Wednesday, January 31, 2007

Why Invest in India - Natural Gas Distribution

Natural gas is a fossil fuel of choice for domestic use: heating & cooking, for generating electricity and for industries in the USA & Europe. But in India, the use of natural gas has lagged behind the demand for decades. Mainly due to government monopoly over Natural gas distribution through GAIL. Due to this monopoly, gas fields in India are undeveloped and natural gas is under used in all segments of economic activity. The map shows how little the government has developed the gas transportation network - the current network touches only 10-15% of the total customer base.
The use of this clean burning fuel has so much latent demand - that new investors can tap easily into this demand and reap rich benefits.

The fast paced growth of Indian economy and the need for energy has led to deregulation of gas distribution business. The state monopoly has been dismantled by allowing private companies to setup new pipelines. Reliance Industries Limited is now building an East-West pipeline to transport the gas from its gas fields in the east coast of India to Gujrat and Northern India. RPL is also building a pipeline to connect its gas fields to the southern city of Chennai.

Government is also considering private investments to build pipelines from Russia, Central Asia, Iran to India. Another proposal is to build pipeline to ship gas from Myanmar to India and another pipeline to transport gas from Bangaldesh to India. Tata’s were in talks to build this pipeline - but it later withdrew from the negotiations owing to political bickering in Bangladesh and the local Anti-India stance of Bangladeshi politicians.

While the cross-border pipelines carry high political risks, they also promise a very high returns. This kind of investments are ideally fit for Fortune-50 type(Exxon-Mobil, Shell, British Gas, Texaco etc) companies who can leverage the influence of US/UK governments to protect their investments.

Local Demand

The local demand for natural gas is very high - provided the costs of transportation is worked out. The use of natural gas as fuel for automobiles, cooking and industries in cities is a huge untapped demand. The key to tap into this untapped market is to build a city distribution pipeline. Large metropolitan cities of India: Ahmedabad, Hyderabad, Chennai, Delhi, Kolkata and Pune will be connected with transportation pipelines. Additional investments in a city distribution pipelines will enable companies to tap into this huge untapped demand.

Another potential latent customer is the electricity generation units - basically new units which will be setup in the coming years. Since India is poised to setup power plants to generate 100,000MW - the demand from such plants will be huge. Existing industries such as metals, fertilizers, chemicals etc are also potential customers.

Closing Thoughts

Investing in gas distribution and transportation business brings huge returns. But this also involves building an influential lobby with the government and tie ups with the production companies - ONGC, Crain, RIL, GSPC, Essar etc. For global energy players (Shell, British Gas, Texaco, etc), a JV with an existing company which has proven gas reserves will create a synergy for both entities to reap rich dividends.
Also See:

Why Invest in India - Electric Power Infrastructure

In my previous blog I had written about the opportunities for investors in Electric power generation sector. The Government of India has woken up to the need for investments in power distribution and transmission sector as well. As a first step, the government plans to disinvest 5% of its equity in three power distribution companies: Power Grid Corporation, Rural Electrification Corporation, and National Hydroelectric Power corporation.

This is a very significant move by the government. This implies that the workings of these public sector companies will now come under the scrutiny of the private share holders and eventually private participation in management of these companies will be seen.

Realizing the need for private investments in power generation, transmission and distribution, the government of India is ending the monopoly of its power distribution business in April 2007.

Taking an early lead in exploiting the reforms in power transmission & distribution sector, Areva T&D India Ltd has worked with NTPC to setup a 765KV switchyard for 3000 MW power plant at Sipat in Chhattisgarh. Areva T&D India Ltd partnered with NTPC in constructing and maintaining a cutting edge technology switchyard.

This collaboration is an important milestone. This signifies how private sector can work in the power generation, transmission and distribution business in India. As India continues on the reforms path in electric power, more opportunities will open up for private investors to tap into the growing market for electric energy in India.

Tuesday, January 30, 2007

Why Invest in India - Aviation Sector

In my earlier blog I had written about the opportunity for investors in Indian aviation. The rapid growth in the number of air travel - has caught the attention of the civil aviation ministry. Privatization of airports, creation of SEZ (Special Economic Zones) dedicated for civil aviation sector and liberalization of foreign investment policies - all points towards the growing opportunities.

This message has been seriously taken by the global leaders in civil aviation. Boeing and Airbus Industries are establishing Maintenance, Repair and Overhaul (MRO) facilities in India. Boeing is setting up a center in Nagpur, while Airbus is setting up a MRO in Nasik. Both the companies are negotiating with HAL for setting up manufacturing/assembly facility in Bangalore. The state government has announced a creation of SEZ in Bangalore - which has an exclusive focus on aviation. GE Aircraft Engines, Pratt & Witney, Bell Helicopters, ATR will be setting up manufacturing facilities, R&D centers, and maintenance centers in India - probably in Bangalore.

The rapid growth in Indian civil aviation has created huge opportunities for support services. Indian Airlines is planning to offer ground handling and engineering services to other private airlines as well. Kingfisher Airlines has outsourced its ground handling and engineering services to Indian Airlines for a period of two years. This implies that other service providers in USA and Europe etc., can invest in India to tap into this service segment - and offer MRO services to all other airlines in the South Asian region - from Singapore, Indonesia, Malaysia, Sri Lanka to Kazakhstan. This market potential is huge.

The growth in air travel has now created a huge demand for other forms are air travel and business: Charter planes, Charter helicopters, sea planes, Cargo operations, etc. Government of India is in the process of changing the rules which will encourage foreign investors to enter into the other aviation business of charter services, part ownership of private planes, aviation training centers etc. With the growth in American and European air travel being stagnant (or negative), Foreign companies are eagerly looking into Indian skies. Lufthansa has already announced an aggressive investment plan in India - and wants to expand its range of services in India. British Airways and Virgin are also actively looking at ways to expand the range of services that they can offer in India.

