The State of Innovation in India

10 years ago, in 1997, I wrote an article called Playing Against 5 Aces for a technology magazine in India called Dataquest. The article looked at how the deck was stacked in favor of American technology companies, because they were playing with 5 Aces in the pack:

1. A large domestic market

2. Access to intellectual capital

3. Reliable, low cost telecommunications

4. A culture that rewards innovation and risk taking

5. A well developed venture capital industry

Against these 5 Aces, India had only one good card, which was low cost labor. It is interesting to revisit these 5 Aces ten years later in 2007 (well, 2008 now!) and see what it means for the state of innovation in India. In short, India is looking a lot better:

  1. Large Domestic Market. Getting better. India still lags the US in market size and customer willingness to innovate, but GDP growth is now in India/China. In the key area of wireless, Asia is a better market for innovation than the US.
  2. Access to Intellectual Capital. Yes the world is flat; access to intellectual capital is not an issue any more. Innovative ideas spread like wildfire through Blogs, Social Networks, Skype, etc.
  3. Reliable low cost telecommunications. Problem solved. That Telecom bubble sure enabled a great industry in India!
  4. Culture that rewards innovation and risk taking. Still a problem. There is a strange dichotomy here. Some large old world companies in India (such as Tata and Reliance) are incredibly dynamic and aggressive when many of their US counterparts seem to be only interested in using financial engineering to distribute profits tax efficiently. But in high tech start-ups? That’s another story, more on that later.
  5. Well developed venture capital industry. Problem solved, VC is pouring into India.

However, despite all these advantages and despite thousands of developers in India creating value for Western companies, where is India’s killer app? Where is the Microsoft or Google from India? Or being slightly less ambitious where is the Salesforce.com or YouTube from India?

Why does this matter for India? Look at the market cap of Google ($218 billion) vs Infosys ($24 billion). This is not bubble valuation. Both have similar and reasonably valued PEG (Price Earnings Growth ratio, the only rational way I know to compare two valuations) with INFY at 0.81 and GOOG at 1.30. Google has over 9x the value and is about 15 years younger.

When you read the Google story, you won’t see anything created in a Stanford dorm room that could not have been created in an IIT dorm room. What is really wild is that the barriers have come down even further since Google came to market.

The fundamental issue in India is the risk/reward equation. It is simply too easy for a young developer in India to get paid a lot by an outsourcing firm; then enjoy being headhunted every year for more money. Those of us old enough to see a cycle or two, can see the parallels between Silicon Valley 1999 and Bangalore 2007, when just being able to spell the words of a popular programming language on a Resume meant fame and fortune. It is possible that when this comes back to some reality the motivation to innovate will come to young Indian developers (yes young; breakthrough technical innovation tends to come from people under 30).

This has been the story for some time but it is changing fast right now and we maybe reaching a tipping point related to innovation in India. Three factors are rapidly narrowing the labor cost arbitrage – weaker dollar, rampant salary inflation in India and new technology that significantly reduces the amount of code that needs to be written.

At the same time, VCs are looking entrepreneurs in the eye and telling them that capital is not a constraint but that you had better find a way to get sustainable advantage and scalability that is not tied to linear growth in headcount.

Innovation is happening today in India. You won’t see a lot of it as yet as the interesting ventures are still fairly small and below the radar. But it is happening.

Today’s successful (meaning currently lucrative) innovation in India tends to be at the process and business level. These companies use technology extensively, they are technology driven and enabled, but the technology innovation is more incremental than disruptive and still uses lower cost labor as a core advantage. There are four interesting types of new ventures in India:

