India, the world's R&D hot
spot By Kunal Kumar Kundu
MUMBAI - Kiran Shaw Mazumdar is the new poster
girl of the Indian economy. The recent initial public
offering (IPO) of Biocon, her biotechnology company, has
made Kiran the richest woman in India and symbolizes the
arrival of research and development (R&D) as the new
star of the Indian economy.
As of now, 100
Fortune 500 companies - including Delphi, Eli Lilly,
General Electric, Hewlett Packard, DaimlerChrysler and
others - have put up R&D facilities in India over
the past five years. GE's John F Welch Technology Center
in Bangalore is the company's largest such facility
outside the United States. With an investment of US$60
million, it employs 1,600 researchers and plans to raise
the number of staff to 2,400. GE Plastics has a
300-member research team in India. GE Motors India has
developed an almost noiseless motor for GE's most
sophisticated washing machines and is the soul sourcing
point of millions of motors every year. The
DaimlerChrysler Research Center in Bangalore is engaged
in fundamental and applied research in avionics,
simulation and software development.
The best-known Indian R&D companies are
in pharmaceuticals - Ranbaxy, Dr Reddy's Labs and
Sun Pharma, among others. Biotechnology is heating up,
with Biocon and Shanta Biotech leading the way. Reliance
Life Sciences is recognized by the US National Institutes
of Health for stem-cell research. Quality,
credibility, reliability and a very reasonable cost structure
are what has helped India emerge as the
information-technology outsourcing destination of the world, and it
is now emerging as the pharma R&D hub to beat all.
India currently is giving Europe tough
competition as a growing pharma R&D hub. The latest
Ernst and Young study has identified India as an
emerging hub for collaborative and outsourced R&D in
drug development, biotechnology and chemicals. The
report follows a European Commission communication that
called for increased cooperation between the European Union
and India in various fields, including biotechnology.
"The EU is the world's second-largest center of
biotechnology research activity after the USA. Indian
biotechnology has been advancing rapidly in the past few
years. Its next challenge is to successfully integrate
the Indian biotechnology industry into the global
biotechnology innovation system," noted the EC
report.
Indian pharma companies are going
for alternative business models to draw on competition
and opportunity. They have shifted from
business-driven research to research-driven business. So much so,
in fact, that Indian pharma companies topped drug
filings with the US Food AND Drug Administration (FDA) in
2003, having filed a total of 126 Drug Master Files,
accounting for 20% of all drugs coming into the US
market, higher than Spain, Italy, Israel and China. Of
the 108 abbreviated new drug applications pending
approval from the FDA in February, as many as 52 were
patent challenges, and nearly half of these were for
first-to-file (180 day market exclusivity) applications.
India's biotech sector itself is expected
to generate $5 billion in revenues and create over
a million jobs in the next five years, according to
Ernst & Young's 2004 "Progressions" report. As
the companies focus on accelerating
productivity, collaboration is the way forward for several US
and European companies faced with a resource crunch.
With its abundant high quality/low cost technical
manpower, India is emerging as a partner of choice.
The emergence of Indian pharma giants, taking an
active place in global R&D fields, has also helped.
Indian companies have developed manufacturing processes
for eight of the world's top 10 blockbuster drugs.