Closing Thoughts

The world’s interest in Indian aviation can be gauged by the number of companies coming to India for "Aero 2007". This trade event is the biggest air show in Asia, and the second largest air show in the world! If the air show grows in popularity at the same rate, Aero 2009 will be the world’s largest aviation trade fair in the world - and by then India would have truly emerged as a global power in the world of aviation.

Also See:

Why Invest in India - Power Generation Infrastructure
Why Invest in India: Innovation & Creativity
The Great Indian Renaissance. Written by Dr Manmohan Singh
Why Invest in India: Resurgent Economic Growth in 2007
Why Invest in India - Banking
Why Invest in India: Booming Air Travel Industry
Why Invest in India?

IPR Dispute and Improper conduct by Indian Government

The recent dispute between Ministry of Information & Broadcasting and Nimbus a.k.a Neosports over the broadcasting rights sets a bad example - and shows India in a very negative light when it comes of protecting Intellectual Property.

As per the business contracts under the Company law of India, Nimbus had won the broadcasting rights for all cricket matches played in India for an amount of $612 million from BCCI. Now that Nimbus has won the telecasting rights, Nimbus should be allowed to do its business. But the Indian government has succumbed to playing popular politics and forcing Nimbus to share its broadcasting rights with the government broadcaster - Doordarshan for free!!

In return for sharing the broadcasting rights, Nimbus gets nothing - not even share of revenue generated by Doordarshan be selling advertisements during the cricket match. This implies that the government is stealing the IP rights of Nimbus - wherein the government of India has the moral responsibility to protect IP rights of individuals and companies. This act of stealing an IP is further justified by the courts in the name of protecting "public interest".

Some Inferences

This gross violation of intellectual property rights by the government of India shows a few interesting facets of Indian life.

  • Firstly, government and ministers do not care about WTO rules on IP protection and are willing to play with the public sentiments - to garner votes. Ministers and politicians will not protect IP if it goes against their interests.

  • Secondly, Indian public and society in general is not ready for the western kind of IP protection laws in India. The average citizen on the street was always supporting Ministry of Information & Broadcasting so that he/she can view the match for free on television - their rational is that BCCI and Indian cricket team is a government funded organization and the event is taking place in India - thus the public as tax payers have right to view the matches.

  • Thirdly, the Indian culture of protecting IP does not exist, in India, people tend to believe that an IP once created should be used for public benefit. Since BCCI is/was funded by tax payers money, the IP created by BCCI is now a public good.

  • Fourthly, BCCI which is a government funded organization - and a monopoly to represent the game of Cricket in India is not a public organization. The recent incident showed that BCCI, which is ironically led by another politician Sharad Pawar to be a money minded profit seeking organization. BCCI has done nothing wrong by selling the broadcasting rights to Nimbus. But then BCCI has done nothing to protect the IP rights of Nimbus either.
All this shows India is a very bad light when it comes to IP protection. Government of India is now violating the very laws it is supposed to protect. This case is akin to having a police force which resorts to robbing Paul to please Peter. History does show that whenever the government violates its own laws bad things happen. In the past, Indian government nationalize several industries under the leadership of Indra Gandhi - this led to two decades of slow economic growth and rapid increase in poverty. ( I guess more Indians died of poverty caused by Indra Gandhi’s government - than those killed by Pakistani soldiers in three wars with India). Both French & Russian Revolution happened when the kings violated the established laws of the country.

In this case, I guess there will be no revolutions but Indian sports will be starved of funds - as other private cable and broadcasters will now stay away from buying broadcasting rights for any sporting events in India.

Closing Thoughts

If the courts side with the Ministry if Information and Broadcasting, then the recent revival of Indian sports will be a short lived one, and Indian sports will enter a prolonged phase of decline and decay. The bigger impact of this could be that India will lose its standing in International trade and will lose face in WTO negotiations when it comes to IP protection and IP related trade issues.

Perhaps the deepest impact will be seen in Pharama and aviation sector where foreign companies are eager to invest in manufacturing and R&D centers in India. If these companies feel that India does not offer good protection to IP rights, then they may opt out of investing in India.

But in the final ray of hope, I expect the courts of India to uphold the IP rights of Nimbus and force Doordarshan to pay for sharing the broadcasting rights. Fortunately, the judiciary in India is independent of the legislature and the courts have a long history of challenging the ministers and upholding the law.

Also See:

Indian Style of Innovation
Why Invest in India: Innovation & Creativity
Knowledge Management - The blood & lifeline of any company
Creating a Culture for Innovation and Protecting Intellectual Property - Part 1
Creating a Culture for Innovation and Protecting Intellectual Property - Part 2
Protecting IP Assets of an Organization
Types of Intellectual Property
Business Creativity and Innovation

Monday, January 22, 2007

Indian Innovation - ISRO's success

India's space agency said on Monday an orbiting capsule had been successfully returned to Earth, marking a major step toward the development of a highly prized manned space program.

The capsule was blasted into space as one of four payloads on January 10 from a launch pad 60 miles north of the southern city of Chennai. It splashed down in the Bay of Bengal 11 days later, boosting plans for a lunar mission in 2008.

"(It) landed in the Bay of Bengal ... as per schedule. The mission is a great success," said A. Subramoniam, head of the team that designed and built the capsule at the Indian Space Research Organization.

"This mission is a stepping-stone to design and build our very own reusable spacecraft, and eventually (carry out) manned missions into space, too," he said.

Though India has for years been building communication and remote-sensing satellites, this was its first foray into deploying reusable spacecraft, joining an elite club led by the United States, Russia, China, Japan and France.

The success of the mission is a morale booster for Indian space scientists who are busy preparing for the country's first unmanned lunar mission scheduled for launch in February 2008, to be powered by a locally built rocket.

India hopes to put an astronaut into space by 2014 despite limited funding for its fledgling program.

Indian style of innovation has seen another successful demonstration. ISRO today successfully tested space recovery capsule - a key component for having manned space missions. While the success of ISRO's program is not a great break through for science or for world space programs. American & Russian space programs have developed such recovery capsules 40 years ago! The important point to note in ISRO's success is the cost at which such a device was developed. ISRO's style makes it cheaper and the need for further test flights are reduced supstantially. US took more than 40 Titan missions before it successfully demonstrate a space recovery capsule. ISRO did that with just one test - albeit 40 years later.

