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 judgements and regulatory decisions in the pharma industry, almost
as though no other industry exists!
Conclusion
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.]
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