Branded drug
Innovator
2002
sales ($billions)
Indian
challenger/s
Lipitor
Pfizer
8.0
Ranbaxy
Zocor
Merck
5.6
Ranbaxy,
Biocon
Prilosec/Losec
AstraZeneca
4.6
Dr Reddy's,
Cipla
Procrit/Eprex
Johnson
& Johnson
4.3
None
Norvasc
Pfizer
3.8
Dr Reddy's,
Matrix
Zyprexa
Eli Lilly
3.7
Dr
Reddy's
Prevacid
Takeda
3.2
None
Paxil/Seroxat
GlaxoSmithKline
3.1
Dr Reddy's,
Bunyan
Celebrex
Merck
3.0
Cipla
Zoloft
Pfizer
2.7
Dr Reddy's,
Cipla
Source: Chemical & Engineering
News
A number
of strategic overseas acquisitions took place in 2003 -
Ranbaxy's acquisition of RPG Aventis' French business;
Wockhardt's acquisition of CP Pharmaceuticals in the UK;
and Zydus Cadila's acquisition of Alpharma in France -
all of which have catapulted these Indian companies into
the global league. There was a lot of inbound investment
as well. Multinationals like Roche, Bayer, Aventis and
Chiron have made India their regional hub for advanced
pharmaceutical ingredients and bulk supplies. Clinical
research outsourcing is seeing fast growth too. Pfizer
doubled its R&D spending in India to around $13
million. Others such as Novartis, Astra Zeneca, Eli Lilly
and GlaxoSmithKline have also committed to making India
a global hub for their clinical research activities.
Less high-profile but more significant may be
the mushrooming of new companies to do contract R&D
for global ones. Divi's Labs, Vimta Labs and Matrix Labs
are some new stars in this firmament. R&D is no
longer confined to the government or big companies. It
is sprouting everywhere. For example, patent
applications in India have shot up from 4,000 in 1995 to
almost 15,000 last year. Business Today estimates that
Indian filings for US patents rose to 1,700 in 2003, up
from 183 in 1997. The auto industry is another beehive
of innovation. Multinational car companies originally
came to India for the potentially huge domestic market.
To cut costs, they had to use local components, which
initially were of low quality. But soon the interaction
between component manufacturers and multinationals led
not just to quality improvement but innovations that
nobody had dreamed of earlier. Today, Indian auto
component companies are conducting computer-aided design
and computer-aided manufacturing, constantly coming up
with new designs that reduce costs and increase
efficiency. This design savvy has made India a
global player, exporting more than $1 billion worth of components
last year. And car exports have shot up to more than
100,000 in 2003-04.
What makes India
tick India is ahead of China in terms of the
proportion of its population that has attained tertiary
education. According to the Institute for Management
Development (IMD) World Competitiveness Year Book for
2001, about 8% of the Indian population ranging from 25
to 34 years old had attained some tertiary education
compared with 5% in China. Another edge for India is
that a majority of the tertiary programs use English as
the main medium of instruction. This is not the case in
China. India also adds about 2.3 million bachelor degree
graduates and about 300,000 engineers annually. In terms
of the degree to which the university education system
meets the competitive needs of the economy, IMD ranks
India sixth among 30 nations, with a score of 6.2 out of
10 compared with a ranking of 25 for China, which
received a score of 4.4.
India also has a large
pool of skilled labor, especially engineers, relative to
its economy's needs. According to IMD, India ranks among
the top three of 30 nations in terms of the availability
of skilled labor. In fact, IMD ranks India No 1 in terms
of the availability of qualified engineers, while China
is in 29th place.
Availability of skilled
labor Source: IMD Competitiveness Yearbook,
2003
The following graph
shows India's competative advantage vis-a-vis other
nations.
Note: Pakistan, Bangladesh and Vietnam have not been
represented for lack of reliable data on productivity
and cost of service employees. Source:
BCG
In the bad
old days of the license-permit raj (the system of
allotting industrial and commercial permits to expand or
initiate production ventures under government
regulations), companies had no incentives to conduct
R&D. Getting foreign collaboration approval ensured
monopoly profits for years. But the new competition
brought in by economic liberalization in the 1990s made
R&D an essential tool to competing and surviving.
Other miracle Asian economies such as South Korea and
Taiwan used labor-intensive manufacturing as their
launching pad, taking advantage of their low wages.
Later, they moved up the value chain. India missed the
bus in terms of labor-intensive exports, but has now
caught the jet plane of brain-power exports. This began
in computer software. It then spread to design-intensive
manufacturing. And it is now sparking an R&D
revolution.
Kunal Kumar
Kundu is a senior economist with a leading
bilateral Chamber of Commerce in India. He has a
master's degree in economics, with a specialization in
econometrics from the University of Calcutta.
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