The point I want to make here is that Indian style of innovation is unique and at many times lacks novelty factor - but India can re-engineer inventions at a fraction of the orginal inventor's cost.

Also see:
Why Invest in India: Innovation & Creativity
Knowledge Management - The blood & lifeline of any company
Creating a Culture for Innovation and Protecting Intellectual Property - Part 1
Creating a Culture for Innovation and Protecting Intellectual Property - Part 2
Protecting IP Assets of an Organization
Types of Intellectual Property
Business Creativity and Innovation
Indian Style of Innovation

Saturday, January 20, 2007

Why Invest in India - Power Generation Infrastructure

Indian economy is going through a period of remarkable transformation. Economic growth is now reaching 10% mark. In the last 15 years - it has been IT sector which has led India’s economic transformation. But in the next decade, economic growth will be led by infrastructure development companies. The growth in India’s infrastructure is inevitable today. As the economy grows, the current transportation infrastructure: Roadways, railways, airports & seaports are in need of rapid expansion to support a sustained economic growth. Government of India has realized the need for investment and is inviting private companies to invest in the infrastructure space. The need for private investments in transportation & energy sector is very acute.

Energy sector - Electricity

India now needs investments to setup new power plants - 100,000MW of additional capacity by 2010.

Taking this as a clue, several companies are investing in infrastructure space. These investments are mainly greenfield ventures where the risks are high - but so is the payoff. Enron was one of the first foreign investor to invest in the energy sector. Enron ventured into India with a greenfield power plant in the state of Maharashtra. However, Enron had not planned for handling the Indian politics and dealing with Indian government. Coupled with its inexperience and the following political controversy - forced Enron into bankruptcy in India.

Enron’s failure has not deterred other investors in power sector. Tatas & Reliance groups have invested in power generation and distribution in Maharashtra - the very state where Enron had failed.

Reforms in Indian Energy sector and the critical shortage of power in India has attracted several new players to invest in India. Continued energy sector reforms in 2007 will aid the rapid growth of this industry. By April 2007, private sector will be allowed to enter into power transmission and distribution business.

Companies like GMR, GVK, Lanco, Suzlon, Graphite India, AV Birla Group, Essar, and whole lot of companies are on an investment spree. The spurt of private investments does not mean that foreign companies do not have opportunity in India. On the contrary, these very Indian companies are eager to tie-up with foreign firms and expand in India. The need for capital, technology and business experience drives Indian companies to look for collaboration with external investors.

Supporting this massive growth in power generation, opportunities are now opening up in manufacturing sector. The demand for power generation equipment, power transmission equipment etc., is also very high. Currently Indian market for power generation equipment is dominated by local companies: BHEL, Triveni Engineering, etc., and a few MNC’s such as ABB, Shnider Electric etc. But as the demand grows - particularly in Nuclear power plants, opportunities for new entrants will be very high. Indian government is looking forward to see companies such as Westing House, Hitachi, GE and others to invest in India to build/Sell nuclear power plant equipment. The recent agreement on nuclear cooperation between India & USA has created an advantage factor for American firms to tap into Indian market in civil nuclear energy space.

Potential Risk Factors

The biggest risk of investing in power sector are the political risks. Since power is on the concurrent list - i.e., the administrative & regulatory authority in electricity generation, transmission & distribution is governed by two sets of laws:- Both the State governments and the Central Government. This makes it difficult to expand operations beyond one state, and takes a longer time to clear all the regulatory hurdles. Government still has a monopoly over power distribution networks and provides adhoc subsidy for farmers - these subsidies are often unfunded and power distribution companies have to take a hit on the profits.

Another bigger risk in power sector is shortage of raw materials: coal, natural gas & other hydrocarbons. Coal mining is a state owned monopoly of Coal India Limited - where corruption in coal supply has ensured that mafia controls the distribution of coal in India. Private electricity generators using coal as fuel will either have to oil the political machinery and the mafia to ensure coal supplies or rely on imported coal. The supply of natural gas is also a monopoly of the government and the pipelines to distribute natural gas to all parts of the country does not exist. This implies that power generation plants will have to build the infrastructure needed to get adequate supply of natural gas.

A side effect of monopoly in energy raw material supplies (coal & Gas) has created a situation where these monopolies operate with little regard to efficient transportation. This implies that power plants must build a huge buffer stock to overcome any disruption in supplies. Often times, it is cheaper to import coal & gas rather than rely on government monopolies.

Closing Thoughts

Economic reforms in India are now touching the power sector. Given the high growth rate of Indian economy - the demand and the shortage of power has skyrocketed. Continuing reforms is ensuring that private players are being encouraged to enter the power sector. The potential for growth and wealth creation in power sector are enormous - as seen in telecom sector. Reforms usher in new wealth creation opportunities for those willing to take the risk of being an early entrant. Power sector is now being primed for a massive expansion - and wealth creation.

Also See:

Friday, January 19, 2007

A contentious Patent Issue in India

A recent trend of global pharmaceutical companies trying to patent incremental innovation on their patented molecule has run into a contentious legal battle. As per the current patent laws allowed under TRIPS agreement of WTO, governments have the flexibility to define the patentability of the innovations concerning to healthcare.

India had a process patent regime prior to its WTO entry and today India follows a product patent – where only the molecule or the base product can be patented. The earlier process patent enabled Indian drug companies to reverse engineer the drug/molecule and sell it in the market – undercutting the original inventors. In 2002, India adapted the TRIPS agreement of WTO on product patent – and thus began a new patent regime. However Indian Generics could not be deterred by the new patent regime. Indian Generic drug manufacturers found a new lucrative market for making generic versions of the drugs losing the patent protection. Indian generic manufacturers were able to make rapid gains in overseas market – US & Europe for the drugs which was going out of patent protection: Simvastatin (Zicor), Atorvastatin (Lipitor)

Companies which invented these drugs therefore had to develop new ways of protecting their best selling drugs from competition from generics. This has led to idea of patenting “incremental innovations” such as drug delivery systems, polymorphic forms, and recombination. Patenting such innovations is seen as a technique for providing patent cover for the drug for an additional 20 years after the original patent for the molecule/product has expired. This leads to a perpetuality of the patent. The original inventor can get infinite extensions to patent protection on a drug – contends Indian pharmaceutical alliance.

