Lenovo, Foxconn & the Indian Pharma Industry face Innovation Challenges – Prof.Rishikesha Krishnan
Who is a Frugal Innovator?
The term innovation is really getting trivialized, and unfortunately even by people who should know better!
A recent article on Lenovo in The Economist caught my eye because of its subtitle: “The rise of the frugal innovator.” The Economist is a serious, and sometimes even scholarly magazine, and I have often found it has useful insights, so I read the article with a high level of anticipation.
But this article is perplexing. Because there is little in the article to point to Lenovo being any kind of innovator, let alone a frugal innovator. First of all, the company makes $1 Billion on sales of almost $38 Billion, demonstrating very low margins. Yes, it makes profits from a business which lost lots of money for IBM, but does that make it an innovator? The article points to Lenovo’s recent acquisition of IBM’s low-end server business and its acquisition of Motorola Mobility from Google as attempts to shore up its competitive position, but acquisition per se can’t be equated with innovation. The article concludes by appreciating Lenovo’s ability to “turn firms around deftly, execute strategies economically and overcome obstacles nimbly” and clarifies that Lenovo is no design-driven innovator a la Apple – but this still begs the point – what is the innovation Lenovo has done? This badly needs further investigation!
Foxconn and the Elusive Quest for Value Capture
Patenting behavior is a useful indicator of invention trends, even if it does not reflect innovation itself. In recent years, China has seen a sharp increase in patenting (see graphic below from a Chinese website). According to another recent article in The Economist, China’s patent office is now the busiest in the world. But Chinese firms are also filing patents outside China at a fast pace.
Surprisingly, Foxconn – the contract manufacturer for several consumer electronic s products including Apple’s iPhone – is one of China’s largest patent filers outside that country. The fact that Foxconn’s margin on every iPhone that it manufactures for Apple is less than $15 while Apple earns $368 out of that same $560 iPhone must have spurred Foxconn to seek additional value capture. But, the move from manufacturer to inventor is not an easy one, so I look forward to seeing how Foxconn deals with this challenge. I haven’t seen the list of Foxconn’s patents, and it’s possible that many of them are more focused on manufacturing processes than product or technology ideas, but since there is often little incentive to patent processes that are embedded inside a plant, there may be something cooking at Foxconn!
Indian Pharma Industry under Siege
I am not a great believer in conspiracy theories but I am increasingly sensitive to the fact that people and enterprises can find common cause and act together when their commercial interests are hurt. The global pharmaceutical industry may have done a great job in the last hundred years in discovering or inventing new therapies, but it got its fair share of returns as well as it has usually been one of the most profitable industries across the industrial spectrum. The industry used patent provisions very cleverly to ensure that these returns were maintained. It managed to convince policy-makers in the US that high patent walls were required to protect the significant investments it has to make in R&D to the extent that some drugs got protection much beyond the period originally mandated. But, there’s a lot of controversy about how much of the huge cost of each new drug is actually driven by R&D and how much by marketing and promotion.
The HIV AIDS Controversy
The drug industry’s determination to protect its profits at all costs comes through very clearly in the fascinating docu-drama, Fire in the Blood. This film chronicles the saga of how even after a cure was found for HIV-AIDS, the drug companies stubbornly defended their monopoly over this therapy even though thousands of people were dying of AIDS in Africa. It took resolute voluntary action by high profile AIDS sufferers in Africa, intervention of global figures like Bill Clinton, a courageous move by George Bush and the resourcefulness of our own Yusuf Hamied and Cipla for this to be diluted at least to the extent of allowing a low cost AIDS cocktail to be sold in Africa.
The inventor drug companies have tried to hit back at the growing clout of imitators and generic companies in myriad ways. Some of them have entered the generic business themselves. Rather than allow generic companies to enjoy some of the benefits of US laws to promote generic drugs (such as the famous “Para 4” exclusivity granted to the first inventor of an equivalent generic drug), other inventor companies have taken to licensing their molecules to selected players as the patent expiry date approaches.
Aim to Discredit Generic Pharma?
More recently, there has been a concerted campaign to discredit generic players. One strand of this is raising doubts about the efficacy of generic drugs (there have been articles appearing on this theme at regular intervals in the New York Times, for example). A second and related strand is the recent move by the US FDA to scrutinize applications from generic producers much more closely than before. The Commissioner of the US FDA even visited India to underline the importance of this campaign. The third is the move to withdraw licenses already granted to Indian players by identifying shortcomings in their quality or safety processes.
Now, I am not for a moment condoning shoddy practices, and I have written elsewhere about my disappointment at leading companies like Ranbaxy getting caught out for their poor quality processes. Those who are living in glass houses should not throw stones, and it’s very short-sighted of some Indian pharma companies to take on the might of the global inventor companies without keeping their own house in order. But can it be a coincidence that we are seeing so many attacks on the Indian pharma industry at the same time?
My suspicions in this direction are heightened by the declaration some months ago by the Global Intellectual Property Center of the US Chamber of Commerce that India has the worst patent regime in the world. Now, the Indian patent system has well-known shortcomings that I have written about elsewhere, but it does function in many cases. The game is given away when you read the report of this US body – all the complaints are about patent laws, court judgments and regulatory decisions in the pharma industry, almost as though no other industry exists!
Companies from emerging markets whether in consumer electronics, high tech manufacturing or pharmaceuticals have their challenge cut out for them in finding the right innovation strategy to compete with global giants!
[The views expressed here are the personal views of the author.]
(The author is the Director of IIM Indore. Previously, he was the Professor of Corporate Strategy at IIM Bangalore. He received the Thinkers50 innovation award last year. He is the writer of ‘From Jugaad to Systematic Innovation: The Challenge for India‘ and co-author of ‘8 Steps to Innovation‘. He blogs on http://jugaadtoinnovation.
We are privileged to begin a new weekly column titled ’Jugaad to Innovation’ by Prof. Rishikesha Krishnan, Director – IIM Indore.
(This work was originally published here)
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