information on it. Moserbaer is also part of the standards setting body for the next generation DVD recording technology, Blu-ray, which will allow 27 GB of data to be compressed into one disc. The company, which has an 18 per cent share of the global optical media storage market, invests 2-3 per cent of its revenues on R&D. It may not seem like much, but the fact is that it has allowed Moserbaer to reinvent itself time and again. It was born as a manufacturer of time-recording machines 23 years ago, went on to become a maker of computer floppies just three years later, and in 1999, transformed into a manufacturer of recordable optical media, starting with CDs and then DVDs. The short point of the long story: In an era where technology changes every few years, innovation may mean the difference between survival and extinction. "The cost competitiveness of our R&D ensures that we don't lag behind our competitors," says Moserbaer's Executive Director, Ratul Puri, alluding to the wafer-thin margins in the business.

Not every company in India is a Moserbaer. For good reason: they don't need to be. Innovation is purely a function of the industry dynamics, which also determines the nature of innovation. Pharmaceuticals may demand continuous innovations in manufacturing processes, but in textiles, the gains may be more in developing a value-added product like, say, stain-proof fabric. In some other industries like auto components, it may not make commercial sense (even if it were possible) for an Indian vendor to try to develop an alternative to, say, anti-lock braking system. A better strategy would be to move from wheels to wheel systems. After all, manufacturing is moving from west to east not because India and China are centres of innovation. Rather, it is because they are countries where manufacturing can be done more cheaply. Says Shirish Sankhe, a partner at McKinsey's Mumbai office: "Innovation-based exports can be 10-15 per cent of the overall exports, but the rest of it will be driven by the cost arbitrage, and I don't think that will change for the next 20, 30, or even 40 years."

But as India's BPO industry has discovered, offshorers quickly come to take low cost as a given. Their question thereafter, every time the contract comes up for renewal, is 'what more can you deliver?' So, process innovation becomes far more important to keep the customer. That's true in general and also of the five winning industries featured in this survey. Take a look at how each of these industries is managing the balance between low cost and innovation:

Auto Components: From Parts To Systems

Auto part makers are more focussed on things like 3D modelling and prototyping

In this sector, the cluster approach adopted by automobile manufacturers to develop an ancillary industry has catalysed innovation and growth. But the innovations are more in the nature of design and cost reduction measures, and value engineering. With greater integration of software into vehicles, auto part manufacturers need to invest in this direction, argue analysts. Furthermore, says Vishnu Mathur, Executive Director of industry association ACMA, "There is a significant degree of proprietary technology in the auto sector like anti-lock braking systems (ABS). Although available for a price, by developing such technology, companies can improve their competitiveness in the marketplace." No doubt, technology and capital is available for a price. But in the manufacturing sector, this price is enough to blunt the competitiveness in the marketplace. "How do you expect the Indian businessman to spend on R&D much more than he is already doing?" asks Bharat Forge Chairman, Baba Kalyani. "About 80 per cent of the vehicles produced in India are not designed here. Besides, the biggest problem with the industry is that it is capital intensive and return on investment comes only over time." Therefore, instead of plunging into ambitious but risky product innovation efforts, the industry would rather do things that push them towards systems delivery. "The next stage of development would see design and development, 3D modelling, and prototype development," says A.K. Taneja, President, ACMA.

Specialty Chemicals and Pharma: Optimisation Is The Buzzword

In specialty chemicals, process and product R&D is extremely important. At Atul, for instance, every business unit has its own R&D team. Why? To respond quickly to market demands. In 2004-05, Atul's R&D team developed approximately 70 processes and the company commercialised about 40 processes. Close to 30 processes were improved with respect to raw material and utility usage, batch cycle time and waste reduction. Just like in fine chemicals, the process development in pharma is aimed at optimisation-that is, figuring out how to make a product perform better, failing which, how to make it cheaper. This is vitally important in the case of contract manufacturing. Although basic research is happening to an extent, it will remain small simply because it's a vastly more expensive and risky than what pharma companies can afford. So, till the time they build sufficient financial muscle, drug makers will continue to pick the low-hanging fruits in generic drugs, which are copies of off-patent branded medicines. According to India's biggest pharma company Ranbaxy, the global generics market opportunity between 2006 and 2010 is estimated at a staggering $60-70 billion (Rs 2,76,000-3,22,000 crore).

Electronics: It's All About Design And Manufacturing

If you are in the electronics business, there are typically three options: Contract manufacture, design and manufacture, or design, manufacture and brand. As the Moserbaer example illustrates, it's not easy to be in the third category. Which is why Moserbaer, besides selling CDs and DVDs under its own brand, also contract manufactures for all the 12 leading manufacturers in the world. Others like Samtel, which makes picture tubes, also sell to competitors. In fact, Samtel has turned its survival strategy into a slogan: Tear down and redesign. That is, tear down costs and make manufacturing competitive by improving production without increasing the overhead. Don't sneeze at Samtel's strategy. With cost pressures mounting on global branded electronics companies, they will be sending more and more orders Samtel's way.

What about textiles? The organised sector's share of fabric production is a measly 3 per cent, so forget about R&D. But as more and more buyers shift to India from China in a bid to diversify their country risk, there will be pressure on the big apparel manufacturers and fabric suppliers to focus on design and product innovation. Like McKinsey's Sankhe says, the low-cost advantage isn't going away in a hurry, but just the same, smart R&D is clearly the need of the hour.

-additional reporting by Shivani Lath in Mumbai and Aman Malik in New Delhi