This issue is now being contested in Indian courts. Novartis has filed a patent application to patent “Glivec” which is a polymorphic form of Imatinib mesylate. This patent was contested by Natco Pharma – which markets a generic version of Imatinib mesylate under the brand name “Veenat”. Novartis lost the first round in the legal battle and has moved the Chennai high court for a review of the ruling by the lower court. The courts will now decide if incremental innovations to a drug can be patented & if its approved it may spell bad news for patients – especially in poor countries such as Africa, Asia & India.

Also See:

Tuesday, January 16, 2007

Indian Style of Innovation and Intellectual Property Creation

The company’ key competitive advantage has been the intellectual capital of its employees. - Infosys Annual report 2006

India’s blend of entrepreneurship, economic reform, investment in quality infrastructure and strength in intellectual capital created an industry offering IT solutions that were both cost-competitive and world-class.

Intellectual property has always been key to success. But its only now that Indian companies have openly started giving it the due credit and have started allocating resources for intellectual property development and protection. But most Indian companies are yet to show any serious commitment towards developing key intellectual property. For example, in 2006 Infosys spends only 0.01% of its revenue on R&D! In 2005, Infosys spent 1.05% of its revenue on R&D.
Other Indian IT services company Wipro is an equal miser when it comes to R&D expenditure. In 2006, Wipro spent Rs 27.4 crores on R&D or 0.25% of its revenues on Research & development.

Despite this minuscule investments in R&D, Indian IT services companies are able to make huge gains in the global market. Lack of R&D investments does not seem to erode the competitive advantages of Indian companies. All this looks like a paradox or a mystery for a person who does not understand the Indian management styles.

R&D drives Profitability

"In 1999, Dr. Baruch Lev at the University of California at Berkeley and his colleagues found that the R&D investment drove profitability. Analyzing changes in R&D investment against changes in operating income over the two decades from 1980 through 1999, they found that a dollar spent on research, on average, a rate of return of 26.6 percent, or 17 percent after taxes. It typically takes seven years to realize the return, but the amount is enough to compensate for the risk that research.

Moreover, companies in any industry that emphasize basic research — the kind in which
researchers follow their own noses — appear to enjoy higher returns. In other words, having a relatively unfettered basic R&D function is a surefire way to prevent commoditization, as long as you can capitalize on the results. Unfortunately, this causal link between research expense and financial return does not appear on any financial reports in most companies."

While Dr Lev’s observation and theory is true, it is not being reflected in Indian companies. Indian companies seem to challenge Lev’s observation - so it takes a deeper analysis.

Indian Firms have a different approach to Innovation

India is been a land of paradoxes and that hold true to innovation also. Indian companies tend to spend as miserly as possible on R&D. Yet these companies are making giant strides in profitability and are gaining competitive advantage over their global rivals - and make tall claims on IP. This paradox can be explained by looking at how Indian firm’s approach to innovation.

Ever since the liberalization on Indian economy started, Indian companies have steadily grown in their competitive strengths - be it in automobiles, Aerospace, steel, chemicals, pharma, IT, or manufacturing. The success of Indian firms can be attributed to prudent management, cost advantage and innovation.

The Indian approach towards Intellectual property and innovation is rather unique. Indian firms and Indian people in general take a fundamentally very different approach to innovation and intellectual property. For Indians, intellectual property is a creation of an individual that must be shared with the society at large. This fundamental notion is deeply ingrained in the Indian culture - and that happens to be a source of Indian competitive advantage.

Innovation Stems from Individual Creativity

Indian society in general believes in collectivism - where general well being of the collective is more important than that of the individual. Hofstede’s studies in this parameter of individualism Vs collectivism also reaffirms this observation. But this does not give a complete picture. Indians are also highly self-centric and with a view that one must contribute in a positive way to the society. This self-centric mindset encourages creativity and the society encourages creative pursuits - resulting in a symbiotic relationship between the creative individual and the society at large.

The proof of this symbiotic relationships can be seen throughout the Indian history. Indian kings and nobility have always provided and supported creative people. From the days of Ramayana, and Mahabharata, kings have had court appointed artisans: Musicians, dancers, sculptures, poets & writers. In return, the creative works of these individuals happen to become a public property. This system implied that individual creativity was highly encouraged - and so was the copying of this creative work. This led to creation of several books, poems, stories, plays, music, dances, tools, implements, etc., and also led to rapid proliferation of these innovations. The concept of IP protection was never built into the Indian society.

On the contrary, In the western world - as early as the Greek civilization, the idea of intellectual property protection can be seen. Greeks and later the Romans had instituted the concept of unique trademarks on pottery/metal products produced by master craftsman - and those who violated this were punished.

Today, Indian society still encourages individual creativity - Indian society actively supports and promotes creative individuals. The society also encourages learning. Though the concept of gurukula way of learning has disappeared, the concept of one-to-one in-depth guru-shishya learning still thrives.

Today, Indian companies have taken over the role of providing patronage to creative individuals - in return the individual’s creative pursuits are aimed for the overall benefit of the organization and society. This implies that a lot of innovative work happens within an organization but it happens at an individual level that cannot be accounted for in the balance sheets. Thus, Infosys can spend only 0.01% of its revenue on R&D and still file 167 patents.

Mentoring & Individual Training

Indian society places a very high emphasis on individual learning and meritocracy. This high emphasis on competitive learning and rewarding the performers on pure merit (i.e., marks scored in competitive exams) is seen everywhere in Indian education system. So at an very early age, Indians learn to be competitive and give importance to learning. In school and colleges, the practice of individual tutors is very common - and the society believes that tutions help the individual.