  1. Leveraged services models. This is where most “next generation BPO” is headed and most niche software services vendors now innovate around a proprietary framework of some kind. These ventures use proprietary technology and other innovation to do transformational change for clients rather than simple offshoring of existing processes. They are being created by teams with deep domain expertise that use India for execution, as opposed to Indian services firms that look for markets that need lots of people. This is “the industrialization of office work”, wringing lots of little process efficiencies through reengineering. It is similar to what Japan did with “Kaizen” continuous improvement to manufacturing in the 1960’s. It is less glamorous than radical, disruptive innovation but it can be hugely effective, creating great value for both client and vendor.
  2. Direct to consumer phone and online services. This is very new. These services use new technology, but the real innovation is in process, training and branding. It is a dramatic departure from the old services model that relied on selling through large Western firms. Three examples are GetFriday, iYogi and TutorVista. Direct to consumer services have been enabled by the Internet, specifically Google search engine marketing which is a phenomenally cost effective way for a start-up (that has the right proposition and knows how to properly leverage SEM) to reach global markets. Indian direct to consumer services fill a nice gap left by US ventures that assume that an entirely self-service online strategy will meet the need; this maybe true in some markets and demographics but there are many markets and demographics where a person on the end of the phone is still needed for at least some of the service.
  3. Concept arbitrage/localization. This is popular with VCs as they globalize as the deal is simple to understand. For example, when eBay was first getting traction in the USA they were years away from looking at foreign markets, so there was plenty of time in many markets to copy the basic idea and add in a few twists to appeal to local tastes. When the originator has won in the USA they use IPO cash/equity to buy up the local players, which is a good result for all. There is less easy money in these deals now as Web 2.0 start-ups either need less localization, or they figure out those issues upfront, leaving less time for a local clone to get traction. This requires more innovation to build features that really make a difference in India and other Asian countries that could later enable a global rollout. One area for innovation is wireless as America is so far behind Asia in wireless. Most of these won’t get much visibility in the West as that is not a target. One success, riding the booming jobs market, is Naukri (India’s answer to Monster).
  4. Cheap clone/selling to bottom of pyramid. Clones dramatically under-price Western products based on lower cost R&D and volume. There have been attempts to do this in software, but open source has taken the bottom out of this game in most segments. With excellent execution there is sometimes room for a “better faster cheaper” fast follower play if the software is delivered as a service and does not require corporate approval to get traction. Zoho is a good example of great execution on a crowded field. The much more interesting play is for real world products that need to be substantially cheaper for the Indian market. Pre the 1991 liberalization of the Indian economy this was derided by economists as “import substitution”, flying in the face of free trade economics. However now it has a new lease of life as “selling to the base of the pyramid”, delivering products to the 4 billion people who are not currently in the consumer market. Generic pharmaceuticals are already a success story. Another example might be a Fetal Heart Monitor, the most basic bit of medical equipment. If a robust product was offered at half the price or less of Western products more rural clinics in India could buy it; would this also later find a market in the West? The standout for me is Novatium, who are really making the sub $100 laptop a reality without any subsidies. Don’t expect to see them in the West any time soon, their market in India is plenty big enough!

Many people would not see these as innovation. They are not seen as classic “killer apps” and disruptive innovation along the lines of eBay or Google. In this view, truly great innovation should be totally independent of the cheap labor advantage or market localization.

There is no reason this type of innovation cannot come from India but also no reason that it should; the innovation spark is totally location independent today. This could come out of an IIT dorm room, or indeed any room anywhere in the world.

India needs to find work for a massive labor force that grows every year. So the Western ideal of a huge business with minimal employees is not the ideal for India. The great Indian success stories will probably still leverage the talent for organizing large numbers of people toward a common goal.

In trying to come up with a top 3 list of great entrepreneurial ventures, I found it easy to come up with two that are very much real world:

  • Jet Airways. If you think it is impossible to build a truly great airline that is a pleasure to travel in whether it is Coach or Business, fly Jet. Doing that in India where infrastructure is weak is a phenomenal achievement.
  • Bharti Mobile. They rewrote the rules on growth by outsourcing everything non-core and became possibly the best Private Equity return ever.

I also find it easy to think of old, large companies that are innovating like crazy – Reliance, ICICI and Tata Motors come to mind; break dancing elephants, wow!

The achievement of the SWITCH (Satyam, Wipro, Infosys, TCS, HCL) is not to be denied; great value creation for investors, clients and employees.

The best shot at a software product breakthrough looks like Zoho. (On a strict definition maybe they should be excluded as their head office is in America but I think that is nit-picking). They could give Microsoft and Google a run for their money in the web office space. The new and highly controversial Live Documents may not strike one as technology innovation but it is certainly a big ballsy move.

The one that will make the biggest difference in my opinion is Novatium; they really bring the web to millions of the poor and without any subsidy.

Conclusion, wow what a lot of change in 10 years! The momentum looks set to make the next 10 years even more dramatic.

What really great innovation have you seen from India? What do you expect to see in the future?

Image of Innovation Center of Infosys in Bangalore, by ianus via Flickr

Facebook Comments