The same culture is carried forward in the corporate world. Indian companies in general do spend a lot of money on employee training. Indian IT firms probably the leaders in instituting the culture of corporate training.. GE started the idea in the US, but in India Infosys took that idea to heart and created the world’s largest employee training facility. Other companies - both large and small are also following the trend. Large companies tend to rely on internal trainers - and get external industry experts as and when required, while small & mid sized companies rely exclusively on external trainers.

Added to this, the enthusiasm of Indian employee to learn is very high. Almost all employees in India have no qualms of attending a training program on a weekend or on a holiday. Many employees also take private skills training from third party trainers - and even pay for it on their own. The culture of individual learning and meritocracy ensures a competitive environment at workplaces.

Another aspect of Indian culture is the willingness to train/teach others. Indian culture encourages sharing of knowledge. Indians therefore tend to do that at workplace also. Managers or leaders in the organization will take time to teach other employees - thus propagating knowledge faster within the organization. This concept of mentoring is slightly different than the western style where it is more formal and budgeted, while in India it is informal and not budgeted.

Indian style of Innovation

Indian culture and Indian companies have developed a unique style for pursuing innovation. At the very foundation lies the problem statement. The problem statement must the convincing enough and the need for a solution must be strong - this is a must. The problem statement should also be agreed upon by the society or the collective. In case of companies, the problem statement must be agreed upon by the management and by most employees. This will then drive the Indian employees to engage in a large series of creative thinking which will be freely shared with fellow employees and others around them (including employees from competitive organizations). The net effect of this is free flowing creative thinking and bouncing off ideas on each other so as to refine the idea. This activity results in increasing the overall awareness and knowledge about the problem within the society and the organization. This also results in several new & innovative ideas which can become possible solution.

The next stage is the experimentation stage. Once the possible solutions are agreed upon by the society or by the management, the experimentation stage begins. At this stage, the capital expenditure is kept to the minimum by trying to seek low cost solutions - the shortage of investment capital and the risk of failure looms large in people’s minds. Every effort will be made to lower the costs of experimentation while seeking success. For most part, expenses incurred in this stage will not be budgeted or accounted as R&D expenses. Instead this will be shown as operational costs.

Once the idea is proven to work, then the management takes over the responsibility. The role of the management at this stage is to study the cost-benefit of the solution. In case of large social problems - such as water scarcity, or power supply etc., the society will debate the solution at great length before agreeing upon how to implement the solution. In case of organizations, the management will also debate on the benefits and costs involved - and will even approach the board of directors for suggestions. This process may take days or weeks or even years. Once the management agrees on the solution, then the budget for developing the commercial version of the solution or a formal prototype will be approved. And only a small part of this expenditure will be accounted as R&D expenses while the rest is often shown as capital expenditure - which can be capitalized and amortized over a period of time.

At this stage, the company is ready to fully implement the solution. And the innovation is ready to go commercial. All expenditure needed for going commercial will be budgeted and shown as capital expenditure or as operational expenses.

This style of innovation results in lower R&D expenditure and also ensures a high rate of success in innovation. Therefore if one were to study the financial statements of Indian companies, one will see a very small figure under "R&D Expenses", yet the company would have filed a large number of patents and would have released a lot of innovative solutions/products.

In case of service industry - IT, BPO, ITES etc., the innovation process is often well merged with the actual operations - such that it is hard to differentiate the two from the accounting perspective.

Summing up, Indian Innovation process can be illustrated as:

Closing Thoughts

Indian style of innovation relies heavily on individual creativity, idea sharing and solution consenses. The entire organization will be involved in the innovation process - and is not limited to R&D departments only. According to Indian accounting procedures R&D expenditure is often incurred only when the idea is being tested or when the prototype is being developed. Thus by western standards, Indian companies may be spending very little on innovation and R&D. But this style of innovation results in greater competitive advantage and lower expenditure. Recent success of Indian innovation: Reva, Scorpio, Saras, Tejas, Tata Ace, Indica, Bajaj Pulsar, TVS Victor, Wockhardt’s Wosulin etc., all have shown how cost efficient Indian companies are at innovation. The general thought process of Indian R&D can be summarized as "minimum input for maximum output".

A major drawback of this style of innovation is that Indian companies will not be able to create a truly breathtaking invention. The need to achieve consensus regarding the problem statement and the proposed solution will ensure that radical and drastically different solutions will be weeded out first. Also another drawback is that, Indian companies will rapidly lose competitive advantage in the market as the Indian culture does not encourage intellectual property protection - and the society believes that the knowledge must be shared. To protect against such losses of IP, Indian companies must realize the importance of patents, copyrights, and other legal methods of IP protection.
Also See:

Wednesday, January 10, 2007

How to Avoid pitfalls in Cross-Cultural Negotiation

My work in International sales, marketing, and project coordination has given me rich experience in working with people from other cultures. Cross-cultural communications has always been a tricky subject - particularly when there is business negotiations going on between two parties who are from different cultures.

Business negotiations is always a delicate business - even when the parties are sitting across the table and are from the same culture. The complexity of negotiations increases when the parties are from different cultures. But when both the parties are negotiating via electronic media - the challenges are immense often putting the negotiations at risk.

Cultural Differences are Invisible

Recently I had written an article on Challenges of Multi-cultural Teams, the problems encountered in managing multi-cultural teams are magnified exponentially when it comes to business negotiations. The problems of parochialism and ethnocentric attitude come into play without people noticing it during negotiations. To illustrate this consider the following example:

A group of Texans in Bangalore who were here to setup their R&D center in Bangalore, India. We started discussions of working across cultures. One of the senior managers in the group was quite unimpressed and he went on saying that cross-cultural issues does not bother him - "I am not worried about working with Indians." He said, "I have lots of Indians working in my group back in Austin, and there has been no cultural issues in the past." Since I lived in Austin, Texas and went to University of Texas, I knew it was better not to rebut his statement - but at a later time, I gently asked him how many of his Indian colleagues in Austin does he count to be his friends? How many of his Indian colleagues participate in the company’s annual Christmas parties? These questions slowly woke him up to concede that there were some cultural issues but they were not affecting the organizational work. I then slowly asked him to think about the challenges he has had as a project manager when dealing with an Indian who is fresh out of college, and then asked him to imagine the set of problems he will have to face when that person is sitting several thousand miles away in Bangalore? These questions made him aware of the challenges he will have to face when he has to manage a team of engineers who are working in Bangalore. Then I asked him to imagine the problems he will have to face when he has to negotiate from Austin with an Indian vendor in Bangalore.

Cross-cultural negotiations are always very challenging. Unfortunately, people do not realize these challenges before starting the negotiations - mainly because cultural differences are subtle and are often invisible.

A Case study

Harry in Austin and Harsh in Bangalore - both speak excellent English. Harsh studied in California, watches NBA and listens to rock music. All this makes Harry think that Harsh is just like any other fellow American - and starts the business negotiation right away. After few rounds - the negotiations come to a screeching halt due when Harsh decided to take a break during the negotiations.

The problem? Both parties had different perceptions of the negotiation process itself and misinterpretations of the other’s behavior. For Harry, negotiation is about pushing through a quick deal. When Harsh took time - Harry became increasingly impatient and become more forceful in the meetings. Harsh interpreted this with suspicion that Harry was pulling a fast one on him - therefore he needed some more time to study Harry’s proposals.
Though the negotiations concluded successfully, it took a longer time than Harry initially anticipated. This negotiation example shows how cultural differences are often invisible for both the parties and it affects the negotiations itself - when both the parties ignore the cultural differences.

Negotiating Across Cultures

There is no right way or no perfect way to overcome the cultural differences in negotiations. International negotiations are always a delicate business - requiring skill, tact, and diplomacy. Here are some tips that can help one negotiate with a foreign counterpart.

Tip-1: Take time to setup the negotiation process

This step is very important when you are negotiating with a new partner. People in other cultures have a standardized ritual process for all negotiations - particularly in the initial phase. Indians for example, tend to focus more on confidence building during the initial phase. Chinese on the other had have to establish a relationship before they start the serious negotiations. Americans would go over the main objectives in few minutes and then start off with the main negotiations. This approach is however not appreciated by other cultures. The best way to start negotiations is to start with explaining each one’s negotiation process. Take time to explain your process - and ask the other party if they understand it & encourage them to share their process. This helps to build a common ground for all negotiations.

Tip-2: Understand Expectations

In any negotiations parties involved will have different expectations - both sides would like to win but they will have different perceptions of victory. In cross-cultural negotiations it is difficult to guess other side’s expectations. It may make sense to talk about the expectations of both sides at the beginning of the negotiations - but fall short of disclosing their BATNA. Take time & effort to understand the other side’s expectations. Indian, Arab, Chinese and Japanese negotiators do not really like contentious style of negotiations - which is often perceived as "I win - you lose" style negotiations. Instead they prefer a more harmonious "problem solving" approach. It would be therefore useful to frame the negotiations in a problem solving mode when dealing with Asian negotiators and explain that is the approach to them. On the other side, Asian negotiator may assume that the American negotiator will adapt a contentious style and will prepare accordingly. So it will be better to explain the approach in the beginning itself.

Tip-3: Explain the decision making process

Decision making is a complex process in most cultures. Unlike in American culture where the decision maker will be at the negotiation table - Asian negotiators may not be the final decision makers. In Indian and most Asian companies, the final decision maker would be different and may not even enter the negotiation process directly but will be watching and monitoring the negotiation process closely. It is important to know who the decision makers are, and how decision will be made - and on what criteria. So take the initiative to explain the decision making process openly to the other party and encourage them to do the same.

Tip-4: Manage the negotiation

Multi-country, cross-cultural negotiations often take a long time. In the process the negotiation stalls due to various reasons. When issues are being exchanged or for seeking more information etc., the negotiations may come to a halt because one of the parties may be taking time to verify or find information. And at times negotiations come to a halt when one of the parities get distracted by other business needs. In all such cases, the best solution is to manage the progress of the negotiation in a methodical manner. Ideally it will be best when one person from both sides take up the role of project manager for the negotiation process and manage it like a project. This will prevent the negotiation from getting off course or getting stalled for a prolonged period.

Closing Thoughts

Cross-cultural negotiations are always tricky. In most cases parties involved in the negotiation process will not have a good understanding of the other’s culture and hence the negotiation process starts off with a set of false set of assumptions and if those assumptions are not tested, the negotiation process will fail. It is therefore a good practice to verify those assumptions and make things transparent and clear at the very onset of the negotiation process and then work towards successful conclusion.

Also see:

Improved Cross-cultural Communication Increases Productivity
Nature of International Negotiations
Hidden Aspects of International Negotiations
International Negotiations - Impact of Location on Business Negotiations
Preparing for Negotiations
Negotiations as Core Business Competency
Negotiating with Tough Customers - "Take it or Leave it" Situation
Challenges of Working Across Cultures

Saturday, January 06, 2007

Why Invest in India: Innovation & Creativity

India has now regained its innovative spirit. As a result, creativity can be seen in all walks of life in India. In the post license raj era, Indian companies have discovered the benefits on innovation and creativity. Sectors such as software, computers, microelectronics, automobiles, Aerospace, telecommunications, biotechnology, Medicare, pharmacy, entertainment, construction, heavy engineering and others have greatly benefited by the spirit of Indian innovation.

India has a long history of creative thinking and Innovation

Barring the dark ages of the British rule, India has always been the hub of innovation, invention and creativity. Creativity in India can be seen in diversity of its languages, classical arts and music, literature, folk arts, construction etc. To highlight the historical fact of Indian creativity consider this: India has five forms of classical dances, two forms of classical music, four major religions of the world originated in India, twenty five languages - kanada and telgu being the most developed languages. ( In these languages, what is written can be exactly spoken - i.e., there are no tones, or silent letters etc.). And that beats any other country in the world. (i.e., no country in the world can boast the same)

Unfortunately during the British rule, the very foundations of Indian creativity were disturbed. The traditional education system - the "gurukuala" was destroyed. The ecosystem for innovation was destroyed. And that resulted in the dark age of Indian innovation. Yet the culture of innovation survived and is now coming back with a great force.

India has now rebuilt its innovation ecosystem

The culture of innovation comes from the attitude of people and the work environment. On a broader scale, it is dominated by the economy, external environment and the support infrastructure. The policy of the government and freedom are probably the biggest factors that contribute towards this cause.

A strong pillar for innovation is capital: Both human and money.

One of the earliest acts of the newly independent India was to create the foundation for scientific and engineering education. Over the last sixty years, India has built a strong and a robust educational system - which now graduates millions of students every year.
Indian stock market and democracy has taken deep roots in the society. Reliance Industries Limited (RIL) was one of the first companies to use the strength of Indian capital markets and build the world’s largest petroleum refinery. Earlier RIL created the world record by having the largest number of individual shareholders for any single company - a feat unsurpassed by any company till date. Having a strong capital markets is essential for innovation. Suzlon, Dr. Reddy Labs, Ranbaxy, Cipla, Biocon, Barth Forge etc, all have tapped into the strength of Indian stock market to raise the required capital for their business enterprise.

Government policy and research assistance in form of large R&D centers, PSU, organizations have created the necessary infrastructure to capitalize on for further innovation. ISRO, BARC, IISc, IITs, CPRI, etc., have become incubation centers for innovation. To highlight the value of Indian research centers consider the mission statement of Society for Innovation and Development (SID) at IISc:

"The mission of SID is to enable India's innovations in science and technology by creating a purposeful and effective channel to help and assist industries and business establishments to compete and prosper in the face of global competition, turbulent market conditions and fast moving technologies. SID strives to bring the leading intellectuals of IISc and the fruits of their research and development efforts closer to industries and business establishments in a cordial atmosphere with prosperity of the Nation as the ultimate goal."

Indians will invent, innovate and create

Unlike Europeans or Americans, Indian approach to innovation, invention and creativity has been very different. Indians tend to opt for cost effective innovation - without wasting capital or resources.

Indian advances in space technology, nuclear science, IT, computers, Automobiles, pharmacy, manufacturing etc., have repeatedly shown that invention in India costs a fraction when compared to USA or Europe. Mahindra & Mahindra developed its best selling SUV - "Scorpio" at one-tenth of what it would have costed Ford or GM to develop a similar vechile. "Saras" - a passenger plane developed by NAL costed only $11 million!

Indian penchant for cost effectiveness is demonstrated in its innovation culture. As a result, the world is now turning to India for all creative work.

World now turns to India for creative work

Some of the biggest brands in the world - like Coca-Cola - are now turning to Indian creative types to manage their online advertising campaigns. What's more, even luxury brands are no longer deterred from using Indian talent, as this example using Alfred Hammel illustrates:

"Typical of ad outsourcers is niche luxury brand Alfred Hammel, which pitches $10,000 Swiss watches to Americans and Europeans in tony magazines and newspapers. Looking to cut marketing production costs, two years ago the New York-based company handed its ad account over to Banerjee & Partners, an agency specializing in outsourcing work to India.

The watch company's president, Gurbakhsh Sethi, meets with Banerjee staff in New York to plan strategy and sign off on designs, slogans and creative ad themes. Behind the scenes, Banerjee's staff in Bangalore, India, does art direction and color correction on the photos, which were shot in New York. The finished work is sent back to New York over the Internet. Dave Banerjee, the agency's founder, says his U.S. team, which works in morning and afternoon shifts to take advantage of the time difference, works closely with the Indian team throughout to process "to ensure that the work reflects the right cultural nuances."

The bottom line appears to be cost savings: according to the Wall Street Journal, some firms in India charge as little as one-eighth of what it might cost in the U.S. Add to that, Indian firms are becoming more sophisticated, especially when it comes to rolling out online campaigns that can really leverage world-class Indian technology talent.

Even the Chinese firms: Lenovo and Heuwai are establishing R&D centers in India. (see: )

Cisco is shifting 20% of its workforce to India. (By shifting, I mean Cisco will hire more in India and also encourage other employees to relocate to India). See:

Closing Thoughts

The great brain drain from India in the 1990s was stemmed after the dot-com bubble burst at the end of the last century. Much of that talent has now returned to India and is being used to grow India's contribution in pharmaceuticals, telecom, and software. Ideas, manpower, and money add up to tremendous innovation occurring in the country right now.

Global business giants have realized the innovation potential in India and have started investing in India. IBM, GE, Microsoft, Cisco, Intel and sixty other top innovating companies have already setup their R&D centers in India. These investment will further create an experienced talent pool which will inturn attract the best talent from other parts of the world as well. Companies investing in India for establishing their R&D centers will reap rich rewards through creating of innovative products and solutions.

Also see:

The Great Indian Renaissance. Written by Dr Manmohan Singh
Why Invest in India: Resurgent Economic Growth in 2007
Why Invest in India - Banking
Why Invest in India: Booming Air Travel Industry
Why Invest in India?

Wednesday, January 03, 2007

Common Mistakes in Managing Virtual Project Teams

Today virtual project team is more of a norm than an exception. These teams are composed of people separated by vast distances who communicate primarily by computer and telephone. For them, e-communication is not an alternative to face-to-face, it’s the only way they can operate. They use networks to develop a sense of community among project team members who may be far-flung geographically and to keep channels open to various regional and functional units that can contribute to the project or be impacted by it.

In my earlier article I had written about some of the good management practices in a virtual team environment. (see:Managing Virtual Project Teams )

While project teams have gone "Virtual", the project management practices have not changed much to accommodate the nature of virtual teams. As a result project managers, program managers, program directors, project sponsors etc., tend to make some common mistakes when dealing with virtual project teams. Most of the mistakes in managing virtual teams stems from wrong assumptions they make in managing virtual teams. I have observed and studied these common erroneous assumptions in several virtual project teams. Many of these mistakes are due to lack of experience in managing virtual teams and due to cultural differences. Some of these problems exist in co-located project teams too - but the problem is more acute and persistent in virtual project team management.

Some of the common Mistakes:
  • Assume that everyone on the team will just get along and work together

    Many project managers, program directors do not understand that in a virtual team, it takes more time for establishing team norms. Also virtual teams suffer from a prolonged team storming. Due to cultural differences and communication difficulties, virtual teams always take more time to establish working norms and settle team disputes. It just takes one or two snafu to discover how much time and energy it takes to smooth things over.

    As a good management practice, one must set aside some extra time at the outset to allow team members an opportunity to agree how they will collaborate and communicate, especially when times turn tough. Project management leaders must put in extra efforts to create a common operating principles in critical areas such as decision making, review, and issue escalation at the very beginning of the project. Waiting until problems arise is far more costly and risky.

  • Management team assumes that they know what the team members want to hear

    This problem is very common in case of cross cultural teams when project managers are from one culture and the team members are from other cultures. In a multicultural project teams, project mangers tend to implement a top-down communication and assume that they can motivate and engage all team members - without listening to what the team members have to say.

    Project managers must listen to what the team has to say. In case of cultural barriers compounded by language barriers & geographic distances, team members may not be able to communicate freely. Under such conditions, project managers must ask them what role they expect to play and how and when they would like to be involved. Find out how they prefer to receive and contribute to communications. Just try and throw out that skepticism or cynicism the team members may harbor so that you can work to overcome it.

  • Face-to-face meetings are costly and can be avoided

    Most project managers are worried about the budget and wrongly assume that face-to-face meetings can be avoided. While this is true in small projects - but not in large complex projects. Many project managers make this wrong assumption about face-to-face meetings.

    This mistake stems from the fact that most project managers (at large & complex project) would have been promoted from smaller teams and their past experience would have thought them that e-mail, conference calls, and video conferencing alone can help build the necessary trust among team members and stakeholders.

    In large and complex projects, the cost of delays and failures are too high. One has to plan for trips for team members so that they can meet face-to-face and cultivate important relationships. Project managers must rotate team members so that all have an opportunity to learn from directly from each other. Team members from remote sites must travel to the main site and see the ground situation. Conference calls, e-mails etc., will work better when augmented with a site field visit.

  • Employ an identical approach in all locations

    Project managers in large virtual projects often fail to accommodate regional differences into their project plan. Most project managers are scared that their project schedule will go haywire if they have to make exceptions for different locations. Also project manager often lack awareness of regional differences - such as public holidays, religious holidays, planned shutdowns etc., as a result during the planning stage they fail to accommodate them and then force a common approach in all locations.

    In one extreme case, I saw a project manager ask all the team members to work as per US work times. This problem is further compounded by parochial attitudes of the project managers. Lack of cultural awareness makes project managers to ignore all cultural differences and they tend to enforce a common approach. ( see: Challenges of Multi-Cultural Teams and Challenges of Working Across Cultures )

  • There is no time to celebrate milestones

    Most projects will be working under tight time schedules - and often time projects will be behind schedule. This makes project managers to bypass celebrating project milestones - to save on time! This has a major demoralizing effect on the team and tends to increase team attrition. In case of virtual teams celebrating milestones are quite complicated - because the team members are spread out across different geographic locations. And that makes it impossible for project teams to celebrate milestones together.

    I recall a situation where a three members of the team were working in east coast - while the rest of the team was in Silicon Valley. The project manager for this project ensured that all the team members would meet face-to-face for all team celebrations - thus making the other members fly to Silicon valley.

    Ideally, project managers must allocate time and budget for team celebrations. It may be true that everyone’s time comes at a premium during crunch times, but arranging for special get-togethers either during work hours or afterward, means a lot to harried team members. Arranging for off-site meetings that reflect thoughtful planning, such as unusual recreational activities or meals at memorable locations, can help boost morale and foster team spirit.If the team cannot get together for celebrating milestones, ensure that every member gets a momento - a coffee mug or a T-shirt etc. These momentos have a great morale boosting effect on team members.

  • Forget to recognize good work

    Project managers in virtual teams often do not get to see other team members on regular basis and will be too busy to acknowledge that their contributions are making a positive difference. Compounding to this problem, project managers tend to recognize and reward people whom they meet on regular basis. This has a demoralizing effect on the entire team - particularly team members who are in distant locations.

    Project managers must invest some time to send out a kudo - either in a group meeting or via group e-mail. Take time to personalize the kudos and keep them coming especially when project pressures build up. This will motivate people to work harder and builds team morale.
Closing Thoughts

Virtual teams are tough to manage. Often times managers are promoted from small co-located teams to manage large multi-national, multi-cultural and virtual project teams. The managers often lack the cultural awareness and lack sensitivity to the needs of a virtual team which results in some of the common mistakes are listed above. As virtual teams become common these mistakes will also increase. Project managers of large virtual teams must be equipped to handle these challenges - either through mentoring, training, and coaching. Project planning process must be suitably changed to accommodate challenges and avoid these mistakes.

Also See:

Challenges of Working Across Cultures
Offshoring Requires Better Collaboration
Collaborate to Innovate
Challenges in Offshoring to India
Challenges of Multi-Cultural Teams
Making Multicultural Virtual Teams Work
Building a Diverse Workforce
Cultural Assessment - Prerequisite for successful Mergers
Soft Skills For Global Managers
Global Manager
Improving communication with Indian Engineers
Leveraging Diversity-Use Brainstorming Session
Common Mistakes in Recruiting a diverse workforce
Managing Virtual Teams - Use of Collaboration Tools
Improved Cross-cultural Communication Increases Productivity
Managing Diversity for High Performance
Keep Overseas Staff Focused on the Right Goals